How to Choose the Right Investments for a Financial Portfolio?

Investing can be a daunting task, to say the least. There are so many options to choose. Where does one start, and how does one ensure that suitable options are selected? There is market volatility wherever one looks, including the aftermath of the US election on the economy, the UK budget aftermath, the instability in the Middle East, and the US-China trade war.

Then, there is the market panic as stocks skyrocket and fall within days. It is easy to get caught up in the panic and make decisions based on emotions, not facts.

Decisions to make before Investing / Investment decisions

Before making any investment decisions, it is advisable to consider several factors, including receiving expert advice from a financial advisor.

Choose a reputable financial or investment advisor

The most important decision is to choose an experienced financial advisor who can help determine the correct investment solutions to suit financial needs and offer the best advice to build a solid investment portfolio. Ensure they are qualified in multiple jurisdictions to offer the best advice for high-net-worth individuals with assets in various countries.

Purpose of investment

Determine the purpose of the investment. Is it for retirement, wealth building, or possibly education savings? This decision will determine the length and kind of investment chosen.

Length of investment term

Commit to a timeline allowing savings to accumulate and grow with compounding interest. Long-term investing is the way to build wealth for retirement or pass on a legacy to beneficiaries.

The longer the term, the more time the investment has to grow and even out the ups and downs in the market.

Level of risk

Each investor has a different risk tolerance when it comes to investing. Some investors are more open to higher risks in hopes of receiving higher returns. A long investment term can afford to be riskier as it has time to even out and mitigate risks. Investors nearing retirement tend to be more conservative as the priority is to preserve the capital that has been accumulated and maintain good returns. In contrast, a younger investor has the time to take a more aggressive approach to investing. The higher the risk, the higher the reward or chances for better returns, but also the higher the risk of losses.

What to look for when Investing / Tips for a good Investment Portfolio

Once the type of investment, investment term and risk level has been determined; the investor can now proceed in selecting funds, stocks and bonds accordingly. Here are some pointers to look out for when selecting the assets for an investment portfolio.

Avoid panic investing

It is easy to fall prey to panic action when markets are volatile. For example, when markets went into recession during Covid or when markets fell due to geopotential events like the Ukraine war, the Middle East conflict or the nosedive of the Japanese economy. Many investors went into panic mode and, to their detriment, sold off shares that were underperforming.

Always consult with a financial advisor before making any financial decisions. Keep emotion and anxiety out of the equation. Investing is a long-term endeavour designed to smooth out market highs and lows.

Choose reputable stocks and funds with a history of stability and good performance

It is essential to do the homework. Research stable companies that have a history of good performance over the long term. Companies that have been around for a long time and are established. Look for reputable funds that have a history of good performance and resilience. A financial advisor has the skills, knowledge, and economic experience to advise on the best possible solutions according to the investor's risk profile and needs.

Portfolio diversification to mitigate the risk of losses

Diversification is a vital tool to help minimise investment risk and mitigate against market volatility and instability. This financial strategy helps spread the risk of losses over various baskets instead of keeping all eggs in one basket.

Kinds of diversification

Diversification can be spread out over various asset classes like equities or stocks of companies, fixed income like bonds of companies and various governments, cash or cash equivalents, real estate and alternatives, to name but a few. Each asset class is a grouping of investments that has its own unique characteristics. What affects one asset class does not necessarily affect another. So, if one asset class performs poorly, the other asset classes in the portfolio will not be affected or affected only slightly.

Choose diversified funds that earn compounding interest

Ensure that investments are earning compounding interest. Over time, compounding interest makes a massive difference in capital.

Example of compounding interest

An investment of ￡200 a month over 20 years with 7% compounding interest amounts to ￡104,185. That is ￡48,00 in capital contributions and ￡56,185 in compound interest. With time, the interest on an investment could be worth more than the capital.

Deciding on the most suitable investment can be challenging but following these simple tips and consulting with a reputable and experienced financial advisor can create an appropriate investment portfolio that will reap the rewards and withstand volatile markets over the long term.

Please note, the above is for educational purposes only and does not constitute advice. You should always contact your financial advisor for a personal consultation.

* No liability can be accepted for any actions taken or refrained from being taken, as a result of reading the above.