Creating your personal portfolio

Q I am always hearing people refer to the need to have a 'balanced portfolio' to diversify and reduce the risk of being over-exposed in any one type of investment. I am in my mid-40s and require some guidance of what types of investments to hold in my portfolio.

A It is quite surprising that research reveals that many private investors know next to nothing about asset allocation when it comes to building their investment portfolio. I typically see 80 per cent or more of investors' funds being invested into emerging market bonds, for example, which goes against all the rules of diversification.

According to research, nearly four out of ten investors admit that they have little idea how their portfolio is split between equities, bonds and cash - they just know they have investments! According to Fidelity Investments, half of those polled confessed that they did not know how their portfolio was structured by country while 49 per cent admitted a similar ignorance about sector exposure, and 48 per cent were not sure how the portfolio was split between large, mid and small-cap stocks.

Put simply, asset allocation is the balance between the major asset types of property, cash, bonds and equities in a portfolio. Getting the right balance is vital if you want to achieve your financial goals and objectives. Fail to do so and it is easy for you to either purchase the wrong kind of investment or to create a portfolio of investments that is unlikely to generate the desired results.

The world stock market turmoil of 2000-2003 showed just how important it is to have a balanced portfolio. People whose portfolios were heavily invested into shares suffered disproportionately large losses as shares prices fell. On the other hand, those with a balanced portfolio including bonds and property, as well as shares, would have faired much better.

Of course the eventual mix of assets in your portfolio will depend on your own personal circumstances such as your age, earnings, attitude to risk and financial objective. People with more substantial portfolios, for example, are sometimes advised to include more sophisticated investments such as hedge funds and commercial property into the mix.

Building a portfolio is a question of managing risk versus return. Risk is not just about potential capital losses - you also have to consider the risk of inflation and of potential reduction in income if circumstances go against you. For example, people in their 30s and 40s may be prepared to have a greater exposure to equities because they can afford to take a longer term view and will be looking to grow their portfolio. People who are nearer to retirement are more likely to want to preserve as much capital as they have got and adopt a more cautious strategy with a bigger exposure to bonds.

You have three choices: do-it-yourself, hand over the management of your portfolio to a professional, or a combination of both. The DIY approach may suit those who have a good knowledge of investment markets and the time to properly monitor things. If you do not fall into that category then you should approach one or more investment advisers to help you make the best decisions for you.

Mark Hollingsworth is the director of Hollingsworth International Financial Services - licensed by the MFSA to provide investment services under the Investment Services Act 1994 (IS/32457). Address any financial questions to: Mark Hollingsworth, c/o The Sunday Times, PO Box 328, Valletta CMR 01. Alternatively, he can be contacted on 2131-6298/9984-2614 (office hours) or e-mail mh@hollingsworth-int.com.

Past performance is no guide to the future and, except where amounts are guaranteed, the price of your investments (and the currency in which it is denominated) may fall as well as rise. Your personal tax situation will depend on residence. Always consult a professional adviser. This article does not intend to give investment advice and its contents should not be construed as such. Readers are encouraged to seek professional advice on their personal financial situation.