Building a £500,000 investment portfolio
It’s important not to put all of your eggs into one basket; that means to invest £500,000 wisely, you need to think about asset allocation and spread your money across a range of asset types.
A diversified portfolio will normally include three key asset classes: cash, fixed interest and stocks and shares.
Cash
Savings accounts aren’t very exciting but they’re an important part of your investment strategy. Firstly, you need to make sure that you have enough money in an easy access account for emergencies (three to six months’ expenses is normally recommended), then you need to think about how much you’ll need for any large expenses you’ll have over the next few years. You’ll probably want to enjoy some of your windfall, so think about holidays, a new car, building work or money to move home.
Having this money in cash means you don’t have to risk cashing in other investments at the wrong time.
However, cash accounts aren’t a great home for the bulk of your windfall, even if your aim is just capital preservation. This is because the spending power of your money is likely to be reduced over time by inflation.
Your money is much more likely to keep up with inflation (and hopefully outstrip it) if it’s invested in asset classes with greater potential for returns.
Fixed interest
Fixed interest is the term for loans to organisations that pay a fixed rate of return. Loans to businesses are corporate bonds, while loans to governments are known as government bonds or gilts. In terms of risk, these are generally considered to fall between cash and stocks and shares. However, some bonds will be riskier than others. As a rule, the higher the yield of the bond, the greater the risk.
You can buy individual corporate bonds and gilts, or you can invest in a fund that offers access to a portfolio of bonds.
Stocks and shares
Shares are a stake in a company listed on a stock exchange. That means the value of your investment isn’t guaranteed and will rise and fall in line with the performance of the company in question.
However, so long as you can invest for the longer term (five years at least) you should be able to ride out any volatility and start to reap the benefits of compound returns. This is where your returns start earning returns and over the years it can give your investment a significant boost.
Buying individual shares is higher risk and takes a lot of research. It’s easier and less risky to invest in a fund that invests in a broad portfolio of shares on your behalf.
