How to Build an Investing Portfolio
In this article, we go through what a typical investment portfolio consists of, some of the best investment portfolio techniques used by the likes of Warren Buffett and how you can get started with your own investing portfolio today!
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How to Build an Investing Portfolio in 3 Steps!
If you’re eager to get started, here is a quick step guide on how to build an investment portfolio with Admirals (formerly Admiral Markets), authorised and regulated by the Financial Conduct Authority (FCA)!
- Open an Invest.MT5 account where you can invest in stocks and ETFs (exchange traded funds) from 15 of the largest stock exchanges in the world. You can open an account with a low minimum deposit of just €1!
- Deposit funds to make your first investment. There is no minimum deposit for bank transfers which are commission-free but can take up to three days. You can also deposit funds commission-free using Visa or Mastercard, as well as PayPal, Klarna, iDEAL and more!
- Click on Trade in the Admirals Trader’s Room to open the web-based trading platform to choose your investments. From here you can search from more than 3,000 different instruments, view their live price charts and invest directly from the chart too!
Did you know that with the Admirals Invest.MT5 account you can build an investing portfolio with ultra-low commissions starting from just $0.01 per share on US stocks? Build your investment portfolio today by clicking on the banner below.
Portfolio Investment Definition
The term investment portfolio simply refers to the assets that are owned by an investor. These could be stocks, bonds, currencies, commodities and even cash. There are also property investing portfolios, vintage car investment portfolios and so on. The aim of an investment portfolio is to produce a return on the initial investment. Essentially, it is to make a profit. This can be done through a variety of methods. Further in this article, we discuss some of the established investment portfolio techniques that you can get started with.
How to Build the Best Investment Portfolio
Building an investing portfolio does take some skill. Even professional advisors can sometimes get it wrong. However, there are some well-known investment portfolios that are used by investors.
Some would use diversification strategies to ensure the portfolio is not heavily biased to just one asset or sector. Investors would typically choose an investing portfolio percentage to allocate their capital which you’ll see in the examples listed below.
Many individuals choose an investing portfolio by age. Modern portfolio management theory tends to allocate a higher percentage of the portfolio towards stocks when the investor is young, with a higher percentage towards bonds when nearing retirement.
Investment Portfolio Examples
Let’s have a look at some of the different types of investment portfolios.
Dividends are payments made from some publicly traded companies to investors. They represent a share in the profits made by the company. Usually, these are paid on a quarterly basis and are mostly cash dividends.
When building an investment portfolio, many investors choose to focus on investing in dividend stocks that provide a high dividend yield. This is calculated by dividing the annual dividend by the share price.
For example, if Company ABC pays out a quarterly dividend of $3 per share then the annual dividend payment would be $12 ($3 x 4 quarters). If the share price was trading at $300, then the annual dividend yield would be 4% ($12 / $300). The annual dividend yield changes as the share price moves but is widely looked at by investors.
DRIP investing stands for Dividend Reinvestment Plan. The concept is for investors to invest dollar amounts instead of share amounts. First, the investor needs to decide how many dollars (or other currency) they can invest on a regular basis, let’s say monthly.
By investing small amounts monthly, consistently throughout the year the investor will end up buying some shares when the price is low and some shares when the price is high. This helps to average out the cost of their investment.
The key is to keep buying small amounts but to also reinvest any dividend payments as well. It’s a technique that removes emotion out of the process but can help to avoid trying to time the market which can be challenging.
Factor investing portfolio theory is an approach that focuses on investing in stocks or ETFs that have known ‘factors’ driving its returns. The factors tend to fall into two categories: macroeconomic factors and style factors.
- Macroeconomic factors include analysis of the broad picture such as the economic cycle, interest rates, credit risk, inflation and so on.
- Style factors include analysis of the individual asset such as volatility, size, financial health and price discounts relative to the fundamentals (also known as value investing portfolio construction).
During the pandemic there was a surge in demand from investors for technology stocks as the macroeconomic factor of lockdown caused more people to embrace technology for work and home.
Combining style and macroeconomic factors can be a powerful combination. For example, during the pandemic investors may not just focus on broad technology sectors using macroeconomic factors but may also analyse company reports to find financially healthy companies.
Coffee Can Portfolio
The Coffee Can portfolio theory may have a strange name but is ideal for long-term investors. The name dates back to old America in which people would place all of their possessions in a coffee can under their mattress and not touch them for a very, very long time.
In the financial markets, it’s the concept of investors using a ‘buy and forget’ mentality. It’s common for newbie investors to be more active when it comes to investing, buying and selling with short-term swings in the market.
The Coffee Can portfolio theory suggests buying high-quality stocks and not look at them again for another ten years - similar to Warren Buffett’s methodology.
Warren Buffett’s 90/10 Portfolio
In 2013, legendary investor Warren Buffett laid out a plan in his letter to Berkshire Hathaway shareholders for how his wife’s trust should be managed.
In this plan, he suggested a 90/10 investment portfolio in which 90% should be invested in a low-cost S&P 500 tracker fund and 10% in short-term government bonds.
The basis of the portfolio is to be invested into a variety of different stock sectors of which the 500 largest companies in the S&P 500 stock market index provides.
Buffett had a particular preference to the Vanguard S&P 500 ETF. This is a fund provided by investment management company Vanguard that tracks the S&P 500 stock market index. The performance of this fund since 2016 is shown below.
Source: Vanguard, 22 April 2021. Past performance is not a reliable indicator of future results.
You can invest in this fund through the Admirals Invest.MT5 account. When building your investment portfolio having access to a range of different instruments is essential for diversification which is what the Invest.MT5 account provides.
Once you have opened a free account with Admirals, you can log into your Trader’s Room to access your different investing accounts (live or demo), as well as deposit and withdrawal features and premium analytical tools.
By clicking on Trade on your account you will be redirected to the web-trading platform. From here you can search for Vanguard S&P 500 ETF from the search box at the bottom of the Market Watch window and view a live price chart and access an investing ticket, as shown below.
A screenshot of the MetaTrader 5 web trading platform provided by Admirals showing a trading ticket. Disclaimer: Charts for financial instruments in this article are for illustrative purposes and do not constitute trading advice or a solicitation to buy or sell any financial instrument provided by Admiral Markets (CFDs, ETFs, Shares). Past performance is not necessarily an indication of future performance.
There are now many more individuals who are learning to build an investment portfolio for the long-term. There are a variety of ways to do this, with a few strategies listed above. The chosen method will depend on you and may require some trial and error to begin with.
Fortunately, you could get started with an Invest.MT5 demo account where you can test all of the features and services provided by Admirals, as well as your own theories and ideas, in a virtual environment until you are ready to go live!
If you are ready to go live now, then you could also open a live Invest.MT5 account with only €1 and enjoy low commissions of just $0.01 per share for US stocks. You can also access a ton of advanced trading tools and analytical services.
Click on the banner below to get started today!
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This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or recommendation for any transactions in financial instruments. Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.