Build an Investment Portfolio
Recently, efinancialcareers.com posted an article breaking down why most junior analysts in their young 20s only come away with less than £1,000 worth of savings a year despite a base salary of £55,000 (excluding compensation). This poor savings habit is frankly absurd and will leave you fully depending on your income from your job in finance. Having no money for a rainy day, nor the money saved to give you the flexibility to move jobs, relocate or even start own business, can really come back to haunt you. For this reason, I have laid out how to start your own investment portfolio in this post. This is essentially taking the first step towards financial freedom: independence from your main income stream and, quite simply, earning more money.
A portfolio, as described by Investopedia, is a grouping of financial assets such as stocks, bonds, commodities, currencies and cash equivalents, as well as their fund counterparts, including mutual, exchange-traded and closed funds. A portfolio can also consist of non-publicly tradable securities, like real estate, art, and private investments. Portfolios are held directly by investors and/or managed by financial professionals and money managers. Investors should construct an investment portfolio in accordance with their risk tolerance and investing objectives. Investors can also have multiple portfolios for various purposes. It all depends on one's objectives as an investor.
The first step in setting up your investment portfolio is to apply for a tax-free independent savings account (ISA) with a low-fee brokerage platform. I would personally avoid any banks or brokerage services that charge high fees as these undoubtedly eat into any profits realised from investments. A tax-free ISA means that interest earned up to £20,000 on your portfolio is exempt from UK income tax, provided all ISA conditions are met. This tax-free allowance can be split across different types of ISA accounts within each tax year, such as Cash ISAs and Lifetime ISAs.
The second step is then deciding whether you want to partake in active or passive investing. Active investing entails a hands-on approach whereby you are regularly checking and adjusting your account, buying and selling securities more frequently. This is usually the case for fund managers, who are looking to outperform the market significantly by constantly seeking new profit-reaping investment opportunities. Passive investing implies a hands-off approach where simply you invest a fixed, recurring amount in a mix of selected financial instruments. You do not actively monitor nor adjust this portfolio, instead relying on longer-term performance for returns.
The third step is reading and researching how to invest. One necessary piece of reading material is Benjamin Graham's 'The Intelligent Investor', which Warren Buffett has dubbed as "by far the best book on investing ever written". Others include 'Security Analysis', 'Common Stocks & Uncommon Profits and 'A Random Walk Down Wall Street'. Read the Investments section in the Financial Times and learn from those portfolio managers who have successfully and consistently generated above-market returns (better rate of return than stock indices such as the S&P 500).