Updated: Nov 23, 2020
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).
The fourth step is to select which investments you want to make. A good basic starting point would be to diversify your portfolio into 50% worth of stock or equity funds and 50% worth of bonds or fixed income funds. Different types of equity and fixed income classifications exist, notably developed market vs. emerging-market equities , value stocks vs. growth stocks and investment-grade bonds vs. high-yield (or junk) bonds. No matter your choice, make sure you look into potential investments in detail before proceeding: check the historical financial performance (five years and beyond is a more reliable estimate based on past performance), the fund allocation if investing in funds, the riskiness (volatility) associated with the investment and finally the fees or other charges incurred at the transaction and throughout the investment lifespan.
Regardless of your investment strategy, it pays to stay up to date with market conditions as this systematic risk has an impact on security prices. The correlation coefficient of the sensitivity of a stock to market changes is referred to as beta (β) while above-market returns is referred to as alpha (α). Some macroeconomic indicators worth paying attention to include GDP growth data, inflation figures, unemployment numbers, interest rate changes implemented by central banks, the price of oil, the price of gold and the volatility index (VIX). To gain a basic understanding of these kind of economic terms and their impact on financial markets, I would recommend Financial Edge Training's Applied Finance & Economics online course. This online course explores the financial markets, monetary systems, US treasuries, indices and more to build a practical understanding of macroeconomics. Use FCLIMB25 voucher code at checkout for 25% off.
The earlier you begin your investing career, the more time you are giving yourself to learn and improve on generating returns from your portfolio. This is a long and steady learning process, NOT a get-rich quick scheme. Patience is a virtue and may earn you your long-awaited financial freedom. Good luck!
DISCLAIMER: The above references an opinion and is for information purposes only. It is not intended to be investment advice and I am by no means a trained nor professional investment advisor, I therefore accept no responsibility for any losses incurred by investors. Remember, the value of investments can fall as well as rise, and you could get back less than you invest. If you’re not sure about investing, seek independent advice. Tax rules can change and their effects on you will depend on your individual circumstances.