Building Your Own Low Cost Investment Portfolio With Vanguard

by Adam on December 12, 2017

If you are getting started in the world of investing, it may all seem confusing, but if you take the time to learn the basics, you can build your own investment portfolio easily.

Your first portfolio doesn’t have to perfect, you can always tweak it later, but getting started is important and once you’ve got a portfolio up and running, it can incredibly empowering – it certainly was for me when I first built a portfolio almost exactly 10 years ago. Better still, technology has come on leaps and bounds since then, and it’s now easier than ever using modern online investment platforms.

ImportantStep 0 – Are You Ready?

Make sure you have some savings tucked away before you start investing. The aim for your investments is for the value of them to go up but this is not guaranteed and you don’t want to feel forced to sell an investment that has fallen in value because you need your money back for whatever life has thrown at you.

A good rule of thumb is not to invest any money that you think you might need for at least the next 5 years.

But if you have worked out you can put money away for the future – for retirement, a dream house, or your children’s education – then I’m excited to walk you through the steps to building your investment portfolio to grow your pennies and save them from the threat of inflation– helping people start investing was the original reason why I set up this site, Magical Penny.

Step 1 – Choose an Account

A Stocks and Shares ISA is often the best place to start, growth is tax-free and you can save up to £20,000 in a standard ISA each year. If you’ve used your annual allowance, a general investment account is fine for now, although you will need to pay capital gains tax if you take money out again that has grown more than the allowance each year (£11,300 for 2017/18 tax year). risk

There are many providers of ISAs and investment accounts, but it’s important to pick one that will allow you to put good quality and inexpensively managed-investments in them, which is why Vanguard, one of the biggest investment fund managers in the world, is a popular choice.

Step 2 – Working out your asset mix

Investing in equities, the name for stocks and shares in companies, is a good place to start because unlike other investments like direct ownership of property, you can invest in much smaller amounts, it’s much cheaper, and the investments are very liquid which means you can buy and sell them quickly, should you need or want to.

For novice investors, investing in individual stocks and shares might be the only thing that comes to mind –we’ve all heard the stories of someone’s uncle who invested in a stock and it either made them rich, or they lost everything!

But investing in individual company shares is only one kind of investing, and is one of the most risky too.

world for saleDiversifying, putting your eggs in more than one basket, is therefore a much less risky way of investing. For easy diversification investors use investment funds.

There are many different types of investment fund– some buy fractions of every company on a certain list, or ‘index’, like the FTSE 100, the top 100 companies in the UK, whereas other investment funds have managers who look for companies in a specific industry or region. Other funds move beyond equities and invest in commercial property or government bonds which pay interest known as a ‘coupon’.

By owning some equity funds and some bond funds, an investment portfolio can be designed to be more or less volatile. Investors can choose to accept a bumpier ride of up and down prices with the hope that the investments grow faster, or they may be more comfortable with a little more certainty in the fluctuating values, but might have to accept a smaller investment return.

Working out the right mix is a personal decision but a higher bond allocation might be more appropriate for those with less time before the investments are needed to pay for something – a child’s education or a retirement age goal for example, because in those instances investors cannot afford the time to wait for any equity investments to recover after a stock market decline.

Step 3 – Selecting the investments

It’s time to pick the funds.

A diversified portfolio typically includes a bit of everything, with UK equities the most popular choice for UK investors (to avoid currency risk). As the funds themselves are diversified, for most investors it is not worth investing in more than a 10 funds (my own portfolio is a mix of global equities, commercial property and natural resources for example), but there are some investors who achieve their goals with just two funds, an equity fund and a bond fund.

Click here for an Asset Allocation Master class from Vanguard

As with any shopping exercise, looking at the prices, or rather the expenses that the funds charge is important. Anything over 1% a year is expensive, but some funds, such as those offered by Vanguard, charge only 0.22% or even less. Not only is Vanguard the cheapest fund provider BuyingI’ve found, but they also have ‘Life Strategy’ funds that offer 5 different combinations of equities and bonds, depending on your goals and time horizon. This makes investing so easy and the ongoing charge is only 0.22% a year, leaving more of your own money to grow.

Step 4 – Press the purchase button – the easiest and hardest step

If you’ve chosen to open an investment account online you can invest at the click of a button! But it can be scary parting with your hard earned money and sending it into the markets. Investment returns are not guaranteed and you may see the value fall over time. But over the long term investments tend to go up and protect your savings from the ever-present threat of inflation.

It can be entertaining to watch the values fluctuate each day by logging onto your investment account, especially when the numbers are going up,  but if seeing the numbers change makes you nervous then it can be best to try to forget about the value and only check your investments once a year.

Setting up a Standing Order from your bank account into your investment accounts to consistently invest over time is also powerful as it removes the emotion out of the investing process. Investing automatically on a consistant basis means you are buying at lots of different prices. This allows you to ‘pound cost average’ which helps further to reduce the risk of investing at any one particular time (if prices are particularly high for example).

To get started investing with Vanguard, read their ‘How to Build a Portfolio’ article series and take the first step in growing your savings  through investing.

**This post is in collaboration with Vanguard**

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