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March 30, 2023

Putting together a portfolio on The Big Exchange

Liz takes you through part one of our series on diversification and the options you have available on The Big Exchange when investing.

How do I put together a portfolio of funds?

Now is the time of year when you may be thinking about opening a stocks and shares ISA to make the most of its valuable tax allowances. The next step is deciding where to put your hard-earned money to work. 

We know our customers choose The Big Exchange because they want their investments to have a positive impact on the planet and society for future generations and also to avoid doing harm. All the funds we offer have undergone an assessment using our own impact methodology and been awarded a medal which relates to the positive solutions they deliver, the transparency provided, and the fund’s influence on the underlying companies in which it invests.

That said, there are other considerations to ensure you end up with a portfolio that meets your needs. You may have read about a particular fund and like the sound of what it is trying to do but one of the golden rules of investing is to not put all your eggs in one basket. Below are some pointers that might give some food for thought.

What are my goals?

With a new tax year approaching, it may be a good time to review your existing investments and check if these are still aligned with your goals. These goals will likely evolve depending on your age and financial position and may influence whether you prioritise capital growth or income. 

Perhaps you started your investing journey with the aim of saving a deposit to get on the housing ladder before new goals came into play, such as saving for your children’s education or a more comfortable retirement. Why not write down some realistic objectives about how much you think you might need for each goal then you will have a plan to review going forward. 

It’s always worth considering whether you are making use of any tax wrappers available , such as ISAs and pensions. We have some useful guides on ISAs and JISAs. As interest rates have risen, more people may find they will exceed the personal savings allowance1 whilst the tax-free allowances for capital gains and dividends outside an ISA are set to be significantly reduced 2.

How much risk should I take?

Investment risk is usually measured in terms of volatility (of a company or stock market) which simply means how much shares move up and down in relation to their average price. Higher volatility essentially means that you must be able to accept greater losses (at any point in time) alongside the potential for stronger gains.  

When it comes to your personal risk profile there are two aspects to consider. The first is ‘capacity for risk’ which depends on your income and other financial resources – this is likely to change as your personal circumstances change. The other side of the coin is your personal attitude to risk which will affect your investment choices (are you a natural worrier for example?). There is no point in investing in areas of higher volatility if it means you lose sleep at night.

Thinking about your capacity for, and attitude to, risk should influence whether your portfolio is tilted towards bonds (loans to companies) or equities (shares in companies). Whilst bonds are generally less volatile than shares that doesn’t mean to say they won’t fall in value in certain market conditions. Even if you are comfortable with stock market risk, it can be good to remember that emotions may drive your investment decisions; it can be all too easy to follow the crowd and forget your personal goals when markets are rising or prices have fallen.

In general, the younger you are the more risk you can take as time is on your side. For example, if investing in a JISA for a child, bear in mind they usually have a long-time horizon, perhaps 18 years or more. So, it may be worth considering asset classes such as emerging markets or smaller companies which tend to be more volatile but have potential for higher growth (but also higher potential for loss too). On the other hand, if you are already retired and hoping to generate some extra income, you might prefer a bond or multi-asset fund. 

Be mindful that inflation can affect any returns – including cash!

High inflation is something we have heard a lot about recently –  it's behind the cost-of-living crisis that is squeezing household budgets. To maintain our living standards, we need to see a ‘real return’ on our savings and investments. But, if your savings earn 4% per annum and inflation is 10% per annum, that means your real return, after deducting inflation, is negative. 

While it is all well and good saying this. More often than not investors find it hard to look past short-term performance: and in times of uncertainty it isn’t nice seeing investments losing value, it is unsettling even for the most experienced investors. However, while we know that company shares rise and fall, and whilst past performance is not a reliable indicator of future results, history suggests that over the long-term markets trend upwards. The general rule of thumb is to stay invested for as long as is suitable for your circumstances – both to try to tackle inflation and also to ensure your investments have as long as possible to try and make back any losses.

Although holding too much cash can risk your capital being eaten away by inflation, do remember to keep an emergency reserve for unexpected events; between three and six months of outgoings is typically suggested.  

Where should I invest?

A lot of investors have a noticeable bias to their home market, perhaps because they recognize well-known brands held by UK funds which somehow feels reassuring. However, although many UK companies do business around the world, our stock market is dominated by ‘old economy’ sectors, such as miners, oil, banks, and tobacco, which are not everyone’s cup of tea. 

So, what opportunities could you be missing out on by focusing on the UK? Experts suggest a well-diversified portfolio, across a range of geographies and asset classes, gives the opportunity to seek out the best each region has to offer. This should help to smooth returns, as not all markets rise and fall at the same time. 

A world of opportunity

There is a tendency to assume that investing overseas is riskier. Certainly, exposure to different currencies can add extra volatility. Some Emerging Market countries have lower standards of corporate governance, and their stock markets may be less well regulated. However, as is always the case, there will be winners and losers. 

Some countries establish leadership in innovative new industries and may be home to companies which have enjoyed global dominance for many years. Examples include the German car manufacturing industry, Japanese electronics and, more recently, US digital technology or clean energy in Europe. 

Long term structural trends (typically driven by powerful forces such as disruptive technologies, changing demographics or consumer behaviour) may also favour certain parts of the world. Asia, for example, is benefiting from a growing and increasingly affluent middle class driving consumer spending whilst financial inclusion, better healthcare, and improved infrastructure and communications is helping to lift millions out of poverty. 

How can the Big Exchange help?

We offer funds specialising by asset class or geography as well as global options. Don’t forget that global equity funds often have a significant exposure to the US which makes up more than two thirds the MSCI World index. So, if you prefer to increase exposure to another region, there are funds to choose from which focus on the UK, Europe, Asia, or Emerging Markets.

For those newer to investing who find the choices overwhelming, we offer our own starter Bundles, or a selection of multi-asset funds for if you prefer to delegate asset allocation to a professional. If you don’t want to invest a lump sum all at once, you can always drip-feed monthly into the market with our monthly investment plan, from £25 a month. 

One of my favourite quotes from the legendary US investor Warren Buffet, which I think resonates with anyone who has a concern for the planet, is this:

‘Someone is sitting in the shade today because someone planted a tree a long time ago.’



To learn more about how to become a positive impact investor visit The Big Exchange or follow on Instagram, LinkedIn, YouTube, Twitter or Facebook or download The Big Exchange App to manage how you save, invest and spend your money, all from one place.  

Please remember that when investing, making money is not guaranteed and your capital is at risk. The value of your fund can go down as well as up. Tax treatment depends on an individual’s circumstances and may be subject to change.  

The Big Exchange does not provide Financial Advice. If you are unsure, please seek advice from an Independent Financial Advisor.

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