When an investor is first setting up their portfolio, they are usually asking themselves some basic questions, like how much risk they are comfortable taking and what goal they are trying to achieve.
For example, if you are uncomfortable seeing the value of your investments move up and down a lot, then you are probably on the risk averse part of the spectrum.
A risk-averse investor may choose to hold a larger proportion of safer assets like bonds or money markets, while a more adventurous investor could lean more on equities.
Riskier assets have historically provided a higher return than safer assets, but at the cost of higher variability. These assets can also have more dramatic losses, that take time for recovery. Not all investors will be in the situation to wait out the market dips.
Whatever type of investor you are, it is important to put money to work as soon as possible to reap the benefits from investing.
What is diversification and why is it important?
Diversification is important because it helps to reduce the variability of investment returns. It can be achieved by investing across a broad selection of companies and other assets, like bonds, commodities and property.
Diversification acts like ballast which steadies the ship during turbulent times. A properly diversified portfolio is not overly exposed to any one sector, industry or investment style.
A quick and cost-effective way of achieving diversification in stocks and bonds is to consider ETFs (exchange traded funds) which track a global benchmark.
The MSCI World index invests in around 1,320 large and midcap companies listed across 23 developed markets, capturing 85% of the global stock market.
The FTSE All-World index includes large and midcap companies and emerging markets worldwide, capturing 90% to 95% of the global equity universe.
A broad-based global bond index is the Bloomberg Global Aggregate Bond index, which invests in thousands of investment grade government and corporate bonds across the world.
Reinvesting dividends and bond interest
One of the attractions of owning stocks is their dividends, which is income from the investment typically paid twice a year by UK companies. Some companies pay special dividends as well, which is an extra payment that usually happens if a company has sold a part of the business that leaves them with excess cash. Not all companies pay dividends, and some will pay much more than others, so it’s important to check before you invest. These amounts can also change over time.
It is important to stay on top of the dividend payouts and, assuming the income is not required, reinvest them.
Dividends allow an investor to buy more shares which increases dividend income next time, which allows more shares to be purchased and so on, creating a virtuous circle. This is the principle of compounding.
Bonds also pay interest, again typically twice a year, and there are products which pay quarterly and even monthly income. investors who do not need the income will need to reinvest it to fully benefit from compounding returns.
Funds can also have dividend payouts, as they will pass on the dividends paid from the stocks they hold to investors. If your portfolio is invested in funds and you hold the “ACC” version, the fund manager will reinvest accumulated income on your behalf.
Don’t forget to invest your LISA bonus or pension tax relief
The Lifetime ISA or LISA is designed for people saving for a home or retirement. Investors aged between 18 and 40 can contribute £4,000 each tax a year which counts towards the personal £20,000 annual ISA limit.
The government pays a 25% bonus up to the maximum £1,000, which means a total of £5,000 can be invested each tax year. Investors can continue contributing until the day before their 50th birthday.
There are only three reasons investors can make a withdrawal without incurring a penalty. When they reach 60 years of age, if they buy a property in the UK for less than £450,000 or terminal illness.
If a withdrawal is made which does not fall under these conditions the government applies a 25% charge on the entire amount invested.
It is worth noting that LISAs are currently undergoing a government consultation process, with the results expected to be published in early 2026.
Investors contributing to a Self-invested personal pension, or SIPP, should remember to invest the 20% annual tax relief that their SIPP provider automatically claims back from HMRC.
Higher-rate tax payers must claim the extra 20% tax relief by contacting HMRC directly.
Martin Gamble: Shares and Markets Writer
Martin Gamble is Shares and Markets writer at AJ Bell. He was previously the Education Editor of Shares Magazine. He has been with the business since 2019.
Martin graduated from the University of Kent in...
