What should you hold in your portfolio? Four investors, four different answers

What you should invest in is a big question to answer, and it requires a lot of personal understanding of yourself and an ability to ignore what other people are doing.

This may sound like something you’d hear in a therapist's office, but they’re entirely relevant objectives for investors as well.

A major question you must answer is ‘how much risk am I willing to take?’, because this will determine what type of assets you should hold and in what ratio.

To help illustrate the options and key considerations we have created four hypothetical personas. The bucket of assets we’ll play with here are equities, which have the highest risk but have the potential to generate the highest returns, and bonds, which are a more steady source of income and add a bit of protection to your portfolio.

There are a lot of other options, such as gold, cash and alternatives, you can hold but, for the purposes of this exercise, we'll stick to the main asset classes.

Adam and Josh, work colleagues aged 27

Starting off with two hypothetical work colleagues, Adam and Josh. Both are coming up to their late 20s and each having a long-term investment horizon.

During their lunch break, the pair frequently talk about the market and their portfolios, and Adam is really excited by all the AI chatter going on in markets and thinks that we’re about to see some really big moves in the stock market. Josh is a bit more nervous, he remembers back in the pandemic when equity markets fell sharply and his portfolio took a big short-term hit, which made him fairly anxious.

Adam, is what we’d call a more ‘bullish’ investor, which is a label given to investors who are optimistic about things being on the up in markets.

Josh, meanwhile, is more bearish, or in other words, he has a more pessimistic view on the outlook.

Both guys fit the profile of someone who could handle a higher risk profile, essentially having more in equities than bonds. This is because they each have a long-time horizon which allows time to ride out ups and downs in the market. The longer you stay invested the more likely it is that your money will have time to recover from any losses.

An interesting fact about markets is that there are only a certain number of days which drive the majority of market returns, so staying invested increases your chances of capturing these. Over the past two decades, money invested in the S&P 500 – one of the highest returning equity markets of that period – grew more than eight-fold. However, if you had missed the 10 best days, you would have earned less than half of that. Read more about the three reasons selling your investments in a panic can really cost you.

Going back to Adam and Josh and while they both suit having a higher equity to bonds ratio in their portfolios, that doesn’t mean that they suit having the same weighting necessarily, because of the disparity in their tolerance for market volatility.

Adam, who is more willing to back the market optimism for potentially higher returns, opts to put 100% of his money into equities, meanwhile Josh has opted for an 80/20 split.

This multi-asset combination for Josh means that while he might end up with a lower level of returns than Adam as bonds tend to produce lower returns than shares, but that’s worth it for him to avoid having sleepless nights over short-term losses.

Amy, 28 and works in a different team to Adam and Josh

While making a cup of tea in the kitchen, the lads’ colleague, Amy, who works across the office from them, overhears them chatting about investing.

Amy immediately feels tense hearing it. Investing makes her nervous but she wants to get her money working harder because of inflation. She’s taken the plunge and invested in a global tracker fund last year but now doesn't know what to do next.

This isn’t to enforce a negative stereotype that women cannot invest, rather it speaks to the reality that men and women have quite different experiences with investing.

AJ Bell’s study into the ISA gap found that while men tend to open their first Stocks and shares ISA at age 21, women tend to do so much later and are way more cautious about it.

Men tend to trade more while women end up holding a lot more in cash which, combined with factors like having children, the value of women’s investment pot tends to be markedly lower than men’s, a 46% disparity in their 30s which is the peak decade for this gap to grow.

Just like Josh, Amy has the time horizon to take on some risk with equities but may feel a tad more secure with some more defensive holdings.

Having already got a global tracker fund, another three to five funds would be a good number to settle on.

The tracker fund will give her pure equities exposure so far with a lot of focus on the US, so in order to keep her pot diversified, Amy might consider a fund focused on a different, non-US region, and may be tempted to follow her ‘home biases’ and opt for a UK equity fund.

For bonds, she may consider an active fund because, while they’re a bit more expensive than the trackers, they can ideally offer better returns and protection during periods of volatility by providing more focused exposure. And as she hears Josh and Adam chatting about all the latest changes, having some expert hands at the tiller managing her money helps her feel that bit more reassured about staying invested.

Chloe, aged 63 and Amy’s line manager

Also making herself a cuppa is Chloe, Amy’s line manager, who is getting ready for their one-to-one this afternoon.

Overhearing the lunchtime chatter makes Chloe think about the changes she’s been making to her portfolio as she prepares for retirement in a few years.

Chloe is grateful that back when she was Amy’s age, her manager told her about paying into her pension when she was young and she makes a note to follow up with Amy later about it.

Just like the investment gap, the gender pension gap is a very real problem and AJ Bell found that age 28 is a tipping point year for this. It's at that age, which Amy, Adam and Josh are about to hit, that women start to move towards this ultimate 48% disparity in their pension pots. This is due to a myriad of factors but, in particular, career breaks to have children. Read more about the role bonds can play in an investment portfolio.

Chloe has had her portfolio split with a higher weighting to equities than bonds for most of her investment journey but now she’s coming to retirement she’s preparing to switch that ratio and take lower risks.

A common goal in retirement is to live off your investments and bonds are a reliable source of income, and the equities she does own will be less focused on growth and more about income-generation and paying a dividend.

She's just sold one of her global equity funds and pivots the proceeds into a strategic bond fund to achieve this. Though it suits Chloe to make this move, some investors in retirement will still want to put the emphasis on growth to make their portfolio last, particularly if they have entered drawdown.

Which just reinforces the point that these scenarios are just a modest illustration of the options available to investors. Everyone will have their own approach to generating wealth from the financial markets.