How to build a balanced portfolio from scratch

How to build a balanced investment portfolio

This guide will explore:

• What is an investment portfolio?
• Using the ‘portfolio mindset’ to build a balanced investment portfolio – starting with two important concepts
• Building an investment portfolio – in five easy steps
• Putting it into practice – An illustrative example
• What to do if a decision doesn’t work out – checking in, keeping it on track

Building your own balanced portfolio doesn’t have to be complicated. The do-it-yourself route can offer the flexibility to customise your holdings to your personal circumstances and goals. And while it takes some time and discipline, the process can be more manageable than it seems.

Whether you are looking to build a balanced portfolio for the first time, or just checking in with how your portfolio is positioned, this guide breaks the investment process down into a few simple, repeatable steps.

Important to know up front: Investing involves risk. The value of investments can go down as well as up, and you may get back less than you invest. This guide is for general information only and is not personal financial advice.

What is an investment portfolio?

An investment portfolio is simply a collection of assets – often a mix of equities, bonds, funds, and cash – held together to pursue a financial goal. The point isn’t just to seek returns, but to maximise your return while managing your risk in line with your personal situation and tolerance.

Most UK investors hold their portfolio across one or more account types. Tax-efficient wrappers such as a Stocks & Shares ISA or a Personal Pension are popular, alongside general investment accounts (in which returns are taxable).

What a balanced investment portfolio means

A balanced investment portfolio is built from investments that may behave differently in different market conditions. The aim isn’t to eliminate risk, but to avoid being overly reliant on a single outcome, by combining assets with different risk and return profiles.

The ‘portfolio mindset’

A key first step is adopting a portfolio mindset. Instead of judging each investment on its own, you consider how any new decision changes the overall mix of risk and returns. This can help you stay disciplined and understand what your portfolio is actually exposed to – especially when markets move.

Two key terms: risk and diversification

What is diversification?

Diversification is one of the most important concepts for investors, and is fundamental to risk management processes across the investment world. Diversification captures the practice (and effect) of spreading investments across different asset classes, sectors, and geographies to reduce individual risk.

The core idea: don’t put all your eggs in one basket.

What is risk?

In broad terms, risk in investments refers to the range of outcomes. At the positive end of the range, your investments may do extremely well, and at the negative end (in extreme cases) you could lose all of your original investment.

In the context of building a balanced portfolio, risk often refers to volatility (how much prices move up and down). Volatility is commonly measured using standard deviation, a common statistical way of describing how widely returns typically vary around their average.

Risk – while measured by volatility – is driven by components that can differ according to the investment. Investors may face factors such as inflation risk, interest-rate risk, currency risk, credit/default risk, and liquidity risk. For the purposes of understanding portfolio risk, volatility is important to understand. You can read about what causes volatility and how it relates to investment return in our guide.

A key diversification insight is correlation: combining assets that don’t move exactly together can reduce overall portfolio volatility. By adding negatively correlated assets – assets that move oppositely to each other – you can smooth out the portfolio return profile. For example, if one portfolio investment performs poorly, an uncorrelated investment may have performed better, reducing the impact. This typically comes at the cost of ‘performance drag’ across different market cycles – adding assets that effectively smooth out volatility can detract from portfolio performance in strong market periods. The “holy grail” for investors is finding assets with near-zero correlation in their return profile.

For example, adding bonds may reduce overall volatility more than simply adding more equities, because bonds tend to behave differently (although these relationships can change over time and are not guaranteed).

In general, higher expected return usually comes with higher risk (all else equal, including time horizon).

How to build your portfolio in 5 steps

Step 1 – Start with your (goals, timeline, and cash needs)

Building an investment portfolio that aligns with your financial goals starts with understanding yourself as an investor.

You can build up your investor profile by asking yourself the same types of questions a wealth manager might ask when getting to know you as a client.

Before you choose funds or shares, get clear on four things:

• Your goal: What is this money for? Knowing what you hope to use your portfolio for will shape lots of aspects of your portfolio. Is it for retirement, a future purchase, long-term wealth, education, or increasing flexibility?
• Your time horizon: When might you need the money? Longer horizons usually make it easier to live with market ups and downs. As a general rule, J.P. Morgan Personal Investing suggests investors only invest money they will not need in the next three years.
• Your access needs (or ‘liquidity needs’): Some investments are easier to sell quickly than others. With harder-to-sell (less liquid) investments, you may not be able to sell right away, or you may have to accept a lower price if you need cash quickly. Consider this if you might need to withdraw funds on short notice.
• Your risk tolerance: Markets move around, particularly in the short-term. If you don’t need to use the funds invested in your portfolio for a long time, you may not be financially impacted by the value moving around within any given year. If bigger fluctuations in your portfolio value make you very uncomfortable, this might mean you have a lower risk tolerance.

Whatever your approach, remember that investors should generally always have a separate cash buffer before investing to deal with emergencies. Having a comfortable buffer means you are less likely to need to sell investments at an unfavourable time.

Step 2 – Set your initial asset allocation

Once you have a clear investor profile and account structure, the next stage is portfolio construction: setting your broad asset allocation and then ensuring you are properly diversified within each asset class.

Asset allocation is how you split your portfolio across broad asset classes.

Common building blocks include:

• Equities (shares): Often a key long-term growth driver, but prices can move more sharply.
• Bonds: Generally regarded as less risky than equities. Can provide income and may help smooth returns. Bond prices can fall – especially when interest rates rise or credit conditions worsen.
• Cash/cash-like holdings: Useful for stability and near-term spending needs, but over time cash may lose purchasing power due to inflation.

Some investors use simple 'reference' mixes. You may hear terms like a '60/40’ portfolio, which refers to a portfolio with 60% of assets allocated to equities and 40% to bonds. Investors may, for example, dial the equity allocation up in pursuit of more returns – accepting that risk will also increase – or dial the equity allocation down in favour of other asset classes, to curb volatility while accepting more modest return potential. There are other asset classes which may help diversify a portfolio and add other characteristics, and come with their own specific types of risk. Some can require more investment knowledge and may be more challenging to access, or require large amounts of capital.

These are not one-size-fits-all. Your goal, timeline, and comfort with risk should drive your mix.

We have written in-depth guides to both equities and bonds, the core building blocks of many portfolios, if you would like to read more.

Step 3 – Diversify within asset classes

Once you’ve chosen your broad mix, diversification continues inside each bucket.

Within equities, you might diversify across:

• Regions (UK, US, developed markets, emerging markets)
• Sectors (technology, healthcare, financials, energy, etc.)
• Company size (large-, mid-, and smaller-company exposure)

Within bonds, you might diversify across:

• Issuer type (government and corporate)
• Credit quality (higher quality vs higher yielding but riskier issuers)
• Maturity/duration (shorter vs longer-term sensitivity to interest rate changes)

This is a step some investors miss when checking in with their portfolio. Understanding how diversified your portfolio’s drivers of return are can be valuable in building a more balanced and resilient investment portfolio.

Step 4 – Choose your investments

Many beginners start with diversified funds to reduce concentration risk and simplify portfolio maintenance.

Concentration risk refers to the extent portfolio performance (especially losses) depends on a small number of specific investments, sectors, countries, or asset types. In other words, it refers to the impact a negative move in one area or investment can have on the overall portfolio. Investors manage it by monitoring exposures and diversifying across assets.

• Exchange-traded funds (ETFs) trade on an exchange like shares and typically hold a basket of investments. Some ETFs track an index (known as ‘passive’ investing), while others engage in security selection ('active'). ETFs can be an efficient way to gain portfolio exposure to certain asset types in a diversified manner, but costs still matter (fund charges and trading costs).
• Open-ended funds (unit trusts and OEICs) pool investor money to buy a portfolio of investments. Unlike ETFs, open-ended funds typically don’t trade on an exchange; they are priced based on the value of the underlying holdings, often referred to as net asset value (NAV).
• Investment trusts are listed companies that hold a portfolio of investments and trade on an exchange. Their share price can be above or below the value of their underlying assets, and some use borrowing ('gearing'), which can increase gains and losses.
• Individual stocks or bonds offer investors the ability to choose an exact company to invest in, which may reflect personal values or convictions. Individual holdings are rewarding to research, but typically require more initial and ongoing work. Individual single-stock holdings can also increase concentration risk, which is one reason some investors prefer diversified funds (especially as they start out).

Step 5 – Keep it on track (simple risk management habits)

• Research – Investment research – forming an understanding of your portfolio holdings and building a picture of world events – is important to risk management. We’ve written a guide to starting investment research to help you set off on the right foot.
• Know your costs – Fund charges, trading costs (which may include market spread) and platform fees can reduce returns over time.
• Invest regularly (if it suits your cash flow) – Regular contributions can reduce the pressure of trying to pick the ‘perfect’ moment to invest, but it does not prevent losses.
• Diversification – Diversification, and knowing how diversified your portfolio is, can be a simple but powerful way to limit concentration risk.
• Pound-cost averaging – One of our Principles of Investing is to focus on ‘time in the market' rather than 'timing the market’. Markets move up and down, particularly in the short term. Pound-cost averaging can be thought of as ‘drip-feeding’ your money into financial markets over time, rather than choosing one moment to commit your funds. This commits your money to (buys you into) markets during the various ups-and-downs, meaning you can be less exposed to short-term market movements.
• Position sizing – Avoid over-concentrating in any single stock or sector. Setting a maximum target allocation for one position can be helpful. You may remain comfortable with a position that has grown beyond your target size, but having targets like this can encourage portfolio discipline.
• Monitor, review, rebalance (if needed) – Reviewing your portfolio at regular intervals that work for you – such as half-yearly or annually – can help to keep it balanced and on track. You could revisit your risk tolerance and goals at the same time, as they can change over time. In a GIA in particular, rebalancing can have tax implications, so be mindful of how adjustments may impact your tax position.

J.P. Morgan Personal Investing does not provide personalised tax advice. If you have any queries about your personal circumstances, you should speak to a qualified tax professional.

Putting it into practice

There's no single 'right' portfolio. The most appropriate mix depends on your goals, time horizon, how comfortable you are with volatility and, in extreme cases, your capacity to absorb permanent loss of capital.

A more cautious investment portfolio may contain a more defensive mix incorporating bonds, cash and equities with a lower volatility profile. An investor more comfortable with risk may have more of their investment portfolio in equities, accepting that the portfolio may experience larger and more frequent swings in value.

An investment portfolio example (illustration only)

Client A is a high-earning woman in her early 40s, with two children. She is married, but the couple keep their finances separate.

She has limited time to research investments but wants to build and maintain her portfolio. She wants to start with passive ETFs and may consider active funds or individual shares later.

Her main investment goals are:

1. Retire comfortably
2. Support her children’s future education
3. Build flexibility to work less in future or take a career break

She might want to contribute to a Personal Pension (in addition to a workplace pension) and use a Stocks & Shares ISA for flexibility. She may also want to set up a Junior ISA (JISA) for each child (or use ISAs in her own name if she wants to retain control).

She expects to retire in ~25 years. She may use her ISA to fund a career break in the future. Her children are 11 and 8, meaning they are seven and 10 years away from accessing JISA funds at age 18 (as the younger child is further from 18, the client may be willing to take on more risk).

Below is a simple illustration of how her accounts and her children’s accounts might be allocated (no cash balance in the example).

If mistakes happen, stick to the principles of investing

Not every investment decision will go your way, and that’s normal. If you’re new to investing, avoiding some common mistakes can prevent a temporary setback from becoming a long-term problem.

• Emotional trading
  
  Panic-selling during downturns can lock in losses. Remember that if a portfolio or asset declines in value, this only becomes an actual loss if you sell it. And whilst losses may continue, the reverse is often true and stocks can move upwards again, in which case there would have been no need to lose money by selling.
  
  ‘Chasing performance’ is another example of emotional trading. It relates to investors buying on the back of recent strength alone, which may not reflect the company’s overall prospects. It can lead investors to buy things they don’t fully understand, and with no firm idea of what they expect from the investment. Setting your expectations for investments ahead of time can prevent emotional decisions. Conducting your own investment research can help you establish how you want an investment to contribute to your portfolio, whether that’s (for example) a fund generating the expected level of income, or a company successfully executing the business strategy to grow.
  
  
• Over-diversification – Holding ‘overlapping funds’ can dilute returns without reducing risk meaningfully. Funds can ‘overlap’ if they hold a number of the same investments, which can mean you’re not as diversified as you think. To avoid it, check the fund’s ‘top holdings’ list and consider funds that focus on different areas. Investors could also use fewer funds instead of several similar ones.
  
  
• Ignoring or underestimating fees – It’s easy to underestimate how fees and trading costs stack up. Know what your investments will cost you to buy, sell and hold.
  
  
• Neglecting rebalancing – Letting your portfolio drift without checking in can mean taking on more (or different) risk than you intended.

If mistakes happen, you can ‘reset’ by returning to our investment principles.

Set clear goals, start early and invest consistently, avoid letting too much sit in cash without a plan, and understand the risk–reward trade-off you’re choosing. Keep diversification purposeful, manage emotions, and use available tax allowances where you can – these habits do more for long-term results than trying to be perfect on every single decision.

Risk warning

As with all investing, your capital is at risk. The value of your portfolio can go down or up and you may get back less than you invest. Tax rules vary by individual status and may change.

Past performance and forecasts are not a reliable indicator of future performance. We do not provide investment advice in this guide. Always do your own research.