How to build a diversified investment portfolio

What is an investment portfolio?

An investment portfolio is your collection of financial assets – shares, bonds, exchange-traded funds (ETFs), commodities and more. Rather than individual pieces working in isolation, these assets are designed to work together to build wealth over time.

A well-structured portfolio balances growth potential with risk management, tailored to your specific goals. Whether you're saving for retirement, a home deposit or long-term financial security, the way you structure your portfolio can make a significant difference to your outcomes.

Why should I build a diversified investment portfolio?

Putting all your money into a single investment is like putting all your eggs in one basket. If that investment underperforms, your entire financial position could suffer. A well-constructed portfolio spreads your capital across different asset types, markets and sectors, reducing the impact of any single investment's poor performance.

This approach is called diversification, and it's one of the most powerful tools available to investors. Historically, diversified portfolios have tended to deliver more stable returns over time, smoothing out the inevitable ups and downs of individual markets.

Types of investment products

You can choose between several types of investment products. Each product offers a different set of features, and your choice will be based on your individual needs or preferences. Investment products include:

1. Stocks

2. Funds

3. ETFs

1. Stocks

When a company (eg, Coca-Cola, Barclays or Tesla) is listed on an exchange, its  shares  become available to the public. This means that you have the opportunity to buy and own shares of a stock.

Often, people want to invest in brands that have a strong performance history. This is because their value is expected to rise, in which case shares can be sold for a profit. Some stocks also pay dividends and offer shareholder voting rights.

Individual share prices will fluctuate according to a variety of market forces – making stocks rather volatile. For this reason, many investors prefer ETFs. Always take care to manage your risk, regardless of the instrument.

2. Funds

Funds pool the money of investors together and use it to buy a selection of assets. These assets could appreciate, and the fund’s value would then also increase. While funds can be structured differently, they all work on the principle that as the fund grows, each share grows in value, too.

Some funds can only be bought directly from the fund provider in an ‘over-the-counter’ (OTC) transaction. Others, like exchange traded funds (ETFs), are traded on an exchange and can be bought and sold like company stock.

Funds can also be actively or passively managed. Passive funds attempt to track an index, like the FTSE 100, buying and selling stocks that mimic the index. Actively managed funds look to outperform the market, but generally incur higher costs.

Note that we only offer on-exchange funds.

3. ETFs

As touched on above, ETFs  track the performance of a basket of underlying assets – like stocks, currencies or even sectors. This means you can get wider market exposure in one position.

An ETF’s price is determined by the value of its underlying assets, known as the net asset value (NAV). This is calculated as the ETF asset value minus the ETF liability value, divided by the number of shares in circulation.

How to start building your portfolio: practical steps

1. Determine your budget: decide how much you can comfortably invest without compromising your emergency fund or short-term financial needs. Many investors start with monthly contributions, making portfolio building a regular habit rather than a one-time event.
2. Open an investment account: you'll need a brokerage or investment platform that provides access to the markets and assets you want. Compare fees, available markets and platform features before choosing. With IG, you can open an investment account through the IG Markets app with with no/$0 commission, platform and settlement fees.
3. Make your initial investments: start with your core holdings, like ETFs. You can add more specific investments over time as you gain experience and confidence.
4. Set up regular contributions: automating monthly investments helps build your portfolio steadily while taking advantage of dollar-cost averaging. This means you buy more units when prices are low and fewer when prices are high, potentially reducing your average cost over time.
5. Monitor your portfolio regularly: checking too frequently may lead to reactive decisions based on short-term movements. Daily price movements are normal parts of investing, though longer-term trends tend to be more significant for portfolio decisions. Quarterly or six-monthly reviews are usually sufficient unless your circumstances change significantly.
6. Rebalance when needed: markets move constantly, which means your carefully planned asset allocation will drift over time. If shares perform well, they might grow from 60% to 70% of your portfolio, increasing your risk beyond your original intention. Rebalancing brings the portfolio back to your target allocation. You might do this annually, or when any asset class moves more than 5% away from its target. Rebalancing forces you to 'sell high and buy low' – selling assets that have grown beyond their target and buying those that have fallen behind.

Asset allocation: building your mix

Asset allocation is how you divide your portfolio across different asset classes. The main asset classes include:

Shares (equities): offer growth potential but come with higher volatility. Companies can increase in value over time, and many pay dividends, providing both capital growth and income. However, share prices can fall significantly during market downturns.

Bonds (fixed income): generally more stable than shares. When you buy a bond, you're lending money to a government or company in exchange for regular interest payments. Bonds tend to be less volatile, making them useful for balancing riskier assets.

Cash and cash equivalents: provide stability and liquidity. This includes savings accounts, money market funds and short-term deposits. While returns are typically modest, these assets aim to preserve capital, though returns may not keep pace with inflation.

Alternative investments: like commodities, real estate investment trusts (REITs) and cryptocurrencies can add further diversification. These often move independently of traditional shares and bonds, potentially improving your portfolio's overall risk-return profile.

The right mix depends on your goals and risk tolerance.

Common approaches when structuring your portfolio

Choosing and diversifying your investments

Once you've determined your asset allocation, you need to select specific investments and diversify within each asset class.

Diversification strategies

Diversification doesn't stop at choosing different asset types. Within each asset class, spread your investments across:

Geographic regions: global markets don't always move in sync. A portfolio with exposure to Asia, Europe, North America and emerging markets can be less vulnerable to regional economic problems.

Sectors and industries: technology, healthcare, financials, consumer goods and energy all perform differently depending on economic conditions. Diversifying across sectors can help protect against industry-specific downturns.

Individual securities: even within sectors, individual companies can face unique challenges. Holding multiple securities can reduce the impact if one company underperforms.

ETFs and mutual funds can make diversification easier by providing instant exposure to hundreds or thousands of securities in a single investment. For investors building a portfolio from scratch, these funds can be more practical than trying to select individual shares across multiple markets.

Learn more about portfolio diversification

Types of investments to consider

Once you've determined your asset allocation, you need to select specific investments. You might consider:

1. Index funds and ETFs which track market indices like the S&P 500 (a US large-cap index) or MSCI World Index (covering global developed markets). They offer broad market exposure, low costs and minimal management requirements. For many investors, particularly those starting out, index funds can provide an effective foundation.

2. Individual shares allow you to invest directly in companies you believe in. This requires more research and monitoring, but gives you greater control over exactly what you own. You might focus on established companies with strong track records or include some growth-oriented stocks with higher potential returns.

3. Bonds and bond funds can provide stable income and help balance equity risk. Government bonds are typically lower risk, while corporate bonds offer higher yields in exchange for slightly more risk.

4. Sector-specific or thematic investments let you target particular areas of the economy. You might invest in clean energy, healthcare innovation or emerging technologies if you believe these sectors will outperform.

Research can help inform your investment decisions. Look at historical performance, but remember past returns don't guarantee future results. Consider factors like management quality, competitive position, financial health and valuation. For funds, examine fees carefully – even small differences in annual costs compound significantly over time.

Common portfolio building mistakes to avoid

Chasing performance

Investing in last year's top performers can lead to disappointment. Markets are cyclical, and assets that have recently outperformed frequently underperform in subsequent periods.

Ignoring fees

A fund charging 2% annually instead of 0.2% costs you nearly 40% of your potential returns over 30 years. Always account for fees in your investment decisions.

Emotional decision-making

Selling during market downturns or buying during euphoric rallies typically damages long-term returns. Stick to your strategy even when markets test your resolve.

Insufficient diversification

Holding just a handful of shares or concentrating too heavily in one sector or region can increase your risk unnecessarily.

Neglecting to rebalance

Letting your portfolio drift away from your target allocation can result in taking more risk than intended or missing out on growth opportunities.

FAQs

Should I invest a lump sum or contribute regularly over time?

Both approaches have merit. Historical data suggests lump sum investing has often delivered better returns over the long term, because your money spends more time in the market. However, regular investing (dollar-cost averaging) can feel more comfortable psychologically, as you're not trying to time a single entry point. It also makes investing more accessible if you're building wealth from your monthly income. Many investors combine both approaches – investing lump sums when available while maintaining regular monthly contributions.

How often should I review and rebalance my portfolio?

Many investors find quarterly or six-monthly reviews work well for their needs, with rebalancing done annually or when any asset class drifts more than 5% from its target allocation. Checking too frequently can lead to unnecessary trading and emotional decision-making. Remember that short-term volatility is normal – your review should focus on whether your overall strategy still aligns with your goals, not on day-to-day price movements.

How can I invest with IG Singapore?

With IG Singapore, you can build your investment portfolio through our investment app, IG Markets. Access shares and ETFs from major global exchanges, including Singapore, the US, UK, Hong Kong and Japan. Open an account online in minutes, fund it and start investing in the shares and ETFs that match your portfolio strategy.