How to build a future-ready investment portfolio

Investors must focus on their allocation of stocks, bonds and commodities based on their risk appetite

Investors should allow a certain degree of flexibility to adapt to changes linked to unpredictable factors. Getty Images

In a world of constant change, building a future-ready investment portfolio requires careful consideration and diversification across asset classes and regions.

As we look ahead to the year, it's important to consider the anticipated trends in various asset classes which, besides industry-specific factors, are often shaped by a combination of economic conditions, geopolitical factors and global events.

Investors should allow a certain degree of flexibility to adapt to changes linked to unpredictable factors, and focus on the allocation to equities, bonds and commodities, while keeping an eye on trends in technology, ESG (environmental, social and governance), inflation and geopolitical stability.

A critical factor to consider is an investor's risk tolerance level and, therefore, help users to make informed decisions.

Let’s explore expected trends and try to provide sample portfolio allocation recommendations for individuals with low, medium and high-risk tolerance levels.

These are just indications that need to be fine-tuned, carefully considering risk tolerance, investment objectives, personal commitments and the complexity of the investor’s financial position.

ESG considerations will play a more significant role in stock selection as investors increasingly prioritise ethical and sustainable investments; and ESG indexes have shown a tendency to overperform general stock indexes.

The technology sector is expected to continue its growth, driven by advancements in artificial intelligence and digital transformation.

Emerging market stocks may offer opportunities for higher returns as they benefit from economic development and increased global trade, but they are also very susceptible to geopolitical tension, trade levels and overall market sentiment.

As for fixed income, as bond valuations and returns are strictly linked to interest rate levels, the anticipations provided by central banks should be carefully analysed.

However, after the surge in interest rates, buying bonds now is still a good strategy, especially for investors looking for the medium- to long-term stability of their portfolio.

In case interest rates start to tick lower, bonds could also provide extra returns as their price will adapt and rise.

The risks of such a strategy might be partially hedged by using inflation-linked bonds.

When it comes to commodities, oil prices are set to remain volatile due to geopolitical tensions and supply-demand dynamics.

The impact of the focus on renewable energy is marginal in the short term, given the speed at which the sector is growing and a great asymmetry between advanced countries and emerging economies, with the latter offsetting lower demand in the former.

Gold is considered a hedge against uncertainty, a safe haven when things get turbulent in the economy and financial markets.

Nonetheless, bullion it is trading above $2,000 per ounce and near its all-time high.

Therefore, gold investment should be carefully sized to avoid an unexpected impact on portfolio volatility.

Before looking at allocations for three different risk appetites, we need to consider the following:

Always keep at least 15 per cent in cash to tackle uncertainty, family emergencies and to take advantage of new opportunities.

Stock portfolios, for each level of risk, should be as diversified as possible, both in terms of sectors and geographics.

Bond portfolios should also be diversified between corporate, government, high-yield and emerging markets, depending on the risk tolerance level.

Low-risk tolerance

Stocks: 25 per cent. Low-risk investors should have a modest allocation to stocks, focusing on stable, dividend-paying companies and sectors. Tech companies can still be part of the stock allocation, but with minimal wight.

Bonds: 50 per cent. A substantial portion of the portfolio should be allocated to high-quality government and corporate bonds to provide stability and income.

Commodities (gold): 10 per cent. A small allocation to gold can act as a hedge against inflation and market volatility.

Medium-risk tolerance

Stocks: 40 per cent. Medium-risk investors can have a larger allocation to stocks, including exposure to growth and value stocks across various sectors.

Bonds: 35 per cent. Maintain a balanced allocation to both government and corporate bonds, adjusting the duration based on interest rate expectations and adding a small portion of high yield and emerging markets bonds.

Commodities (oil and gold): 5 per cent each. A modest allocation to both oil and gold can add diversification and mitigate risk.

High-risk tolerance

Stocks: 50 per cent. High-risk investors can have a significant allocation to a diversified portfolio of stocks, including international and emerging market equities.

Bonds: 20 per cent. A smaller allocation to bonds is advisable, with a focus on short-duration and high-yield bonds for potential income.

Commodities (oil and gold): 5 per cent each. A small allocation to both oil and gold can serve as a hedge, while providing potential for capital appreciation.

Alternatives: 5 per cent. Consider allocating a portion to alternative investments like real estate investment trusts or hedge funds for added diversification.

Roberto d’Ambrosio is the chief executive of Axiory Global