http://www.teletext.co.uk/personalfinance/hunter/default.aspxen-gbFri, 11 Dec 2009 12:41:39 GMThttp://www.teletext.co.uk/images/Logo64x64.gifhttp://www.teletext.co.uk
Before constructing a portfolio, you need to decide on your attitude to risk (low, medium or high) and whether you want capital growth, income or a mix.

You can then think about the balance. The key thing to remember here is not to have all your eggs in one basket.

Just as the best companies have diversification within their business models, so investors should have a range of companies in their portfolio.

Diversity allows an investor to benefit from strongly performing sectors, rather than relying on just one.

So, if a particular share or sector is not performing, a range of stocks will mean this does not disproportionately affect the whole portfolio.

A UK investor may be largely invested in UK stocks because these are ones we can touch, feel and thus understand.

You may even already have a portfolio, perhaps by way of privatisations or have shares in your employer.

If this is the case, you may find your portfolio is skewed towards certain sectors, so remember this when picking future stocks to maintain balance.

For more experienced investors - and those whose available funds to invest are sufficient - there is also the need to consider geographical diversity.

Growth opportunities exist everywhere. The correction in markets has thrown up some interesting buying opportunities.

Also, the economies in the likes of China and India continue to grow apace and certain developing countries' shares have shown significant growth.

One way to access overseas shares could be via a fund that invests in a basket of shares. Investing in overseas shares directly can be expensive.

There is also the need to consider diversification between what are known as "defensive" and "cyclical" shares.

"Defensive" shares are those that are largely unaffected by different parts of the economic cycle, because they provide certain services.

For example, the utility companies. Whatever the state of the economy, we all continue to need water, electricity and gas.

Other sectors, however, are more "cyclical" by nature, and their fortunes will change as time goes on.

For example, at certain times during the economy, the makers of luxury goods and certain retailers will benefit from the consumers' feel-good factor.

When things turn tough, so can the performance of these companies' shares. The different seasons of the year can also have an influence on trading.

Finally, there is weighting. You may decide that you particularly favour banking and retail shares, for example.

The main thing to remember is that by spreading your choices, you have some protection if certain parts of your list perform badly.

A final thank you to all of those readers who have followed the column and provided feedback over the years.

Richard Hunter is head of UK equities at Hargreaves Lansdown. Send your views and feedback to fintalk@teletext.co.uk or text 07624 809882.

Hargreaves Lansdown

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