How To Build The Perfect Portfolio

Your risk tolerance and goals should determine the appropriate mix of investments

- David Thornton

The investment world is full of concepts and jargon. Defensive, growth, correlation, risk, yield … the list goes on. What’s less frequently talked about is how these concepts fit together to form possibly the most important concept of them all – portfolio construction.

As billionaire hedge fund manager Seth Klarman put it, “the challenge of successfully managing an investment portfolio goes beyond making a series of good individual investment decisions”.

How you construct your portfolio will go much further towards achieving your objectives than the individual investments you make. Research by Vanguard has shown that 88% of the investing experience, being volatility and returns, can be attributed to asset allocation.

So how do you go about it?

Set the goals

You don’t start laying the bricks to build a house without first working out a floor plan. The same logic applies when constructing a portfolio.

“You need to know what you’re trying to achieve in the first place, when you’re trying to achieve it, and how you wish to get there,” says Stuart Fechner, director of retail relationships at Bennelong.

It may seem obvious, but goal setting is frequently ignored by many investors.

“Most people don’t really think about goals at all,” says Jonathan Philpot, a partner at HLB Mann Judd. “Ask yourself: what’s the purpose of the portfolio?”

Key elements in a sound plan would include an explicit objective, constraints (such as time), a saving or contribution target, and a timeline for monitoring and re-evaluating progress.