Creating strategic wealth portfolios can be a daunting and uncertain process, but there are some basic steps that can help you the best wealth portfolio for you and your family.  

There are two main ways of constructing a portfolio. The first is to pick a list of the best investments you can find and then invest in them. This is a “bottom-up” approach. If you are into sport, think of it as picking the best stars available to create your dream team. It’s your team of champions. If, like many, you have a portfolio spread across 20 to 30 shares, then you’ve likely already adopted a bottom-up approach.  

Think of your growth assets as your backs in rugby, or forwards in soccer. They are the flamboyant stars who may cost you a bit more but who you rely on to score points.

Alternatively, you can look at the portfolio as a cohesive team, with each player picked based on how they best interact with, and complement, each other. Your goal is to create your champion team.

If your focus as an investor is asset allocation between asset classes (domestic shares, property, international shares, cash and bonds), then you likely follow a “top-down” approach.  

I’ve long followed the “top-down” approach. With clients, I focus on their portfolio goals, how we split their investments between growth and defensive assets and the various asset classes, and then selecting best-of-breed investments that meet their objectives.

Before you construct your portfolio, determine what you are trying to achieve. Are you seeking long-term capital growth, capital preservation, income or a mixture of each? Is it a legacy for your family? Will you need to access portfolio funds in the short term? Are you prepared to weather short-term volatility?  

Build a solid line of defence

You should take no more risk in your portfolio than you need to. If you want a 2.5% return and you can achieve 2.5% return by holding cash, then why take any more risk? Additional risk is only required if you want to achieve a higher return. Determine what you are trying to achieve with your portfolio before you begin constructing it.  

If we return to our sporting analogy, you can think of your growth assets as your backs in rugby, or forwards in soccer. They are the flamboyant stars who may cost you a bit more but who you rely on to score points. Your defensive assets are your rugby forwards (or your soccer backs) who provide a solid line of defence.  

Growth assets include domestic shares, international shares and property. Your defensive assets include cash, term deposits and fixed income investments (also known as bonds). They all deserve a position in your strategic portfolio.  

Keep things simple and avoid riskier assets such as commodities, hybrids, gold, derivatives and foreign exchange.  

A key secret to savvy portfolio construction is admitting to yourself that you will never be right all the time on all your investments. Some will go up and some will go down in value at different times. Accepting you are going to be wrong does not mean you need to accept lower returns.  

Constructing a strategic portfolio can increase your returns where the whole portfolio performs better over time than the sum of the investments.

Evaluate performance on investments

There is extensive financial theory that supports the concepts of diversification and correlation. However, I prefer the wisdom our grandmothers knew all about: don’t put all your eggs in one basket. It’s simple, but it’s also one of the best rules in portfolio construction.  

In the same way a good coach will regularly evaluate their team’s performance, you should review your portfolio at least twice a year. Use this opportunity to intelligently rebalance your portfolio back to your target asset allocation between growth and defensive assets and across the asset classes.  

I am passionate about portfolio construction and find it fun, exciting and challenging. However, I understand that not everyone shares my passion.  

I encourage you to adopt a disciplined approach to constructing and rebalancing your portfolio. Not only will this result in higher long-term performance, it will also help reduce the emotions and stresses of investing.  

This article is part of a regular Wealth Management column offering tips on personal wealth management and analysis of issues within the wealth management profession. Have something you’d like this column to cover? Email the Acuity team now.