Portfolio construction – Managing risk and getting the investment mix right

Portfolio Construction is all about investing in a range of funds that work together to create an investment solution for investors. Building a portfolio involves understanding the way various types of investments work, and combining them to address your personal investment objectives and factors such as attitude to risk the investment and the expected life of the investment.

When building an investment portfolio there are two very important considerations.

  • The first is asset allocation, which is concerned with how an investment is spread across different asset types and regions.
  • The second is fund selection, which is concerned with the choice of fund managers and funds to represent each of the chosen asset classes and sectors.

Both of these considerations are important, although academic studies have consistently shown that in the medium to long term, asset allocation usually has a much larger impact on the variability of a portfolio's return.

To help in choosing a suitable asset allocation we have created a Risk Profiler that helps identify your attitude to risk and therefore better identify a combination of investments to build a portfolio.

With such a vast number of investment funds to choose from, spanning the full range of asset classes and world markets it is easy to become confused when choosing which investments to make. It is even more difficult to choose the right combination of investment to potentially meet your investment goals. 

The 4 steps to creating a portfolio

The 4 steps to creating a portfolio

  • Create your risk profile – Measure your perceived level of risk for an investment (scale of 1 to 10)
  • Asset Allocation – Determining the right combination of assets – the most important part of the portfolio construction process.
  • Fine tune your portfolio – Choose to invest in and/or review your existing portfolio to fit in with the asset allocation most suitable to you, potentially reducing your risk and increasing your returns.
  • Review your portfolio regularly – Once you have constructed your portfolio, it is important to continue to review your asset allocation on a regular basis. Investors failing to do this, may find they become overweight in a particular asset class, potentially increasing the overall risk of their portfolio.

Many investors have built collections of funds over their investing lifetime. As markets have developed and investing styles come in and out of fashion, it is likely that the total portfolio may be too heavily invested in a particular asset class (e.g. equities), region (e.g. Australia), sector (e.g. technology) or even a particular share which is present in every fund but to varying degrees. In other words, your combined portfolio may no longer meet your needs or aspirations.

Run through our Risk Profiler and see if your investment strategy still suits you

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