Portfolio Construction
Portfolio construction is simply selecting a ‘basket’ of investments – selected from available investment types such as cash, fixed interest, property, equities (shares) and even alternative investments – that take into account the investor’s objectives over the short, medium and/or long term.
It is about constructing a diversified portfolio of assets using an appropriate asset allocation strategy to enhance performance and minimise risk of the overall portfolio (or basket of investments).
Key steps to portfolio construction

Asset allocation
Asset allocation is a key fundamental of portfolio construction and investing. Studies have shown that a large part of the variation in returns between different portfolios can be attributed to inappropriate allocation of assets, rather than market timing or individual investment selection.
There are four types of asset allocation methods used in the industry.
- Static – set the benchmark and hold
- Strategic – set the benchmark, regularly review and re-balance when required
- Tactical – short term tactical changes to "beat the market"
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Dynamic – based on macro trends, economic cycles, etc
Fundamentals of asset allocation
- Diversification
- Defensive assets vs Growth assets
- Time frame for investing
- Rebalancing the portfolio
Successful asset allocation means achieving objectives with the least possible risk.
Diversification benefits
Diversification of your
investment portfolio across
all asset sectors allows you to 'hedge your bets'.
By spreading
your exposure and investing in
different assets you create a
portfolio in which you are able
to minimise to some degree
the losses that may occur in
one asset sector with gains in
another. The overall effect is
that you moderate the risk and
smooth out your investment
returns over time.
Benefits
- Exposure to a broader range of assets across the different asset classes
- Optimise performance of a portfolio by having negatively correlated* assets
- Minimises volatility of portfolio by spreading risk across various assets and asset sectors
- Potential to yield higher returns with lower risk
Risk vs return
Each asset class comes with it its own element of risk. Understanding the risk/return trade-off for the various asset classes is
very important.
That is, the greater the returns, the greater the risk you take, and vice versa.
It's how much risk you are prepared
to accept from each class that helps determine your asset allocation.

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If you stick to the basics of
investing you will have a much
better chance of getting through
any period of high volatility and
uncertainty. We can help you develop a portfolio that suits your investment goals. Speak with one of our experienced advisers for an obligation-free discussion.
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Visit our learning centre for more information on the basics of investing.
Investment Basics
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