Portfolio Construction
Portfolio construction is the process of understanding how different asset classes, funds and weightings impact each other, their performance and risk and how decisions affect investor objectives. The role a diversified portfolio plays is an important determinant of investment objective and risk. Aligning the portfolio with objectives and tolerance for risk is essential to managing through inevitable periods of market volatility and avoiding fear-based decisions which can result in permanent destruction of value. Many unique factors can impact both portfolio objectives and strategy (for example, aligning investments with values such as environmental sustainability or social justice). Therefore, a holistic approach to portfolio construction - one that considers the entire ecosystem builds a foundation for success.
When developing a portfolio, it is essential to understand the level of spending it must support, as well as other events that can increase reliance on the portfolio. Asset allocation must reduce the risk of permanent loss of capital by avoiding withdrawals during a market decline. In addition, concentration stemming from privately held businesses or real estate holdings must be considered when developing a diversified investment portfolio, as funds from the portfolio may be required if these other cash flow sources are significantly reduced.
Those with a multi-generational mindset and a desire to grow their portfolio net of any spending, inflation, and taxes must be comfortable taking some risk to meet their long-term objectives. Most take a moderate approach, balancing growth and preservation of capital. Sufficient liquidity and capital preservation in down markets is typicaally of utmost importance. Estate planning to transfer assets as efficiently as possible to the next generation, typically including trusts, have important implications for asset allocation and portfolio implementation. For example, distribution requirements or limitations in a trust may impact the liquidity or income needs of a portfolio, which can impact asset allocation or implementation decisions.
If you need assistance with portfolio construction for your situation, please contact us.