Portfolio construction

Deciding the shape of the whole - what each part of the money is for, how much goes into any one holding, what is held back, and along which dimensions the holdings are spread.

Example

Ring-fencing a house deposit in stable assets and investing only the undated remainder is a construction decision, not a selection one.

Important

Construction sits above selection. A portfolio of individually good holdings can still be the wrong instrument for the job the money has to do.

Related terms

• Position size — How much of your total capital a single holding represents - the weight that decides how much any given move actually matters to you.
• Asset allocation — The split of capital across broad asset types - equities, bonds, property, cash - expressed as target percentages. The decision that sits above choosing individual holdings.
• Diversification — Holding enough genuinely different assets that no single outcome decides your result. It reduces risk specific to individual holdings; it does not reduce the risk they all share.

Lessons that explain it

• One investment can decide the return of twenty — Venture portfolio returns follow a power law: most of the money comes from very few companies. Working through a portfolio's arithmetic shows why missing the best company matters more than avoiding the worst. (11 min)
• If you invest everything in first cheques, you cannot back your winners — Planning reserves for follow-on investments before making initial investments protects your ability to support your best companies and to maintain ownership where it matters most. (11 min)
• What a portfolio is actually for — A portfolio is not a collection of good ideas. It is an instrument built to deliver specific amounts of money at specific times, and almost every construction question becomes answerable once that is written down. (10 min)

All 578 terms in the Investing glossary