Portfolio Construction Principles

Long-term return forecasts can be a vastly superior guide to the future than historical returns.

• Breaking returns into the three components income, income growth, and the effect of changing valuation ratios can provide clear insights into future returns




• Long term forecasts of asset class performance are generally far more reliable than short term forecasts, and infinitely more reliable than historical extrapolations




• Using past sector performance as a guide to the future is worse than meaningless. It is generally a counter indicator.

Risk, like beauty, is in the eye of the beholder. It is best assessed with the investor in mind.

• All risks that are relevant to the investor must be considered.




• Most risks faced by private investors can be grouped as affecting long term real returns, liquidity or peace of mind. 




• The key risk faced by most investors is having insufficient long-term, real returns to satisfy their cash flow needs




• The most important risk to any investor is rarely associated with a Greek letter




• The one risk that investors should not have to worry about is someone else’s business risk

Portfolio’s should be built to meet investor cash flow needs

• The main driver of portfolio construction should be meeting investors cash flow needs with an acceptable level of certainty




• Portfolios don’t have to be theoretically perfect, highly efficient and robust will do.




• Taxes, transaction costs and fees can represent over 50% of returns, they must be factored in to all decisions.




• Business risk should never be the key driver of portfolio construction.