Portfolio Construction

Design. Build. Review.

Portfolio construction is the process of selecting investments and determining their proportions, based on guiding principles, with the goal of increasing the likelihood of achieving your desired outcome.

Design

Before building a portfolio, it's essential to define the framework: 

• Definition of risk: What does risk mean to you?

• Ability and willingness to take risk: What can you afford to lose, and are you comfortable risking that much?

• Time horizon: How long until you need access to your capital?

• Return objectives: Are you targeting absolute returns or performance relative to a benchmark?

• Benchmarking: Will you measure success against a public index or private liabilities?

• Asset class allocation: How will you divide capital across equities, fixed income, alternatives, etc.?

• Geographic exposure: What economic regions or currencies should be in your portfolio?

• Unique preferences or constraints: Liquidity needs, tax considerations, or other personal factors.

Build

Once the design is clear, construction begins: 

• Concentration vs. diversification: How much risk are you willing to take in individual positions?

• Market cap weighting: Should your portfolio reflect market size or be equally weighted?

• Investment style: Active, passive, or a blend?

• Correlations: How do your investments interact with one another?

You’ll also need to weigh the relevance of:

• Historical performance: How much should past performance (or back-tested results) influence your decisions?

• Forward-looking projections: What assumptions are baked into your future expectations?

Review

After implementation, ongoing evaluation is key:

• Monitoring and updates: How frequently will you review performance, rebalance and/or change individual investments?

• Structural flexibility: Will your portfolio structure evolve with changing circumstances, or remain fixed?

Intentionality

For every decision above, why was it made?

At EAO Capital, we help you thoughtfully navigate these questions to create a tailored investment policy that reflects your goals, values, and circumstances.