Key Takeaways

  • To build a robust portfolio, we believe 12-steps need to be agreed and practiced consistently.
  • This process helps take a complex operating system and simplifies it into actionable stages.
  • This is the structure that all portfolios overseen by Morningstar Investment Management follow, providing dependability of approach.

Investing is often about taking the complex and simplifying it into digestible and relevant chunks. If this can be done repeatedly, you’re well on your way to healthy risk-adjusted returns. With this in mind, we thought it would be useful to highlight why we decided on a 12-step process that can be consistently used for portfolio construction—including why this helps an investor to reach their goals.

To start, we must agree that building anything worthwhile requires three core pieces of knowledge. We’ve drawn a parallel with how one would select a sports team, but the same applies if building a house, building a ship or building a portfolio:
• Appreciate the rules—know the goal, including the parameters and any constraints.
• Rank the players—obtain a thorough understanding of each implementation option, accounting for both the expected reward and any associated risk.
• Select the team—take all available information, consider how each implementation option might work together and find the most appropriate overall solution.

Of course, we must highlight that this process is iterative. We never know how a given player will perform on a given day, nor whether a storm will hit, but if the framework is holistically followed it should produce results over the long term. Turning this into a specific investment framework, the 12-steps we believe are best placed to help investors are as follows:

1. Outlining investment objectives
2. Identify portfolio constraints
3. Determine portfolio construction rules
4. Identify investments available for inclusion
5. Understand reward versus risk
6. Assigning conviction levels
7. Ranking the opportunity set
8. Producing all feasible portfolio iterations
9. Development of portfolio quality characteristics
10. Identify the most attractive portfolio composition
11. Iterate portfolio sizing
12. Finalise portfolio allocations

Collectively, these steps allow us to deliver a clear investment process that increases the likelihood of reaching an investors’ goals.

Taking all of the above, we are finally in a position to select the most appropriate solution. This judgment-driven stage allows us to maximise the potential of the portfolio and account for the complexity of investment risk. To prepare investors for the future, the investment team use their expertise to construct robust investment solutions designed to perform well in different environments rather than being considered “optimal” based on expected results or a specific environment.

As a general rule, we avoid short-term forecasts based on one’s ability to predict specific environments. Instead, we aim to prepare for different environments through constructing portfolios that will hold up under many possible scenarios—even ones that we haven’t seen before. In effect, this involves trade-offs to deal with the probability and impact of negative outcomes.

This provides accountability and ultimately helps ensure the outcomes are in line with the best interests of an end-investor.

(We’re a well-established local firm of Independent Financial Advisers, covering Hampshire, Surrey and Sussex.

Our success is based on building strong, lasting relationships with our clients through a friendly, personalised and professional service (Chartered Financial Planner). Acting with integrity in everything we do, helping clients in making life’s big financial decisions, to provide them with peace of mind at every stage.

We provide genuinely independent Wealth Management and Financial Planning services, specialising in Investment Advice, Pension Reviews (including providing advice on Defined Benefit (DB)/Final Salary pension transfers & Commercial Property SIPPs), Investment/Pension Portfolio Management, Options at Retirement, Estate Preservation (Inheritance Tax Planning), Trusts and Funding Solutions for Long-Term Care.

Being independent means we can provide impartial and unbiased advice that you can trust, assessing the whole marketplace to find you the most beneficial and cost-effective solution. The best interests of our clients are at the heart of everything we do and our main focus is to help them in achieving their financial ambitions both now and in the future.)

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