4-1 What Is a Portfolio?

The chapters so far covered what kind of product equities and funds are and what movement and return they carry. Next comes how to combine them to suit your own purpose. With a portfolio, what matters is less guessing the correct weights and more deciding the overall allocation while checking how much movement can I actually keep holding through.

1. Look at overall allocation, not a list of productsCopy Anchor Link

Looking at products one by one pulls your attention towards "does this product look good?". That question is necessary, but on its own it tends to skip is this a way of holding that suits me. Even if you understand how equities and funds behave, the weights you hold them at change how your whole portfolio moves quite considerably.

2. When deciding weights, start from the movement you can tolerateCopy Anchor Link

The first thing to think about in a portfolio is not the size of the expected return. What to put first is how much movement can I absorb?. Risk here, as Chapter 1 set out, is the size of the price movement. It is not only risk as a number — what matters is how you actually feel when your assets swing sharply.

If you feel I could keep holding through a swing of around 30%, a design with a higher weight in equities or individual shares becomes easier to take. If instead you feel I would rather not be on edge over large moves, building around lower-movement products such as bonds and deposits is easier to sustain.

3. The ideal allocation is not set by age aloneCopy Anchor Link

You often see "you can be aggressive while young" and "you should be defensive as you get older". These are useful as a starting handle, but they are not simple rules to apply as they are. In practice, the allocation that fits changes with your purpose, your horizon, and how much movement you can keep holding through.

Investor A is 55, but wants to run spare money for a long time and can accept movement, so the equity weight is higher. Investor B is 38, yet weights defence heavily because the money is needed soon. Investor C is 25, but being young does not automatically mean high risk — the balance reflects how they feel about movement.

What to take from this is not "whose allocation is correct". When age, purpose, and risk tolerance differ, the reasonable weights differ too. Which is precisely why, rather than copying someone else's weights, it matters to be able to explain in words how much movement can I tolerate and why did I choose this allocation.

So a portfolio is something you look at as an overall allocation rather than a list of products. Next, we work through the three axes to check when thinking about diversification.