PORTFOLIO CONSTRUCTION | MODULE 1

Understanding portfolio construction

Start the portfolio construction course with module 1, which helps define portfolio construction and details how to get started with establishing an investment process.

What is portfolio construction?
Portfolio construction is the process of understanding how different asset classes, funds and weightings impact each other, their performance and risk and how decisions ladder up to an investor’s objectives.
Bulldozer

In Latin America, a common trend is to focus on individual, high-performing funds

Remember to focus on more than high-performing funds

However, by not thinking about how individual funds work together, the portfolio can be exposed to unintended risks. Adopting a portfolio construction process allows for a holistic approach to investing, which can improve the possibility for better investment outcomes.

3 action items to get started

Checklist
Start by setting objectives
Individual investors and financial professionals can work together to create a plan around short- and
long-term goals.
Risk
Then, understand risk tolerance
Financial professionals should understand how comfortable a client is with changes in investment returns and be intentional about the risks being taken.
Reduce cost arrow
Lastly, minimize portfolio costs
Taxes and fees can be a drag on portfolio returns. Account for these early in the planning process in order to maximize the value of the portfolio’s investments.

Adopt the portfolio construction process

After addressing the three preliminary action items, consider implementing the process BlackRock’s portfolio construction specialists set in place to build better portfolios. The process includes four steps: 1) Benchmark 2) Budget 3) Invest and 4) Monitor.

  • Meet Adam.

    To build a house that is safe, functional, and economical, Adam has to understand how all of the elements of design fit together. Like Adam, financial professionals should understand how elements of a portfolio – like asset classes, weightings and different investment vehicles – work in unison.

    For everything to work together as it should, Adam creates a blueprint. It is a way for him to see how the building process will play out, while making sure his clients’ goals are top of mind.

    Likewise, for financial professionals, it is important to understand clients’ financial goals and the amount of risk they are willing to take to achieve them. Assessing the impact of investment fees and taxes on clients’ returns is equally important.

    When the time comes to build a portfolio, BlackRock’s four-step process makes it easy to get started.

    It all starts with benchmarking, which sets a standard for measuring performance throughout the investment process. Think of it as a blueprint that helps financial professionals navigate asset allocation.

    The second step is budgeting. This involves weighing both the costs and risks of the portfolio, aiming to optimize returns.

    The third step is investing. Before selecting an investment vehicle to invest in, it is important to have a strong due diligence process in place. This allows exposure, risk, cost, and performance of the investment vehicle to be considered before making an investment.

    The final step is monitoring the portfolio, which involves assessing results and adjusting strategies as needed.

    Like Adam, BlackRock understands that having a solid process improves the possibility of better investment outcomes and can help financial professionals achieve their clients’ goals.

Think differently

Taking a few extra steps to understand client objectives, how much risk they are willing to take on to achieve their goals and understanding how costs impact returns is foundational and will help financial professionals properly build out an optimized investment process.

This concludes the first module of the portfolio construction course. Read the next module, which takes a deep dive into the portfolio construction process, to continue the course.

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