Learn how to build diversified portfolios with “Portfolio Builder”

Marcia Lewis Brown, CFA, presents a series of model portfolios, from lower to higher risk, and explains the principals of each one. Every Quarter, you can follow Marcia as she adjusts these model portfolios to take into account changing market conditions. We track their performance over time to demonstrate how different asset mixes affect portfolio performance and risk.

Managing Risk and Return

The goal with any portfolio is to manage the trade-off between lower risk and higher return. In order to have the potential for getting better returns, you have to take on more portfolio risk. Too often we focus on predicting the future performance of the economy and individual securities, sectors and asset classes. But these are just the raw materials: they are so much more effective together than they are on their own. A well-constructed portfolio is more than the simple sum of its parts. The key to building a sound portfolio lies in combining asset classes that do not behave in exactly the same way. When you do this, you lower the risk of the total portfolio without sacrificing return. And then, by increasing the risk of the total portfolio, you can increase the possibility of higher returns.

Finding the Right Risk for You

“Portfolio Builder” demonstrates this principle with a series of sample portfolios that range from low risk to high risk. Of course, there are an infinite number of possible investments and combinations, and our model portfolios are only intended to get you thinking about portfolio management issues. No single portfolio strategy is appropriate for everyone: individual circumstances, financial resources and attitude all play a role. Only you yourself know where you fit into the spectrum and only you can determine what kinds of portfolios feel right for you.

Some of “Portfolio Builder”’s model portfolios have an asset mix which may be more appropriate for taxable assets, while others are more appropriate for your RRSP, taking into account the different tax treatment of interest income, capital gains and dividends. Our higher-risk portfolios have less of a Canadian bias than the lower-risk portfolios and contain somewhat higher-risk investments such as corporate bonds, emerging market equities and hedge funds.

The model portfolios in “Portfolio Builder” each contain a core of Exchange Traded Funds, or ETF’s. This is the easiest and least expensive way to access markets and sectors around the world. ETF’s are primarily passive or indexed investments, which means you gain broad exposure to the markets but have virtually no opportunity to outperform a given market. We do at times include individual securities or mutual funds that offer specialized expertise or that provide exposure to markets where no ETF’s are available.

Again, these model portfolios are simply examples. You must determine what asset mix and specific holdings are right for you. What these models will do is help you focus on asset mix, serving as an important reminder that it is always important to see the forest through the trees.

Marcia Lewis Brown, CFA

Marcia Lewis Brown is a Chartered Financial Analyst and independent security advisor with a 21-year career in the investment industry, including 17 years with TD Asset Management Inc. She was instrumental in the firm’s growth from its beginning stages to becoming one of Canada’s largest institutional money managers. Most recently, she was a managing director with TDAM, where she was a member of the senior institutional strategy team and responsible for the firm’s relationships with top-tier institutional clients. Marcia holds an MBA and two graduate degrees in music.