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Are you a collector or constructor?

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Are you a collector or constructor?.

Like Lego bricks, investments come in a wide range of shapes, sizes and colours. After a few years of investing you may find that you've accumulated quite a variety. While you may be happy to own a large collection, it may resemble a bin of loose bricks rather than having a cohesive design.

If an investor adds to their portfolio with every new share offer or bond issue they can end up with a collection that has lots of duplication, too much concentration and a lack of overall cohesion. Inevitably there will be a lot of very similar pieces and for an investor, this is a real problem. A jumbled collection means that you are more likely to get caught out by market turmoil, lose sight of your original investment plan, or abandon it at the worst possible time.

Every investor benefits from being methodical and organised.

The most successful investors are those who build well planned portfolios rather than collections of investments. They see themselves as "constructors" rather than "collectors".

The first step is to sort out your collection. This can be achieved by classifying investments into categories or, to use a market term, "sleeves" of similar securities. Typical sleeves are NZ Shares, Australian Shares, International Shares, Property and Infrastructure, Cash and Fixed Interest.

You should place each piece in its relevant sleeve and measure the size of each sleeve. It is likely that most people will find that the largest sleeves by far are New Zealand shares or bank deposits. In contrast, a well balanced portfolio will have a healthy weighting to international investments and to fixed interest assets.

There is not going to be a single allocation that suits everyone. It has to be matched to your individual risk tolerance and objectives.

The tough part is that inevitably you will have to throw some pieces out. This can be hard with Lego — ask any parent — and may be even harder with investments; but it has to be done if you want to create something great.

Bear in mind that in a diversified portfolio not every sleeve will be as colourful or exciting as others. The very nature of a well balanced, diversified portfolio is that some sleeves will be going strongly while others are going sideways; but that's the aim of a long term portfolio.

The construction process is not a one-off. It requires ongoing adjustment to stay on course and ensure that the end result is solid.

Constructing a well balanced portfolio is like turning a pile of Lego bricks into an amazing castle. Become a constructor rather than a collector!

 

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