Basics of Portfolio Planning and Construction

How an adviser turns a client's goals and circumstances into a written investment policy statement (risk and return objectives plus constraints), and how that statement, combined with capital market expectations, becomes a strategic asset allocation and then a real portfolio, with ESG preferences built in along the way.

1. 1. The investment policy statement: why and whatThe investment policy statement (IPS) is the written plan, built from a fact-finding with the client, that records the client's objectives and constraints and governs every later portfolio decision.Free12 min
2. 2. Risk objectives and risk tolerance: ability vs willingnessRisk objectives can be absolute, relative or liability-based, and the client's risk tolerance combines an objective ability to bear risk with a subjective willingness to take it; when they conflict, the lower one usually wins.Video · 6 min14 min
3. 3. Return objectives and the required returnA return objective can be absolute or relative, nominal or real, before or after fees and taxes; it must be realistic and consistent with the client's risk tolerance and the market environment.Video · 7 min12 min
4. 4. Constraints: liquidity, horizon, tax, legal and unique circumstancesFive types of constraint limit which assets suit a client: cash needs, the time horizon, taxes, laws and regulations, and anything else unique about the client, including their values and their other exposures.Video · 7 min14 min
5. 5. Asset classes and the strategic asset allocationThe strategic asset allocation (SAA) gives the client exposure to the systematic risks of well-defined asset classes in proportions that meet the IPS objectives, found by combining the IPS with capital market expectations.15 min
6. 6. Integrated case: IPS thresholds, client exclusions and the efficient frontierAn IPS usually gives a return floor and a risk cap rather than a utility function: the adviser tests candidate allocations against both, re-estimates any class the client restricts, and agrees a compromise when nothing fits.15 min
7. 7. From SAA to portfolio: risk budgeting, TAA, selection and rebalancingAfter the SAA, the manager splits the risk budget among strategic allocation, tactical deviations and security selection, chooses active or passive management per asset class, and controls drift with a rebalancing policy.15 min
8. 8. ESG considerations in planning and constructionResponsible investing preferences enter the IPS and then shape the SAA, the benchmarks and the instructions given to managers, through six approaches from negative screening to impact investing.13 min