When people think about building an investment portfolio, they often jump straight to picking funds or stocks. But that’s the last step—not the first.
A well-constructed portfolio starts with understanding you—your life, your family circumstances, and where you want to be in five, ten, or even thirty years. Without this foundation, any investment recommendation is just guesswork. There is also the tax component which speaks to which investment structures you should use, but that’s for another time.
Step 1: Defining the Mandate
The first step in portfolio construction is defining the mandate. What are you investing for? Retirement? Preserving wealth for the next generation? A mix of both?
Your personal goals dictate how the portfolio should be structured. Without this clarity, you risk making decisions that feel right in the moment but don’t actually align with your long-term objectives.
Step 2: Asset Allocation—The Backbone of Investing
Once the mandate is clear, we move to asset allocation—the single biggest driver of long-term returns.
Fortunately, we don’t have to reinvent the wheel here. Decades of research provide clear best practices for structuring a portfolio efficiently. The key is balancing risk and return in a way that matches your financial goals. For my clients in or close to retirement, I rely on work by Jaco Von Tonder who has done excellent research in this space.
Step 3: Choosing the Investments
The final step is selecting the right investments.
Early in my career, I worked at an independent investment house and later at a large institution. I saw firsthand how portfolios were put together—especially those built with actively managed funds. The approach relied heavily on deep knowledge of portfolio managers and their strategies and included some predictions on what was happening in the world economy and metrics like interest rates, growth rates, geo-political risks. I’ve written about these predictions before.
The challenge? Constant monitoring and guesswork.
A fund manager might have a great track record, but what happens when they underperform? Should you stay invested, or is it time to move on?
A UK study looked at financial advisors who routinely switched out underperforming active funds for top performing funds. It compared the result of the new portfolio with how the original portfolio would have done if they had simply left it.
The result?
The portfolios that simply held onto the underperforming funds ended up performing better over time. In other words, by selling low and buying high, advisors systematically made the wrong call.
This came to mind when I saw headlines about Nick Train, once considered one of the UK’s top fund managers. His Finsbury Growth & Income Trust was a star performer—until it wasn’t. Over the past five years, the FTSE All-Share has returned 33.1%, while Train’s fund has delivered just 17%.
At his latest annual meeting, he acknowledged the poor performance:
“As I look at this slide I do not find myself in the mood for fuzzy nostalgia, and I definitely don’t feel in the mood for any form of self-congratulation… I sort of feel I’m running out of ways to say sorry.”
Investors in his fund now face a familiar dilemma: Do they hold on or sell out? If they sell now, will they regret it just before a turnaround? Or has the strategy lost its edge permanently? And if they do switch, won’t they just be chasing another top performer—repeating the cycle?
Why a passive index approach helps solve this problem
I remember sitting in investment committees when I was at PSG, debating these same questions. The constant monitoring, the pressure to make the right call—it was exhausting.
One of the biggest lessons from this experience was the value of using passive instruments as the tools to make up the chosen asset allocation. For example, if I needed 30% exposure to South African equities, I could simply buy the South Africa market with a tracker fund, instead of sifting through the 200 odd active managers.
Adding broad, low-cost index funds to a portfolio means you no longer have to monitor individual fund managers. It’s like a cheat code—you get market exposure at a fraction of the cost (typically 1% cheaper than active funds) and remove the burden of deciding when to switch managers.
Passive investing doesn’t replace everything, but it complements portfolio construction so well that the final step—choosing the right investments—becomes dramatically simpler. Once you know your required asset allocation, you can efficiently build exposure with index funds, reducing both cost and complexity.
The Bottom Line
Portfolio construction isn’t about chasing returns or picking star managers. It’s about designing an investment strategy that aligns with your life and sticking to it.
- Start with your life goals.
- Use research-backed asset allocation.
- Don’t chase past performance.
With this approach, you sidestep the endless cycle of second-guessing and focus on what truly matters—building a portfolio that stands the test of time.
