Portfolio construction made simple: five rules for better investing

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Owen Raszkiewicz (1:00)

We have a lot of clients that come to us that are wealthy, they're smart, but they still seem to make mistakes. And I want to ask you, what are they kind of overlooking?

James Phelan (1:07)

Probably most common is that there's no intent behind the investment purpose. Setting your financial goals defines everything. A little bit of shiny object syndrome. They see something and get very interested in it. Purchase it. Maybe pretty close to something they already have.

Owen Raszkiewicz (1:23)

Two thousand podcasts and counting. That's how many we've done here at Rask over the years. And a lot of those have been on some of the technical details of investing. What do you do when you've listened to a few episodes and you're thinking about, how do I put all this together? Like, how do you actually go about doing that? This is a whole field of finance called portfolio construction. And it has everything to do, as you're going to find out, with what you actually want from your money. In this episode, I'll be joined by Rask co-head of financial advice, James Phelan. As we go through the academic literature, where this whole concept of risk and return comes from, we'll talk about how actual people deal with money and how that may be different to what you read in a textbook, or you even hear right here on this very podcast. We've got a jam-packed episode today, so I can't wait to get into it.

Hey there, here's a quick note. This podcast contains general financial information only. That means it's not specific to you, your needs, goals or financial objectives. So don't act on the information until you've spoken to your financial planner. You'll find our full disclosure, disclaimer and link to our financial services guide in the show notes.

James, how are you, mate?

James Phelan (2:28)

I'm very well, Owen. How's yourself?

Owen Raszkiewicz (2:30)

Pretty good, mate, pretty good. Glad to have you in Melbourne with the team. It's not every week, month or even every quarter that we get everyone together. I think we were maybe only missing one person this quarter in the team session, so that was really good. You're a Newcastle native, well, that's where you are now, I should say, out towards the Hunter enjoying the life and you brought the weather with us down here. So I want to talk to you a little bit today about portfolio construction. I've got a few different things here on the page in front of me. We're going to talk about how portfolios are built in theory, but also in practice, how you put portfolios together when you've got a new strategy, say if you see a financial advisor or you realize that what you already have is maybe not up to what you wanted it to do. And then we're going to talk about tax and a few other things, how property plays into all of this.

Maybe just to start, I want to, very high level question James, is, do you think people overcomplicate portfolio construction?

James Phelan (3:32)

Absolutely, or it's misunderstood. So they might think that it needs to be more complicated than what it does.

Owen Raszkiewicz (3:40)

Yeah, I definitely think that's the case. And thanks to the proliferation of ETFs in particular, but also just the general information around investing at large, people seem to be making more informed decisions and those decisions seem to be simpler than they were before, no matter how much money you have.

Speaking of which, you deal with clients of every walk of life. You deal with some younger accumulators and business owners, but also extremely wealthy individuals and will cover how they may or may not do things differently in just a moment. I thought maybe we should go back and explain where a lot of this portfolio theory comes from. Do you remember much of the academic literature from uni?