Sometimes I wonder whether investors treat their portfolios too much like a hobby collection; I own this counter. I own that counter. I have some of this, some of that, and perhaps a few more things because they look interesting.
But are they actually building a portfolio, or are simply collecting investments?
Picture generated by Meta AI
Think About a House
Imagine this analogy: The house is the portfolio, the rooms are the asset classes, and the furniture inside each room represents the individual investments or counters.
A bedroom, for example, may contain a bed, wardrobe, bedside tables and a chair. Each piece of furniture may be good on its own, but putting five beds and no wardrobe into the room does not make much sense.
The same applies to a portfolio. A good investment does not automatically make a good portfolio addition. If I already have plenty of exposure to a particular sector, country or macroeconomic factor, adding another good counter with similar exposure may increase concentration rather than diversification.
The Furniture Has a Purpose
In the Bedokian Portfolio, the five broad asset classes are equities, REITs (real estate investment trusts), bonds, commodities and cash. Each represents a different room in our investment house, and the individual investments are the furniture within those rooms. The allocation determines how much space each room gets. The selection guidelines then help us decide what furniture goes into each room.
So the hierarchy is rather simple: Portfolio first. Asset allocation second. Individual investments third.
Before buying another counter, perhaps one should ask: Does it fill a gap in the house, or am I simply buying another piece of furniture because it looks attractive?
Core and Satellite
There is also a way to think about the “Core and Satellite” approach.
As stated in The Bedokian Portfolio eBook1, exchange traded funds (ETFs) typically form the core, while individual counters form the satellites. Going back to our house metaphor, the important furniture such as beds and wardrobes can represent the core, providing the main structure and purpose of the room. The bedside table, lamps and other pieces can represent the satellites. They provide additional functionality or character, but they are not the foundation.
Similarly, the ETFs provide broad exposure that forms the foundation, while individual counters allow for more specific exposures or opportunities.
A counter can also appear indirectly in both. For example, an individual company may already be part of an ETF, while a separate holding in that company provides additional exposure. The important point is understanding what each piece of furniture is doing in the room.
A House, Not a Furniture Store
A portfolio should have a purpose, an allocation and a structure; it is not simply a collection of counters sitting in a brokerage account (or a few). One does not furnish a house by buying every piece of furniture that looks good. The rooms come first, then what each room is for, and finally how everything fits together.
Investing is not that different. Buying a good investment is one thing. Putting good investments together is another.
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1 – The Bedokian Portfolio (2nd Ed), p135-137
