CHAPTER 6

Portfolio Construction

Markets are constantly in a state of uncertainty and flux and money is made by discounting the obvious and betting on the unexpected.

—George Soros

Portfolio construction is a hot discussion topic that always garners attention, and at times, criticism. I wish it were possible to say that there is only one way to construct a portfolio and the directions are as follows. If followed accurately, you would have on your hands a winning portfolio. Unfortunately, as you might have guessed, there is not one single way to construct a portfolio. Whether the portfolio is conservative in nature or more aggressive, there are numerous opinions on the right way to try to reach the end goal. Some methodology is derived from a very technical or formula-heavy approach, while others subscribe to a more fundamental approach. This is then followed up by connecting these goals to the portfolio's strategy.

In this chapter I will walk you through the different aspects of portfolio construction within the fixed income market. I will outline the three factors I deem most important to portfolio construction and the benefit each factor strives to bring to your portfolio over time.

  1. Risk defined
  2. Aligned goals
  3. Portfolio analysis

The order in which these are transacted in is just as important as the factors themselves. As with almost anything in life, portfolio strategy included, it is important to start by defining what you are looking to accomplish before embarking down the ...

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