Building an investment portfolio is not simply about buying a few stocks or ETFs that look attractive.
A portfolio is a system.
Two investments can make perfect sense individually while creating an unbalanced allocation when combined. A portfolio may contain twenty different holdings and still be heavily dependent on US equities, technology stocks, interest rates or a single currency.
So the real question is not simply:
What should I invest in?
It is:
How can different investments be combined into a portfolio that fits your goals, time horizon and the level of risk you can realistically tolerate?
That is where portfolio construction begins.
It is also the idea behind Portefeuille Serein.
A calm, resilient portfolio is not one that never falls.
Such a portfolio does not exist.
It is a portfolio whose risks you understand, where each major component has a purpose, and whose structure is sufficiently aligned with your circumstances that you can stick with it when markets become difficult.
Let’s explore the essential principles.
What Is an Investment Portfolio?
An investment portfolio is the collection of financial and, potentially, real assets owned by an investor with the aim of preserving or growing wealth.
It may include:
- stocks;
- ETFs;
- bonds;
- cash;
- real estate;
- gold;
- commodities;
- and other investments.
But simply listing the assets does not fully describe a portfolio.
Their relative weights matter just as much.
Imagine two investors owning exactly the same asset classes: stocks, bonds, gold and cash.
The first holds 80% in equities.
The second holds only 30%.
They own the same types of investments, but their exposure to risk is completely different.
This is known as asset allocation: the way capital is distributed among different asset classes.
Asset allocation has a major influence on volatility, expected returns and the way a portfolio behaves when economic conditions change.
Before choosing individual products, it therefore makes sense to understand what kind of portfolio you are trying to build.
Why Build a Diversified Portfolio?
Diversification is based on a simple idea:
avoid allowing one event to put too much of your wealth at risk.
Imagine an investor who owns only shares in their employer.
If the company runs into serious trouble, that person could simultaneously lose their job and a significant part of their investment portfolio.
Spreading capital across several companies reduces company-specific risk.
But diversification goes much further.
Diversification Across Companies
Owning several businesses reduces the impact of a problem affecting one specific company.
Fraud, a failed acquisition or the loss of a major customer may hurt one business without affecting the others.
Sector Diversification
Owning twenty technology companies does not necessarily protect you from a technology-sector downturn.
Healthcare, financials, industrials, consumer goods, technology and energy do not always react in the same way to economic conditions.
Geographic Diversification
Different economies do not move through exactly the same cycles.
US equities may outperform for years before another region becomes relatively more attractive.
We previously explored this question in Are Investors Underestimating Europe?.
Diversification Across Asset Classes
Stocks, bonds, cash, property, gold and commodities respond to different economic forces.
And this brings us to one of the most important concepts in portfolio diversification.
Correlation: Owning More Investments Is Not Enough
Suppose you own ten different investments.
That sounds diversified.
But if all ten tend to rise and fall together, the actual diversification benefit may be much smaller than it appears.
This is where correlation matters.
Highly correlated assets tend to move in similar directions.
Assets with lower correlations may behave more independently.
The purpose of diversification is therefore not simply to accumulate more holdings.
It is to combine investments whose risks are not perfectly identical.
This explains why a portfolio containing 15 ETFs is not automatically better diversified than one containing three.
If all 15 funds largely hold the same US companies, the investor may simply have created the appearance of diversification.
The better question is not:
How many investments do I own?
It is:
What economic risks am I actually exposed to?
What Asset Classes Can You Hold in a Portfolio?
Each asset class behaves differently.
Understanding its purpose is more important than immediately searching for the best product.
Stocks: The Long-Term Growth Engine?
Buying a stock means owning part of a business.
If that company increases its profits and cash flows over time, its value can grow.
Stocks therefore allow investors to participate in economic growth, innovation and rising corporate productivity.
This explains why equities play a central role in many long-term investment portfolios.
But that growth potential comes with significant volatility.
A company can lose a large proportion of its market value.
An entire sector can fall out of favour.
A recession can push much of the market lower at the same time.
And importantly, a great company is not necessarily a great investment at any price.
As we explained in Why Can a Stock Fall After Good Earnings? Understanding Market Expectations, markets do not react simply to whether results are good or bad.
They react to the difference between reality and what investors had already expected.
Investing in stocks therefore requires thinking about quality, growth, risk, valuation and expectations simultaneously.
ETFs: A Simple Way to Diversify?
An ETF, or exchange-traded fund, allows investors to gain exposure to a basket of assets through a single security.
A broad global equity ETF can provide access to hundreds or even thousands of companies.
The advantage is obvious.
Instead of selecting every company individually, an investor can gain broad market exposure relatively easily.
But there is a common misconception:
ETF does not automatically mean diversified.
An ETF may track:
- the global stock market;
- a single country;
- one industry;
- small companies;
- bonds;
- a commodity;
- or a particular investment strategy.
A technology ETF remains a technology-sector investment.
A US ETF remains primarily an exposure to the United States.
It is therefore essential to distinguish the investment vehicle — the ETF — from the underlying economic exposure.
Is One ETF Enough?
This is a common question.
The answer depends on what you are trying to diversify.
A very broad global ETF may provide substantial diversification within equities.
It can contain hundreds or thousands of companies across multiple industries and countries.
Adding five more equity ETFs does not necessarily make the portfolio much more diversified.
It may simply create significant overlap.
However, even an extremely diversified equity ETF remains an equity investment.
It does not necessarily diversify an investor across different asset classes.
That distinction matters.
One ETF can potentially provide excellent geographic and sector diversification within equities without necessarily representing a complete portfolio for every investor.
How Many ETFs Should You Have in a Portfolio?
There is no ideal number.
An investor may use several ETFs to obtain complementary exposures.
But adding funds without understanding what they contain can create the opposite of the intended effect.
Imagine a portfolio containing:
- a global equity ETF;
- an S&P 500 ETF;
- a Nasdaq ETF;
- a US technology ETF.
It contains four funds.
Yet the largest US technology companies may appear in every one of them.
The portfolio looks diversified by number of funds while remaining economically concentrated.
Before adding another ETF, it can therefore be useful to ask:
What genuinely new exposure does this ETF add to my portfolio?
If the answer is “very little”, its purpose may deserve reconsideration.
How Many Stocks Should You Have in a Portfolio?
Again, there is no magic number.
Owning two stocks clearly creates substantial concentration risk.
But moving from 30 stocks to 50 does not automatically guarantee better diversification.
It depends on what those businesses have in common.
Ten banks may react to many of the same economic developments.
Ten oil companies remain heavily influenced by energy prices.
Ten US technology companies may share similar exposure to interest rates and market valuations.
Investors therefore need to consider:
- the size of their largest positions;
- sectors;
- geographic exposure;
- currencies;
- common economic drivers.
Diversification is less about the number of companies than about how independent their underlying risks really are.
Bonds: Income and Stability?
A bond represents debt.
When you buy a bond, you lend money to a government or company under predetermined conditions.
Bonds can serve several purposes within an investment portfolio:
- generate income;
- provide a return source different from equities;
- reduce certain forms of volatility;
- help fund future liabilities.
But bonds are not risk-free.
A company may fail to repay its debt.
That is credit risk.
Interest rates can also change.
When rates rise significantly, existing bonds offering lower yields become less attractive and their market prices may fall.
The level of interest rates therefore has a major influence on the relative attractiveness of bonds and other assets.
Cash: How Much Should You Keep?
Cash is sometimes described as “money that isn’t working”.
That is too simplistic.
Cash serves several important purposes.
It can fund short-term spending.
It can reduce the risk of being forced to sell investments during a market downturn.
And it can provide flexibility when opportunities appear.
But holding excessive cash for very long periods also has a cost.
Inflation gradually erodes purchasing power.
The relevant question is therefore not:
Should I hold cash?
But:
How much capital needs to remain readily available given my circumstances and investment horizon?
There is no universal percentage.
Someone with highly predictable income may have different liquidity requirements from a business owner.
An investor preparing to buy a home in two years is in a different position from someone investing for the next thirty years.
The cash allocation should therefore be linked to the purpose it serves.
Real Estate: Genuine Diversification?
Property can provide a source of return that differs from publicly traded financial assets.
But its role within a portfolio needs to be considered carefully.
A homeowner may already have substantial exposure to real estate even if they do not think of their home as an investment.
Adding more property can therefore sometimes increase overall wealth concentration rather than reduce it.
Real estate also has specific characteristics:
- limited liquidity;
- high transaction costs;
- frequent use of leverage;
- geographic concentration;
- specific taxation.
Property can play a useful role, but it should be considered alongside the rest of an investor’s wealth rather than in isolation.
Gold and Commodities: What Role Can They Play?
Commodities differ fundamentally from stocks and bonds.
A business can generate profits.
A bond can pay interest.
A tonne of copper or an ounce of gold produces no cash flow on its own.
Commodity prices depend more directly on supply, demand, inventories, production costs and the broader economic environment.
Gold
Gold also has a monetary dimension.
It may attract investors during periods of uncertainty, but this relationship is far from automatic.
Industrial Commodities
Copper follows a different logic.
Power grids, electrification and data centres could support demand while developing major new mines can take many years.
We explored this in detail in Copper: The Strategic Commodity of the Decade?.
But before investing in any commodity, it is important to understand its cycle, supply dynamics, inventories and potential substitutes.
That is the purpose of our framework on How to Analyze a Commodity.
The broader question is whether structural constraints across several commodity markets could contribute to a new commodity supercycle.
How Should You Allocate Between Stocks, Bonds and Cash?
This is where many investors want an immediate answer.
60% stocks?
70%?
80%?
How much in bonds?
How much cash?
The problem is that an allocation has little meaning without considering the person who owns it.
Three factors are particularly important:
goals, time horizon and acceptable risk.
Your Goals
Are you investing for retirement?
Trying to generate income?
Saving for your children’s education?
Planning to buy a house?
Building wealth over several decades?
The purpose of the money influences how it should be invested.
Your Investment Horizon
The closer a future expense becomes, the more problematic high volatility can be.
Money required in twelve months should not normally carry the same risk as capital intended to remain invested for thirty years.
A long investment horizon can help absorb some market fluctuations.
But:
long term does not mean risk-free.
A bad company can still disappear.
An asset purchased at an extreme valuation can produce disappointing returns for many years.
Time reduces some risks.
It does not eliminate all of them.
Your Risk Tolerance
Risk tolerance is particularly easy to overestimate during bull markets.
It is easy to consider yourself comfortable with risk after several years of rising asset prices.
A better question is:
What would you actually do if your portfolio fell by 20%, 30% or more?
If a normal decline for your chosen allocation causes you to panic and sell, the portfolio was probably too risky.
Risk therefore needs to be considered before the crisis.
Not during it.
What Is a Balanced Portfolio?
A balanced portfolio generally seeks a compromise between growth and stability.
The best-known historical example is the 60/40 portfolio:
60% equities;
40% bonds.
This is not a magic formula.
The allocation became famous because it combines two major asset classes that have historically behaved differently in many market environments.
But correlations change.
Interest rates change.
Valuations change.
And most importantly, investors have different objectives.
A balanced portfolio should therefore not be defined by one universal percentage.
A better definition might be:
A portfolio in which the different sources of risk are reasonably aligned with the investor’s objectives.
For one person, that may mean a high equity allocation.
For another, much less.
How to Diversify a Portfolio Geographically
Geographic diversification helps prevent an entire portfolio from depending on a single economy.
But the concept is more complicated than it first appears.
A US-listed company may generate a large proportion of its revenue in Europe and Asia.
A European company may depend heavily on American customers.
The country where a company is listed is therefore not necessarily identical to its true economic exposure.
Nevertheless, investors often consider several broad regions:
- United States;
- Europe;
- Japan;
- emerging markets;
- other developed markets.
Relative performance changes over time.
After a prolonged period of US dominance, for example, it is reasonable to ask whether other regions may become relatively more attractive.
We explored that question in Are Investors Underestimating Europe?.
The purpose of geographic diversification, however, is not to predict which country will win next year.
It is to reduce your dependence on getting that prediction right.
How Do You Measure Portfolio Risk?
Portfolio risk is often reduced to one number: volatility.
That is useful.
But incomplete.
Several dimensions deserve attention.
Volatility
Volatility measures the magnitude of price fluctuations.
The greater the fluctuations, the higher the volatility.
Drawdown
Drawdown measures the decline from a previous peak to a subsequent low.
For investors, this can be much more tangible.
A volatility figure of 15% is abstract.
Watching £100,000 temporarily become £70,000 is not.
Concentration
How much of your portfolio is represented by your five largest holdings?
Your largest country?
Your largest sector?
Correlation
Do the different parts of your portfolio respond to the same events?
Currency Risk
Investing internationally can introduce another source of gains and losses through exchange rates.
The US dollar is particularly important because of its central role in global finance and commodity markets.
We explored some of these mechanisms in Why Does the US Dollar Remain So Strong?.
Liquidity Risk
Can you actually sell the investment quickly and at a reasonable price when you need the money?
Permanent Loss of Capital
This may be the most important risk of all.
A temporary market decline is not the same thing as owning a company that goes bankrupt or an investment whose underlying thesis permanently deteriorates.
Risk can therefore never be captured by one metric alone.
How Can You Protect a Portfolio Against Inflation?
Inflation reduces the purchasing power of money.
But there is no single asset that perfectly protects investors against every type of inflation.
Companies may sometimes be able to increase prices.
Some commodities can benefit from supply constraints.
Property may behave differently.
Bonds can suffer if inflation causes interest rates to rise.
Cash retains its nominal value while gradually losing purchasing power.
The source of inflation matters too.
Inflation caused by strong economic demand is not the same as an energy shock occurring during a recession.
This is one reason markets can sometimes continue rising despite persistent inflation.
A diversified portfolio therefore does not necessarily try to identify one perfect “inflation hedge”.
Instead, it seeks to avoid depending entirely on a single inflation scenario.
Should You Change Your Portfolio Based on Economic Forecasts?
A recession looks likely.
Should you sell stocks?
Interest rates may fall.
Should you buy bonds?
Artificial intelligence requires enormous amounts of electricity.
Should you buy copper?
Each argument can sound perfectly logical.
The difficulty is that financial markets are also trying to anticipate the future.
Widely known information may already be reflected in asset prices.
This is why a company can announce excellent results and still see its share price fall: investors expected even more.
The same principle applies across financial markets.
A correct economic forecast does not automatically produce a profitable investment.
You also need to understand what the market already expects.
Diversification offers a different approach.
Rather than constructing the entire portfolio around one forecast, it allows investors to prepare for several plausible outcomes.
Predicting and preparing are not the same thing.
How Do You Rebalance an Investment Portfolio?
Suppose an investor creates an asset allocation that fits their objectives.
Several years pass.
Stocks perform much better than the other assets.
Their portfolio weight rises automatically.
The investor is now taking more equity risk than originally intended.
Portfolio rebalancing means bringing the portfolio back towards the desired allocation.
There are several ways to do this.
An investor may sell some of the assets that have become overweight.
But they may also direct new contributions towards underweight assets.
This can sometimes reduce the need for unnecessary sales.
There is no universal rebalancing frequency.
Rebalancing every week could create excessive trading.
Never rebalancing can allow the portfolio to drift far away from its intended risk profile.
The key principle is simpler:
When your portfolio becomes materially different from the one you intended to own, it deserves another look.
10 Common Investment Portfolio Mistakes
1. Buying Only What Has Recently Gone Up
Recent performance naturally attracts investors.
But strong past returns may also coincide with increasingly optimistic expectations.
2. Confusing the Number of Holdings With Diversification
Fifteen ETFs containing many of the same companies do not create fifteen independent sources of return.
3. Excessive Concentration
One company, sector or country can gradually become an outsized part of the portfolio.
4. Ignoring Fees
A seemingly small difference in annual costs can become meaningful when compounded over decades.
5. Underestimating Your Reaction to Losses
The perfect spreadsheet portfolio can become a terrible real-world portfolio if it causes you to sell during every market panic.
6. Holding Too Much Cash Without a Clear Purpose
Nominal stability comes at a cost when inflation steadily erodes purchasing power.
7. Investing in Things You Do Not Understand
It is difficult to decide whether to hold an investment through a downturn when you never understood why you bought it.
8. Constantly Changing Strategy
A new theme appears almost every year.
Technology.
Crypto.
Energy.
Artificial intelligence.
Commodities.
An allocation that changes with every new trend may no longer be an allocation at all.
9. Ignoring the Rest of Your Wealth
Someone who works in technology, receives shares in their employer and invests their entire financial portfolio in the Nasdaq has several exposures to the same underlying risk.
An investment portfolio should therefore be considered in the context of the investor’s broader financial situation.
10. Searching for the Perfect Portfolio
It probably does not exist.
Every allocation experiences periods of underperformance.
The objective is not to find a portfolio that wins in every environment.
It is to build one that is sufficiently robust to pursue your goals across several plausible environments.
What Is a “Portefeuille Serein”?
We can now return to the idea behind the name of this website.
A portefeuille serein — literally, a more peaceful or resilient portfolio — is not necessarily conservative.
It does not necessarily consist mainly of ETFs.
It is not necessarily focused on dividends.
And there is no universal asset allocation behind it.
Instead, the concept rests on several principles.
Clear Objectives
You cannot choose an appropriate investment without understanding what the capital is ultimately intended to achieve.
A Suitable Time Horizon
The level of risk should be compatible with when the money may be needed.
Genuine Diversification
Not simply many holdings, but different sources of risk and return.
An Allocation You Understand
Every major part of the portfolio should have a purpose.
Tolerable Risk
A strategy that you abandon during every crisis is probably not suitable for you.
Long-Term Discipline
The entire portfolio should not need to be rebuilt every time the economic outlook changes.
The concept can therefore be summarised as follows:
A resilient portfolio is one that is sufficiently aligned with your objectives that you do not need to predict the future precisely in order to stick with it.
This article covers the fundamental principles behind portfolio construction.
Determining the exact allocation between asset classes, selecting investment vehicles and establishing a portfolio management process requires a more detailed framework.
That is the purpose of the Portefeuille Serein Guide, where the complete approach is developed step by step.
Frequently Asked Questions About Investment Portfolios
How Do You Build an Investment Portfolio?
Building an investment portfolio starts with defining your objectives, investment horizon and acceptable level of risk. You can then consider how capital should be divided between asset classes before selecting the individual investments or funds used to obtain those exposures. Choosing products before deciding on the overall allocation effectively starts the process backwards.
How Do You Diversify an Investment Portfolio?
Portfolio diversification can involve combining different companies, sectors, geographic regions and asset classes. The number of holdings alone is not sufficient. Investors should also consider whether their investments depend on the same economic factors.
How Many ETFs Should You Have in a Portfolio?
There is no optimal number. One broad ETF may contain hundreds or thousands of securities, while several similar ETFs can create significant overlap. Each additional ETF should ideally provide a genuinely different exposure or fulfil a clearly defined role.
Is One Global ETF Enough for Diversification?
A broad global equity ETF can provide substantial diversification within equities through exposure to many companies, industries and countries. However, it remains an equity investment and therefore does not necessarily provide diversification across different asset classes.
How Many Stocks Should You Have in a Portfolio?
There is no universal number. Diversification depends on position sizes, sectors, geographic exposure and correlations as much as the number of companies owned. A portfolio containing many businesses from the same industry can remain highly concentrated.
What Is a Balanced Investment Portfolio?
A balanced portfolio aims to combine growth potential with risk management by holding different types of assets. The traditional 60% equity / 40% bond portfolio is a well-known historical example, but it is not an allocation suitable for every investor.
How Much Cash Should You Keep in Your Portfolio?
The appropriate cash allocation depends on future spending requirements, income stability, investment horizon and the need to avoid forced sales. There is therefore no percentage that is appropriate for every investor.
How Often Should You Rebalance a Portfolio?
There is no universally optimal frequency. Rebalancing involves bringing a portfolio back towards its intended asset allocation after market movements have changed the relative weights of its holdings. This can be done through sales or by directing new contributions towards underweight assets.
Investing Calmly Means Accepting That You Cannot Know the Future
Nobody knows with certainty which market will perform best next year.
Nobody knows exactly when the next recession will arrive.
Or where interest rates will be in five years.
Or which region will dominate global markets over the next decade.
Building an entire investment portfolio around one forecast therefore means betting that the forecast will be correct.
There is another approach.
Accept the uncertainty.
Understand what you own.
Diversify the sources of risk.
Match investments to their appropriate time horizons.
Maintain enough liquidity.
Avoid paying any price for an attractive story.
And build a strategy that you can continue to follow when markets become uncomfortable.
Peace of mind in investing does not come from eliminating risk.
It comes, in large part, from understanding it.
The purpose of a well-built portfolio is not to predict the future. It is to allow the investor to keep moving forward even when the future remains uncertain.
This article is for educational purposes only and does not constitute investment advice. All investments involve the risk of loss.
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