How to Start the Portfolio Design Conversation
- Scott H. Tonai, CFP®
- Aug 7
- 4 min read
Why good investment management starts with understanding the investor
Travis and I recently filmed Episode 5 of our series, Andrews Insights, where we discussed our investment process.
Our role as fee-only financial planners and wealth managers allows us to wear multiple hats when managing portfolios. We are fortunate to work with a flexible platform that gives us access to a wide range of investments and fund managers.
Sorting through all of those opportunities can be daunting. We regularly hear from investment managers explaining their strategies, recent performance, and how their approach could potentially help our clients.
Performance, investment strategy, fund management, and expenses all matter when evaluating an investment. But I believe the most important part of building a portfolio has very little to do with choosing investments.
It starts with understanding the person the portfolio is being built for.
I am reminded of this during our semiannual reviews with clients. Over time, our meetings have shifted away from simply reviewing specific investments and articulating what each one does. Instead, much of the conversation centers around three important questions:
What is the money for?
What risks can you afford to take?
What do you already own?
What Is the Money For?
This is arguably the most important question we can ask.
Understanding cash flow, time horizon, goals, and future needs is the cornerstone of our investment approach.
I think about this in my own life. Katie and I are looking to make a down payment on a townhouse within the next year. If I put that down payment into the stock market today and saw the market fall 20%, that would lead to a lot of heartache.
On the other hand, seeing the same 20% decline in my 401(k) or Roth IRA doesn't cause me nearly the same amount of stress. I don't expect to need that money for another 30 years.
It's the same person, experiencing the same market decline. What changes is the purpose of the money and when I'll need it.
The goals for my investments help determine how my money should be allocated.
That leads to the next question.
What Risks Can You Afford to Take?
Investing carries risk. The dollar you invest today may not be worth the same amount tomorrow.
But not investing carries its own set of risks. We experience the effects of inflation on the money sitting in our bank accounts every time we go to the grocery store or fill up our gas tank.
Whenever we review our clients' accounts, we weigh the potential benefits of different investments against the risks they introduce.
We've written before about using different "buckets" for different time horizons. Money needed decades from now can generally tolerate more volatility than money needed next year.
We also consider the types of risks we expose our clients to. Speculative investments may not be appropriate for money that forms the foundation for major life goals such as relocation expenses, retirement income, or long-term care needs.
To use a baseball analogy, we're generally looking to hit singles and doubles rather than swinging for home runs with the possibility of striking out.
The goal isn't to eliminate investment risk.
The goal is to take the risks that make sense for what we're trying to accomplish.
What Do You Already Own?
Finally, we look at the client's overall financial picture and what they already own.
• Is there enough cash in their bank accounts to fund expenses in the short term?
• What are the tax consequences of selling existing investments or taking distributions from certain accounts?
• How are they invested in accounts outside of our management?
All of these questions matter when designing a portfolio and determining an appropriate asset allocation.
Looking at one investment account in isolation is like carefully manicuring a flower pot while the rest of the garden is filled with weeds.
Ideally, we're looking at the entire garden.
Understanding how a client's cash, retirement accounts, taxable investments, outside accounts, and other assets fit together helps us make sure the different pieces are working toward the same goals.
The Investment Process
The investment process is ultimately a people process.
Stopping at portfolio construction and investment recommendations misses a large part of financial advising.
We can't do our best work unless we understand a client's goals, biases, risk tolerance, cash flow, and overall financial picture. Just as importantly, clients should understand why they're invested the way they are.
That's why our review conversations aren't limited to which investments performed well or poorly. We revisit what's happening in our clients' lives, whether their goals have changed, and whether the amount of risk they're taking still makes sense.
Only then can we determine whether their portfolio needs to change.
We can spend countless hours searching for what we believe are the best investments and strategies. But even the best investment isn't necessarily the right investment for every person.
Good portfolio design starts by putting the client first.
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