What building a house can teach investors about investment portfolios

What building a house can teach investors about investment portfolios

February 12, 2023: Investment portfolios are not built in a day. A portfolio is built over time by gradually acquiring and expanding investments, aided by flexible plan to suit investment goals over time.

Emanuel Datt, Chief Investment Officer, Datt Capital says, “In fact, the process of constructing an investment portfolio is pretty like building a house.

“Let me explain. The first step is the decision to invest in building a new house (portfolio) on a land holding (capital).

“The owner (which is the investor) has a number of options when it comes to building. Those on a budget may pick a volume builder (retail financial advisor) where they can pick from a number of standard designs at a fixed price. In this case, I refer to financial products. These financial products may not be a perfect fit for the owner (investor) and may be used to only fulfill short-term financial needs.

“An alternative option is to hire an independent builder (independent financial advisor) to build a high-quality, unique home to the owner’s desired specification.

“This may provide an end product (portfolio) that fulfils the needs of the owner (investor) over most timeframes. However, this option may 'lock' the owner (investor) into decisions before the house is tangible.

“The final option is that the owner (investor) can organise the building of the house (portfolio) themselves. This involves hiring and working with various tradesmen (fund managers. This option may provide the most flexibility with greater initial involvement (due diligence) required by the owner (investor).”

Datt adds, “A word of caution here. Investors need to note that some tradesmen (fund managers) pay independent research houses for certification or ratings to increase their credibility so the builders (financial advisors) can hire or recommend them to their clients.

“This certification does not guarantee the quality of the job that will be performed (investor returns or investment performance) but rather that the job will be performed in a systematic manner.

“Builders (financial advisors) often can't use tradesmen (fund managers) that do not pay research houses due to insurance requirements. Independent builders (advisors) may not have this requirement.

“The end result is often builders (financial advisors) build a house that fits within their own requirements, not what the owner (investor) actually wants or needs (performance at the appropriate risk appetite).

“If you need a single-storey, four-bedroom house with a spacious yard, why would you settle for a triple-storey, two-bedroom townhouse because your builder can only build this product?”

“Ultimately, owners (investors) should consciously participate in building their own homes (portfolios),” says Datt.

About Datt Capital

Founded in 2016, Datt Capital is an independent investment fund manager based in Melbourne, Australia. The firm manages long-only strategies focused on delivering consistent, risk-adjusted returns through disciplined research and original thinking. Datt Capital invests primarily in Australian listed equities, debt, and derivatives, constructing portfolios designed to generate alpha with low correlation to broader markets.

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