Portfolio construction: Why keeping it simple is crucial
A Yuvraj cannot become a Dravid overnight and vice-versa. Similarly, you need to know your risk appetite, choices and goals. With this background, you go about building your innings. You set small targets, which are in sync with your overall long-term goals. In the early part of the innings, you tend to leave the balls pitched outside your off-stump, get yourself accustomed to the pitch and the ball movement and generally make yourself comfortable.
Similarly, in portfolio construction, you will set your goals and return expectations, and rebalance targets. As in cricket, you can set your target, if you are batting first, or chase a target if your batting second. If you have a lower risk appetite, you will want to achieve a real return beating inflation on a consistent basis. A higher risk appetite will indicate that you can cope with volatility, which could lead to an alpha return over the investing period.
Simple and easy to do Many-a-times, we miss the trees for the
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