Portfolio Construction

Lets take a look at these couple of heat maps. (Generated working with AI after something similar from internet)

These are return profiles over the last 15 years on a) traditional assets, b) alternative assets and then only c) commodities

a)

b)

c)

Now, given the range of options, any asset manager needs to construct the portfolio carefully from the available opportunities and to arrive at the most optimum risk-return profile. 

How does one allocate capital and construct an optimum portfolio. (Institutions, Wealth)

First, to set the overall tone and objective, here's the investment strategy from Roger Gibson (Asset Allocation, book)

Tailored, all-weather such that one need not abandon it in widely varying markets. And then given what is held already and what is expected in terms of goals. Traditionally, following is the set of asset classes:

And then there is a version which includes alternative asset managers as well.

Perhaps before diving deeper, here's a look a) at the fee as well and risk profile too to complement the above return studies. Additionally, b) some capital allocation percentages. (Again, with AI)

a)

b)

Given this greater granularity, here's again the Investment Management consideration for further perusal:

Now here's a quick look at how the $23 trillion of institutional assets are allocated

So first portfolio construction, then allocating capital according to that construction. Dynamic rebalancing

Capital allocation and portfolio construction -  How do the best people do it. Here again I had a discussion with AI basis some of the classic thinkers in this space. Sharing the list of questions to consider as we arrived at here. Each question opens up the thought in this space and clarifies investment objective:

🧠 Capital Allocation Mental Checklist

Inspired by Munger, Marks, Swensen, Klarman, and Dalio

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I. First Principles – Before Any Allocation

1. What is the true purpose of this capital?
   (Preservation? Growth? Mission? Intergenerational income?)

2. What is the time horizon for this decision?
   (Will this capital be needed in 1 year, 10 years, 30 years?)

3. What does success look like—financially and ethically?

4. Have I inverted the question?

   “What are the ways this investment could go wrong?”

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II. Risk Clarity – Not Just Volatility

5. What is the real risk here?
   (Overpaying? Liquidity mismatch? Permanent loss?)

6. If everything goes wrong in this investment, what do we still retain?

7. What are the second- and third-order consequences of this choice?

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III. Cycle and Context Awareness

8. Where are we in the relevant cycles?

   • Interest rate?

   • Credit?

   • Valuation?

   • Inflation?

   • Geopolitical?

9. Does this investment rely on forecasting, or is it robust across scenarios?

10. Am I reacting to recency bias or memory of past returns?

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IV. Valuation and Margin of Safety

11. Are we paying a fair price—or a hopeful price?

12. What is the implied return if nothing good happens?

13. Is there a margin of safety if we’re wrong?

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V. Character and Alignment

14. Do I understand the incentives and governance behind this investment?

15. Who benefits most if this fails—us or the manager?

16. Would we own this if no one else did?

(Klarman: “Be willing to look wrong before you’re proven right.”)

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VI. Behavioral Discipline

17. Am I under pressure—emotional, reputational, or herd-driven?

18. Would I make this same decision in a quiet room with no news cycle?

19. Do we have the patience to hold through discomfort if we’re early?

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VII. Portfolio Coherence

20. How does this position complement or crowd other assets we hold?

21. Does it improve our resilience across future possibilities?

22. Are we keeping enough optionality (dry powder, liquidity)?