Investors are often focused on analysis and decision-making based on individual trades. Bank of Singapore’s Owi Ruivivar believes the appropriate philosophy is to make considerations from a holistic portfolio context, rather than as standalone bets.
While efforts are underway to support high net worth individuals (HNWI) in adopting structure and discipline when developing asset allocation strategies, constructing portfolios, and rebalancing, there are still many cases where investors, especially those of the self-directed kind, tend lack this bird’s eye view and focus on individual bets.
According to Owi Ruivivar, Bank of Singapore’s chief portfolio strategist, “the portfolio is the primary object of investment analysis and decision-making”.
“The central proposition is that the portfolio, rather than the individual investment, is that object,” she explained in an essay. “Once this perspective is adopted, familiar concepts such as diversification, capital allocation, risk budgeting and performance evaluation are naturally understood in terms of each investment’s marginal contribution to the portfolio as a whole.”
Five key ideas
Ruivivar urges investors to rethink their investment philosophy and consider five key related ideas:object, value, interactions, scarcity, and time.
She reiterates the importance of focusing on the portfolio as the object of analysis, stressing that “portfolio construction is not the accumulation of attractive investments but the deliberate management of an integrated system”. She notes that the value of investments are portfolio-dependent, rather than determined in isolation as each decision is made at the margin and alter the collective holdings. These investments interact in an integrated system with interdependent properties such as correlations, convexities, liquidity profiles, and funding requirements. Resources such as capital, risk, and liquidity are scarce and finite. Finally, portfolio management is a dynamic process and its state evolves through time.
“These ideas become increasingly relevant as wealth becomes more complex. Public and private assets, multiple objectives and longer investment horizons increase the importance of interactions that cannot be understood through the analysis of individual investments alone. Better portfolio analytics have made those interactions more visible. They have not created them,” Ruivivar added.
“The portfolio has always been the object that investors seek to shape. Thinking about investment decisions from the perspective of the portfolio simply places it where it belongs: at the beginning of the investment process rather than at its end.”
