Three steps to building a smart investment portfolio on Covestor


By Alexander MacAndrew, CFA, Investment Director at Covestor

Picking the right portfolio managers requires having a firm handle on your financial goals and risk tolerance, along with smart research.

Covestor provides a transparent platform of up-and-coming managers and the research tools to help investors assemble portfolios that address their specific needs and objectives.

Breaking the process down into three bite-sized chunks can make the process more manageable. These three stages are portfolio selection, portfolio construction, and monitor and rebalance.

1. Portfolio selection

The first step in creating a portfolio is to select attractive components, with a focus on choosing managers and strategies that align with risk objectives. We all know that markets go up and down, and that styles of investment go in and out of favor. Personally, this makes me cautious about portfolios with outsize returns, because the managers may have taken big risks to rack up those gains. Instead, I try to choose portfolios that can produce a consistent return going forward.

To be confident of the portfolio’s ability to continue meeting its investment objectives, I want to see a clear investment process, and understand what the manager is doing. Consistency is also important. I want to have confidence that the manager believes his or her approach is tried and tested enough to stick with it through the inevitable tough times. I want to know how the portfolio might look in the future and how it could perform in different market conditions.

Finally, I’ll be making educated guesses on what market conditions might be in the future. I can then make a rough judgement about whether this strategy might remain in favor, and whether I want higher or lower allocations to it. For example, if I think a market correction is coming, then I’ll be looking for strategies that could perform well in a downturn.

2. Portfolio construction

Building diversified portfolios provides an opportunity for investors to generate extra returns for the amount of risk taken. When components of a portfolio are not perfectly correlated with each other, they may not all move in the same direction. It is therefore possible that when one component is falling, another may be rising. This effect leads to an overall combination that may have less risk, in terms of volatility and drawdowns, than the average of its individual components. In a diversified investment portfolio, the sum can be greater than the parts.

Covestor’s website is designed to help guide investors to different styles and strategies that can provide diversification. In addition, using the search function enables investors to sift portfolios by risk score, asset classes, allocation strategy, geography, market cap, styles, etc. Selecting a varied combination of these will provide diversification.

Covestor also enables clients to combine passive allocations with emerging and more established portfolio managers.

3. Monitor and rebalance

After selecting managers to form a diversified portfolio and making the investment subscriptions, it’s important to periodically monitor the portfolio.  I want to ensure the portfolio stays within the desired risk target and the managers are performing as expected.

Portfolio managers on Covestor maintain and trade their portfolios as market conditions change to keep investors up to date with that particular strategy. However, from a broader perspective, investors should check their overall allocations to the portfolios in which they’re invested on Covestor.

For example, various Covestor portfolios will perform differently based on pockets of strength or weakness in the overall markets. Some portfolios may gain value during the year, while others may fall.

I would check quarterly or monthly and provided all portfolios are behaving as expected, I would consider balancing back to my initial allocation. The aim here is to sell high and buy low — trim significant winning Covestor portfolios and scoop up losers.  This ensures my portfolio stays diversified and gets back to the overall risk level I am targetting.

Another reason to change allocations might be a change in risk tolerance. For example, perhaps your kids have graduated from college and you now have the financial flexibility to take on more risk with your investments.

Again, picking the right managers and assembling a diversified portfolio isn’t easy. However, breaking the process down into these three steps can help simplify the job.

Read more about Covestor’s investment philosophy.

Disclaimer: All investments involve risk and various investment strategies will not always be profitable. Diversification does not ensure a profit or guarantee against loss. Past performance does not guarantee future results.