How to Build a Portfolio That Fits Your Life

12 minutes ago

11 min read

A practical guide for Caribbean professionals and business owners

For someone who has spent years building a business or progressing through a demanding career, investing can develop through a series of separate decisions.

There may be local shares purchased some years ago, a mutual fund receiving monthly contributions, a pension through work, property bought when an opportunity arose and, more recently, an overseas account holding an S&P 500 fund. Each purchase may have made sense at the time, although it can become difficult to explain how everything is supposed to work together.

The questions that prompted this series came from Trinidad and Tobago investors interested in the S&P 500. In the first article, I examined how access to currencies and investment markets affects the choices available. In the second, I considered the risks of relying on U.S. large-cap equities to meet every financial objective. This final article brings those discussions into the decisions an investor actually needs to make when putting a portfolio together.

My starting point would be to understand the wealth already accumulated, the commitments it must support, and how much of it can remain invested through difficult markets. That assessment gives a purpose to the investments we choose and a basis for deciding how much to put into each one.

Start with the wealth you already have

A business owner whose income, property and company value depend heavily on the Trinidad economy already has considerable domestic exposure before buying a single share on the TTSE. A senior professional may have a similar concentration through employment, a pension and property, even if the investment account itself appears reasonably diversified.

A consolidated view of the household's assets and liabilities should include the investments held by a spouse where these contribute to shared goals. Business commitments and personal guarantees should also be considered because they can create demands on personal savings that are easy to overlook when reviewing an investment statement.

The exercise should distinguish assets that can provide cash from those that produce income or would require a lengthy sale. The family home, for example, may contribute substantially to net worth while providing little flexibility for day-to-day spending. Pension income should be distinguished from an accessible investment balance, and funds owned by a business need to be considered separately from personal spending money.

The same review should extend inside the funds you own. Several accounts can hold overlapping investments, and an S&P 500 fund, a U.S. growth fund, and a few familiar technology shares may repeatedly expose the family to the same companies. Adding their underlying exposures together is more useful than counting the number of funds on the statements.

Give each financial goal a date and a currency

Consider a hypothetical Trinidad business owner who wants to retire in twelve years, expects a child to begin university overseas in two years, and occasionally needs to provide additional capital to the business. Although all three goals are funded from the same family's wealth, they allow very different amounts of flexibility.

The university expenses will arrive on a fairly predictable schedule, while a business funding requirement could appear with less notice. Retirement has a longer horizon, but the income required from investments may increase substantially once the owner steps back from the company. Before discussing an equity allocation, I would want to estimate those cash flows and identify which can be covered from reliable income.

Currency belongs in that exercise from the beginning. An expense due in Canadian dollars introduces a different funding requirement from one due in TT dollars, and a U.S.-dollar investment still leaves an exchange-rate exposure if the eventual payment is in another currency. For a Trinidad investor, the practical ability to obtain the spending currency also matters, particularly when access cannot be assumed at short notice.

That is why I would avoid building a plan around a single portfolio value converted at a quoted exchange rate. A more useful question is how much money can actually be made available, in the required currency, by the time the payment falls due. The investment plan should reflect that answer, including any funding gap that needs to be addressed through additional savings or a change to the goal.

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Decide how much capital can remain invested

Once the commitments are mapped, it becomes easier to distinguish money available for long-term investment from money that already has a near-term use. A family with substantial wealth in property and a private business may still need to keep a meaningful reserve in readily accessible assets, particularly when business income is uneven.

Cash, suitable short-term deposits and carefully selected money market investments can serve that purpose, subject to their withdrawal terms and risks. A money market fund is an investment rather than a bank deposit, and investors should understand what it owns, how redemptions work and whether its value can fluctuate. An attractive advertised yield alone does not establish that a product is suitable for an emergency reserve. For a family with a substantive liquidity sleeve, deposit insurance becomes a relevant factor.

There is an opportunity cost to holding reserves, since money kept available may earn less than growth investments over time. That cost needs to be weighed against the consequences of having to sell shares during a decline, delay a family commitment or find expensive funding for the business. The appropriate reserve depends on those circumstances, rather than on a standard percentage applied to every investor.

For our hypothetical business owner, setting aside the education funding and an appropriate contingency reserve would leave a clearer amount available for retirement investment. The risk discussion can then focus on capital that has a realistic chance of staying invested.

Build the growth allocation with a view of all your holdings

The S&P 500 can remain an important part of that long-term allocation, alongside exposure to businesses in other developed markets, emerging markets and, where appropriate, smaller companies. The purpose of broadening the equity holdings is to reduce dependence on a particular group of businesses or one country's market conditions, while accepting that different markets will take turns leading and lagging.

There are several ways to implement this. An investor might use a broad global equity fund as the starting point, or combine a U.S. allocation with funds covering other markets. These approaches can produce similar exposures, but buying a global fund alongside existing U.S. holdings requires a check of how much U.S. exposure the global fund already contains.

Otherwise, a purchase intended to diversify the portfolio may increase a concentration that was already substantial.

International equities also bring their own currency, political and market risks, making their contribution to the total portfolio the relevant test. A country or sector that has recently performed well still needs to justify its allocation, particularly if the investor is buying after valuations and expectations have risen.

For an investor who already owns a successful Caribbean business, the international portfolio may be particularly valuable as a source of wealth outside that business and its local operating environment. That role can justify holding investments that feel less familiar, provided the research and the size of the allocation support the decision.

Choose fixed income for the cash flows and risks you need

Fixed income deserves its own design process because bonds can differ substantially in credit quality, maturity, currency, and sensitivity to interest rates. If the objective is to provide dependable funding for planned spending, I would place considerable weight on the issuer's ability to pay and the timing of the expected cash flows.

Individual bonds maturing around future spending dates can be useful where the portfolio is large enough to spread exposure across issuers. Repayment remains subject to the issuer meeting its obligations, and an investor who needs to sell before maturity may receive less than expected. Bond funds can provide broader exposure through a single holding, although an ordinary ongoing bond fund does not promise to return a particular amount on the date an investor happens to need it.

Longer-term bonds generally respond more sharply to changes in interest rates than otherwise comparable shorter-term bonds. Higher-yielding corporate bonds introduce greater credit risk, and their prices can come under pressure at the same time as equities when the economic outlook deteriorates. A fixed-income allocation selected mainly for its headline yield may therefore provide less support during a downturn than its owner expects.

For an investor preparing to draw retirement income, the combination of pension payments, bond cash flows and reserves should be assessed against withdrawals through a difficult period. The equity allocation can then retain a growth role without being the only available source of spending money.

Keep local and regional investments connected to the plan

Local securities can have a useful role for investors with TT-dollar expenses, established knowledge of regional companies or opportunities that merit a place in the portfolio. The amount allocated should still reflect the investor's broader domestic exposure and the practical ability to sell a position when required.

Holding TT-dollar equities does not by itself secure a TT-dollar goal, because the share price can fall and the dividend can change. Money held for a dated local commitment needs to be distinguished from capital invested in a local company for income and growth, even though both appear in the same currency on a statement.

For investors whose access to foreign currency is limited, the review can include local fixed income, mutual funds and accessible regional investments alongside TTSE shares. With any fund, the relevant questions concern its mandate and actual holdings. Where a TT-dollar fund owns international assets, that exposure should be included in the portfolio analysis, while the currency and terms of redemption must be checked separately. Underlying foreign investments should not be assumed to give the unitholder a right to withdraw U.S. dollars.

The practical objective is to make the best use of the opportunity set available and recognise the concentrations that remain. If access expands later, new contributions can help adjust the overall mix without requiring an immediate overhaul of everything already owned.

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Gold and other alternatives need a clearly defined role

Gold may provide diversification because its returns can respond differently from equities and bonds to economic conditions and investor demand. It does not generate an income stream, however, and its price can fall substantially or disappoint over extended periods. I would consider an allocation in relation to the risks elsewhere in the portfolio and the investor's ability to hold it through those periods.

Other alternatives require equally specific consideration. Private equity funds, for example, may commit capital for many years and restrict withdrawals, while fees and the manager's investment decisions materially affect the outcome. For someone who already owns an illiquid business and several properties, another private investment needs to justify the additional demands it places on the family's capital. A larger net worth does not automatically create greater capacity to tie up cash.

Structured products also deserve a brief introduction here. A common form, the structured note, combines a financial institution's debt obligation with a derivative linking payments to shares, an index or another reference asset. The terms can be designed around conditional income, specified downside protection, or a particular pattern of market participation.

The trade-offs need to be understood together. Income may stop, gains may be capped, and an early redemption can create a need to reinvest. Some notes promise principal repayment only at maturity, while others offer conditional protection that can disappear if a stated threshold is breached, potentially leaving substantial capital losses. All promised payments depend on the issuer's financial strength, while fees and limited opportunities to sell before maturity also matter.

I would assess a note by its actual payments and losses under different market outcomes. A note tied to equities already held elsewhere can add exposure to those equities along with issuer risk, so a different product structure does not establish diversification. These instruments merit a separate discussion, with their role determined by the investor's needs and the specific terms.

Select the investments with position size and cost in mind

Once the intended exposures are clear, the choice between funds and individual securities becomes easier to assess. Broad funds can provide access to many holdings with relatively little administration. Direct stock and bond selection can offer more control over the companies, issuers and maturities owned, but requires sufficient research and attention to how much is placed in each position.

The size of an investment determines how much a mistake can affect the family. For illustration, a holding that represents 5% of a portfolio and loses half its value would reduce the portfolio by 2.5%, assuming everything else is unchanged. That calculation says nothing about whether the holding deserves to be purchased, but it helps put the possible loss into the context of the overall plan.

The full cost of implementation includes fund expenses, advice or management fees, trading charges, custody costs and currency-conversion costs where applicable. A quoted commission of zero can coexist with other charges, while small recurring expenses can make a meaningful difference over a long holding period. The question is what service or exposure the investor receives for the total cost and whether the arrangement offers value.

A busy professional should consider the time required as well. A portfolio that depends on closely monitoring many individual securities may be difficult to manage alongside a demanding career, even when the investor has the knowledge to do the research.

Delegating that work to a wealth manager or using broader funds should be considered against the responsibilities the investor is prepared to retain.

Put the rules in writing and review the portfolio as life changes

I would record the main decisions in a short investment policy that identifies the goals, required currencies, liquidity reserve, intended allocation, and limits on individual exposures. It should also establish how new contributions and withdrawals will be handled, when the portfolio will be reviewed, and who is responsible for making decisions.

Over time, market movements will change the allocation even if no trades are made. Rebalancing brings exposures back towards the agreed mix, with new contributions or cash distributions sometimes providing a way to do this without selling existing holdings. A review schedule or pre-agreed allocation ranges can help make those decisions more consistent, although rebalancing still involves costs and does not guarantee a better return.

The policy should leave room for genuine changes in circumstances. Selling a business, retiring, receiving an inheritance or bringing forward a major family expense can alter both the amount of capital available and the risks it can carry. Those events deserve a fresh assessment of the allocation rather than an automatic continuation of a plan written years earlier.

Performance also needs to be judged against what the portfolio was designed to accomplish. A portfolio holding cash and bonds alongside equities should not be expected to match an all-equity index during every strong market. Its review should consider whether the family remains on track, whether the risk has stayed within acceptable limits and whether each investment continues to justify its place.

The practical questions that come next

Once investors can see how a portfolio should fit together, the next questions become more specific. How does a Trinidad and Tobago resident open an international brokerage account, what is involved in opening a local one, and how should someone decide between individual stocks and a fund? Investors also need to understand the difference between choosing an account provider and choosing who will make the investment decisions.

Those topics deserve their own practical articles, and I would welcome readers' questions to help shape them. Opening an account makes execution possible, while the work discussed in this series gives the investor a basis for deciding what to do with it.

Bringing the series back to your own finances

The original interest in the S&P 500 led us to questions about currency access, the risks inside a single index and the wider responsibilities of an investment portfolio. For Caribbean professionals and business owners, those responsibilities extend into family spending, retirement and the concentration of wealth in businesses and property.

My preference is to build from those circumstances, using the available investments in amounts that the financial plan can support. A portfolio can evolve as wealth grows and access improves, provided the decisions remain connected to its purpose, and the investor understands the risks being accepted along the way.

If you have accumulated investments across several accounts, or are preparing to invest a meaningful sum and want to establish that structure from the beginning, you can arrange a portfolio consultation through Wealth with Daniel. We can review what you already own, identify the commitments the portfolio must support, and develop an allocation that reflects your goals, currency access, and capacity for risk.

As always, no pressure, just perspective.

- Daniel Tittil, CFA, CAIA, MSc.

Lead Advisor, WealthwithDaniel.com

Portfolio & Wealth Manager, Director, Admiral Capital Chief Investment Officer, Legacy Wealth Management (Cayman) Ltd.