Portfolio Construction 101: Ready Player One

What do a gaming character and an investment portfolio have in common?

Despite being seemingly unrelated, there are resemblances between creating a gaming character and an investment portfolio. Specifically, the thought process and the logic you need to build are both crucial and will determine your chance of success.

In a nutshell, it’s all about the build. It starts with a well-thought-out plan. Building without a plan increases the likelihood of things moving in a direction not initially intended or can even lead to an earlier-than-expected end. By contrast, a proper build minimizes risks or helps you avoid them while simultaneously raising efficiency.

In video games, “build” means a specific arrangement of items, equipment, skills, etc., to best arm a character for the challenges at a certain stage of the game. This build is bespoke because it is based on the specific stats of the character and the player’s own playing style.

Sounds familiar? We can see parallels between how a game player and an investor tackle their tasks. Portfolio construction marries knowledge of both financial market conditions and an investor’s risk profile. From a gamer’s point of view, building and maintaining a portfolio can be done by thinking about the following:

Consider your “playing style”—take note of your risk tolerance, appetite, and objectives. Investors have different perceptions of risk. Some like very little risk, while others welcome or even seek it out (risk appetite). This has to be matched with your capability to handle risks (risk tolerance) and what your investment goal is (objective).

Understanding where you stand in relation to these elements will help you create a risk profile.In video games, the conservative gamer (Player 1) may prefer to hit targets from a distance, whereas the aggressive gamer (Player 2) may prefer to be in the thick of the action.

Choose a character—asset allocation matters. After determining your risk profile, select a portfolio asset allocation that best matches it.Prior studies have suggested that a significant portion of returns are due to a portfolio’s asset allocation.

This step is a balancing act between risk and return. Higher risk means a higher return. Conservative investors have more time deposits compared to aggressive ones who have more stocks. Here, Player 1 has a higher tendency to pick an archer, while Player 2 will go for the swordsman.

Pick your equipment—load up on specific securities. With the allocation set, the investor buys a list of securities (bonds or equities). Now the initial portfolio is constructed. In gaming, Player 1, the archer, goes for the bow and arrows, while Player 2, the sword and shield.

Explore and fulfill mission objectives—scan the market landscape and rebalance your portfolio accordingly. With the objective and portfolio set, you now need to look outward and check economic conditions and financial markets.

Are interest rates high? Is economic growth rising or declining? Are company earnings sustainable? Answers to these questions will paint a backdrop of market conditions that need to be considered in selecting a strategy. It’s like Player 1 and Player 2 are exploring the map to fulfill mission objectives. They face challenges that force them to reevaluate.

Recalibrate player equipment when necessary—work out portfolio allocation and security selection to fit the current market situation. Financial markets and the economy undergo cycles, and your portfolio needs to adapt to these changes. Recalibrating portfolios involves rechecking the portfolio’s asset allocation and securities. Economic booms give you the opportunity to be more aggressive, while recessions require a defensive touch.

Being flexible and not falling in love with portfolio holdings is important. Your financial advisors and portfolio managers, likewise, play a huge role in giving you guidance. Players 1 and 2 need to recalibrate, too, depending on their mission. They can change their equipment to become more effective. This goes on and on until they reach the end of the game and come out triumphant.

Just like with any endeavor, it takes practice to sharpen your expertise, regardless of whether it’s playing a video game or investing. Looking at current market conditions, it may look like the difficulty level in building a portfolio is set at an expert level. In times like these, gamers usually consult with reviews and guides. Investors, likewise, are advised to do the same.

Sounds like a plan? Have a conversation with your investment advisor. It never hurts to have an edge when it comes to investing.

JON EDISON MUNSAYAC leads the Portfolio Solutions Department of Metrobank’s Trust Banking Group which specializes in providing investment-based answers for clients’ portfolio needs. He has a little over 10 years’ worth of experience in trust banking, primarily in markets research, strategy, and investment solutions. He is a storyteller at heart and an avid believer in keeping things simple when possible.