Why investing is like building a house

Rome (or a house) wasn't built in a day, and neither was your portfolio.
Emanuel Datt

Datt Capital

A new year is a great trigger to start thinking about long term wealth accumulation.

A well-known path to building wealth is often referred to as creating an investment portfolio. An investment portfolio, put simply, is an accumulation of all your assets.

We know that this does not happen in a day. A portfolio is built over time by gradually acquiring and expanding investments, aided by mapping a plan that is flexible as life goals change over time. If you like, the process of constructing an investment portfolio is pretty similar to building a house.

Let me explain.

The first step is the decision to invest in building a new house (portfolio) on a land holding (capital).

The owner (which is the investor) has several options when it comes to building. Those on a budget may pick a volume builder (retail financial advisor) where they can pick from some standard designs at a fixed price. In this case, I refer to financial products. These financial products may not be a perfect fit for the owner (investor) and may be used to only fulfil short-term financial needs.

An alternative option is to hire an independent builder (independent financial advisor) to build a high-quality, unique home to the owner’s desired specifications.

This may provide an end product (portfolio) that fulfils the needs of the owner (investor) over most timeframes. However, this option may 'lock' the owner (investor) into decisions before the house is tangible.

The final option is the owner (investor) can organise the building of the house (portfolio) themselves. This involves hiring and working with various tradesmen (fund managers. This option may provide the most flexibility with greater initial involvement (due diligence) required by the owner (investor).

A word of caution 

Investors need to note that some tradesmen (fund managers) pay independent research houses for certification or ratings to increase their credibility so the builders (financial advisors) can hire or recommend them to their clients.

This certification does not guarantee the quality of the job that will be performed (investor returns or investment performance) but rather that the job will be performed systematically.

Builders (financial advisors) often can't use tradesmen (fund managers) who do not pay research houses due to insurance requirements. Independent builders (advisors) may not have this requirement.

The end result is often builders (financial advisors) build a house that fits within their own requirements not what the owner (investor) actually wants or needs (performance at the appropriate risk appetite).

If you need a single-story, four-bedroom house with a spacious yard, why would you settle for a triple-story, two-bedroom townhouse because your builder can only build this product?

Ultimately, owners (investors) should consciously participate in building their own homes (portfolios).

High-net-worth investors have a greater range of investment options that fall well outside the typical constraints of financial advisors. These options may provide superior returns when incorporated into an appropriately diversified portfolio.

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Emanuel Datt
Datt Capital

Emanuel is the Principal of Datt Capital, a boutique Melbourne-based investment manager focused on identifying high growth and special situation opportunities.

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