One insightful writer has compared investing and portfolios to food — one of my favorite subjects. He says that people have historically thought of their investments as you would a salad and creating an investment “portfolio” was like adding different vegetables to the salad bowl. While it may be an enticing mixture of ingredients, each vegetable — and each investment — is still uniquely identifiable and continues to maintain its own identity, function and “flavor.” The raw ingredients may be sub-divided into different classes — stocks can be divided into domestic vs. foreign, small vs. large, value vs. growth — but dividing a carrot for the salad into 6 or 12 different slices does not transform it into something new or different; it is still a carrot. Salads are good. Mixtures of investments may be good, but such a mixture does not necessarily make a portfolio.
Now, let’s think of soup. When you combine the raw ingredients to make soup, you anticipate that the resulting concoction will be uniquely different from the ingredients that go into making it. The finished product is not just the sum of its components; it is a different product. The raw ingredients have been transformed into something new and different — the soup. Such is the case when designing an investment portfolio. A well designed portfolio is much more than just the mathematical sum of its component investments. The resulting portfolio has unique characteristics of risk and return that are different from any of its component investments. The portfolio is a new and different investment designed to allow the specific client’s pursuit of financial needs and goals. One should not look inside the portfolio to determine which of the component investments will provide income or growth or risk aversion. The investments are no longer as important as the portfolio. The whole is indeed, larger and more important than the sum of its parts.