Define what the portfolio must do
A portfolio intended to meet a near-term cash need has a different job from one with a long horizon. A fictional investment policy statement should define objectives, liquidity, horizon and constraints before selecting products. It also needs a clear description of how much loss the plan can absorb.
Count exposures, not product names
Several funds can hold similar companies or respond to the same rate and currency changes. Review the underlying exposures, position sizes and liquidity. Diversification is a relationship between risks, rather than a count of holdings.
Make the risk assumptions visible
Consider two assets with annual volatilities of 20% and 10%, correlation of 0.20 and equal portfolio weights. The standard two-asset variance formula gives an annual portfolio volatility of about 12.04%. This is an illustration under fixed volatility and correlation assumptions; changing either changes the estimate, and volatility alone does not describe every kind of loss.
Decide how the plan is reviewed
Specify a review calendar, rebalancing rules, cost assumptions and a suitable benchmark. Test a scenario with larger losses and stronger co-movement. Record why an allocation changes, so that a review follows the policy rather than simply reacting to the latest market move.
A learning example, not a market recommendation. Work through the assumptions before applying any model.
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