How does a target mix become a real portfolio?

A target allocation on paper and a portfolio in the world are different objects, and the gap between them is where most practical problems live. Four gaps are worth naming, because each one silently changes the actual mix.

Gap 1 — the policy is not written down

Institutions formalise the mix in an investment policy statement. Stripped to its essentials, it records five things:

1. The asset classes in use, and what job each one does.
2. The target weight for each.
3. The permitted range around each target.
4. The rebalancing rule — calendar, threshold, or hybrid — stated in advance.
5. The review cadence, and what would justify changing the targets themselves.

The document exists so that decisions get made when markets are calm and executed when they are not. A rule written in a quiet month is a completely different object from a decision made in a falling one.

Gap 2 — the stated mix is not the look-through mix

A fund's label describes its mandate, not necessarily its holdings on a given day.

• An "equity fund" holding 8% cash makes a portfolio's real equity weight lower than the statement says.
• A "balanced fund" is an allocation decision made by someone else, nested inside yours.
• A "global" fund weighted by market capitalisation may be 60%+ in a single country — which, per the previous lesson, may be exactly the concentration you were trying to reduce.
• Two funds with different names can hold substantially the same large-cap names.

The fix is mechanical: compute weights on the underlying exposures, not on the fund labels.

Gap 3 — the accounts are counted separately

Most people hold money across several accounts — a workplace pension, a personal brokerage account, a tax-sheltered wrapper. Each may look sensibly allocated on its own screen while the total is nothing like the target.

A rounded illustration: a pension of €150,000 at 90/10 and a brokerage account of €50,000 at 20/80.

• Equity: (150,000 × 0.90) + (50,000 × 0.20) = 135,000 + 10,000 = €145,000
• Total: €200,000 → equity weight = 72.5%

Neither account is 72.5%. The portfolio is, and the portfolio is the thing that generates the returns and the drawdowns. The unit of analysis is the household total, not the individual account — and once that is accepted, the placement of each asset class across accounts becomes a separate question with tax consequences.

Gap 4 — the fee drag is invisible per year and enormous per decade

Fees are deducted before the return you see, so they never appear as a line item. Compare an illustrative €100,000 compounding at 7% gross for 25 years:

• At a 0.10% fee (net 6.90%): 100,000 × 1.069²⁵ ≈ €530,000
• At a 1.00% fee (net 6.00%): 100,000 × 1.06²⁵ ≈ €429,000

A gap of roughly €101,000 — about 19% of the ending value — from a 0.9 percentage-point annual difference. This is the same compounding curve from the foundations course, running in reverse against the investor. It is also the one input in this entire course that is knowable in advance rather than estimated.

In the data

Every fund reports what it holds split into US shares, non-US shares, bonds, cash and other. A US total-market fund:

Label and contents are separate facts, even when they nearly agree: a sliver of this "US" fund is foreign shares and a sliver is cash. A household total assembled from fund names rather than from rows like these will not be the mix that was computed.

Try it now

1. Write a five-line policy using the structure above for a hypothetical portfolio. Every line should be a decision you could hand to somebody else to execute without further instruction.
2. Test Gap 2 on a real wrapper rather than on its name. Two funds are below, split the same way: iShares MSCI ACWI, whose name says "all country world", and SPY, an equity fund. How much of the first is a single country, and how much cash is sitting inside the second? Compare each with what the label suggested.

3. Redo the two-account arithmetic with your own hypothetical numbers. Compute the household-level equity weight and compare it with each account's individual weight.