Building stronger portfolios from the bottom up

by Jerry Wagner

Investment advice from an unusual source

More than 30 years ago, in a small church on the village green of Franklin, Michigan, I heard a sermon that’s guided me ever since.

Dr. Richard Cheatham shared a story from his childhood:

“No matter how often or urgently Mom would remind us of the need for haste, I usually headed for the door at the last moment, grabbing for whatever the weather called for on my way. In winter, this usually required a bit more time. Michigan winters can be brutal. Coats, mittens, scarves, and headgear had to be in place prior to opening the door to receive the first blast of frigid air. I invariably began the buttoning process somewhere in the middle of my coat, donning hat and scarf between buttons. Often, in my haste, I began with the wrong button in the wrong hole. By the time I was finished, part of the coat was scrunched up around my neck, while one side dangled limply alone at the bottom. In frustration, I would turn to Mom and plaintively ask, ‘Can you make the buttons even?’ In response, she would begin unbuttoning them and then start the process from the bottom, saying, ‘Dick, if you get it right at the bottom, it will come out right at the top.’”

That simple story—and the advice behind it—has stayed with me. To reach any goal, you have to start with the basics. The same is true in investing: You can’t build a truly robust portfolio by starting in the middle and working to the end. You have to build from the bottom up.

The danger of the single-asset-class portfolio

Building from the bottom up starts with diversification. Relying on a single company or asset class can expose investors to risks that may not be visible until it’s too late.

For much of the 20th century, Sears was a household name and a cornerstone of many portfolios. But over time, shifts in consumer behavior and competition eroded its dominance. The stock—once a symbol of reliability—eventually collapsed, leaving long-term investors with little to show for their loyalty.

The lesson still holds: Even the most trusted names can falter. Markets evolve, and no single company or asset class can withstand every cycle. That’s why diversification—and an active, risk-managed approach—remains essential to building portfolios that can endure.

Building portfolios for performance and risk management

So what does it mean to build a portfolio from the bottom up?

Too often, investors—and sometimes even advisers—assemble portfolios piecemeal. They hear about something promising, with impressive past returns, and add it to their holdings. Over time, they end up with a collection of investments but no real plan.

Even when advisers build portfolios around top-performing asset classes, the result can be just as shortsighted. It may look great on paper—until markets change. That’s because those portfolios are designed for the past, not the future.

When we invest, we’re not investing in history. We’re investing in what comes next. The risks we need to manage are the ones we haven’t yet seen. That’s why a robust portfolio must be designed to participate in asset-class returns while also providing protection in uncertain markets ahead.

Performance is important, but it’s only half the equation. A portfolio benchmarked to the S&P 500 may look appealing—until you remember that the Index has fallen over 50% more than once in the past two decades. The NASDAQ Composite has dropped even further in major downturns.

Return alone cannot guide an investor’s decision. After all, a lottery ticket offers infinite potential return, but the loss is almost guaranteed. The goal is not to chase returns but to balance opportunity with protection—starting from the bottom up.

Begin with a strong core

Every portfolio needs a foundation—a core that supports both performance and protection. The core’s role is to participate in the returns of the component asset classes, providing balance and stability through changing markets.

The problem with most portfolios is that they draw these building blocks from the wrong asset classes. They focus on stocks and bonds because they have the best track record since the market bottomed in 2009. They are great at optimizing history but are not prepared for future crises.

That uncertainty is why core portfolio construction needs to reflect more than just optimizing returns. It’s also why a buy-and-hold strategy should not be the only basis for a core portfolio.

Dynamic, risk-managed strategies allow a portfolio to adapt to changing conditions. They can shift allocations when markets move and maintain balance when conditions remain steady. Buy-and-hold strategies can’t do both.

Of course, once you move beyond buy-and-hold, the choices can feel overwhelming. Some dynamic strategies perform best in trending markets, others in sideways ones. Some use alternatives or bonds, others use leverage. Choosing the right mix can be difficult.

That’s why we developed QFC Multi-Strategy Core—a single, suitability-based solution offered in five profiles, from conservative to aggressive. It actively allocates among our many core strategies to take the guesswork out of choosing which strategies to include in the portfolio and when. It chooses the initial strategies and the percentages for each. It monitors their results and reallocates monthly. It can drop underperforming strategies from the portfolio and add new strategies to the mix.

QFC Multi-Strategy Core is designed to deliver three levels of risk management:

1. The dynamic risk management employed within the funds used in each strategy.
2. The active management among the funds required by the strategies themselves.
3. The dynamic allocation employed among the strategies by QFC Multi-Strategy Core itself.

Together, these layers aim to help investors participate in asset-class returns while managing risk in uncertain markets. Because we built it right at the bottom, we believe it will come out right at the top.