Investment Portfolio:How to Build a Diversified Portfolio

Throughout our investing modules, we have learned about different ways to invest: from our cash-flow-oriented strategy, through selecting quality companies at an attractive valuation using Quality Value, to using ETFs to invest more simply and with greater diversification.

Now it is time to bring all those pieces together. In this final lesson, we will see how to build a portfolio consistent with your objectives and share the approach we use at Scale & Own to structure our investments.

What should you define before building your investment portfolio?

Before selecting the assets that will make up your portfolio, it is worth defining what you want to achieve with your capital, how much time you want to spend managing it and what your investment horizon is. These decisions will shape the strategy and the type of assets that make sense to include.

What is your investment objective: cash flow, growth or a combination?

The first step is to define the role you want your portfolio to play:

Cash-flow approach

This seeks to generate recurring income through dividends, interest or other distributions.

Growth approach

This seeks to grow the value of your wealth over the long term, primarily through capital appreciation.

Hybrid approach

This combines both objectives, assigning one part of the strategy to growing wealth and another to generating recurring income.

How much time do you want to spend managing your portfolio?

Once you have defined the objective, you need to decide how you want to pursue it according to the time you wish to spend analysing and monitoring your investments:

Level of involvement	Common approach	Main characteristic
Low involvement	Diversified ETFs	Simplicity, diversification and less need to analyse individual assets
High involvement	Individual stock selection	Greater control over the quality, valuation and companies included
Combined approach	Individual stocks + ETFs	Combines a diversified foundation with individually selected positions

Important: an ETF is not a strategy in itself, but a vehicle. Both growth and cash flow can be pursued through ETFs, individual asset selection or a combination of the two. Your level of involvement determines how you carry out your strategy, not which objective you should choose.

How do your time horizon and risk tolerance affect the portfolio?

Your time horizon, risk tolerance and financial capacity to withstand temporary losses will determine the level of volatility you can accept in your portfolio. A horizon of several decades may allow you to withstand greater temporary fluctuations, provided they are compatible with your risk tolerance and financial circumstances.

By contrast, if you will need access to the capital in the short term, preserving capital and maintaining sufficient liquidity become more important than seeking returns from volatile assets.

We regard stock-market investing as a primarily long-term strategy and distinguish clearly between investing and trading.

How do you diversify an investment portfolio?

Diversification is not simply about accumulating more positions. It is about preventing one company, one sector or one source of risk from carrying excessive weight in our portfolio. We take a practical view of diversification.

Geographic diversification: beyond the country of listing

Geographic diversification seeks to avoid exclusive dependence on a single economy. Beyond the country where a company is listed, however, it is worth analysing where its revenue actually comes from and which economies its business is exposed to. Many large companies conduct a significant part of their business in different international markets.

For this reason, we do not believe a portfolio needs to be distributed symmetrically across multiple countries to achieve geographic diversification.

Sector diversification: function rather than quantity

Every industry develops differently according to the economic environment. Technology, healthcare, energy, consumer goods and infrastructure do not react in the same way to cycles, inflation or interest rates.

The objective of sector diversification is not to be present in every sector as a rule. It is to build a portfolio in which the different positions do not depend on exactly the same economic factors at the same time.

What is false diversification and how do you avoid it?

Holding many positions does not necessarily mean being well diversified. Several companies may belong to the same subsector, compete directly with one another or depend on the same economic factors. In those cases, even though we own different stocks, a large part of the portfolio remains exposed to similar risks.

How many positions does a portfolio need?

There is no perfect number or fixed rule. A more concentrated portfolio can amplify results when decisions are correct, but it also increases the effect of every analytical mistake.

The number of positions is therefore a personal decision. It depends on the level of concentration you are comfortable with and your ability to analyse and monitor each investment properly.

At Scale & Own, we prefer to keep each strategy relatively concentrated, generally with around 10 positions, commonly within a range of 8 to 12. The total number will be higher when we combine several strategies within a hybrid portfolio.

What does each investment approach involve?

As we saw earlier, we distinguish three approaches according to the main objective we seek, which simplifies decision-making: generating income, growing wealth or combining the two.

These approaches allow us to integrate most of the assets and strategies studied in the earlier modules into a portfolio that is consistent with our objectives.

This is intended for people who prioritise recurring income, whether to supplement other sources of income or move towards financial independence based on cash flow.

• Common assets: dividend stocks, REITs, BDCs, fixed-income products and ETFs focused on generating income.
• Main advantage: it can generate periodic income without relying exclusively on selling assets to obtain liquidity.
• Limitation: by prioritising income generation, its potential for capital growth may be lower than that of a strategy focused mainly on appreciation.

This is intended for people seeking to grow the value of their wealth over the long term.

• Structure: it can be built with broad-market ETFs or through individual stock selection. At Scale & Own, when we select companies for this objective, we apply our Quality Value method.
• Main advantage: it prioritises the compound growth of wealth over the long term.
• Limitation: it may generate little immediate cash flow and require the sale of part of the positions to turn accumulated capital gains into liquidity.

This combines the two preceding approaches, assigning one part of the portfolio to growing wealth and another to generating recurring income. This is precisely the approach we have currently chosen at Scale & Own.

It is not a permanent structure and may evolve with our objectives and experience. We will now see how we apply it in practice.

How do you put the hybrid strategy into practice?

For us, financial independence is not measured solely by the theoretical value of a portfolio at one point in time, but by its ability to generate real cash flows over time.

The logic of the two engines: growth and cash flow

Within our approach, growth and cash flow work together:

• The growth engine acts as a long-term catalyst for wealth.
• The cash-flow engine provides periodic income and a source of liquidity that does not depend exclusively on selling assets.

The importance of flexibility

This hybrid structure gives us considerable operational flexibility. The capital generated, whether from periodic cash flow or realised capital gains, can be used to:

• Add to existing positions.
• Take advantage of market opportunities we consider undervalued.
• Fund personal or professional projects without changing the investment’s main structure.

Why not depend only on selling stocks?

Simply because nobody can guarantee how long a bear market will last or how long it will take to recover capital gains after a correction.

For this reason, we prefer not to depend completely on market movements or have to sell assets at unfavourable times to generate income or fund projects.

Proposed allocation for a cash-flow-oriented portfolio

As a reference, we propose distributing the cash-flow portion among different sources of income, while always maintaining discipline over selection and valuation before including each asset:

Asset type	Indicative weight	Function in the portfolio
Dividend stocks, including telecommunications, consumer staples, tobacco/alcohol and oil, among others	30%	Diversified base of companies and dividend generation
REITs (stock picking)	25%	Income from property without direct property management
BDCs (stock picking)	15%	Exposure to private credit and generation of periodic income
Covered-call ETFs	15%	Income generation through option premiums
Infrastructure/pipeline ETFs	15%	Exposure to infrastructure and additional sources of income

Example of a portfolio based on Quality Value

In a Quality Value portfolio, the composition depends on the opportunities available at any given time. We follow several principles when building it:

• A relatively concentrated portfolio, generally with 8 to 12 positions.
• Companies that meet our Quality Value criteria, including an attractive valuation at the time of purchase.
• Diversification across different economic drivers, without needing to be present in every sector.
• Weights that can vary according to quality, risk and conviction, while maintaining a minimum weight per position that each investor can define according to their preferences.

Based on these principles, a portfolio could combine companies such as the following:

Growth driver	Example position	Function in the portfolio
Technology and cloud	Microsoft	Enterprise software, cloud and technology ecosystem
Digital advertising	Meta Platforms	Digital advertising and monetisation of global platforms
Digital payments	Mastercard	Structural expansion of electronic payments
Financial data and analysis	S&P Global	Ratings, indices and financial-information services
E-commerce and fintech	Mercado Libre	Growth of digital commerce and financial services in Latin America
Platforms and mobility	Uber	Mobility, delivery and expansion of its global platform
Biotechnology and healthcare	Regeneron	Pharmaceutical innovation and development of new treatments
Luxury and premium brands	Hermès	Brand strength and pricing power

Important: this portfolio is presented only as an educational example. The inclusion of these companies does not mean that they currently meet all our Quality Value criteria. Its actual composition will depend on the opportunities available when investing.

The limits of our hybrid approach

We want to be clear: this is our personal view of investing, and we do not claim that it is the most suitable strategy for every profile.

Our hybrid model involves allocating capital to two different objectives. The cash-flow portion can limit growth potential compared with a strategy focused exclusively on appreciation, while prioritising growth alone would mean giving up some of the recurring income we seek to generate. It is a balance we have chosen consciously and one that may evolve over time.

When initial capital or the capacity to make regular contributions is low, focusing only on growth or only on cash flow may be simpler and more efficient. The hybrid approach becomes more meaningful as you develop a solid capital base or a consistent capacity to contribute.

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What if you do not yet feel ready to begin?

If you do not yet feel ready to build your portfolio, it is worth identifying the main reason first.

Insufficient capital

If your capacity to invest is still limited

When the available capital is small, the absolute income or capital gains generated may seem modest.

In that context, it may make more sense to prioritise increasing your main income or savings capacity first. This is why we place so much importance on developing digital assets and complementary sources of income before over-optimising a stock-market portfolio.

Lack of confidence

If you do not yet feel sufficiently confident

If you have the capital but do not yet feel ready technically or emotionally, there is no need to act urgently.

Continuing your education, observing the market and taking the time required to understand how each asset works is a prudent decision. Confidence is built through knowledge and gradual progress.

Your next step with Scale & Own

This lesson closes our investing section. Throughout this journey, we have explored different tools, methods and structures to help you build and grow your wealth consciously and in a way that suits your objectives.

When you feel ready, you can continue to the next stage of our journey and enter the section on international tax optimisation and expatriation, where we will cover how to protect and manage the results achieved more efficiently. And if you want to see how each country taxes residents, begin with the country comparison for choosing your tax residence.

Continue to the next stage: Expatriation →

Module 9 of 9 · 100% · Silo complete

• Define your investment approach
• How do you diversify an investment portfolio?
• What each approach involves
• Hybrid strategy
• Cash-flow strategy
• Quality Value strategy
• Limits of the hybrid approach
• Do you not feel ready?
• Next step