In all of your extensive research about how to formulate an investment portfolio that is right for you, you may have come across articles talking about “the perfect portfolio” or “the investor who has done the impossible” by finding the exact perfect mix of investments and, thus, created “the perfect” returns. If you have not seen these articles yet, try a thirty second Google search. Or, just trust us. They are everywhere. With all of these headlines flying around about other investors’ great successes, you might be wondering: how do I create the “perfect” portfolio? Indeed, this is a question that many new investors ask – and oftentimes we look to more experienced investors for their advice.
But, let us help to set the record straight before we look to this advice. The truth is: there is no single, perfect portfolio. In fact, there are millions of “perfect” portfolios – because the perfect portfolio for an investor is highly dependent on the independent, individual characteristics of the each and every investor. What we mean by this is that your perfect portfolio may not be the same as your friend’s perfect portfolio – even if you are both making the same, great returns. Then, the real question becomes: how can I make a portfolio that is perfect for me? Now, here comes the advice of some very experienced investors!
1. Be able to name all of your investments off of the top of your head.
This strategy intends to focus on two different factors of your portfolio. The first point we want to make is that you do not need to own shares of 400 different investments in order to have a “diverse” portfolio. In fact, the added diversification value (or reduction of risk) that you gain by adding an additional stock to your portfolio typically starts to trail off when you add your 20th investment or more. Especially if you invest in ETFs or indexes, your portfolio will typically get the diversification that it needs after only a handful of investments. So, the point is this: do not buy too many stocks just because you think it will help your diversification. Instead, try to be able to name all of your investments off of the top of your head.
The ability to name all of your investments off of the top of your head will bring about an additional value, as well. This second value is that each of your investments will be memorable for a reason. This means that each of your investments will be special to you – that you picked each one for a reason other than its diversification value. When you become this selective about your investments, you give yourself a better chance of picking promising investments!
2. Do you own any investments that you don’t completely understand?
Look at your portfolio now and ask yourself this question. Are there any stocks or investments that you own which you really just don’t get? Maybe you do not know how the return structure works for an investment – such as how its returns are calculated – or you don’t understand how a company plans to be successful going forward. What does a company sell, how is its marketing? Are clients or customers happy with a company’s products? These are all things that you need to know in order to know your investments well. By simply understanding your investments thoroughly, you can put yourself a little bit higher on the scale towards creating your own perfect personal portfolio.
3. Have a concrete reason for why you bought each investment.
Do you remember the reason why you bought each investment? Was your purchase a result of a long-term factor or a short-term change in expectations? It may be helpful to write down the factors that lead you to your stock-purchasing decisions, so that you can remember them for later. And, if you look at your portfolio and realize that you do not have a concrete decision for why you purchased a stock (we’re talking about the shares you might have bought just because you had a “good feeling”), you might want to go back and look at that investment in the future.
4. When was the last time you shuffled things up?
Finally, a perfect portfolio is fluid. Whatever your time horizon or strategy, you should be checking in on your investments periodically to re-evaluate or even re-allocate your money according to your original investment plan. When was the last time you bought a new stock or sold an existing stock? You might like to consider this as a possibility once in a while, just to keep your portfolio up-to-date with the inevitable changes in the market. Just remember: even the most “perfect” of portfolios can benefit from little tweaks once in a while.
At the end of the day, the perfect portfolio for you will be one that is diverse enough for you to manage your risk, but well-selected enough for you to know and understand why you hold each investment. Little changes every so often can also help you in your goal of creating the perfect portfolio. Keep in mind: while there is not one single portfolio that exists for all investors, every investor is capable of creating his or her own perfect portfolio!