How do you define the perfect portfolio?
It’s probably not the most optimal allocation based on historical market data. The perfect portfolio up to the 1970s, was less perfect in the 1980s. The same can be said for the ’80s in relation to the ’90s, the ’90s relative to the 2000s, and so on to today. The market changes and is too unpredictable for that type of consistency. The data only tells us what happened not what will happen in markets.
It’s probably not whatever offers the highest returns either. That requires foresight, which we all lack. Too much dumb luck and risk involved to be worth considering. You’re far more likely to end up broke instead of rich.
It’s also not some cookie cutter portfolio you copied online. Not the worst choice but it’s missing an important consideration.
So, what is it then? One might argue that the perfect portfolio “is the one you can stick to.” Except that catchy phrase is incomplete.
A new book by my friend Peter Lazaroff, titled The Perfect Portfolio, breaks it down for you.
No single mix of funds stays perfect across every job, every family situation, every tax bracket, every market environment, and every temperament. A portfolio works when it matches your purpose, your limits, your stage of life, and your ability to stay steady when markets get loud…
The perfect portfolio means a portfolio built on a small set of principles: it has a clear personal purpose, respects emotional and practical limits, leans on evidence, and evolves as your life changes. It’s designed to help your savings grow faster than inflation without taking risks that offer no meaningful reward.
A lot of factors go into determining the perfect portfolio. The most important factor being you.
What’s your financial situation? What life-stage are in you? Do other people depend on you financially? Where do you live? What type of accounts do you have? Why did you buy the stocks/funds you own? What causes you to make changes to your portfolio? How do you react when the market gets crazy? How comfortable are you when your portfolio falls in value? What’s really important to you? Why are you investing your money? What’s your objective?
All these questions and more should be considered when building your portfolio. Your situation, goals, emotional disposition, and the trade-offs you’re comfortable accepting matter when it comes to your portfolio.
Armed with those answers, a basic understanding of market history, and a little behavioral finance is enough to build a portfolio that gives you a high probability to reach your goals. And interesting enough, it’s easier to stick with a portfolio tailor-made to you than some one-size-fits-all allocation copied from someone else.
If you’re not sure where to begin, go grab Peter’s book. He mixes stories and data to explain the process and uses himself as a real-world example on how to build a portfolio that better fits your needs.
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