Below is a short section of a recent blog from one of my favorite financial bloggers: The Oblivious Investor (http://www.obliviousinvestor.com). It is about as perfect advice on portfolio structure that you can get.
Forget about Perfect
Even the idea that it’s possible to have a perfect portfolio is problematic. It can make people want to change their portfolios all the time based on the most recent convincing-sounding argument they’ve read. (I know this personally, because I used to struggle with it myself.) And it can keep people from focusing on other things — such as savings rateor retirement age — that are generally more important than asset allocation.
Instead of searching for a perfect portfolio, I’d suggest the following approach:
- Work out a “good enough” portfolio.
- Recognize that it will not be perfect and that there will always be well-reasoned portfolios/strategies that have outperformed you over any particular period you choose to examine.
- Implement the portfolio anyway and move on with your life.
What Makes a “Good Enough” Portfolio?
As far as what makes a portfolio “good enough,” it’s not anything tricky:
- It should be diversified. (This does not necessarily require several mutual funds.)
- It should have a roughly appropriate asset allocation for your risk tolerance. (Consider limiting your stock allocation to twice your maximum tolerable loss.)
- It should have low costs.
