Many investors ask me how do I choose my investments? Is there a system you follow? How can I improve the performance of my portfolio? What factor or factors do I need to consider to improve my portfolios performance?
All good questions. I will discuss seven broad elements that typically determine the overall performance of your portfolio.
- Security selection. Or stock picking. This has proven not to be a good determinant of portfolio success. When you find a manager with great results. There is no reason to believe they will continue. Actually there is zero correlation between past performance and future results.
- Costs and expenses. This one is tough. Cheapest is not always best. My grandpa told me don’t buy the cheapest and don’t buy the most expensive. The best value is somewhere in the middle.
- Asset allocation. This is probably the most important technical determinant of portfolio success. Modern Portfolio Theory has proven to be a very effective tool in developing a successful portfolio. However, it’s development must be done correctly. And strictly enforced. In that, there needs to be periodic rebalancing.
- Valuation and year of birth. This is a determination of risk.
- Longevity and starting early. This also a determination of the level of risk you are comfortable with. However, 4 and 5 are just part of the equation. Each individual is different. Therefore, the generalization that these are the only determinates of risk is false.
- Humility and learning. If you google investment you will find millions of items to review. The Wall Street bullies have convinced most that someone has the holy grail of investing. They have convinced us that they and they alone can help you pick stocks, get into and out of the market at the right times and can find the best money managers to ‘beat’ the market and make you ‘rich’. Nothing could be further from the truth. The only ones getting rich are these on Wall Street. This is primarily because they make money on every trade you make. It does not matter whether you make money or not.
Remember, you don’t have to know everything about investing to be successful but you do need to know the right things.
- Behavior and discipline. This is by far the most important determinant of portfolio success. The Wall Street bullies use your emotions against you. They convince you that if you don’t act now you will miss out on ‘the opportunity of a life time’. Most, if not all of us need an investor coach to guide thru the maze of investment choices and keep us disciplined to meet our goals.