While there’s no one perfect portfolio, there is a perfect portfolio for each individual investor, and the experts from Andrew Lo and Stephen Foerster’s new book In Pursuit of the Perfect Portfolio shared their ideas in a MarketWatch article.
A portfolio is very personal, with so much depending on individual circumstances, tastes, and willingness to take risks. Lo suggests using his “Three Ps of Investments”: principles, process, and path. First, begin with the 7 investment principles checklist:
- How much expertise do you have in financial planning and how much time and energy are you willing to devote to managing your portfolio?
- What are your financial plans, both currently and in the future?
- Determine where your comfort zone lies regarding risks.
- What is your investment philosophy; what beliefs do you hold about the markets?
- Make a list of all the assets you currently hold and are willing to hold (mutual funds, ETFs, stocks, bonds, real estate, etc).
- Gain knowledge of the current investment environment.
- Limit obvious mistakes.
Once you’ve made your checklist, the next step is the process of creating a perfect portfolio for your situation. To help you do that, Lo suggests finding out which of the 16 different investor archetypes you fit into. Those archetypes depend on 4 key characteristics: degree of risk aversion, how much wealth you currently hold and your potential for future wealth, your financial needs both now and in the future, and the current investment environment. Though Lo acknowledges the complexity of this step, he contends in the article that investors “need to get smarter because life has gotten more complicated.”
The last step is the path. Here, Lo lists 4 levers to help you achieve your financial goals:
- What’s the ideal target size of your goals?
- How much are you willing and able to contribute to savings and investing?
- How much time do you have to achieve your goals?
- What’s the expected return on your investment?
However, Lo cautions in the article’s conclusion, the perfect portfolio changes over time. “You never step in the same river twice,” he said, “…So, you need to take into account both the previous path that got you to where you are, as well as the future path that you’re going to take in order to try to reach your goal.”