A perfect portfolio would be able to correctly anticipate short and long-term trends, automatically switching between assets to provide a consistently high return.
Even if this could be done, you’d also need to do it in a way that minimized trading costs and taxes.
This is… basically impossible – predicting the immediate, mid, and long-term futures AND being tax and cost-efficient.
Morgan Housel, one of my favorite investment writers, has this to say about the challenge of investing,
“If investing were all about math, mathematicians would be rich. If it were all about history, historians would be rich. If it were all about economics, economists would be rich. If it were all about psychology, psychologists would be rich. In reality, it’s a mix of many disciplines, but some of the brightest people specialize in one topic and can’t see the world through another lens.”
What we do know is that the future is full of uncertainty, and a broad range of outcomes is possible. Participants in markets are continually re-evaluating their projections of the future and what prices they are willing to pay for different assets.
Many of these participants also have different objectives, including speculation, not just fundamental investing.
The Perfect Portfolio for YOU
The perfect portfolio cannot be known ahead of time as the ideal portfolio of the past will have little to no bearing on future returns and will most certainly not be the best portfolio going forward.
Instead, the perfect portfolio should be viewed as the one that will have the highest probability of success, based on empirical evidence, each investor’s circumstances, and given the broad range of possible outcomes the future holds.
These circumstances include (but not limited to):
- Timeline
- Temperament
- capacity for risk
- investment knowledge
2020-2021 has been a roller coaster in most areas of our lives, including investing. We have seen a drop in equity markets between 30-40% last year, and then a rebound taking stock markets to all time highs.
If investors panicked and made moves out of fear, the loss may be permanent. If they stuck to a systematic investment plan, they would have benefited when the market rebounded to all time highs.
Market ups and downs should be expected, they are a feature of public markets, not a bug; in other words, they are the price of admission to higher long term returns.
Attempting to avoid the risk means you have to time the market twice, when to get out AND back in.
History tells us that nobody has been any good at this consistently, and especially after tax and trading costs.
It’s better to be a steady investor than a reactive investor. With this in mind, it’s always a good time to evaluate your investment strategy to make sure it’s one you can stick with when the next storm comes.
Questions?
If you have any questions or would like help optimizing your portfolio for your unique situation, go here to book a free 15 minute call with me > https://calendly.com/marcberger/15min-phone
What I’ve been reading lately:
It’s always beneficial to study history and learn from those with grey hair. Times change, but human behaviour is strong and ingrained. Jason Zwieg does a great job simplifying timeless, levelheaded investment principles.
Jason Zweig,“Everyone Who Thinks the Stock Market Is a Game Loses”
Sticking with a disciplined process and not getting caught up chasing fads is not easy, but it’s that self-discipline that wins out over time.
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