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What makes a good investment portfolio

Every good investment portfolio should be an all weather portfolio.

Learn what makes a good investment portfolio.
A good investment portfolio captures the market’s returns
Investors lose valuable returns if they try to succumb to temptations and try to use various forms of market timing with the idea that they can anticipate market directions for either individual stocks or groups of securities. For 99% of Americans, buy and hold is the best strategy for a successful investment portfolio.

Stocks should be broadly diversified and investors should drive out costs—management costs, fund operating expenses, transaction costs, tax costs—all costs. If you have 1 percent in costs and your portfolio returns 4 percent after-inflation, you are losing a quarter of your fortune. That’s the huge reward for building a simple investment portfolio that you can manage yourself.

Everyone has occasional questions. Pay for good advice the same way you pay other professionals (doctors, lawyers, etc.). The best way is to pay for their advice only, and not to mix this with with the service of managing your portfolio. If you seek medical advice, a doctor might prescribe medicine—but you don’t pay them to put the pills in your mouth. From time to time you may want financial advice, but you don’t need someone to be investing for you. (I’m not even mentioning the conflicts of interest.) Take control of your finances. A good investment portfolio is simple and you can manage it yourself.

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Good investing portfolios control risk
Portfolios differ because investors have different goals, the goals have different timeframes (known as investment horizons), and each investor has a different willingness, ability, and need to take investment risk.

Bucket strategies create portfolios with different investment horizons. They are a psychological tool, not a financial strategy. But they are very useful to help beginners establish the correct stock/bond ratio and give investors confidence to stick with their plan by explicitly seeing that all their short-term needs are safe.

You can build an outstanding investment portfolio with just three or four funds. You don’t need more than two stock funds and fixed-income securities.

Investors should own the whole market for the greatest return per unit of risk. Deviations of that can give higher expected returns but at disproportionately higher risk (as measured by expected volatility). Tilting towards small and value stocks are common examples for investors that seek that. Individual stocks are not, because they carry uncompensated risk.

A good investment portfolio has a simple written plan
A good investment portfolio also has a simple written plan. This clarifies goals and helps investors stick to their plan—because simple plans can be remembered.

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