What’s your “blueprint” for investing?

Posted by on October 12, 2012 @ 1:25 pm in Investing

I remember one of my colleagues observed that many investors don’t really have portfolios—they have “collections” of securities. He meant that their accounts had been assembled piecemeal over time, with a brother-in-law’s recommendation here and a newsletter recommendation there. In some cases there was an emotional attachment because the investment was a college graduation present or it was stock in a company where a grandparent had worked. In other cases, tax considerations kept the investor from selling. Occasionally, emotions took over, and in the end, the investor didn’t quite know how all the pieces fit together.

One way to avoid having a collection is to think about your portfolio the way you would think about building a house. Whether you work with an architect (or a financial planner in this case) or develop a plan on your own, some kind of blueprint is almost always the starting point. For a house, a blueprint limits the likelihood of big mistakes. It assures that the house will have enough windows and doors. For a portfolio, likewise, a blueprint may help you approach the portfolio “construction” process very deliberately and absent the emotion that frequently comes with investment decisions.. (Does your portfolio have too many “windows” and not enough “doors”?) For example, do you have too many specialty funds and not enough that provide broad diversification?

When it comes to constructing a portfolio, your strategic asset allocation should serve as the foundation. Beyond that, a well-constructed portfolio, as with a well-constructed house, should be balanced.

Finally, any reputable builder will outline a project’s costs up front so that the buyer knows what he or she can expect to pay. Make sure that’s true for your investments as well.

So, do you have a collection or a portfolio? What’s your “blueprint” for investing?

Notes: All investing is subject to risk, including the possible loss of the money you invest. In a diversified portfolio, gains from some investments may help offset losses from others. However, diversification does not ensure a profit or protect against a loss.

Follow

Get every new post delivered to your Inbox.

Join 169 other followers

%d bloggers like this: