The Perfect Portfolio: Don’t Bother Trying

I write a lot about improving your portfolio, whether it’s by choosing an appropriate asset allocation, minimizing costs, or minimizing taxes.

All of those things are important. But it it’s also important to recognize that, no matter how hard you try, your portfolio will never be perfect.

Extreme Optimization

I recently had an email conversation with an investor who had determined that, by moving his IRA to a different brokerage firm and shifting the holdings in his 401(k), he could reduce his average expense ratio by 0.05% per year while keeping the same overall asset allocation.

On this investor’s roughly $100,000 portfolio, reducing costs by 0.05% would have amounted to $50 of savings per year. Saving $50 every year certainly isn’t a bad thing, but it’s unlikely to make or break his retirement plans. And it might not be worth the hassle of moving accounts from one brokerage firm to another–especially given that his current brokerage firm could end up being the lowest-cost choice a few years from now.

Analysis Paralysis

Similarly, I often receive emails from people who recognize that their holdings are a mess and that something needs to be done about it, but they can’t bring themselves to make any changes because they want to have everything “just right” before pulling the trigger.

Of course, “just right” never happens. There are a thousand different asset allocations that could make sense for a given investor, and you could spend months (or even years) trying to research and answer all the possible questions:

• Should you use ETFs or index funds?
• Should you use Vanguard or Fidelity?
• Should you have 45% of your portfolio in stocks or 60%?
• Should you invest 20% of your stock holdings internationally or 40%?
• Should you overweight small-cap/value stocks?
• Should you have a specific allocation to REITs?
• Should you own any bonds other than Treasuries?
• Should you own international bonds?
• Should you stick with short-term bonds, intermediate-term bonds, or both?

All of those questions (and many others) have reasonable arguments that can be made on each side. If you try to find the “right” answer to each and every such question, you’ll never get anywhere.

At some point, you have to accept that your portfolio will never be perfect. Perfect portfolios do not exist. But good portfolios do. And a good portfolio can get the job done.