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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.

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  1. While I’m in complete agreement with the overal premise of this post, I just want to comment on the fee example. 0.05% in fees likely won’t make or break like you stated, but I think the cost was under stated. For a portfolio to be able to cover $50 in fees each year, the principal needs to be 20 to 30 times the amount of the fee (and that additional principal increases costs too). Another way to look at it is that you need to hold about $1,250 dollars more worth of investments just to cover the $50 each year. It becomes more important to view annual expenses (be they fees or taxes or whatever) in this way as the expenses increase. At 2% (which can make or break) about half of a portfolio exists just to pay annual fees. I’m not trying to say I think your OKing high fees, just trying to illustrate that the “cost” can is greater then the fee subtracted from the portfolio balance.

  2. You might try dealing with the question from the reverse angle: what allocations or investment strategies might be most likely to produce a bad portfolio?

  3. One of my favorite quotes on investing [I have added it to my written Investment Policy Statement]:

    “90% of what passes for brilliance or incompetence in investing is the ebb
    and flow of investment style (growth, value, small, foreign).” – Jeremy Grantham.

    Anyone setting out to pick a “winning strategy” for the NEAR or medium term future should take a long HARD look at the Callan Periodic Table of Investment Returns. It is a graphical representation of reversion to mean.
    What worked yesterday, last month, or in the last couple years is unlikely to continue to work in the next decade or longer investment time frame. You can find it here:

  4. Mike,
    I couldn’t agree with you more. Recently, on, Taylor Larimore asked the question: “What is your single favorite quote?” My immediate response was a quote from John Bogle in which he stated: “The greatest enemy of a good plan is dream of a perfect plan.” I use to struggle with this all the time and found myself not making the type of decisions I needed to make consistent with my overall plan. Matter of fact, I have struggled with many of the questions you mentioned in your blog. Once I was able to finally internalize that there is no perfect plan, I have been able to better manage my plan with a lot less anxiety.

  5. Thanks for the post Mike…but I have Paralysis from Analysis and it is making my wife crazy! . 🙂

    And what was the answer to that question again? “Should you stick with short-term bonds, intermediate-term bonds, or both?” 🙂
    You are great guy.
    Have a GREAT day!

  6. Can you give example of a good portfolio?

  7. Larry: Not a bad idea.

    Jim: I’ve always enjoyed that chart. It shows well how unpredictable financial markets can be.

    John: I don’t recall hearing that quote before, but I like it. 🙂

    Singh: I think any of the portfolios listed here would be “good” portfolios:

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