What’s the best way to put a portfolio together?
There’s a school of thought that says people are basically alike: apart from their individual tolerance for risk, they desire a modest amount of income and capital growth from their investment portfolios, so they should combine a balance of index funds together to have a low-cost, broadly-diversified portfolio.
There’s a lot to be said for this approach: it’s inexpensive and it gets people started on the investment process. And people usually get more conservative with their money as they age, so reducing risk by increasing the bond allocation isn’t unreasonable.
But this ignores some basic facts. People aren’t all that similar. Once you scratch beneath the surface, most folks have very different hopes, desires, fears, and concerns. And everyone brings a different set of resources to the table: financial, emotional, intellectual, and so on. Using a “cookie-cutter” approach of mutual funds and investment models neglects these assets.
Building an investment portfolio is like constructing a house. Yes, people have a common need for shelter, but no two living spaces are alike. The structures may all have a foundation, four walls, and a roof, but the similarities usually end there. And homes in southern California are very different from dwellings in New England—or anywhere else! Like a home, an institution’s or family’s investments need to fit their current lifestyle and their future plans. It needs to use the materials at hand to provide resources for the future.
Investing, like all of life, is complex and multifaceted. Managing your money is as much an art as it is a science. Some generalizations may be useful, but at its core all finance is really personal finance
Douglas R. Tengdin, CFA
Chief Investment Officer
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