In reply to our recent discussion comparing two of Fidelity’s international index funds, a reader wrote in with a response that I wanted to highlight:
“I’m noticing a trend here. When answering questions about portfolio specifics, one of your most common answers is, ‘It doesn’t really matter.’
I’m working on a portfolio makeover, and I started a Bogleheads discussion with several questions about my portfolio. Many of the answers I received were of the same nature. Honest truth, I found it frustrating. I don’t know a lot about investing, and I just wanted somebody to tell me what to do.
But I think I’m finally starting to get it. You *are* telling me what to do. And the answer is to pick something, move on, and stop worrying about it.”
If you have a portfolio that you know is a mess for some reason (high costs, lack of diversification, obviously-improper asset allocation, etc.), it’s better to go ahead and move to something that you know is at least a good portfolio, rather than spend years in search of the perfect portfolio before making any changes.
Forget about Perfect
The idea that you need to develop the perfect portfolio before taking action can be quite problematic.
- It can keep would-be investors from getting started,
- It can keep investors from taking the initiative to fix an obviously-broken portfolio, and
- It can keep investors from breaking free of an advisor who they know is ripping them off.
Even the idea that it’s possible to have a perfect portfolio is problematic. It can make people want to change their portfolios all the time based on the most recent convincing-sounding argument they’ve read. (I know this personally, because I used to struggle with it myself.) And it can keep people from focusing on other things — such as savings rate or retirement age — that are generally more important than asset allocation.
Instead of searching for a perfect portfolio, I’d suggest the following approach:
- Work out a “good enough” portfolio.
- Recognize that it will not be perfect and that there will always be well-reasoned portfolios/strategies that have outperformed you over any particular period you choose to examine.
- Implement the portfolio anyway and move on with your life.
What Makes a “Good Enough” Portfolio?
As far as what makes a portfolio “good enough,” it’s not anything tricky:
- It should be diversified. (This does not necessarily require several mutual funds.)
- It should have a roughly appropriate asset allocation for your risk tolerance. (Consider limiting your stock allocation to twice your maximum tolerable loss.)
- It should have low costs.