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A “Good Enough” Portfolio Really Is Good Enough

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.”

Yes! Exactly!

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:

  1. Work out a “good enough” portfolio.
  2. 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.
  3. 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:

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Comments

  1. I really like this. As Winston Churchill says the spelling of perfection is PARALYSIS. The search for the magic bullet is endless. Best to go with good enough.

  2. Yes, very nice post. That’s most of what anybody needs to know about the accumulation stage. Assess risk tolerance (simply), diversify, keep expenses low. Then focus on building wealth, primarily through career, and possibly through real estate and business ownership. “The perfect is the enemy of the good.” -Voltaire

  3. There are various strategies that have [sometimes] worked in the past, like tilting your stock portfolio to small cap or value stocks, but nobody knows if – or when – they will work in the future. In the recent [Fall 2007 to Spring 2009] market break none of them worked. In regard to efficient market theory, etc. I like what James Montier wrote in his May 2012 GMO Whitepaper “The Flaws of Finance”:

    “Practitioners should abandon their obsession with optimality. One of financial theory’s lasting contributions to the world of financial practice is the concept of optimality. I don’t believe that the optimal can exist in an ex ante sense without the aid of a crystal ball. Of course, ex post, it is trivial to construct an optimal portfolio. However, since I’ve
    yet to encounter an investor armed with a fully functioning crystal ball, I would suggest that we need to abandon the pursuit of the optimal, and instead aim for robustness. Ex ante optimality is inherently fragile: it is only optimal for your best guess of the future.”

    Let me Repeat him, “abandon the pursuit of the optimal, and instead aim for robustness”!

    Hear, hear!

  4. Well said Jim, Montier’s comment about optimality is spot on. Optimality, I think is an academic or philosophical construct, like how many angels can dance on the head of a pin. The applications in reality are limited at best.

  5. Can I add to the chorus of praise? ;)

    Seriously, I’ve just finished The Intelligent Asset Allocator by William Bernstein and was struck by the fact that he always stressed the same conclusion as Mr Montier: no one can know the optimum asset allocation in advance; just use history to get you in the right ballpark and choose a portfolio that is robust instead of aiming for perfection.

    On that subject, I’m about to invest in a portfolio that I intend to include long government bonds. Here in Sweden it’s not so easy/cheap to buy government bonds directly as in the US (spreads are significant, and I’ve only found one broker that offers decent commission and minimum order sizes within my range). Should I just go for the “good enough” option of a mutual fund of investment-grade bonds (government and covered bonds with medium duration) instead, especially considering the low annual charge of 0.15%? It would certainly mean less effort….

  6. Thanks for making this point again Mike. I was like many investors…futzing and worrying about my asset allocation and not doing anything…when you made me realize that i just needed to take the plunge. I went with a 50/50 allocation between stocks and bonds and selected a total of 5 Vanguard Index funds. I thought that i would refine and improve upon this over time however one year later I have done nothing. In recent posts you have also pointed out that there is very little difference between 50/50 and 55/45 asset allocation despite the fact that i spent so many hours deliberating which was best.

    It is an awesome feeling and a huge weight off my shoulders. I know its not perfect but its pretty good and my ave portfolio costs are 0.1%.

    Thanks

If you want to discuss this article, I recommend starting a conversation over at the Bogleheads investing forum.
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