5 Steps to Design the Optimal Portfolio

Our topic on this episode of the Ready for Retirement podcast is about the 5 steps to design the optimal portfolio.

Questions to ask ourselves: Am I invested the right way? Am I owning the right types of investments for my goals? Where do I start when it comes to designing the optimal portfolio for my individual situation? 

Are you ready to start focusing on the things that truly matter when it comes to your financial future?

Key Points

• 5 Steps to Design the Optimal Portfolio
  • Don’t try to outsmart the market
    • Over the past 20 years, out of all the U.S. active fund managers, from 2000-2019, only 41% are still in existence today, which means 59% are completely out of business, and of those that still exist, only 22% beat the market.
    • The most highly intelligent people rarely outsmart the market and even fewer do so consistently.
    • Successful investing is about capturing the market and beating the market isn’t required to reach your financial goals.
  • Determine what type of investments outperform over time
    • Stocks outperform bonds over time.
      • If you would like more growth over time, stocks provide a greater opportunity to do so.
      • Invest across small-companies, mid-size companies, large-companies and understand the goals of your portfolio which dictates how much to allocate to each.
      • Value v. Growth Stocks
        • Value stocks historically outperform growth stocks over time.
        • Over the past 10 years, growth has performed tremendously well, but value companies have outperformed growth companies throughout history.
    • Bonds provide capital preservation, so when markets are fluctuating, historically, bonds provide more stability.
  • Constructing a portfolio that meets your needs 
    • You may want small companies, big companies, international companies, value stocks, growth stocks, government bonds, corporate bonds, or maybe all of them, it all depends on your goals
    • If your goal is to generate income, your portfolio should look vastly different than an individual hoping to maximize returns or preparing for a first-time home purchase.
    • Invest in things that you enjoy if you think they will provide peace of mind (bitcoin, individual stocks, etc.).
  • Rebalance
    • Assume you have a 50% stocks and 50% bonds portfolio allocation and after a year of investing in the market, the weight of that portfolio has now adjusted to 60% stocks and 40% bonds.
      • Rebalancing includes selling stocks and buying bonds in order to reach your desired allocation for your financial goals.
    • Rebalancing minimizes risk and enhances returns over time.
  • Don’t let emotions drive decisions
    • Example: From February 2020 – April 2020, the stock market dropped 35% in ~ 5 weeks.
      • Most investors see their portfolio decrease and sell to “get out while I can” and buy back in at another time.
    • 2020 saw the fastest ever decrease in the history of the stock market, but we also saw the fastest rise in the history of the stock market, where the S&P 500 ended the year +16% in 2020.
  • Overview
    • Don’t try to outsmart the market
    • Determine what type of investments outperform over time
    • Constructing a portfolio that meets your needs 
    • Rebalance
    • Don’t let emotions drive decisions

Timestamps

2:00 – Don’t Try to Outsmart the Market

2:30 – Capturing the Market to Reach Your Financial Goals

4:40 – Stocks vs. Bonds: What’s The Right Allocation For Me?

5:27 – Determine What Type of Investments Outperform Over Time

7:41 – Value v. Growth Companies

9:30 – Align Your Financial Goals With Your Portfolio

11:40 – Bitcoin & Individual Stocks

13:10 – Rebalancing Example

15:23 – Don’t Let Emotions Drive Decisions

17:00 – Overview: 5 Steps to Design the Optimal Portfolio

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