Your Investment Portfolio’s Foundation: Where Should it Be Built?
A good investment plan today is better than a perfect plan tomorrow. Unfortunately, most people don’t have either. What about you?
Building a healthy portfolio with sustainable and satisfactory performance doesn’t happen by accident. It takes planning and having the proper framework.
The process of assembling and managing your investments is comparable to the construction of a building. Before the construction work can start, an architect must first draft a blueprint. Thereafter, the construction process happens over a prescribed period beginning with the very first phase; the pouring of the building’s foundation. How illogical it would be to ignore this first phase by skipping to the latter phases of construction!
Similarly, building an investment portfolio on a solid foundation of core asset classes is always the first phase and absolute priority of every prudent investor. There is no other way. A person, for example, cannot begin building their investment portfolio by first investing in non-core asset classes like individual stocks, currencies, private equity, venture capital, and volatility (NYSEARCA:VXX). Doing so without first building the portfolio’s core (foundation), is like trying to build the second and third story of a building without first completing the building’s foundation. It’s poor engineering!
What if you already built your investment portfolio around non-core assets and forgot to first build the core? For instance, let’s say you have 100% of your assets spread across individual stocks, hedge funds, private equity (NYSEARCA:PSP), derivatives, and other non-core assets. Then what?
The right course of action would be re-construct your portfolio by liquidating non-core assets and funneling the proceeds into broadly diversified core asset classes like U.S. stocks (NYSEARCA:SCHB), international stocks (NYSEARCA:VEA), emerging markets (NYSEARCA:EEM), bonds (NYSEARCA:AGG), commodities (NYSEARCA:GCC), real estate (NYSEARCA:RWO), and cash. You don’t necessarily have to sell all your non-core assets, but the bulk of your portfolio’s value should be invested in core assets.
Figure 6 shown above is taken from my upcoming book about the Portfolio Report Card grading system I invented. The illustration shows how a person’s investment portfolio is divided into two parts: A core and a non-core. The core always holds core asset classes that are broadly diversified, whereas the non-core portion can hold concentrated or undiversified assets. The ultimate goal is to help individual investors to have the right investment framework for successfully building and managing money.
Without a solid foundation, no physical structure can survive a storm. And your investment nest egg is no different.
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