Creating the ideal investment mix to build the “perfect portfolio” is a tough challenge. Deciding on the right investments and building a well-diversified portfolio can be overwhelming. Even asking investment experts can lead to confusion, as they often give conflicting advice. Ask three experts and you’ll get four different opinions. Heard any of these recently?

• “The market will keep climbing; buy more stocks” vs. “We’re at market highs; buy bonds and lock in gains.”
• “U.S. stocks are winning; stick with them” vs. “International stocks are undervalued and ready to rise.” 
• “Large-cap stocks are driving the market; buy more” vs “Small-cap stocks are overdue to outperform.”

So what’s an investor to do? Luckily, I’m here to help. But first, let’s explore the challenge with a story.

An Amusement Park for Investors

I recently took my kids to an amusement park, a place I hadn’t visited since I was a teenager. They loved it, racing from one ride to the next. I really enjoyed it too, despite feeling my age.

One ride, though, got to me. As the ride spun, I watched my kids’ smiles while feeling my stomach churn. This wasn’t a loop-to-loop ride that made you go backward, making everyone feel loopy. No, this was a simple ride in the part of the park for little kids who weren’t big enough to ride the big rollercoasters. And it was making me sick. It was an embarrassingly sober reminder that I was 42, not 22. Naturally, my kids wanted to ride it again, so I told them I’d watch them – NOT a cool dad moment!

When I was young, I loved a ride called Tom’s Twister. It just spun in a circle over and over. I couldn’t get my parents to ride it because it made them sick, but I couldn’t get enough. Now, the roles were sadly reversed. 

Thankfully, my kids’ favorite ride that day was the Log Flume – an easy water ride with a few drops but no spinning. My kids wanted to ride it all day, so I was happy to oblige (and so was my stomach).

Staying on the Investing Rollercoaster 

Staying invested for the long haul feels like riding a rollercoaster all day. It’s full of ups and downs that can make you feel queasy. Some rides (and portfolios) are more intense than others. So, how do you create the perfect portfolio?

Think of your long-term investment portfolio as a rollercoaster you have to ride all day long. The challenge is choosing a portfolio with a risk level you can handle without feeling sick. If you can’t stomach the ride, you might cash out at the worst time, missing the market’s eventual recovery.

Some people can ride the loop-to-loop spinning rollercoasters all day without a problem. Others (like me) need a more gentle ride like the Log Flume. Investing is similar. Some can stomach the ups and downs of an all-stock portfolio and not blink during bear markets and recessions. Others need a balanced mix of stocks and bonds to stay invested.

One of My Favorite Charts

When building your perfect portfolio, remember that the long-term is made up of many short-term periods. You can’t reap the long-term benefits if you can’t survive the short-term shocks. Check out the chart below. Specifically, look at the worst 1-year returns in stocks, bonds, and a 60/40 stock-bond portfolio over the past 83 years.

Think you can handle an all-stock portfolio? Sure, the long-term returns are great, but could you stay invested if it fell 37% in a year? If not, those projected returns are meaningless. 2020 was a great real-life experiment – stocks fell by 33% in a little over a month during the onset of the Covid pandemic.

60/40 portfolios have been championed for investors because historically, it captures most of the upside of an all-stock portfolio (see box in chart above) with much less downside (see 1-year worst returns above).

Four Steps to Building the Perfect Portfolio

1) Built to Last – The perfect portfolio is diversified enough to withstand all the stomach-churning ups and downs without begging to get off the ride. 

2) Think $, Not % – Consider risk in your portfolio in dollars, not percentages. Don’t just think about a 37% drop as the worst 1-year return in stocks. Imagine your $1 million portfolio dropping to $630,000, losing $370,000. Dollars are more real than percentages.

3) It Will Change –  Just like your tolerance for rollercoasters, your willingness and ability to take investment risks will likely decrease with age. 

4) Focus on What You Can Control – A disciplined investor is a wealthy investor because they understand that market fluctuations are the price of admission and that patience pays off. Looking at your portfolio less helps, too.

Talk to any personal growth expert like Tony Robbins or Ed Mylett, and they’ll tell you that perfection is actually the lowest possible standard because it’s impossible. So stop chasing the perfect portfolio. Instead, use these four steps to build a portfolio that best fits your risk tolerance, time horizon, and financial goals. By following these steps, you’ll own a portfolio that’s prepared to navigate the market’s unpredictable ups and downs.

Castle Quote: “Investment is a process that transfers wealth to people that have a strategy and can execute it from those who don’t and can’t.” – Bill Bernstein