The Best Portfolio

By: Jamie Ostrander

Billy Crystal plays the leading character Mitch from the 1991 movie City Slickers. In the film Mitch asks a gruff old cowboy character named Curly; “What is the meaning of life?”. Curly simply holds up his index finger in the air and says “one thing”. Mitch responds naturally with, “but, what is the one thing?” To which Curly explains as he smiles, “That’s what you have to find out”. Mitch was sent on this adventure to “find his smile” by his wife. She saw a pattern of discontentment, Mitch didn’t feel like his life really fit him anymore. He didn’t know his one thing, his why.

“What is the meaning of life?” Curly simply holds up his index finger in the air and says “one thing”. Mitch responds naturally with, “but, what is the one thing?” To which Curly explains as he smiles, “That’s what you have to find out”. –City Slickers, 1991

If you want the best portfolio you need to answer Curly’s question first. There is no shortcut. The best portfolio is the one that you will be committed to because of how well it fits you. Investing in this portfolio gives you confidence that it is both appropriate and passes the single most important test; why are you investing?

Beginning with the reasons for committing to a portfolio can help you maintain focus as the uncertainty of life and financial markets persist. Constructing your portfolio involves assumptions about the future—assumptions that may not pan out. Although you cannot avoid making assumptions, you can ask whether they are realistic and consider how your lifestyle might change if future economic and financial conditions are much different than expected. For instance, you may assume an average return based on historical performance. But there is no certainty that future portfolio returns will resemble the past, regardless of time frame. Moreover, short-term results may vary drastically, which could force hard financial choices. Investors should think in terms of probability, not history.

Managing asset mix, payout, and time horizon inevitably involves tradeoffs. Exhibit 1 below illustrates the dynamics. For example, a bond-dominated portfolio with a lower expected return may suit investors with a shorter time horizon, or require them to accept a lower payout rate to increase the odds of portfolio survival. A portfolio with a higher allocation to equities may be appropriate for someone with a long time horizon or a strong desire for a high payout rate, but a higher assumption of risk also results in greater uncertainty about future wealth. Investors who take this route must be able to handle the risk emotionally, and they should be ready to adjust their lifestyle in response to market downturns. In fact, investor flexibility plays a role in all of the tradeoffs.

Exhibit 1: Asset Mix, Payout Rate, Time Frame
Finally, before you undertake the task of defining your asset mix, payout rate or time frame, remember to ask; why am I investing in the first place? If your portfolio does not fit, you will not be committed to it when it matters most. If you are interested in exploring your main reasons for investing and making sure that you are systematically and purposefully directing your time, energy and assets at your most important goals, please schedule a call with a WealthCoach here at FirstWave Financial.

You should not assume that any discussion or information contained in this publication serves as the receipt of, or as a substitute for, personalized investment advice from FirstWave Financial. A copy of the FirstWave’s current written disclosure statement discussing our advisory services and fees is available upon request.

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