Portfolio Building: The Base Portfolio

Tina Haapala |


By Gary Silverman, CFP®

In case you’ve lost track (or you’ve just now found my column) we’ve been discussing real world investing topics and have finally gotten to the point of building an investment portfolio. Now that we’ve looked at some of the basics of asset allocation over the last few weeks, I’ll describe the basics of how my company builds a portfolio for a client. You can go through the same process with your own investments.

There is a base portfolio that I have developed over the years and tweak on regularly. It is my educated guess on what mix of assets will produce the best total return over the next 5 to 10 years. This is the core of any client portfolio. I’m not going to tell you what it is.

No, I’m not being selfish…I’m begin realistic. No matter what kind of portfolio you have, no matter how good it is, you will periodically be disappointed in it. Sometimes it just annoys you. Sometimes it frightens you. Sometimes it steps on your foot. But it will, at times, not make you happy.

When that time comes I want you to be able to pick up the phone or get online and ask the person who came up with the darn thing what’s going on. And unless you are my client I don’t want you calling me to complain.

Not only that, but as I explained previously the best possible portfolio you can build times the market so that you’re in when it goes up and out when it goes down. Unfortunately, many who try to do that end up doing just the opposite which, you can imagine, is the worst portfolio you can build. My firm doesn’t try this, but maybe you want to. Or maybe you want to try one of the hundreds of variations on the way to build one.

The bottom line is that I want you to do your own research on what kind of base portfolio you want. What strategies you want to use, what tactics you want to use, and how you’d expect it to perform in the various economic conditions that fate might throw at it. Either that or hire someone who will do that for you (and be able to explain it to you).

But once you have this magical baseline perfect portfolio—one that you deem to be able to give you returns commensurate to the risk that is built into it—you are not quite done. That’s because unless you are one of the select few with an iron gut, it is likely that during market extremes your “perfect” portfolio isn’t one you’ll be able to live with.

That’s why I spent many columns going over the importance of understanding the many types of risk and coming to terms with how much of each type you can stand.

So, just as I’ll adjust my perfectly marvelous (at least in my opinion) portfolio to my client’s risk tolerance, you’ll need to do the same.

More on that next week.

Gary Silverman, CFP® is the founder of Personal Money Planning, LLC, a Wichita Falls retirement planning and investment management firm and author of Real World Investing