Never invest in anything that can kill you. Now I don’t mean cigarettes or other harmful items, but instead making the mistake of investing so much of your capital into one venture that its failure could knock you out. That’s the gist behind diversification. It’s an essential element of a durable portfolio, one designed to hold up to the rigors of life and the challenges our markets and economies are sure to face.
Most people seek durability because it’s symbolic of utility and represents stability. If we depend on an item, we want to know it will be there for us when we need it most. Tools, clothing, and gear are all items that we must depend on when the going gets rough. Your financial plan and portfolio should be no different. But how do we gear up our portfolio to stand the test of time? What can we do to build a little resilience and strength into our investments and even how we invest? Here are a few of the methods we use to improve the durability of our portfolios:
Extend Your Time Horizon: One of the best ways to increase the probability of your success is to extend your time horizon. The longer your timeframe, the more opportunity your portfolio has to ride out any bumps or bruises along the way. This is true of nearly all asset classes, and intuitively we all know it. Investing in stocks, real estate, or businesses — whatever the asset class — you’ll find that the longer your horizon, the greater your confidence. It’s an unfair advantage. Alternatively, the shorter your timeframe, the greater the uncertainty. Durability is tested over time. When investing, remember that time is your ally.
Don’t Over-Invest: Never invest more than what you can comfortably handle. Whether it’s buying a home, business, or something else, invest to the level with which you are comfortable. Putting too many of your proverbial eggs in one basket not only decreases the durability of your portfolio but increases your risk of a total wipeout. Instead, build a plan toward your goal. Invest enough to achieve your goal and let time work your plan.
Diversify Your Financial Assets: There is some truth that wealth can be built by a massive concentration of your portfolio. There are billionaires with their entire net worth invested in their company. We describe them as “all in” investors. This is not a strategy for most of us, nor a healthy way to build an investment portfolio. I use the “killing amount” metric when thinking about diversification. In other words, don’t have so much belief in a single investment that if it blows up, it will kill you. Likewise, if you don’t have enough of a business, you might miss making a killing from it. I think diversification means owning 20 to 25 different businesses that are understandable, trackable, and worthwhile to own.
Don’t Overthink It: A good, durable jacket is rarely fussy or complicated. Your investments should be the same. Consider owning a portfolio of businesses that sell products and services you actually use and with which you have experience. We are big believers in consumer products companies because of their durability through all economic cycles. In good times and bad, people buy and use consumer products like toothpaste and ketchup. The market could crash tomorrow, but people will still need toilet paper. Remember that simplicity is often a characteristic of durability. Know what you own.
It Works, Even When It Doesn’t: Engineers build in fail-safes when an item has to work, like an airplane or climbing rope. As the name implies, these fail-safes are designed to kick in when other parts have failed. Diversification goes a long way toward meeting that goal, but we also encourage investors to consider dividend-paying companies with track records of continuous payments no matter the market. This means the market can go up, down, or sideways, all without affecting the income you receive from those companies. Of course, a company can always modify its dividend, but we like those who avoid doing so at all costs. Did they continue to pay their dividend through the dot com crash or the great recession? That’s the definition of durability to me, and I want to own it.
Avoiding Accidents: While durability is often measured by an item’s ability to come out of accidents unscathed, we need to minimize accidents as much as possible when it comes to our finances. To err is to be human, but when we let emotion affect judgment, we risk ruining our portfolio’s durability. In many ways, we can be our own worst enemy if our investment decisions are dictated by our emotions of panic, fear or greed. Though we may not be able to avoid feeling them, that doesn’t mean we need to be directed by them. Your financial plan is your guiding light. Use it to dictate your investments, and don’t let daily swings or onset market panic change your course. Over a long enough time period, the market has always recovered from the occasional accident.
Remember, a durable portfolio is only as resilient as the person managing it. There are steps you can take to build a stronger, more lasting portfolio, but it will be your job (or the person to whom you have delegated this task) to pilot it through rough patches. Your challenge is to understand that your portfolio was built to take the infrequent bruise, bump, or scrape, knowing full well that it was built to last.
Steve Booren is the founder of Prosperion Financial Advisors in Greenwood Village. He is the author of “Intelligent Investing: Your Guide to a Growing Retirement Income.” He has been named by Forbes as a 2021 Best-in-State Wealth Advisor, and a Barron’s 2021 Top Advisor by State. This column is not intended to provide specific investment advice or recommendations.
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