Three Steps to Plan Your Portfolio

Three steps to plan your portfolio

“Investing is simple, but not easy.” – Warren Buffett

All too often, because we’re all human and flawed creatures, we take the simple and make it unnecessarily complicated all too quickly.   For today’s post, I’m suggesting investors consider some questions to help them plan their portfolios – questions I often revisit myself.  I suggest there’s always time to get into the details once you’ve answered a few simple questions.  Don’t kid yourself.  Simple answers don’t always come from simple questions…

Step 1 – What kind of investor am I?

Try to answer these questions:

  • What is my current risk tolerance for investing?  Risk, what are you talking about?
  • Do I prefer focusing on investment growth or income?  Do I know the difference?  Do I even need to decide?

Step 2 – What is my investment plan?

Try to answer these questions:

  • How much can I save for investment purposes?  Are saving and investing the same things?  Is there a difference to me?
  • How long do I want my money invested?  5 years?  10 years?  20 years or more?  Do I know?  Why is this important?
  • Can I easily explain my investing goals to someone else?  How do I know these goals are realistic?  What information am I basing this on?  Why the heck do I need goals?

Step 3 – What are my investment options?

Try to answer these questions:

  • What investment products do I understand?  Are there investment products I do not understand?
  • How comfortable am I choosing my own investment products?  Do I need someone to choose my products for me?  If so, why?

I think smart investing starts with a clear understanding of who you are first, what your plan is second and then narrowing down the options and potential solutions available to you. Financial plans come before financial products. If you’re struggling with any of these questions, I wouldn’t see that as a negative but as an opportunity to get some help and support from professionals.  The beauty of our human condition is, nobody knows all the answers all the time.  We’re all learning and we always can if we really want to.

I propose you understand yourself, your plan and then starting looking at investment options.  Do you agree with this order?  Why or why not?  What important questions did I miss?

My name is Mark Seed - the founder, editor and owner of My Own Advisor. As my own DIY financial advisor, I'm looking to start semi-retirement soon, sooner than most. Find out how, what I did, and what you can learn to tailor your own financial independence path. Join the newsletter read by thousands each day, always FREE.

19 Responses to "Three Steps to Plan Your Portfolio"

  1. I would add in one more caution and that is understanding the tax implications of your investment choices. In addition to minimizing taxes, you don’t want a “nightmare” when it comes to annual tax time. For years I never sold an investment because I had no idea how to calculate the adjusted cost basis ( the ultimate buy and hold strategy). Although I have since discovered its not all that difficult, it does take some discipline and organization to stay on top of things ( especially if you have DRIPs or ETFs that have return of capital)

  2. These are all, important questions especially to someone like me who pays someone to do all my investing for me. The one question that stood out the most was not so much my risk tolerance but understanding the investments and being able to explain my investments to someone else. If there is one thing I can’t do is that and it frustrates me to no end. I don’t like having to pay someone to handle my money and I want to take back that control in my life. I want to know how to be able to explain what I’m doing. I think I would feel much more confident if I learned from the ground up. The basics and build that knowledge month over month. Great post Mark.

  3. Answering these questions is the first step anyone wanting to invest should figure out. I think everyone should figure out what their goals are, the amount of risk they can tolerate and how much they truly know about managing money. Then they can figure out a plan to reach those goals, learn what they need to learn and map out a set strategy with some rules to follow. Great advice.

  4. @My Own Advisor
    Yeah, lots of thoughts. You don’t review your emotions and let them dictate your investing strategy. You pick your goals and let them dictate your investment strategy – see bet crook’s comment below, they’re exactly right. Your emotions don’t provide a rate of return and therefore do not impact your investment strategy.

    Letting your emotions dicate investment strategy is ridiculous. The idea that you’ll react inapproproiately to market turns and buy/sell when you shouldn’t is just as ridiculous in determining your investment strategy. People need to ignore their emotions on this, not examine them.

    As for the timeline, a 50 year old investor has a life expectancy of about 85. 35 years sure sounds to me like a long term investment timeline. What’s the industry do? They say ‘you need to be scared, so we’re going to invest in something with a horrible rate of return, that actually has LESS likelihood of meeting your needs over the long term’. And people buy it, because it’s common sense. Except its not common sense, it’s feeding into their expectations and fears.

    1. Thanks for clarifying Glenn. I agree you shouldn’t let your emotions dictate your investment strategy, but what I suggest is you better figure out what your emotions are / are not when it comes to money, otherwise your emotions will take over. It’s not as simple as saying don’t be emotional when it comes to money. That’s like saying everyone shouldn’t be afraid of heights. You’re not human if you’re not emotional and everyone is different which is what that’s important to figure out early on in any process; financial management is no different.

      The financial industry preys on some fears, yes, but so does other industries. Home security comes to mind. Industries and businesses in general that breed fear happens all the time to sell products but that’s an entirely other set of blogposts; which I will write about, at some point, no doubt 🙂

  5. @Jane Savers @ The Money Puzzle
    Jane – I think you are approaching this wrong. I think you are confusing risk with volatility. Even industry people get this wrong.

    Only 3% of equity investors beat someone who invests in an index fund for the long term. And choosing that 3% of investment strategies is effectively random. That’s been shown to be true, time and time again. The other 97% of people? They do WORSE over the long term than someone who just parks into an index fund and ignores the market as it goes up and down.

    So what’s riskier, putting money into an index fund and watching markets rise and fall? Or doing anything else and trying to make that random 3% of investors?

    I decided long ago that getting better returns than 97% of everyone else was going to be good enough for me. All I had to do was park in an equity fund and ignore the markets (and all the various common sense advice that gets thrown around).

  6. The whole ‘what is your risk tolerance’ just opens the door for emotional sales. What the heck does that even mean? Does it mean that you don’t want to invest in assets with high volatility?

    Because if you’re investing over 20-30 years, then why would you care if your investments bounce up and down during that time period, as long as you reach your goal?

    To much distraction. If you can’t define it specifically – like ‘risk tolerance’, then there’s a good chance it’s quackery masquerading as common sense.

    1. I ask the question because it forces you to understand your emotions when it comes to investing. If you’re not sure how you will react to money in some instances, how can you invest with it?


      Also, some people don’t have a 20-30 investment period. This assumes middle-age or later. Not every investor is middle-age.

  7. Jane Savers @ The Money Puzzle · Edit

    Part of risk tolerance should include a discussion of how much money there is to invest and how much is expected in pensions for retirement. If there is no money to fall back on then risks taken should be minimal. A person with a big fat work pension could take more risk because they have a guaranteed income if they suffer losses.

    I keep wanting to take great risk inside my TFSA and RRSP because I don’t have very much saved. I do not have much of a pension at work to fall back on because I haven’t been there very long and hope to retire in 10ish years. My government pension won’t be very large either because I was a stay at home mom for a decade.

    1. Hi Jane,

      This is exactly the point I’m trying to drive home in my post, you are jumping to solutions when you’re talking about “…pensions for retirement.”

      This is a solution to a plan and says nothing about the plan itself.

  8. For me, the fundamental question is “What do I want to accomplish with investing?” Once I decided that my goal was early financial independence, things got easier. Then I looked around for styles of investing that would fit with the goal of providing me with enough income to live on and settled on dividend growth investing.

    I started with a very basic plan and have since been modifying and expanding it as I learned more about investing.

    1. Good question. What is your timeline for FI? How much do you think you’ll need to retire?

      I settled on dividend growth investing because while captial appreciation makes sense, dividends are more tangible and could be spent if I needed the income vs. selling stock/ETFs in bear markets.

  9. I think these questions are among the “deceptively simple” kind:
    “What investment products do I understand? Are there investment products I do not understand?”

    Sometimes even products that LOOK simple aren’t. As an example, several banks sell GICS that offer a “market linked” return. Most people who buy them do not know what the rules say about the most they can earn, the least they can earn, and especially how what they earn will be calculated. If you read the ultra-fine print for these products most people would never buy most of them.

    These are all great questions to consider slowly.

    1. Thanks for your comments.

      Things that LOOK simple, sometimes are not, which is why is it important to understand the products as much as possible before you buy them. I don’t understand covered-call ETFs (very well). I don’t buy them.

      An analogy: not everyone understands absolutely everything about a car before they buy it, but I suggest they understand the features of the car and if they need the car with those features before they buy. At least they have a fighting chance.

      You don’t buy a car with a bunch of features only to figure out you don’t need the car nor the features with it, when a bicycle to get around town will do. That isn’t very smart, so why on earth would you do the same for an investing product? If you focus on who you are and what you need then the solutions become much easier to figure out.

      Again, this is my thesis and it’s perfectly OK to disagree.


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