Portfolio #2 adds a few more ETFs and gives up nothing in performance. In fact, the projected standard deviation (portfolio uncertainty) drops from 20.1% to 17.6%. Diversity is increased from 8% to 29% and the Portfolio Autocorrelation drops two percentage points.
While it is rather early in the morning here on the West Coast, I'm still thinking clearly so take these ideas seriously. When putting together a portfolio, follow these general guidelines.
- Use index funds or index ETFs to build the core of the portfolio.
- One should not need more than eight to twelve ETFs to build a well-diversified portfolio.
- Only add individual stocks with your "mad" money.
- Always follow the Golden Rule of Investing. Search the blog if you missed this fundamental rule.
- Be patient.
- Develop a plan and then discipline yourself to stay with the plan.
- The plan should include a model to avoid or minimize losses.
The last point – avoiding portfolio losses is essential if the investor is to end up with the necessary funds for retirement. Pay attention to, and learn from, the ITA Risk Reduction model I am using with the Maxwell and Euclid portfolios. If only I had followed this advice over the last 50 years of investing. I'm passing on my experience so young investors can avoid pitfalls that are going to come in the future.