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investing

How to Design the Right Portfolio for You

Just as there is no one-size-fits-all method for raising a child, there is no universal blueprint for building a portfolio.

When my kids were young and I was desperately trying to figure out how to be a good parent (the hospital didn’t provide a manual), I watched my friends closely. How did they handle TV watching, crossing streets and eating sweets? Did their kids play organized sports, enroll in “enrichment” activities, have a formal bedtime? How did they impart important life lessons, from manners and hygiene to honesty and compassion?

I was hoping for a model to follow. But no two friends did everything alike. Instead, we all managed to cobble together our own formulas. The kids, all adults now, grew up to be universally marvelous. So time and experience taught me that there are many blueprints for raising great children.

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I feel the same way about the often-bedeviling issue of asset allocation. Many readers ask about it because they recognize that finding the right mix of stocks, bonds, cash and other investments is arguably the most important determinant of their portfolio’s performance. Yet although many smart people have formulas for divvying up assets, no two approaches are exactly alike. Just as there is no one-size-fits-all method for raising a child, there is no universal blueprint for building a portfolio. But there is a formula for designing a winning portfolio for you.

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Master the basics. Every child must learn a few basics to survive and fit in: Brush your teeth. Look both ways. Share. Say “please” and “thank you.” Every decent portfolio must include a few basics, too: stocks, bonds, cash, international securities and real estate investment trusts. These five building blocks meet all of your key investment needs for growth, income, safety and the preservation of your buying power.

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Have a mission. My mission was to raise honest, kind and responsible people. Sure, I wouldn’t be depressed if they also turned out to be straight-A students and billionaires. But if I could foster those three qualities, I would be content. This mission helped me make otherwise vexing decisions on the fly. Did I lie about my child’s age to get into the movies or Disneyland for a reduced price? No. At report-card time, did I make a big deal about an unimpressive grade or a teacher’s praise for my son’s citizenship? I praised him effusively for his good behavior but kept mum (mostly) about the grade (though I did mention that he could do better).

Having a mission for your investments can direct not only where you put your money but also how to react to changing circumstances. When my life was risky—when I had little mouths to feed and relatively little job security—my portfolio’s mission was to provide safety. Today, with my situation far more comfortable, my portfolio’s mission is to generate growth. Yes, it may seem counterintuitive that, at 55, I’m taking more investing risks than I did when I was in my twenties, when I was supposedly able to shoulder a lot of risk. But when I was young, I was living closer to the edge and couldn’t afford big losses. Today, the edge is a safe distance away. Whenever I consider a new investment opportunity or whether to panic when markets are in turmoil, I go back to my mission. Does the investment fit my goals? Do I need to worry? The mission itself is likely to deliver the appropriate answer.

Pay attention. Just as your kids can go off the rails if you’re not watching, your portfolio is likely to get unbalanced if you neglect it. Make sure you regularly review your investments and consider whether the current mix still makes sense and addresses your unique goals and circumstances. If it does, leave it alone. If not, you know what to do.

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