Self-Assessment: Your Path to Your Perfect Portfolio
Perfect Portfolio: Principles, Process, and Path
We’ve created the Three P’s of Investments: principles, process, and path (for more details, please refer to Chapter 12 of In Pursuit of the Perfect Portfolio).
1. Start by reviewing our seven investment principles that apply universally and offer an important checklist for you to use before you invest.
2. Our process involves a simple self-assessment that best describe who you are and what kind of investment environment in which you find yourself. Use the simple tool below. Your answers place you in one of sixteen categories and these archetypes provide you with a quick assessment of your financial situation.
3. That assessment in turn points you to the path to the Perfect Portfolio, including action you may need to take today.
1. Lo-Foerster Portfolio Principles
P1. Determine how much expertise you have in financial planning and how much time and energy you’re willing to devote to managing your Perfect Portfolio.
P2. Determine what your current and future financial needs are. Some obvious starting points are identifying your current income, both professionally and through any current investments. Next, identify your current expenses. The harder part is identifying future income and expenses. The key is to start with overall life goals, then translate them into financial goals.
P3. Find your comfort zone regarding financial gains and losses. How much can you lose in your savings or retirement account before you begin to freak out and start moving your assets into safer investments?
P4. Think about your investment philosophy and what you believe about markets. For example, are you convinced that, by and large, markets are efficient (particularly the U.S. stock market)? If so, then index funds are the place to start.
P5. List all the assets that you have and the assets you’re willing to hold, such as mutual funds, ETFs, stocks, bonds, real estate, and so on. Also, think about assets you aren’t willing to hold.
P6. Develop a sense of the current investment environment and how stable that environment appears to be relative to historical norms.
P7. Avoid obvious investing mistakes. These mistakes may include paying higher fees than needed, experiencing high (and potentially costly) turnover in your portfolio, needlessly incurring taxes, and investing with active managers based solely on trust and friendly connections.
2. Lo-Foerster Self-Assessment Process
Follow our process to determine which of sixteen investor types fits you best based on four key characteristics: (1) your risk aversion (hawk or dove), (2) your income level (Midas or Penia), (3) your spending needs (Scrooge or Gatsby), and (4) your assessment of the current economic environment (expansion or recession). We recognize that in some cases it may be difficult to choose between the extreme alternatives, so just try to make one choice as best as you can.