The Who, How, What and Why of Portfolio Management

by | Jul 3, 2014 | Investing

Today I’d like to talk portfolios, but before we do let’s get some numbers on the table:

There are almost 8,000 different mutual funds in the U.S. to choose from, along with over 1600 Exchange Traded Funds (ETFs) and another 6,000 individual stocks for those investors crazy enough to pick individual stocks.

You’re not really thinking about trading individual stocks, are you?

If you would like some help managing your portfolio, the big banks have 55,000 advisors at your disposal. And if you’re looking for independent advice, there are more than 11,000 independent advisory firms registered with the SEC and another 15,000 firms registered with one or more states in the U.S.

You can always get thoughtful advice from your brother-in-law, your co-worker, a neighbor, and any number of friends. Indeed, free investment advice isn’t all that hard to come by.

Even with all these resources at your disposal, managing your porfolio can seem like an overwhelming task. But it really shouldn’t be. Simply answering a few questions can help you determine the direction you need to take. Consider the Who, How, What and Why of portfolio management, and you’ll have the information you need to make wise decisions about who should be managing your investments.


First off, you need to decide who is going to be managing your portfolio. This decision usually comes down to you, your spouse or a professional manager. The good news is it’s really not that difficult for the average investor to build a portfolio. The bad new is, regardless of the difficulty, most do-it-yourself investors aren’t very good at managing their own money.

If you’re going to do it yourself you’ll need to have enough time, temperament and training to be successful. Opting for professional advice, on the other hand, requires a certain amount of research and a huge leap of trust in the end.

Regardless of whether it’s you or someone else, there needs to be somebody responsible for managing your life’s savings. Neglect is not a successful strategy.


Next you have to decide how to manage your portfolio. Believe it or not, we are rarely asked this question when we meet with families. I can’t say whether it’s deference to a professional opinion, or maybe they’re just unaware of the options. Either way, the question of “how” is terribly important. You might not be interested in the details, but you must understand the philosophy underlying how your portfolio will be designed and managed.

In the investing world there are really just two options as you’re deciding how to manage a portfolio. You can take the conventional approach, scouring the landscape for greatness, or you can be average.

Wow! Seems like an easy choice.

But before you choose greatness over average, name ten great investors.

OK, name five.


You probably put Warren Buffett’s name on your short list, because he’s one of only a handful of great investors over the past 5 decades. But even Warren has been arguing for years in his annual letter to shareholders that most investors should opt for average.

In fact, Mr. Buffet bet $1Million that a simple S&P 500 Index could beat a team of hand-selected Hedge Fund Managers. Six years into his 10-year bet his average investment in the S&P 500 is beating the experts by a large margin.

It’s counter-intuitive, I know, but a simple market return will be more than enough for your retirement if you have a well diversified portfolio with low costs and the right amount of risk.  As Nobel Laureate Paul Samuelson put it, “Investing should be more like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas.”

A diversified portfolio can be constructed with 8 to 12 low cost mutual funds or ETFs. You can find details on how to build a portfolio and links to resources in my upcoming article on building a portfolio.

WHAT (is the cost)?

Costs matter a lot in the investing world. You can buy an S&P 500 mutual fund from Vanguard for 0.05% or you can buy a mutual fund with the same 500 stocks from plenty of other companies – like Wells Fargo, The Principal Financial Group or State Farm – for 10 times as much, 0.5%. That’s like charging $40 a gallon for gasoline when the station across the street is selling it for $4!

The research company Morningstar even pointed out recently that there is no better predictor of future performance for a mutual fund than its cost. Cost is actually a better predictor of future performance than the famous Morningstar ratings. Pay very close attention to the costs of your funds.

Here’s a simple reference chart for your mutual fund costs.

Expense ratio Graph 7-2-14

Remember, all mutual funds are NOT the same, and neither are their costs. Just about every portfolio should have several different types of bond funds and at least 6 types of stock funds. Funds that focus on small stocks or international stocks are more difficult to manage and trade, so their expense ratios will be higher. That’s OK because you need the additional diversification they offer.


The final question you must answer is why are you investing in the first place? It seems like an obvious question, but is it really? Is your portfolio intended to pay for college in a few years or is it supposed to support your retirement many years down the road? Are you 21 and just starting your first 401k or are you getting close to age 70 1/2, when the government forces you to start taking money out of your IRAs?

How much do you really need for retirement anyway? Are you saving enough or far too much?

My point is you shouldn’t be investing just for investing’s sake. You should have a plan for your money and your future before you ever start considering how to invest. Don’t throw money at the problem and hope for the best. You need to carefully define your goals, along with their costs, and then thoughtfully apply what you’ve learned to your portfolio.

The Bottom Line

Putting your investment portfolio and your future on the right track is not terribly difficult.  Remember, always start with a plan – start with “why?”  Next you need to decide who will be responsible for managing the accounts and how the portfolio will be constructed. Keep a close eye on what it costs and don’t you dare spend more than 10 to 20 hours each year on your portfolio.

Your portfolio shouldn’t need much attention. Get it right the first time and then leave it alone, except for regular rebalancing. You’ve got other dimensions of life to attend to.