Does it bother you to see that some investments, in your portfolio, have not done well?

That is totally understandable! The surprising truth though, is that those investments are intentionally there in your portfolio, not due to bad judgement but by thoughtful design!

The intent of this article is to give a brief and yet a simple explanation of why it is the way it is.

The assumption that many people make, when selecting investments, is that it is possible to guess how the future will turnout. One of the very fundamental principles of designing a good portfolio, is to NOT make that assumption. A robust portfolio is built on the fact that the future is unpredictable. Think back in early 2020. Even as late as in February 2020, well after everyone had learnt about the Corona Virus, could we have imagined that the world will go through what we have seen in terms of lockdowns and travel restrictions?

Could we have foreseen, even as late as last month, when I wrote about Elon Musk being the second richest man in the world, that he will become THE richest man on earth, even before my next article, for this month, is published?

Therefore a good portfolio design puts together investments that will keep some semblance of balance even in the uncertainty of the future as it unfolds. Which necessarily means that some investments will not do well, because they were designed to do better in a different scenario.

And yet, the necessity of having a portfolio arises ONLY because of the uncertainty of the future. Else all you need is one single investment, that will do well in the future…. if that future is known to you!

The difference between a good portfolio and a good investment is very similar to the difference between a good wardrobe and a good outfit. A good wardrobe doesn’t just have great looking evening wear, but also crumpled cotton clothes that feel just right for snuggling in for a good night’s sleep.

What we need is not just lovely clothes but a wardrobe that will keep us covered, come winter, summer or rain. Now that is a good wardrobe, isn’t it?

- Devang Shah

February 1, 2021

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