Strategies for Self-Managed Portfolios

By Del Chatterson

Special to the Financial Independence Hub

First the disclaimer: I am not an expert. Certainly not a certified financial planner or financial advisor. But I have managed my own portfolio for more than thirty years and I’m willing to share the strategies that worked for me and might work for you.

Like the Random Ramblings of Uncle Ralph in my book of advice for entrepreneurs, Don’t Do It the Hard Way [shown on the left], I strongly believe in the value of learning by sharing stories and ideas with my fellow adventurers in life, business and investing. Based on my experience in successfully growing an investment portfolio over several decades, these are my suggestions for your consideration.

Start with educating yourself. Learn from the experts. Read Warren Buffett’s bible, the Intelligent Investor by Benjamin Graham, to understand the basic principles of investment analysis and value investing. (The technical details may be beyond your understanding and are probably more than you need or want to know.) Look at current recommendations and valuation assessments of competent financial analysts to understand their processes and the factors that most affect future prospects for any business. You’ll discover that while there may be consensus, there is never unanimity. Learn to evaluate businesses against the criteria used to identify the top performers in Built to Last and Good to Great by James Collins and Jerry Porras. You will gain confidence and learn to trust your own analysis and instincts to select investments in businesses that you also understand, like and respect. Would you buy from this company? Would you like to work for this company?

Start to build your self-managed portfolio with an online direct-investing resource. You may choose to gradually transition from your current advisor or financial planner as you gain confidence, before deciding whether or not the results justify their fees for portfolio management services. You may decide not to interfere with their good management and avoid taking on the responsibility of managing your own portfolio.

Although I’ve been satisfied with my own portfolio management, I’ve still left some of the family portfolio with an investment advisor. I don’t want all the financial responsibility and it continues to give me a convenient comparative benchmark and resource for evaluating my own portfolio management. But if you’re confident in your knowledge and analysis and in your ability to remain calm, cautious and patient through the inevitable crises and extended downturns, then you’re ready to take charge and do it yourself for some of your investment portfolio.

At this point, the decision depends on your confidence, interest and ability to achieve better performance at lower cost. Although, the rationale for assuming management of a self-directed portfolio can range from loving the challenge and the learning experience to the thrill of taking risks and enjoying the entertainment spectacle of volatile and irrational markets.

If you do decide to start building and managing your own portfolio, it is essential to give yourself some key ground rules related to risk and return, just as you would give your risk tolerance profile and return expectations to your financial planner. Control your impulses with restraining limits on the amount of individual investments and the criteria for risk-reducing diversification. My two overriding guidelines: never more than ten percent of the portfolio in any one investment and never less than fifteen distinctly different investments.

More specifically, I’ve used the following approaches to manage my portfolio and consistently grow my net worth for more than thirty years:

• Limit fixed-income investments in cash, corporate and government bonds and maintain over 90% of the portfolio invested in equities. My primary low-risk “fixed income” investment is the equity in my principal residence, which has consistently increased in value at better than the rate of inflation and also provides the intangible value of comfort and security in owning a home.
• Choose equity investments that have a history of good management and strong prospects of sustainable growth to achieve acceptable returns at reasonable risk.
• Double up on diversification with a mix of Exchange Traded Funds (ETFs) to provide a balanced mix of companies in different markets and add a selection of individual companies for enhanced performance. For example, ETFs in health care and technology, with added weight in those sectors by also investing in individual stocks like Johnson & Johnson and Microsoft.
• Maintain diversification in multiple dimensions: by industry sector – financials, industrials, consumer/retail, technology, energy, resources and infrastructure; by size – large-cap, mid-cap and small business; and by region – Canada, U.S., international and emerging markets.
• Ignore arbitrary balancing ratios and pick preferred sectors based on the expected risk and return, security and growth potential. For example: my investments in energy and resource sectors had been reduced to zero and consumer/retail was below three per cent before those sectors were hit so hard in the last few months.
• Apply personal ethical or moral choices to investment decisions to encourage and support ethical and responsible entrepreneurship delivering intelligent long-term solutions in health care, climate change, sustainable sources of energy and resources and third world economic development.
• Add a little spice to a boring, conservative portfolio with a few bets on the current high flyers. Tesla or Shopify? Make the bets small enough that you can afford to lose them entirely, but large enough that doubling your money will make a difference and better than that will let you indulge in a few of your favourite fantasies.

These guidelines have served me well and I recommend them to you when you’re ready to assume management of you own portfolio.

A few final words of encouragement: Learn from the mistakes and don’t be afraid to make them. Just be sure they’re small enough to recover from. And don’t forget the entertainment value and the bragging rights that go with making good decisions.

Happy investing,

Del Chatterson, your Uncle Ralph

An entrepreneur and business advisor, consultant, coach and cheerleader for entrepreneurs, Del Chatterson has written extensively on business topics for decades. He is now writing fiction with this series of Dale Hunter crime novels and a short story collection in progress. Originally from the Rocky Mountains of British Columbia, Del has lived and worked for the past forty years in the fascinating French-Canadian city of Montreal, Quebec.