How You Can Tailor-Make a Winning Portfolio

How You Can Tailor-Make a Winning Portfolio
By Dan Caplinger March 25, 2009

Anybody can throw a bunch of investments together and call it a portfolio. It takes a lot more, however, to find a select group of promising prospects that fit well with your temperament, your time horizon, and your particular financial goals.

Too often, investors don't think about their investment portfolio as a single unit. Instead, they grab shares of various stocks and funds willy-nilly, based solely on their individual characteristics -- never thinking of a new stock's impact on the holdings they already own.

Make the right portfolio
In this month's brand-new issue of Motley Fool Champion Funds -- which goes live this afternoon at 4 p.m. EDT -- Foolish fund expert Amanda Kish takes a look at this question from a unique angle. Part of what Amanda's newsletter offers subscribers every month are three model portfolios, each of which represents a blend of some of the funds that the service has recommended over the years.

But of course, unless you're just getting started with your investing, you'll probably already have some stocks and funds to bring to the mix. In addition, even if you have cash available, you may not have access to buy the exact funds you want -- especially if you have to choose from a fixed menu of investment options, as many workers must in their 401(k) plans.

Given those limitations, what's the best way to choose investments in a way that will complement your existing portfolio rather than create problems?

Watch out for the concentration trap
With individual stocks, problems often come from haphazardly choosing promising companies that aren't well diversified. For instance, here's an extreme example of stocks you might have been tempted to add to your portfolio based on these news items from early last year:

• With the discovery of a massive oil field off the cost of Brazil, Petroleo Brasileiro (NYSE: PBR) found itself fortuitously positioned to take maximum advantage of the news.
• The red-hot Haynesville shale play brought quick profits to natural gas players like Petrohawk Energy (NYSE: HK) and Chesapeake Energy (NYSE: CHK).
• Demand for fertilizer rose much faster than supply, giving industry players like Potash Corp. (NYSE: POT) and Mosaic (NYSE: MOS) great returns during the first six months of 2008.
• Early in 2008, heavy demand for industrial metals from China and other development-hungry economies bolstered prospects for copper producers like Southern Copper (NYSE: PCU) and Freeport-McMoRan (NYSE: FCX) -- and with China's economy forecast to grow strongly, the end seemed far away.

Clearly, if you'd acted on those temptations, you would've owned a portfolio that was way overweighted in energy and commodities stocks -- stocks that came crashing down during the latter half of the year.

Dealing with funds
With mutual funds, there are a bunch of things to keep in mind when tailoring a fund portfolio for your particular wants and needs. For instance:

• If you have a strong relationship with a particular fund company, you might want to use their offerings in particular asset classes rather than mixing and matching across different fund companies.
• Even within broad categories like large-cap value or small-cap growth, you'll find dozens of different strategies. Some may appeal to you more than others, even if all of them have been equally successful at creating gains over the long haul.

Champion Funds gives portfolio recommendations for conservative, moderate, and aggressive investors. But if you find yourself halfway between two of those categories, then an easy way to split the difference may be to add another fund.

In this month's newsletter, Amanda goes through these and other reasons you may have for making switches -- and gives you a useful set of tools to help you evaluate whether a particular fund you may have in mind is the right one to keep your overall portfolio strong. And with dozens of different fund recommendations to choose from, Champion Funds subscribers don't have any shortage of great funds to plug into their overall investment strategy.

Putting together a tailor-made portfolio will take some work, but the rewards will last a lifetime.

For more on winning investment strategies, read about:
Yes, you can defend your portfolio from losses.
Will 7% returns really make you happy.
Want to retire? You need options.

Fool contributor Dan Caplinger is constantly making adjustments to his portfolio. He owns shares of Freeport McMoRan and Chesapeake Energy. Petroleo Brasileiro is a Motley Fool Income Investor pick. Chesapeake Energy is a Motley Fool Inside Value recommendation.

http://www.fool.com/investing/mutual-funds/2009/03/25/how-you-can-tailor-make-a-winning-portfolio.aspx