How to Build the Perfect Portfolio - Part 2 of 2

Tyler Gardner (0:00)

The single most reliable destroyer of long-term investment returns is not market volatility. It is the investor's response to market volatility. People who did best in 2008 were the ones who did nothing. The people who did best in 2020 were the ones who did nothing. The people who will do best in the next downturn, whenever it comes, whatever causes it. And I guarantee very little, but the people who will do best will be the ones who built a portfolio they understand, at a risk level they can tolerate, and then left it alone.

Hello, friends. This is Tyler Gardner welcoming you to another episode of Your Money Guide on the Side, where it is my job to simplify what seems complex, add nuance to what seems simple, and learn from and alongside some of the brightest minds in money, finance, and investing. So let's get started and get you one step closer to where you need to be.

Quick note before we start. September's pre-order bonus for my book, Real Wealth, is something I've wanted myself for years and never been able to find. So I created it. It's called the Real Wealth Money Calendar. Twelve months, five action items per month, all on one page because most people I know already know what to do. They just don't necessarily know when and they don't have accountability. So this is your 2027 on one page, 60 moves in the month you actually need to make them. Pre-order Real Wealth at tylergardner.com/book. Let me know you did and your Money Calendar will be in your inbox in early October. Welcome back my friends. If you're joining us for the first time, I would strongly encourage you to go back and listen to part one from last week before continuing. Because what we're building on here is cumulative. And if you didn't catch last week's episode, that's okay. This is part two of how to build the perfect portfolio. And when I say perfect, I don't necessarily mean for you. I mean, according to 10 of the world's greatest academic and finance minds ever to write and think about such a topic. The research for these two episodes was largely sourced from Professor Andrew Lowe and Professor Stephen Forrester's book, In Pursuit of the Perfect Portfolio. And as I mentioned last week, if you're a finance nerd like me, and you want to do a deep dive into some intro to finance, you can find Professor Lowe's Intro to Finance videos online completely for free, as he's open source some of his introductory finance courses, and he's one of the first people who got me truly excited to go into finance and portfolio management. So, if today's episode resonates, I'd highly encourage you to check him out, because I'm merely, as always, passing knowledge and research down the line. Now, what's amazing about looking at 10 of these thinkers over two episodes, is each thinker is going to add another layer to our thinking. The goal by the end of today's episode is going to be to leave you with something genuinely useful, a framework built on the best thinking in the history of investing, translated, hopefully, into a language that doesn't require a PhD to understand. And, for those of you who are with me in part one, welcome back, for those of you who are not, here's a quick recap. In part one, we covered five thinkers. Markowitz gave us the mathematical foundation of diversification. What matters, he said, is how assets move relative to each other, not just how risky they are individually.

Sharp told us to combine a riskless asset with the market portfolio and keep costs low. Fama said markets are efficient and tilt towards small cap and value if you want, but never forget you can only get more return by taking on more risk.

Bogle operationalized all of it with the index fund and reminded us that cost is the one variable we can actually control. And Scholes pushed back on all of them, not to say they're wrong, but to say, hey guys, have you thought carefully about what happens when everything goes wrong in an index fund at once?

Today we cover five more of the world's greatest financial minds. And then, and this is the part I have been looking forward to, we're going to pull all ten together into the five things they mostly agree on, that you can take home and actually use starting today. Before we get into it, familiar ask, if you haven't left a review on Apple or Spotify, I would genuinely appreciate it. It helps new listeners find the show and it tells me the microphone in the Vermont woods is pointed at something other than my dog, who's been asleep since roughly the second paragraph of episode one. Let's get in to part two of how to build the perfect portfolio.