Portfolio Theory

One of the challenges with managing investments is filtering opportuites that present themselves. To make decision making easier, I’ve created a series of filters. I’ll share them and explain a little about each.

Thinking through your own filters can help you avoid mistakes. The deals that end up sucking time, for little return, nearly always fall outside these parameters.

Simple – if something is complicated to manage, or understand, then I don’t bother. This means that I “miss out” on emerging industries and don’t look at technology investments. I acknowledge that the only way I would make money via complexity would be luck, so I skip.

Low cost to hold – holding costly investments hurts, and can force you to sell at poor times.

Focused on long term capital gain – a long horizon reduces the urge to try to make a quick buck by buying things that are cheap. I ask myself, “Where is this investment likely to be in 25 years?”

Liquid in event of capital being required – I’m careful with putting capital into a situation where I might not be able to get it out (at any price).

Tax effective – part of the reason I like residential property is the ability to write off the value of the house against current income. There is a segment of my portfolio that I never expect to sell and the capital gain will “reset” on my death.

If it won’t make a difference then wait – I’m often tempted to make small investments and tinker. History tells me that it’s better to wait and invest only when the fundamentals are extremely compelling.

For advisors that recommend that you to deviate from your principals, consider their financial incentives.