Back to the Basics: How to Manage Your Portfolio Without Overthinking It

0:00All right, so we're wrapping up our Back to the Basics series. We've covered all kinds of great stuff in the previous five episodes. So today we're tying a nice big bow around it and wrapping it all up into the conclusion of portfolio management, which I am so excited to talk about. It's portfolio management is one of my favorite topics. So this is going to be fun. And I say that tongue in cheek because it's absolutely not. So buckle up, get ready, because here we go. This show is sponsored by Liquid IV. Now that the weather is finally heating up, one of my favorite ways to step away from spreadsheets and the SEC filings is getting outside for an early morning run.

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2:55Stephen:You're tuned in to the Investing for Beginners podcast. Investing for Beginners podcast. The show for the long-term investor. We cut through the noise to focus on what works, compounding, discipline, and the conviction to buy wonderful businesses and stick with them. Your path to financial freedom. Start now. Welcome back to the Investing for Beginners podcast, everybody. My name is Stephen Morris, and across from me is the Portfolio Management King, Andrew Sather. This is totally his idea, not mine. I don't want to do this at all, but I have to because Andrew said so. So, Andrew, portfolio management, what is it?

3:43How do we do it? No, I'm kidding. Again, it's tongue in cheek. To me, this is the least fun part of our job. And I don't even have a good reason, Andrew. I don't know why talking about this and focusing on this drains me so much. It just does. I don't enjoy it. I don't know. I don't know, Dr. Andrew. Well, why do you think that is?

4:09Stephen:I feel like the doctor who's on MLB network and he's geeking out over like the little swing mechanics, right? It's like, do this with your shoulder, do that with your thighs and make sure your stance looks like this. Everybody else just wants to see the home runs. We don't care about how the bacon's made. But unfortunately, I have learned some painful lessons around portfolio management. and you start to realize just how important it is. And it's one of those things where the train's moving in such slow motion. You don't learn these lessons for years. And then all of a sudden, it's like you look back and you're like, oh, wow.

4:48Like, for example, I was looking, not on purpose,

4:52Stephen:but I was just looking today. Costco has been a great stock pick for us. And let's put this in context. the real money portfolio is like at 35 grand. So it's not this huge number. Costco, what a great stock pick. It's made the portfolio$250 versus like Google is up, I think two grand or 2 ,500 or something like that. So it's like, obviously a 10 X difference in price and gain based on it being 10 times bigger, but it really shows that like I could have made the best pick in the world and it doesn't matter if you have other picks that are doing better or worse so it's something worth considering and talking about right and i guess like to your point i just haven't been in this game long enough i guess to realize because i know it's important you've definitely pressed into me that portfolio management is one of those things you don't ignore.

5:59I guess I just haven't learned the respect for it. The will take a few more years, I guess. Hopefully I don't have to learn it super painfully. But we'll see what happens. I'll let you know. I think the urinalogy initially really hit the nail on the head. I about said the hammer on the head that would suck.

6:29Stephen:You're about to do that too after this. But I loved your analogy because that is such a good point because, you know, as you were talking, I was thinking more of, I know, I know mechanics are important in all sports. But one of the sports where I think mechanics really shines through is golf. um if you've ever tried to play golf you understand exactly what i'm talking about because what they do on tv is not even close to easy with with that being said like it's so important that i have a coach in these mechanics because literally my entire future rides on my portfolio so i mean i guess i it's a long-winded way of saying that i'm really thankful that i have you to like force these, these lessons on me and make me understand and talk about these things so that, uh, I don't make those costly mistakes in the future.

7:28So thank you, Andrew.

7:30Stephen:You're welcome. I guess I'll continue to be here. So when it comes to portfolio management, uh, from a beginner's standpoint, what is the first thing, you know, if you, so you're teaching your daughter. about portfolio management, what is the first thing you make sure she understands? I think the very first thing is you got to not put all your eggs in one basket. You're carrying that basket of eggs and you drop that basket. Well, maybe that's a bad way to think about it. I don't know. If I'm talking to my daughter, I don't think she like resonate with Enron. But when I talk to other adults, I feel like that resonates pretty good.

8:10Stephen:Enron was one of these companies that was just the best. on all the media and everything. And then it turned out they were a fraud. So obviously, if you had your entire life savings in Enron, you didn't do too well. And so that's why before you talk about all the nitty gritty of like, well, do you want to put 10 % here or 2 % there? Just the most important thing that covers almost everything is spread it out, diversify, make sure everything's not all in one place. Because you just don't know. We don't know the future. Who knew that, let's say, if you went back in time five years ago and told yourself, hey, AI is going to be a thing, be like, what?

8:53Stephen:Right? Like, AI has completely dominated everything. None of us saw that coming. It just kind of happened. And that's just where we are. Same thing happens when industries get disrupted and companies go under. It's those things that just keep surprising us. And we keep being surprised that we're surprised, but that's just part of business as part of investing. So that's why the best thing you can do and the most important thing you do is diversify and make sure not everything's all in one place. Definitely. And I love how you say that. I've never thought of it that way, but that makes so much sense being surprised that you're surprised.

9:36Man, that applies to so much of my life. but anyway uh i think that's such a good point when you say diversify does that mean a bunch of different stocks does that mean some money in the stock market some money in real estate some money in a uh gross uh high yield savings account uh some bonds like what what does it mean when

10:02Stephen:you say diversify it's really different for everybody and even more so than everybody like where you are in your stage of life where you are in your wealth building journey if you are very very early i think a lot of times just having 100 stocks makes a lot of sense but if you start getting into home buying age and wanting to be financially secure you look at high yield savings accounts and having emergency funds. Some people like real estate, some people like gold just for the security and just to have a little bit in there. I've got a very tiny percent in Bitcoin right now. Everybody can kind of take the different aspects of finance and apply it to themselves because we're always talking about stock picking.

10:50Stephen:I like to think of it from a stock picking lens and being some of the earlier in my wealth building journey, I like to just always have this mentality of being 100 % in stocks because my time horizon is longer. And I'd argue most people who are looking into the stock market should try to have that longer mindset. Because one of the things that Brian Feraldi has talked about a lot that I'll repeat again, every different time period of the stock market, we've had the stock market since like the 1800s in the United States. If you look at every five year, 10 year, 15 and 20 year time period at 20 years, if you had been in the stock market, there was no 20 year time period where the stock market lost money.

11:38Stephen:So at the very worst, you are breaking even or making a little bit. So that's even if you bought at the peak of, let's say 2000 or take whatever the peak was before that. The market continues to do well. And so if you have, hopefully if you're in the stock market, you have a long time horizon and hopefully you have a good chunk in the stock market. Now, when you start getting closer to retirement, you start needing to pull funds. That's where you need to start getting creative about, do I throw bonds into the mix? Do I have other kind of investments that play a different role in my portfolio. And in that case, I really recommend going to a financial advisor because they can help you not only understand your risk tolerance, understand where all your assets are, but also understand just from tax perspective, social security, all of those things play a big role, insurance.

12:32Stephen:So get somebody on your side who knows what they're doing and please don't try to DIY that is what I would say. Yeah, it's funny you bring that up because I've noticed this tax season, there's a fiduciary. I can't remember his name or I give him a shout out. He's famous in the local Indianapolis area. I've never met him, but from what I hear, his business is one of the most trusted by local residents. And he's had a commercial running on almost every media platform, the local media platform that there is about that exact fact. Most people think in retirement their tax burden gets smaller. But actually, if you've done things right, and even in a lot of cases, when maybe you're just living off of a small 401k and Social Security, in a lot of cases, your tax burden is going to actually become much more complicated.

13:32Not necessarily more expensive, but more complicated. and that gets a lot of retirees in trouble early on in their retirement because they don't realize that so that is i think a huge point uh maybe you are close to that and that's something you need to start taking stock in as well so let's get into like the the core of what you do when when we use the word portfolio management, I guess the very first core principle in that is allocation. So when we talk about, you know, 10%, 2%, what are we actually talking about?

14:16Stephen:Yeah, really, position size is another way to call it. It's the same thing, or tomato, tomato. though. It's what percent are you putting of your portfolio in a specific stock? I would start by saying the generally recommended principle that everybody kind of talks about, which is based on an academic study that looked at volatility, blah, blah, blah. Everybody kind of says if you're picking stocks for yourself, shoot for a portfolio 15 to 20, because they found based on the different studies that if you start getting like to 25, 30, 35, whatever the number is, the benefits you get from diversifying have a diminishing returns.

15:02Stephen:And so once you get much higher than 20, there's almost like an overly diversification that could be at play. When you start getting under 15, you look at like 10 positions, that can actually be a volatile place to live. If you're confident in your stock picking and you don't mind the volatility, that might work for you. But I think 15 to 20 is always a good benchmark. And I think for beginners, that's a good frame of reference. And that's where I started. I bought one stock a month until I hit 15 to 20 before I even thought about selling something. so if you did it once a month you'd be full portfolio by like a year and a half or two years which is a good amount of time to kind of get your feet wet and start learning something and and actually by the end of that you might actually feel like you know a decent amount and probably making better and better stock picks right so what what what does a full portfolio mean uh like uh if that's a good question i don't know like full i guess fully diversified which saying that out loud seems kind of silly because um it can get completely out of whack like let's say let's say you bought a stock and it was netflix like you bought netflix early early and and Netflix became a huge part of your portfolio.

16:36Stephen:That's like all of a sudden you're like not diversified, but looking in hindsight, it would have been best if you just didn't touch it and just let Netflix continue to become one of the best companies that are in the world. So it's, it's one of those weird things I've noticed. Like I like to experiment with like having different brokerages, having different portfolios. And I've mentioned before how I like, I've like played in crypto and stuff. And I find myself sometimes like I'm manicuring a garden with some of these like play portfolios I have where it's like, well, I don't like how this isn't balanced.

17:14Stephen:So I'm going to balance it. And I think that's actually a dangerous way to think about portfolio, especially if it's like your retirement, your life savings. I think like the human mind kind of wants things organized and neat and tidy. But if what you're doing is rebalancing and taking away from your winners to make your losers bigger and then everything kind of balances out and you're just constantly like making your portfolio feel full and organized and happy, what you're really doing is you're cutting the flowers to water the weeds. That's a quote by Peter Lynch. You don't want to be selling your best companies, your best stocks to be buying your worst stocks because yes, we're trying to outsmart the market.

18:01Stephen:And yes, we're looking for our special insights, but the market's going to be right more than it's wrong. So if you have a stock that's going up, it probably means the business is doing good. If you have a stock that's going down, it probably means that business is not doing good or is not going to do good in the future. So we have to be careful about over manicuring our portfolios and just kind of letting them run as they will.

18:31Stephen:Because then that will allow the winners to run. And that's... We don't have to get super into it, but there are moonshots in the stock market, which is why the stock market goes up as high as it does. because those moonshots raise the average up so high. So if you ever get one of those in your portfolio, you want to keep it because that will drive most of your returns. Right. That's such a good, I guess, mindset check. As you're looking at your investments, understanding truly what is driving your portfolio because I love that quote, you're cutting the flowers to water the weeds. So huge. And that will destroy you, destroy your portfolio, completely blow it up.

19:27And we'll get more into that later. The next place we need to go, or at least for me, Andrew, that I think we need to go is entry rules. And those vary drastically, especially as I talk to the value spotlight community, talk to you, Evan. Everybody has different entry rules, like how they, and when we say entry rules, that means how you're getting into the stock. And for what we do, it's very important that the math lines up to when we enter the stock to ensure we're getting the best, trying to get the best value for our dollar. So what are your entry rules when it comes to that stuff, Andrew.

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22:40Stephen:Starting with the basics, starting with the easy, but starting with the most important. I'm constantly putting money in. It's called dollar cost averaging. You got to be putting money into the market no matter what the situation and do it consistently. I like to do it once a month. That consistent habit will build a wealth snowball that will slowly get bigger over time, but that needs to be front and center. Like we can't be trying to market time coming in and out. That's, it's just not going to work. Dollar cost averaging works. That's why 401ks people blink. And all of a sudden they have six figures in a 401k and didn't even realize it.

23:19Stephen:The reason why it works is because of dollar cost averaging. So let's start with that. And then as far as knowing how much to put into a stock, I have a stock that I'm really interested in. How do I know how much of my portfolio they put into it? I think over time you start to get a sense of what kind of investor you are and what you're comfortable with. And I know that sounds kind of just vague and not really helpful, but use the example of if you're ultra growth, like almost investing in every IPO or you're almost like investing in startups or something, you have to understand that when you play by those rules, your probabilities of success are pretty low.

24:12Stephen:When you go into these places that are super high growth, super high competition, there's only going to be usually a few players that come out on top. So statistically, if there's only a few players that come up on top, there's a lot of losers. So if you're buying super high growth, you need to buy a lot of positions. So maybe even the 15 to 20 framework doesn't work. You should have maybe 50 to 100 instead of 15 to 20. You really want to have a lot of stocks because you just need like the Netflix or the NVIDIA or the Tesla to really carry your portfolio. That's if you're playing that game. Uh, on the flip side, if you're trying to be like Warren Buffett, who, um, you know, doesn't want to do anything for five years and then all of a sudden take out his elephant gun and go hunting.

25:06Stephen:Maybe, um, I think you do need to pair that patience with the higher position size, like Warren Buffett. He really waited until he had the fattest of fat pitches. Like he was so certain about Coca-Cola. He knew so much about it. He had probably been watching it for years and years and years. And, and because he has so much conviction about it, he made it a quarter of his portfolio. That's a pretty big allocation. You don't have time. Uh, I think he spread it out over like six months. So he did like a big chunk of the big chunk, but yeah, essentially it was essentially at one time. That's, um, that takes a lot of chutzpah to quote myself.

25:48Stephen:You don't get, you don't have many chances when you're putting a quarter of your portfolio. So you better make sure those, those chances do well. And so I think that's why it matters who you are, what you're trying to accomplish. I've always found for me, my sweet spots, like five to 6 % for that. So I consider like my high conviction position. And then if it's something that's, maybe like a higher chance of failure. I'll scale it down. It'll be like a percent and a half or something. So those are just like the percentages I've fallen on. But basically, I found that like, just because I had more conviction about a stock didn't make me any more right than usual.

26:39Stephen:And usually actually meant I was more wrong because it was more value and it was more distressed and those are usually more wrong. So I've had to like pare down my, my exposure to different stocks because I like to play the numbers game. I like to buy a lot of beaten up stocks and find the ones that really rebound. And so that's, what's worked for me being in that five to 6%, but everybody might be a little bit different. That's why it really does depend on what kind of stocks you're trying to buy and how those stocks tend to perform as a group, not just as one or two. When it comes to dollar cost averaging, Andrew, you had mentioned like, The studies show that just being in the market beats trying to time it every single time.

27:25And I just want to make it clear. Correct me if I'm wrong. That's like every single downturn bear market. Like, ultimately, if you keep dollar cost averaging, even through those tough times, you are still going to come out on top. So Andrew continues the dollar cost average. which Stephen sees what's happening, pulls all his money out of the market and waits for it to turn bullish again. And then gets back in the market. Andrew's going to crush Stephen in the longterm. Correct?