The Ten Essential Principles for Portfolio Construction

BEFORE diving into the analysis of specific portfolios, it’s helpful to first outline the core principles that guided their selection.

These 10 principles represent what I consider essential to any sound portfolio construction process. They draw from both behavioral finance and evidence-based investing. Here they are:

1. You are a saver, not an investor.
2. You are your portfolio’s worst enemy.
3. Beating the market is hard. Really hard.
4. Diversification is the only free lunch.
5. The Cost Matters Hypothesis.
6. Real, real, returns are all that matter.
7. Risk is uncertainty of lifetime consumption.
8. Asset allocation is a temporal conundrum.
9. Past performance is not indicative of future returns.
10. Set realistic expectations and stay the course.

Let’s go through each of these in more detail.