If you are managing your own investment portfolio, it is important to know how to choose the best—and safest—investments

Portfolio management is the process of choosing and monitoring investment holdings for an individual or institution. Portfolio managers typically choose from a range of investments, including stocks and bonds, in aiming to maximize returns for their clients. At the same time, of course, you can manage your own portfolio.

Here are a number of tips we think are valuable if you are managing your own investment portfolio:

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Professional advice for managing your own investment portfolio: The best stocks to hold all have this in common

The best stocks to hold in your portfolio all give you reason to believe they might be worth holding on to indefinitely.

Most of these stocks have an established business and a history of sales gains, plus some earnings, if not dividends. To put it more simply: these stocks have a clear business plan that seems to be working.

Of course, stocks like these will still suffer in a deep market downturn. They may also suffer in the shallower, shorter downturns that come along more often. But most recover quickly when the market revives, as it always does. In fact, stocks like these may lead the inevitable market recovery.

These are the kind of stocks we put in our clients’ portfolios. However, even though we think they are worth holding on to indefinitely, we keep an open mind. After all, they are subject to the usual risks. Competitors can overtake them. Expected contracts can fall through. They can lose key employees, run into union or regulatory problems, and so on.

Of course, nobody can predict the future, but the best of the bunch will more than offset your losses and we think leave you with highly satisfactory long-term returns.

Two common errors often made by unsuccessful stock portfolio managers:

1. Becoming more “bullish” or optimistic because stock prices have gone up. Some investors only feel safe buying stocks after prices have risen. This is opposite to the way you make most purchases (cars, clothing, etc.) Ordinarily, it’s better to buy when prices go down, not up.
2. Becoming more “bearish” or pessimistic because stock prices have gone down. When other investors sell and drive prices down, you may wonder if they know something you don’t. However, random influences may be at work.

Bonds and managing your own investment portfolio

If you are reluctant to hold a 100%-stock portfolio—and many people are—then one alternative to consider is to keep a portion of your investment funds in relatively short-term fixed-return investments, with maturity dates of a few months to no more than two to three years in the future.

These fixed-return investments will lose some value when interest rates rise, but not enough to make a serious dent in their value. You can hold them till maturity, and soon get your money back for reinvestment.

Assessing goodwill risk is a part of managing your own investment portfolio

As part of our portfolio management strategy, we look at the amount of goodwill that a company carries as an asset on its balance sheet.

Goodwill is an accounting entry that reflects the price that the company paid for its acquisitions, minus the value of the tangible assets, like land and equipment, that it received as part of the acquisition.

However, goodwill acquired in an unwise acquisition can lose value overnight. When that happens, the company has to write it off against earnings. At worst, the company might have to write off most, if not all, of its goodwill.

If that write-off wipes out most of the company’s shareholders’ equity, and/or most of a year’s earnings, it can devastate the share price. That’s a situation your portfolio management strategy should avoid at all costs. 

Concluding advice for managing your own investment portfolio 

In the long run, the best way to build a successful portfolio is by sticking to high-quality investments—plus making fewer transactions.

If you do that, along with diversifying across most if not all of the five main economic sectors, and downplaying or avoiding stocks in the broker/media limelight, you are following our Successful Investor approach. We feel it’s by far the best way to invest.

Less frequent trading saves you brokerage commissions. It also improves your tax deferral. For instance, suppose you buy an investment at $10 and it goes to $20. As long as you hold on to it, the entire $20 keeps on producing dividends and capital gains for you. If you sell, you’ll have only $16 or so to reinvest after paying capital-gains taxes and commissions.

Why do you manage your own portfolio? Have you worked with portfolio managers in the past, and if so, what was your experience like?

If you manage your own investment portfolio, have you made any mistakes that have made you reconsider that strategy?