Pinning Down Portfolio Rules of Thumb
Investing can be complicated, but common portfolio guidelines can be a good starting point.
Investing can be incredibly complicated, with hundreds of thousands of investment choices that can be combined in nearly infinite variations. The sheer number of options available--and the high stakes involved in getting decisions right--can make the process overwhelming. That’s one reason why rules of thumb can be useful. They’re a way of cutting through complexity and helping investors make decisions more quickly without getting bogged down in endless questions about “what if” or “what’s next.” These heuristics, or mental shortcuts, can help investors focus on the most important steps to take without getting trapped in analysis paralysis.
In this article, I’ll take a closer look at some of the most common rules of thumb for portfolio management. Most of them make sense as a useful starting point, but understanding their limitations can help investors use them more effectively.