Three Steps to Making Sure Your Portfolio Earns an 'A'

Within my first 15 minutes on Wall Street, I had an experience that would change my life forever.

I was fresh out of college. And I had been fortunate to land an investment-banking job with Blackstone – the powerful firm started by legendary financiers Pete Peterson and Steve Schwarzman.

That morning, I entered a large conference room with a dozen other new banking hires. Then he walked in. Schwarzman – one of the most powerful men on Wall Street – was there to meet us in person on our first day.

The room went silent. He smiled and briefly welcomed us. Then he delivered a message I will never forget...

I've seen all your resumes and college transcripts. You're an impressive group... But it hasn't all been perfect, has it? Most of you got some A-minuses in school. Some of you averaged A-minuses. Let me tell you something right now. The Blackstone Group is NOT an A-minus firm. A-minus work will NOT cut it here... So you had better turn it up a notch if you are to succeed. Now, let's get to it.

And with that, he got up from the table and left the room.

I learned something that day – about life, and about investing. Today, I'll show you a few ways you can apply it to your own portfolio.

I remember thinking that Schwarzman wouldn't be my first choice to deliver a commencement speech or pep talk at halftime... The CEO had already crushed our spirits on the first day of our brand-new careers.

But something funny happened. I found myself caring more about the job. And I found that what I thought was my best could actually get better. As harsh as that first speech was, it was exactly what we needed to hear.

It provided a great rule to live by: Demand more from yourself and you will get more.

Now, this is great advice. But how do you know you're making "A+" investments in your portfolio? How do you test for strengths and weaknesses, so you know where to improve?

Here are the three steps you must follow to evaluate your investing results...

  1. Establish clear investment goals.

As I've said before, your approach to investing will differ greatly if your primary goal is preserving your wealth versus aggressively growing your long-term portfolio.

However, another key part to goal-oriented investing is that you need to establish realistic goals. We're now nine years into a bull market in which the total return for the S&P 500 Index is more than 300% (or more than 18% per year, assuming reinvested dividends).

Don't expect returns anywhere near that level over the next nine years. When this bull market ends, stocks will likely perform in the mid-single digits for a long period of time. You can't ever produce grade-A portfolio results if your goals are unrealistic.

  1. Do the work and stick to your plan.

Do enough research to know what you own and why. When you have a deeper level of understanding about what you own, it empowers you to make better decisions. This is particularly important during times of heightened market panic or greed. It will give you courage in your convictions to drown out the market noise.

The other part of this step is sticking to your plan. This means buying securities that fit your goals. You want to invest big when you are certain an excellent opportunity is presenting itself.

This also means you must have the discipline to sell. Get out when you hit your stops, or when the reason you bought is no longer valid. Finally, respect the macro environment. Volatility and market drawdowns will inevitably occur, so it's vital to protect your portfolio.

  1. Evaluate your performance over a complete market cycle.

The third step is the simplest step – but in my experience, the hardest for most investors to actually follow.

A complete market cycle contains both a bull and a bear market. Using this longer-term "lens" enables you to see how your investing performs in good times and bad. This is critical. An aggressive strategy that performs magnificently in bull markets but crashes in bear markets will often leave you worse off than a "steady Eddie" approach.

Consider famous investor Bill Miller... Miller's mutual fund Legg Mason Capital Management Value Trust outperformed the S&P 500 every year from 1991 through 2005. Over this period, Miller averaged returns of more than 16% per year, easily besting the market's 11% annual gains.

But here's the thing: The vast majority of this outperformance came during a bull market from 1991 through 1999. And once the bear market of 2008 hit, Miller's fund cratered... so much so that if you owned his fund for the entire 20-year period from 1991 through the end of 2010, you barely beat the S&P 500. The bear market all but eliminated his historically excellent streak of outperformance during the bull market.

Assess your returns over a full cycle. This doesn't mean you can't make interim evaluations and changes when necessary... But reserve final judgment until you get through the full cycle.

Your path to optimizing and then evaluating your returns starts with these three steps. Of course, we at Stansberry Research do our best to give you the tools to successfully perform the first two steps... But it's up to you to have the fortitude to complete the third.

Good investing,

Austin Root

Further Reading

"Don't assume that the next decade in stocks will look like the last," Steve writes. He's talking about why diversification is so important for investors... Learn one specific way it can lower your risk right here: This Hasn't Burned Your Portfolio Yet... But It's About To.

Back in January, Porter Stansberry shared three key secrets that can help you boost your long-term investment performance. "Nothing else you can do this year is more likely to increase your portfolio's return," he says. Read more here: The Best, Safest, and Surest Way to Get Rich in Stocks.

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Market Notes


Today's chart highlights a company that has found a niche within a saturated market...

As DailyWealth readers know, we like to invest in businesses that sell the staples of daily life – like pet food. These days, the majority of U.S. households own a dog or a cat. And with no shortage of food-brand selections, many pet owners are choosing health-focused options for their companions...

That's where Freshpet (FRPT) comes in. In 2007, when a massive pet-food recall hamstrung many companies in the industry, Freshpet made a name for itself as a safe, holistic brand of pet food. It manufactures refrigerated food and treats for dogs and cats with natural, minimally processed ingredients – best served fresh. This niche strategy is still working today... In the second quarter, sales jumped to $47.6 million – that's 23% growth over the prior year.

As you can see, the stock has climbed more than 115% over the past year, recently hitting a new all-time high. As folks continue to seek out "natural" nutrition options for their pets, Freshpet should continue to profit...