If you’re like most people, you have better things to do with your time than pore over daily market news, wondering how or if it applies to you. Instead, we recommend applying market-based strategy to guide your investment habits. By investing according to identified market efficiencies (instead of fighting against them, as most investors do), you are freed to focus on decisions you can expect to understand and control, and to ignore the market’s daily distractions.

Here are three practical portfolio construction techniques that help patient investors build durable wealth in an ever-volatile world.

Practical Investing

1. Take the Long View in Your Portfolio

Position your portfolio to capture the expected long-term capital growth created by the markets’ billions of annual trades. This is typically accomplished by investing in an appropriate mix of riskier and less-risky asset class funds, where each fund’s growth is expected to behave like the lines you see in this “Growth of $1” chart. This chart demonstrates how near-term market trends generate many market-risk events along the way, but that various asset classes (and the funds that efficiently track them) are expected to deliver various rates of overall growth over time. Keep this big picture in mind and avoid reacting to these events.

2. Manage Market Risk With Diversification

Forget about what the rest of the world is doing. Focus instead on your personal financial goals, and don’t take on any more market risk than is necessary for your own aims. For example, if your timeframe is short, you may need to favor a smoother ride with lower expected returns. Vice-versa if time is on your side. Either way, diversifying your portfolio by blending multiple asset classes together helps you dampen your portfolio’s overall risk.

3. Harness the Power of Cost Management

In selecting particular investments in your portfolio, favor those that most effectively capture the targeted expected returns while aggressively minimizing associated costs. Ironically, seeking efficient, low-cost investment vehicles is among the most powerful factors over which you have considerable control as an investor – and yet it is a simple tactic all too frequently overlooked

Another Ingredient: The Advice You Heed

In our next post, we’ll cover an additional, essential ingredient in portfolio construction: How to tell the difference between solid investment advice versus suspect sales pitches.

Chart Disclaimers: In US dollars. Indices are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is no guarantee of future results. US Small Cap Index is the CRSP 6–10 Index; US Market Index is the CRSP 1–10 Index; Long-Term Government Bonds Index is 20-year US government bonds; Treasury Bills are One-Month US Treasury bills; Inflation is the Consumer Price Index. CRSP data provided by the Center for Research in Security Prices, University of Chicago. Bonds, T-bills, and inflation data © Stocks, Bonds, Bills, and Inflation Yearbook™, Ibbotson Associates, Chicago (annually updated work by Roger G. Ibbotson and Rex A. Sinquefield).