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Editor's Note

The Optimal Portfolio Strategy Is One You Can Stick To

We believe investors should not sell out of fear during a correction nor abandon their allocations.

by Charles Rotblut | May 2025

Charles Rotblut leads a class in AAII's new Essential Investing Video Course. Go to https://www.aaii.com/ves for more information and to subscribe.

The S&P 500 index remained in a tariff-driven correction as we finalized this month’s issue in late April.

We believe investors should not sell out of fear during a correction nor abandon their allocations. Rather, stick to your strategy.

The optimal strategy is one that you can follow no matter what the market is doing. It should reflect your investing time horizon, the timing of planned withdrawals, the size of those withdrawals relative to your wealth and your psychological ability to handle stock market volatility.

Your strategy should also include clear rules for selling a stock. A good rule is to sell a stock when its fundamental quality deteriorates. Reviewing a company’s financial statements and ratios can help you identify such weaknesses. In this month’s issue, I describe 16 red flags to look out for.

Some are obvious, such as declining profit margins and revenue trends that are weaker than those of industry peers. Others may be less obvious, like declining accounts receivable and accounts payable ratios. The combination signals that a company and its customers are struggling.

I walk you through these 16 indicators and link to a fillable checklist you can download to assist you with your own analysis.

Not all analysis requires blocking off a large chunk of time. Artificial intelligence (AI) can help identify potential problem spots to scrutinize. In the second installment of our new series on AI-powered investing, Wayne Thorp shows you how to use AI to analyze financial documents. He gives you several prompts you can start using plus a real-world example of doing such analysis. 

AAII Members’ Use of Cash

Given the drop in stocks and still comparatively high interest rates, we asked AAII members about the role cash plays in their portfolio. Allocations varied, though more than 40% of those surveyed said that cash accounts for less than one-tenth of their total portfolio. Primary reasons for holding cash include having the flexibility to take advantage of buying opportunities, protecting against market downturns and funding ongoing withdrawals. 

Wishing you prosperity and good health,

Chuck Rotblut siganture image

Discussion

JOHN P from PA posted about 1 year ago:

A good time to sell is never.


JOHN L from NJ posted about 1 year ago:

Sticking to an investment strategy doesn't make it optimal! The optimal investment strategy produces the highest return you can sustain for the longest time.


CHARLES R from IL posted about 1 year ago:

John,

In a world without human emotions, ignoring volatility to maximize long-term returns makes sense. However, many people have difficulties coping with downside volatility. These individuals will do better by following a strategy with reduced volatility rather than seeking maximum return and bailing out every time there is a correction or a bear market.

-Charles


JOHN L from NJ posted about 1 year ago:

Charles, I agree. Optimal isn't the highest return or some conventional stock bond blend like 60 - 40. It is the highest stock allocation that can be sustained over the longest time. Everyone should ask themselves; how much volatility can we sustain. If they can sustain more volatility; their equity allocation is too low. Sticking with a strategy is necessary but not sufficient to make it optimal.


ROBERT A from NC posted about 1 year ago:

One of the best things I've taught my children is to expect enormous volatility and then ignore it. Giving into fear of volatility is like giving into a fear of water and therefore never learning to swim. I think it's much better to teach children (or adults) to swim than to teach them how to avoid the water. One defect in this analogy makes it all the more poignant: Water presents a REAL risk to one's life, while volatility is no risk at all to a long-term investor. Just my humble opinion.


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