Quick note before we start: this article shares general ideas about choosing and maintaining an investment portfolio. It's not personal financial advice.
This is Part 2 of a series on simplicity in investing. Read Part 1: Less Is More
There is something strangely addictive about trying to build the perfect portfolio.
You find an ETF. Then another. You compare their fees, check their historical returns, study their holdings. You discover factor investing. Then small-cap value. Then momentum. Then quality. Then you start wondering whether you should have 10%, 15%, or 20% allocated to each one.
And suddenly, investing has become a research project.
I know this because I have done it. For a long time, I thought the next improvement to my portfolio was always just around the corner. Eventually, I realized the problem wasn’t that I hadn’t found the right portfolio.
The problem was that I was still looking for one.
Key takeaways
- There is no portfolio that maximizes every desirable characteristic at once — every portfolio involves trade-offs.
- The more you learn about investing, the more things you’ll find to potentially change. That’s not always progress.
- A backtest tells you what happened. It can’t tell you what will happen, or whether you’ll have the discipline to hold the strategy when it disappoints you.
- A theoretically superior portfolio you abandon under pressure isn’t superior anymore — behavior is part of portfolio construction.
- You don’t need to beat every other portfolio. You need one that’s good enough to reach your goals and easy enough to actually stick with.
The perfect portfolio doesn’t exist
Every portfolio involves trade-offs. Want more potential growth? You usually need to accept more risk. Want less volatility? You may have to accept lower expected returns. Want more diversification? You may give up some concentration in the investments that perform best.
You can’t simultaneously maximize every desirable characteristic of a portfolio. So the question isn’t:
“What is the perfect portfolio?”
A better question is:
“What is a good portfolio that fits my situation and that I can stick with?”
There is always another ETF
You build a diversified portfolio today. Six months later, you discover another ETF — a slightly lower fee, a different factor exposure, a better-looking historical return. So you start thinking about changing.
Then another ETF comes along. And another.
There are thousands of ETFs available today, covering almost every imaginable investment idea. There is always another strategy to consider — and that creates a strange problem.
The more you learn about investing, the more things you discover that you could change.
More information doesn’t always lead to better decisions
Learning more about investing is generally a good thing. But there’s a point where additional information stops improving your decisions and starts creating new ones instead: a value tilt here, a bit more emerging markets there, a small caps allocation, a momentum sleeve. At some point, you’re no longer solving a problem — you’re creating new ones.
As covered in Part 1, Vanguard’s research emphasizes focusing on what investors can actually control — goals, balance, cost, and discipline — rather than reacting to short-term market movements or new investment trends. Simple, but easy to forget.
Why backtests can mislead you
Backtesting is one of the most useful tools an investor can have. It’s also one of the easiest to misuse.
You can compare a 60/40 portfolio, an 80/20, a factor tilt, a dividend strategy, a globally diversified fund — and sometimes one portfolio clearly wins. At least on your spreadsheet. Then you start wondering: why wouldn’t I just choose the portfolio that performed best?
Because the future doesn’t know what your spreadsheet says.
Historical performance is information — it isn’t a promise. A strategy that performed exceptionally well over the last 20 years might underperform for the next 10. An allocation that looks perfect in hindsight might have been extremely difficult to hold during its worst period.
The backtest can tell you what happened. It cannot tell you what will happen — and it definitely cannot tell you whether you’ll have the discipline to hold that strategy when it disappoints you for five years.
The portfolio that wins on paper can lose in real life
| Portfolio A | Portfolio B | |
|---|---|---|
| Expected return | Higher | Slightly lower |
| Complexity | High | Low |
| Number of decisions | Many | Few |
| Historical performance | Excellent | Good |
| Your confidence in it | Medium | High |
| Likelihood you’ll stick with it | Uncertain | High |
Which one is better? There isn’t enough information to answer that mathematically. But there’s an important question hiding in this table:
What happens if Portfolio A makes you uncomfortable enough to abandon it?
A theoretically superior portfolio that you sell at the wrong time isn’t superior anymore. This is why behavior is part of portfolio construction. Your portfolio isn’t just a collection of expected returns and standard deviations — it’s something you actually have to live with.
You don’t need to win every comparison
I used to compare portfolios as if investing were a competition. If Portfolio A had a higher historical return than Portfolio B, Portfolio A was “better.”
But that’s not really how personal investing works. Imagine you choose a globally diversified portfolio, then discover another portfolio that would have returned 0.5% more per year over some historical period. Does that make your portfolio bad? No — it means another portfolio had a better historical outcome over that particular period. That’s it.
You don’t need to beat every other investor. You don’t need to own the best-performing ETF every year. You need a strategy that gives you a reasonable chance of reaching your goals without taking more risk or complexity than you’re willing to accept.
Investing isn’t a competition against every other portfolio.
The difficulty of consistently finding the winner
Even professional investors, with enormous time and resources, struggle to consistently identify what will outperform. S&P Dow Jones Indices’ SPIVA Canada Year-End 2025 report found that more than 85% of Canadian active funds underperformed their benchmarks on average — a stat we touched on in Part 1, but the persistence data here is even more striking.
Among 169 Canadian funds that were in the top quartile of their categories at the end of 2021, only one remained in the top quartile for each of the following four years.
This isn’t evidence that simple portfolios will always outperform. It’s evidence that identifying yesterday’s winners and expecting them to remain tomorrow’s winners is difficult — which should make all of us a little more humble about our own ability to spot the “perfect” portfolio in advance.
So what should you actually optimize?
Instead of asking “what investment could make my portfolio better?” — ask “what parts of my financial life can I actually improve?”
- Savings rate — you control how much new money enters your portfolio
- Asset allocation — determines how much risk you’re taking
- Diversification — reduces dependence on a small number of investments
- Investment costs — lower costs leave more of the return in your pocket
- Taxes — account selection and tax efficiency affect what you actually keep
- Discipline — helps prevent emotional decisions
- Time in the market — lets compounding do its work
Notice something? Finding the next ETF isn’t on the list. That doesn’t mean ETF selection doesn’t matter — it does. But there’s a point where the marginal benefit of switching from one good diversified investment to another becomes very small compared with the attention it demands.
Good enough is not a failure
There’s something psychologically uncomfortable about accepting a “good enough” portfolio. We’re taught to optimize — the best phone, the best car, the best mortgage rate. So why wouldn’t we try to find the best portfolio?
Because investing is different. There are too many unknowns, and the future is too uncertain. A portfolio can be excellent without being optimal. In fact, good enough can be an investment advantage — if it helps you stay consistent.
You don’t need to constantly improve something that’s already doing its job.
The goal isn’t to find the portfolio that looks best on paper. The goal is to find a portfolio you can actually live with.
That question — what changed for me, and when — turned out to be its own story. I’ll get into that in Part 3.
FAQ
Isn’t it worth switching if I find an ETF with better historical returns? Not automatically. Past performance doesn’t predict future results, and switching has its own cost: more decisions, more room for error, and less certainty you’ll actually stick with the new choice.
How do I know if my portfolio is “good enough”? If it matches your risk tolerance, supports your goals, is reasonably diversified, and you can hold it through a downturn without panic-selling — it’s likely good enough, even if it isn’t theoretically optimal.
Does this mean I should never review or adjust my portfolio? No. Review it when your goals, risk tolerance, or life circumstances genuinely change — not simply because you came across a new strategy or a better-looking backtest.
Why do so few top-performing funds stay on top? Markets shift, and the conditions that helped a strategy outperform rarely persist indefinitely. SPIVA’s persistence data shows how rare sustained outperformance actually is, even among professional managers.
The takeaway
There will always be another ETF, another strategy, another allocation that looks better on paper. You don’t need to own all of them.
Build a diversified portfolio that fits your goals and risk tolerance, make the important decisions carefully, and then give yourself permission to stop searching.
Good investing isn’t necessarily about finding the perfect portfolio. Sometimes it’s about knowing when you’ve found a good enough one.
Next step
If you haven’t already, write down why you chose your current portfolio — your target allocation, your reasons for choosing it, and the situations that would justify changing it. Then give yourself a rule:
Don’t change the plan simply because you found something interesting. Change it when your circumstances or objectives have genuinely changed.
Related articles
- Less Is More: Why Simplicity Works in Investing
- Stocks vs. Bonds vs. Cash: A Simple Guide for Canadian Investors
- All-in-One ETFs in Canada: The Simple, Diversified, Low-Cost Way to Invest
Sources and further reading
- Vanguard: Principles for Investing Success
- S&P Dow Jones Indices: SPIVA Canada Year-End 2025
- S&P Dow Jones Indices: Canada Persistence Scorecard 2025
Disclaimer: This article is for educational and informational purposes only. It does not constitute financial, investment, tax, legal, or other professional advice. Investing involves risk, including the possible loss of principal. Past performance does not guarantee future results. The examples and opinions presented are general in nature and may not be appropriate for your individual circumstances. Before making investment decisions, consider your own financial situation, objectives, risk tolerance, time horizon, tax situation, and investment knowledge. If you are unsure about what is appropriate for you, consider consulting a qualified financial professional.