Build the Best Portfolio

What is the best portfolio for you?

Could it be a portfolio modeled after Legg Mason's Bill Miller, the legendary fund manager who has bested the market for 14 years running? Or is it something more like that of George Soros, the financial wizard who was capable of bringing entire nations to their knees?

Actually, it's neither. This is a trick question. The best portfolio for you is one that you create for yourself. Each individual has a unique risk tolerance and return requirement, so only a tailored portfolio that takes those considerations into account would be optimal for you. The next time you have an opportunity to duplicate George Soros' private portfolio, you're best off saying, ''Thanks, but no thanks."

Save yourself thousands
There are two ways to create your own portfolio. The first is to call in the help of a financial advisor. That sounds easy and convenient, but it can be very expensive. You'd be surprised how much an annual fee of 1% or more can cut into your nest egg.

The second way requires a bit more work, but it will save you thousands. You (yes, you!) can do it, and we can help you. Let's get started.

The source of outperformance
The first thing you'll want to formulate is an investment policy statement (IPS). By clearly stating your return objectives, risk tolerance, time horizon, and liquidity needs, you'll create a master document to help you stick to your investing plan for the long term.

Next, you'll need to consider market expectations in light of your IPS. How much time do you have? How much volatility can you handle? Obviously, if you have a shorter timeline and don't have much risk tolerance, you'll want to stick with bonds or treasuries. But as your timeline lengthens and your risk tolerance increases, you may want to include higher-yield bonds, large caps, mid caps, foreign stocks, and even small caps. For information on the how market has performed over the long haul, take a look at the research of a respected academic such as Jeremy Siegel.

You can also look at the past performance of an S&P 500 index tracker such as SPDRs (AMEX:SPY), which is for large caps, or the iSharesRussell 2000 Index (AMEX:IWM), which is for small caps. There is a case to be made for putting your money into equities, if you have the time to let the market go to work for you.

The fun part
Once you have your IPS and asset-allocation plans in place, you are officially allowed to have fun and start picking stocks. A few months ago, Rex Moore wrote that you could juice the market's returns with an "Index Plus a Few" strategy, in which you buy shares of SPY and enhance that position with a few carefully chosen stocks. This strategy provides broad diversification with the potential for market-beating returns. After all, a one-time investment in the S&P 500 index will get you instant exposure to the market's historical stalwarts, including:

While you couldn't go wrong with an index, you may be able to beat the index by adding some smart individual stock picks. If you'd like some help making that happen, consider checking out our Motley Fool Stock Advisor newsletter. Fool co-founders David and Tom Gardner present two recommendations each month complete with full write-ups and a presentation of risks and counterpoints. With your ISP and asset-allocation game plan in hand, you'll be able to take a look at the recommendations and decide which are right for your personal portfolio. David and Tom give members a nice list of stocks from which to cherry-pick -- their companies are beating the S&P 500 by more than 40 percentage points since the newsletter's inception in 2002. (Click here for details on a 30-day free trial.)

The Foolish bottom line
Once you've created your portfolio, you'll still have to monitor it -- and rebalance it from time to time (which Stock Advisor can help with). But by doing it yourself, you will have saved thousands of dollars in advisor fees -- and you may discover that you enjoy charting your own financial future. It's unlikely that you'll earn billions like Soros or beat the market year in and year out like Miller (we should all be so lucky), but I'd be willing to bet you'll get closer to realizing your financial dreams. As Yogi Berra once said, "If you don't know where you're going, chances are you will end up somewhere else."

John Reeves owns shares of Johnson & Johnson and Procter & Gamble. The Fool's disclosure policy zigs when others zag.