What makes the perfect portfolio? The following stocks, perhaps:

  • General Electric (NYSE: GE)
  • Bank of America (NYSE: BAC)
  • Microsoft (Nasdaq: MSFT)
  • Merck (NYSE: MRK)
  • AT&T (NYSE: T)
  • Texas Instruments (NYSE: TXN)

Why did I pick these? Truth be told, they're just some of many that came to mind, and most people would be better off owning more than just six stocks. But bear with me.

I chose these companies for a bunch of reasons: They've all had great runs in the stock market and have made many investors rich. They're companies I have admired over the years. Some have played a big part in America's economic past, while others are major players in its future -- and some straddle both camps. Their strong brands make it hard for others to compete with them. They have serious competitive advantages, too, such as sheer size, and they tend to have robust profit margins.

It's all in the timing
But none of this by itself is enough; timing plays an equally critical role in anyone's portfolio. You and I might have the same portfolio of stocks, but if I've owned them for just a year, and you bought them a decade ago, the picture will differ quite a bit. Let's see how this portfolio would have fared if you'd owned it over the past decade, versus just owning it over the past year. Here are the companies' annualized returns to shareholders for the trailing 10-year period and for just 2007:


10-Year Annualized Return

2007 Return

General Electric



Bank of America












Texas Instruments



Average of above



S&P 500



Data from Morningstar.

One lesson to draw from this: Although this basket of stocks beat the market in both periods, their various performances were quite different. For some stocks, the trailing-12-month period might be the more exciting one (or vice versa), but remember, the market is rather unpredictable over short periods. You could just as easily have lost to the market significantly while remaining invested in companies that would go on to perform well later. The important thing is to find the most promising companies you can for the long term, and invest in them when they're undervalued.

Of course, no one knows exactly when to invest in any company. Still, smart investors do their best to determine the right time, which often proves to be "a long time." Over longer periods, strong, growing companies tend to perform well. The right time also includes some discrete periods, which become apparent in retrospect but take some skill to estimate.

For example, check out these returns for Intel:


Total Gain

Average Annual Gain

December 1986 to December 2007



December 1986 to December 1997



December 1989 to December 1999



December 1992 to December 2002



December 1997 to December 2007



Clearly, if you'd invested in Intel 10 years ago, you wouldn't have fared so well (5% per year). Still, the future is paramount, and if you aim to hold it for another 10 years, you might still do very well overall. If you'd invested in it 21 years ago, you'd have done rather well indeed (22% per year), but an intervening 10-year period offered a much higher growth rate (44% annually). Your level of happiness in having Intel in your portfolio would likely have varied widely, depending on when you put that stock in it.

So how would you have known when to invest in such a stock? Well, luck can certainly be a factor for many investors. Other than that, it wouldn't have been enough just to spot hefty profit margins or a strong earnings growth rate. Such measures can decline over time. Ideally, you'd have wanted to be well-versed in the company's industry and familiar with its competitors and emerging technologies, and you'd have wanted a strong grasp of Intel's competitive advantages, operational risks, and future promise. You'd also have been looking out for a good price at which to buy into the company. All of this research can't guarantee any kind of return, but it can significantly increase your odds of doing well.

Get guidance
That's all easier said than done. If you're not confident in your ability to find such promising companies at the right time, look for some trusted advisors. One resource I use is our Motley Fool Stock Advisor newsletter, which recommends two promising companies each month. Over five years, its average recommendation has gained 63%, versus 22% for like amounts invested in the S&P 500. A free, no-obligation 30-day trial will give you full access to all recommendations and past issues.

Regardless, when you envision your perfect portfolio, don't look only at the quality of the company. Think about the stock's price as well, and whether this is a good time to jump aboard. When in doubt, focus on the long term! A growing company may falter over the short run, but in the long run, it usually fares well. And when a healthy company falters, it could provide the best time to buy.

Here's to a more perfect portfolio!

This article was originally published on April 2, 2007. It has been updated. 

Longtime contributor Selena Maranjian owns shares of General Electric and Microsoft. Intel and Microsoft are Motley Fool Inside Value recommendations. Bank of America is a Motley Fool Income Investor recommendation. The Motley Fool is Fools writing for Fools.