4 Portfolio Strategies to Grow Your Money
By Ron DeLegge, Editor
May 13, 2009
SAN DIEGO (ETFguide.com) Ė Even though the stock market has rebounded from its March lows, millions of individual investors are still stuck in the mud. Theyíre lost, scared, disillusioned, and confused, which means theyíre probably still losing money.
Only the best investors adjust their investment strategies to avoid financial catastrophe. And what about the worst investors? They just keep repeating their mistakes, perfecting them until they can stand no more.
Letís analyze four basic strategies to help you get your investment portfolio on track. If your money is already on track, these strategies will reinforce the rightness of your way.
Stop Betting on the Wrong Horses
Around 85% of all mutual fund assets are invested with fund managers that propose to beat the market, while the remaining portion is in index funds and index ETFs that propose to match the market. Even though most fund investors are betting that fund managers will lead them to the Promised Land of outperformance, look at what the numbers say.
Over the past 5 years, Standard & Poorís reports 71.9% of active large cap funds failed to beat the S&P 500 index (NYSEArca: SPY), 79.1% of active mid cap funds failed to beat the S&P MidCap 400 index (NYSEArca: MDY) and 85.5% of active small cap funds failed to beat the S&P SmallCap 600 index (NYSEArca: IJR). What does all of this mean?
The financial lesson you can take from this, is not that investors need to pick their mutual fund managers more carefully as those that suffer from data misinterpretation deficit (a form of financial puberty) would conclude. Hereís the real lesson: Trust the indexes and the financial products tracking them, not the portfolio managers that try to beat them and fail. Translation: Align your money with winners not losers.
Avoid Funds with High Portfolio Turnover
Itís hypocritical for the mutual fund industry to preach long-term investing to the general public when the typical stock fund manager is selling every single holding in their entire fund portfolio every 6 to 12 months. Thatís not investing, itís trading! If you want to gamble your money on unproven strategies like rapid fire trading in and out of stocks, you certainly donít need to pay a fund manager 1 or 2 percent in fees. You may have a better chance of turning a profit at the race track, plus you get to enjoy some fresh air.
An even better investment strategy than relying on fund managers or horses is to invest in index funds or index ETFs. Not only will most stock and bond ETFs consistently beat the performance of both, but most index funds have annual portfolio turnover under 20%. In the vast majority of cases, this translates into a lower tax bill, lower internal fund costs and better long-term performance. Can you say Ca-Ching?!
Cut your Fund Fees, Immediately
Countless academic studies have shown that low fee funds have the tendency to outperform higher cost funds over the long-run. Donít buy into the misleading propaganda that mutual fund managers are able to earn you back your fees plus an additional 1 or 2 percent above the market. The truth is most of them donít because most of them canít. Do the math.
A $500,000 investment portfolio with 0.50% in annual investment expenses will grow to $938,000 if it averages a 7% return over 10 years. Assuming an identical return of 7%, the same portfolio weighed down by 1.5% in annual investment costs will grow to just $854,000. Would you rather have an extra $84,000 in your pocket or in Wall Streetís? The numbers donít lie. You decide.
Get the Right Formula
Just because you have unfettered access to carbonated water, food coloring and corn syrup does not mean you can successfully replicate a refreshing glass of Coca-Cola. The fact of the matter is Coke has the secret formula and you donít.
Along similar lines, using index funds or index ETFs inside an investment portfolio is a great start but in itself wonít necessarily guarantee your investment success. Even though youíve chosen the right ingredients, itís quite possible youíre using the wrong mix of ingredients or the incorrect formula. For example, many ETF investors own a mixture of funds that contain overlapping stock and bond holdings. Instead of getting high octane performance, these particular investors are getting impotent returns caused by needless duplication. Are you one of them?
Even during this difficult bear market, itís possible to experience financial success. Visible evidence of this is the six Ready-to-Go ETF Portfolios weíve supervised since 2005. Through the May 12th market close, four of our six ETF portfolios are beating both the S&P 500 and the MSCI EAFE (NYSEArca: EFA) international stock index. The secret to our successful ETF portfolios is getting the correct mix of funds. You too can enjoy the same type of success!
Do you have the right formula?