How Can I Get Control of My Investments?
By Ron DeLegge, Editor
August 24, 2011
It’s one thing to have an out-of-control stock market (NYSEArca: VT), it’s quite another to have an out-of-control investment portfolio. Why? Because while none of us can manage the stock market’s daily moves, we can manage how our investments are arranged.
Wrong Foundation, Wrong Location
Observing the way a home is designed and where it’s built offers us clues as to why so many investors have investments that fail to reach their goals.
A home built in a questionable location will have a difficult time surviving a major catastrophe. For example, constructing a home on a cliff top offers wonderful views, but can be trouble if the cliff gives way. Likewise, a home built with the wrong construction materials is asking for big problems. While a brick structure, for instance, may be ideally suited in hurricane prone areas, it won’t hold up well in earthquake zones.
How does this relate to your investments? Simply put, building your investment portfolio with the wrong ingredients can lead to disappointing results. How do we know?
Just the Facts Ma’am
Research from Standard & Poor’s shows that over the past three years, Wall Street’s money managers have not been earning their keep. The study shows that 63.96% of actively managed large-cap funds were outperformed by the S&P 500 (NYSEArca: IVV), 75.07% of mid-cap funds were outperformed by the S&P MidCap 400 (NYSEArca: MDY) and 63.08% of the small-cap funds were outperformed by the S&P SmallCap 600 (NYSEArca: IWM). If the bulk of your investments consist of actively managed mutual funds, there’s a good chance you’re among the throngs of investors who’ve paid for subpar performance.
What’s the main message from this? It’s NOT that investors or financial advisors need to pick their mutual funds more carefully, but rather, people should be building their portfolios on a rock solid foundation of low cost index funds/ETFs in various asset classes that match the market’s performance. That’s priority number one, everything else comes after. Put another way, trust the indexes, not the portfolio managers that try to beat them and fail!
Going for the Gold
Many people have convinced themselves the best way to get ahead is to put all of their money in whatever is performing the best. This strategy was tried during the Dotcom heyday (NYSEArca: FDN), during the housing boom (NYSEArca: XHB), and it’s being tried (once again) in the precious metals market (NYSEArca: SLV).
Gold (NYSEArca: IAU) has been one of the few good performing assets over the past decade, averaging annualized returns of 18.72 percent. Without much surprise, that hot performance has seduced both retail and institutional investors to pile in. And for that reason, gold offers an interesting case study in human behavior.
What’s particularly sinister about gold’s rise is that people who have no business owning it, have now made it their only holding. This is quite common among retirees, who for the most part, have income generation as their principal investment goal. Yet, precious metals offer no income source or dividends to speak of. Then why do so many retirees have all gold portfolios? I don’t know the answer, ask them.
Whenever precious metals (NYSEArca: GLTR) crater, these individuals are sure to get crushed. And they’ll have nobody to blame but themselves.
Before you can get your money right, you first need to get your mind right. This undying truth was made clear in the movie Cool Hand Luke.
The prison warden said to prisoner Luke, “You ain't gonna need no third set 'cause you're gonna get your mind right. And I mean right.” In the end, Luke never got his mind right and paid dearly.
Building an all ETF portfolio with exposure to the all the major asset classes is a winning formula and ETFguide’s Ready-to-Go ETF Portfolios prove it. Our Strategic Balance ETF Portfolio is ahead by 1.66 percent, the Contrarian Fox Portfolio is ahead by 8.02 percent and the Generation Growth Portfolio is up by 3.50 percent year-to-date. Over the same period, the S&P 500 has fallen almost 8 percent.
Good investment results don't happen by accident and good things come to those who mindfully build to their portfolio mix. It’s an important first step in getting control of your money.