A Personal Testimony from My Portfolios
I really don’t like mutual funds. In principle they’re great. An investment manager takes your money and with the best of his expertise invests in the best companies within a given sector or industry. Theoretically, you get the best investment expertise making trades with the sole purpose of making you money. The problem, however, is the mutual fund managers are typically tied to too tight a sector. For example if you invest in a small cap technology fund, the manager has no choice but to buy stocks that are both small cap and in the technology sector. If either technology or small cap companies start to sputter, the fund manger has no choice but to ride the industry or sector down.
But what about diversification? If you think the answer is diversification, then with mutual funds, you’ll buy a small cap fund, a mid cap financial sectors fund, and maybe a large cap fund. In essence you just bought a combination of several thousand companies! That’s a ludicrous amount of diversification, especially given that traditional statistics shows that a portfolio is pretty well fully diversified with only 10 different companies! So with this diversified approach, you’re basically buying the total market a few times over. And your return? It will most likely be below the total market! The reason is simple, most fund managers are required by their portfolio guidelines to hold some amount of the portfolio in cash or cash equivalence. This means you are destined to under-perform the market in every bull market, albeit you’ll beat the market in a bear season, but that means over the long run you’ll only beat the market if the stock market is lower in the future than it is today.
So what about total market mutual funds? These funds are getting closer to a good investment, but now you’re paying a mutual fund manager and his team to take your money and invest in something that you could easily do yourself.
Here’s a look at how my portfolios are doing for the year (2014 YTD). Keep in mind that I actively manage all my funds and seek to beat the market, even within my 401(k)
Stock Market as defined by the S&P500 (SPY): 12.4%
My Self Managed Portfolio: 21.8%
My 401(k): 9.4%
These are actually all very good returns mind you, but the point is, I have a terribly difficult time trying to beat the market within my 401(k) (all mutual fund options). And if I buy the total market fund, I’m simply paying someone to do a simple task that I could easily do myself.
With that said, I am still a huge fan of 401(k)s if your employer matches your contributions. In this case, I will gladly take an under-performing portfolio if it includes free money.
Jim Post Real Estate Broker is a local
Long Beach Realtor specializing in making the buying and
selling process simple, smooth, and inexpensive. Working in
Long Beach Real Estate for over 10 years, we can provide
valuable representation for any transaction. Learn More @
www.lbrealtor.com
www.twitter.com/RealtyLongBeach
Long Beach Realtor specializing in making the buying and
selling process simple, smooth, and inexpensive. Working in
Long Beach Real Estate for over 10 years, we can provide
valuable representation for any transaction. Learn More @
www.lbrealtor.com
www.twitter.com/RealtyLongBeach