- How do you pick your funds?
- Do you have something against funds with loads?
- Why don’t you invest in individual stocks?
- Which is more important, asset allocation or fund selection?
- Why are you so heavily weighted in stocks?
- How often do you add or change funds?
- You have a lot of stock funds … do you really need that many?
- Why do you have so much invested in Health Care sector funds?
- Do you count your home in your real estate holdings percentage?
- Do you count insurance as part of your investment portfolio?
- You don’t have many non-taxable bond funds – why?
- You seem to like corporate bond funds – why?
- You have 30% of your portfolio in International
Equities. Why such a high percent?
- Why are your international holdings weighted so differently between geographies?
- Why do you have “commodities” funds in your portfolio?
- Are hedge funds a missing component of your portfolio?
- How has your portfolio performed over time?
- How tax efficient is your portfolio?
- How do you expect your portfolio to change in the next 10 years?
- Where did you learn about investments?
- Do you use a financial advisor or brokerage firm to help you manage your portfolio?
First, I decide what that fund is supposed to represent in my overall portfolio – what type of fund I’m looking for. Then, I will typically use several on-line mutual fund screener tools to develop a list of possible fund candidates. There are many basic free mutual fund screening tools at Morningstar, Yahoo, E-trade, Forbes, etc. I only consider no-load funds from significant fund management companies. Once I have a list of possible funds, I research each fund individually. There are many things I look for, but key are: consistency with stated fund goal, last 5-year performance, stability of the fund manager, expense ratios, 12b1 fees, performance against industry benchmarks, Morningstar rating, and overall fund size. Evaluating all these factors, I make a final fund selection.
Yes. Less than 10% of load funds beat the market over any significant time period. And those funds that do tend to change over time. For a 10% chance of beating the market, you get to pay much more in commissions and charges, thus reducing your overall return. Plus, load funds tend to trade more frequently, making them less tax efficient. Tons of research continues to show that investors end up with better overall returns investing in no-load funds versus those with loads. So I eliminate load funds from consideration.
Risk, complexity, and time. Unless you know something specific about an individual company (thus having a market advantage), you are taking on more risk buying individual stocks versus doing a great job of asset allocation and selecting solid mutual funds. Mutual funds, being a combination of many companies, spreads out the risk of any one stock tanking. Of course, it also eliminates the spectacular return of picking the next Microsoft, Dell, or Google. But I don’t have the time and energy to do the real detailed research necessary to properly pick individual stocks. Also, picking and then managing individual stocks would make my personal portfolio management much harder. I have nothing against people with significantly large portfolios (who have an extra 5-10 hours a week) picking stocks over mutual funds. However, in the long-run, the majority of them will not beat a mutual fund managed approach.
I believe asset allocation is most important. If your asset types (i.e., stocks, bonds, real estate, etc.) are not balanced correctly, you are unlikely to realize the best returns for the amount of risk you choose to take. However, poor fund selection can obviously hurt. But average funds, managed in a total portfolio correctly, will produce a reasonable return for most investors. Poor asset allocation can either wipe out an unsuspecting investor, or never achieve their goals.
I’m relatively young with another 2 decades or more of earnings potential ahead of me. I also have significant fixed assets tied up in my personal home, equity business ownership, etc. So, I can be more aggressive than most investors. Stocks have produced the highest long-term returns of any asset class. By long-term, I’m measuring in 30-50 year increments. Since I can afford significant short-term swings/risks, I can put more in stocks to chase higher gains. I would obviously give very different advice on asset allocation to someone in different circumstances than myself.
I evaluate all my funds performance twice a year. If a fund is “doing poorly”, I investigate why. The first thing I do is compare it to peer funds and benchmark indices. Even if the fund is doing poorly, but the majority of similar funds are also doing poorly, I’m not going to change. Things that will make me consider changing are: “fund drift” (i.e., the fund originally said they were going to follow one strategy of investing, and they now have changed course either deliberately or by “accident”), change in fund management (depending on the reason), sudden increase in fees or underlying investment turnover, business issues at the fund management company, or unexplained poor performance. I actually do read the fund managers annual or quarterly reports, mostly to just see how they are explaining the fund’s performance and their outlook. Of course, sometimes I change funds when my own overall asset allocation strategy has changed. This may include just selling some shares from one fund and investing in another (to balance out my holdings), or selling a fund all together. I only add funds when I need some specific fund position (i.e., I need a short-term government tax-free fund) and I don’t own a fund that covers that need.
Most investors don’t need nearly the number of funds I have. I do for a couple of reasons. First, I have a personal limit of how many dollars I’m comfortable having in an individual fund and/or fund company. So, if the dollars get too high and I want to invest more, I find a very similar fund in which to invest. This would normally not affect most investors. Secondly, I do make asset allocation strategy decisions that require purchasing into a very targeted fund. Examples include sector fund choices like health care and biotech, or international choices like China. When I want to invest “narrow and deep”, then I need certain extra funds to allow me to do that. Third, my choices are sometimes limited; if I want to invest in my company’s 401K, then I may have to invest in certain funds. That adds some funds to the overall list. For most investors, 6-8 funds are probably all they need to get good diversification and basic asset balance.
I believe in mega-trends. In the 1980s, I believed in technology and owned several technology sector funds. When technology started to become a commodity in the 1990s, I eventually sold them. I believe in the overall aging of the US population, and therefore have believed since the 1990s that health care, in almost any flavor, would be a growth business for my investment lifetime. If you look at the performance of my main health care holding over the last 10 years, I think you will conclude that it has been a good investment. In the 2000s, I have started to believe that biotechnology is moving past its infancy and will become a growth industry, similar to how technology evolved and playing off the same overall aging demographic. I have therefore started to invest in that sector looking at a 10-15 year timeframe. The sector fund investing represents one of the most aggressive portions of my portfolio strategy, but it is fundamentally based on beliefs in mega-trends.
No. I actually view my home as a fixed investment. That means I don’t anticipate any appreciation, or depreciation, in my equity value. That probably sounds crazy; after all, I clearly have made significant increases in wealth when I have moved and sold my home. However, I view that as unanticipated wealth building, since I never specifically purchase a house planning to sell it. When I do personal estimates of net wealth, I do consider it, but I don’t view my home as part of an investment portfolio since it is not a viable liquid asset (unless I can get my family to agree to become homeless).
No. First, I believe almost all insurance products are poor investment vehicles. I also believe you should own insurance for it’s own use (as insurance), and own investments for their own use (to build wealth). I own plenty of term insurance to protect my family. I don’t own any universal life or variable annuity products; I believe it’s better to find outperforming investments to beat the tax burden rather than putting money into inferior investment products even if they are sheltered.
Almost all my bond holdings are in 401K or IRA accounts, and are therefore tax deferred. In general, I’m investing to build wealth. I don’t need my investments to generate income streams like I will when I retire. So, there is little to be gained in having non-taxable bond funds in a tax deferred account – I rather get the higher return and have it re-invested.
Basically because I can get 1-2% extra returns (versus government bonds) with minimal risk. If I were purchasing individual company bonds, I would feel differently since the risk would be higher if that company defaulted. But the corporate bond funds I’m investing in are only purchasing very, very highly rated company bonds. With a whole mixed portfolio of highly rated company bonds, I believe the risk is low.
In late 2005 I made a strategic decision that I wanted more of my portfolio
to be in international stocks. While I expect the US stock market to
perform well over the next 20 years, I believe it is most likely to produce
returns averaging in the 6-8% range. Higher rates of growth (>10%) seem
most likely in Asia and Latin America. Therefore, I have increased my
equity mix in international versus domestic.
I expect different things from different regions of the world at this particular time. First, you will notice that I’m still predominantly following an index approach even internationally. However, I did recently (within the last 2 years) make a strategic decision that Asia, and especially China, would produce higher growth rates and returns than most of the rest of the world (including the US). I therefore invested in growth funds based in Asia, with specific ones focused on China. Secondly, I believed that Europe would produce steady returns, and therefore followed a more value-based investment philosophy in my European fund selections. This is a point-in-time investment decision, and I may end up being 100% wrong. But that is why my portfolio weightings are currently the way they are.
Basically for diversification. Most investors probably don’t need these in their overall portfolio. But eventually, as a portfolio gets very large, it makes sense to diversify into non-equity based assets. There are lots of options: gold, art, oil & gas, pork bellys, etc. The funds I have invested in create portfolios of derivatives against basic commodity groups and inflation-indexed fixed securities. This allows me to get commodity exposure without buying options, contracts or swaps. For almost any investor, commodities should never be more than 3-5% of an overall portfolio.
Maybe. I don’t believe it makes sense to invest in hedge funds unless you are willing to tie up a minimum of $500,000 in one. That’s more than I want in such a risky investment. There are now “funds of hedge funds” that allow you to buy into a portfolio of hedge funds for relatively low amounts, but they have very short track records and I have not yet found one I believe in. In short, I’m not convinced that the risk/reward of a hedge fund is worth it to me.
With such a high amount of indexing, it will never outperform the market by any large degree. But, due to the mix of sector, international, and small-cap growth investing I have done, it has beaten the market on average the last 10 years. The most it has beaten the market was by 7%; the worst it has done was simply tied the general market indices. During 2001-2003, I would have done better in those specific years with a higher percent invested in bonds, but 2004 recovered most of that difference in asset allocation. Unfortunately, I reduced my technology weighting in 1998-2000, and lost out on the pure internet rush, but also avoided the internet bust.
About 30% of my portfolio is in tax deferred accounts; those are very tax efficient! In general, due to indexing, my portfolio is reasonably tax efficient. I don’t trade out of funds very often, which helps that situation too. The least tax efficient area is the REIT funds. I own them in taxable accounts (which was unavoidable), but that’s just part of owning REIT funds.
The biggest change will be increasing the percentage of my portfolio
allocated to bonds and other fixed rate instruments. This will be done in
relation to my age. I would expect that only 60% of my portfolio will be
in equities by the time I reach age 60.
Mostly through college. I have an MBA in Finance from Indiana University, and I took many (probably too many) investment finance courses. It also personally interested me, so I’ve spent a lot of time reading magazines and books on various financial topics. I am not an expert, but believe I’m good enough to cover the vast majority of financial decisions in my personal life.
No. I sometimes use professionals for tax or legal advice, but not for investment advice. I tend to be very distrustful of the motives of brokers and commissioned financial advisors. I realize many people have not had a formal education in finance and need advice. If you fall into that category, I would recommend a fee-based, independent financial advisor to help you create a financial plan and recommend some basic no-load mutual funds. In general, you should then invest your own money directly with a major mutual fund company (Vanguard is my favorite). Until your net worth runs into the millions, that’s all you really need.
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