2/7/2014 7:45 PM ET|
6 reasons your investments stink
Have you ever looked under the hood of your mutual fund? Many of them suffer from a common set of problems.
Wouldn't it be great if there were an investment portfolio you could just forget about? Wouldn't it be great if you could free yourself from the madness of the market and go fishing?
Some people -- including, naturally enough, many MarketWatch readers -- are fond of playing the great game of the financial markets. But others just want to leave their money to work for them quietly.
I have a personal interest in this. I have come to accept that I cannot manage my own portfolio and write actively about the markets. There are strict rules keeping one's personal holdings a million miles from anything one writes about (and quite rightly so). This means I have to give my best tips to my readers, and then I can't buy them myself.
I've decided I just don't want the stress of managing a portfolio, either. Yes, I think a well-run portfolio can beat the market over time. But to do that you need a free hand. And you need to manage it actively: You need to be able to pounce on stocks, sectors, and even markets, when their price falls too far, and sell those that have risen too high.
So I have come to decide I just want to join Main Street and put my money into those fire-and-forget portfolios.
But then I started looking at them, and I came to a harsh conclusion: All the options on offer are fundamentally flawed. They're rubbish.
That includes "target date" funds. It includes managed portfolios by most financial planners. It includes those cookie-cutter "smartest portfolios" you sometimes read about. It even includes index funds.
I'm not even talking about the failings of "active management" -- the fact that most active, stock-picking mutual fund managers end up underperforming their own benchmarks. I'm talking about the new low-cost stuff as well.
Why are they inadequate?
1. They are not geographically diversified
Check out any target date fund and you'll find that 80 percent of the stocks they own are U.S. stocks. The U.S. accounts for about one-fifth of the world's total economy. Why should it account for most of my stock portfolio?
Even the people running these funds know this is silly. At a dinner a couple of years ago I sat next to the chief of the target date fund operation at one of the biggest fund companies in America. I asked him why nearly all their equity exposure was in the U.S. He sighed. "Because that's what the customers want," he replied.
2. They are not diversified across stocks
Have you ever looked under the hood of these "index" funds and exchange-traded funds? The marketing departments of the fund companies claim that they are giving you the maximum diversification, what in Wall Street jargon is sometimes called "the market portfolio."
But it's hooey. Most of these funds are massively overweighted toward a handful of individual stocks, simply because those are already the most popular and "valuable." A fund tracking the Standard & Poor's 500 Index ($INX) has a fifth of its money in just 10 stocks. It puts 100 times as much of your money in Apple (AAPL) as it does in, say, Owens-Illinois (OI). That is not diversification. Indeed these funds automatically invest more in the more popular and fashionable stocks.
There is a great deal of research which says that an "equal weighted" portfolio -- for example, one that just holds the same amount in each of the S&P 500 stocks -- will beat these skewed funds over time.
3. They don't understand asset allocation
I am tired of people telling me to put all my faith in that standard panacea, a "balanced" portfolio of stocks and bonds. Bah. Since 1982 stocks and bonds have both gone up together most of the time. And guess what? If they can both go up together, they can both go down together. That's what happened in the 1940s and the 1970s. People who entrusted their money to this simplistic "balanced portfolio" malarkey got royally hosed. Thanks, but no thanks.
4. They hold too many bonds, and the wrong kind
They own too many U.S. Treasurys, and too many short-term bonds paying bupkis -- deadweight in the portfolio. They own too few zero-coupon bonds (the best insurance against a stock market crash), too few foreign bonds and too few from countries -- such as Norway, Australia and New Zealand, and certain emerging markets -- with the best credit.
5. They don't include other assets in a sensible manner
Do I need some gold or gold-mining stocks? Timber? Commodity futures? Natural-resources stocks? Inflation-protected securities? If I need commodities, how do I protect myself against getting absolutely hosed on the fees or trading costs? The one thing I know: By the time the money managers work it out, it will be too late.
6. They miss out on the low-hanging fruit
For example, there is a lot of research showing that over time cheaper "value" stocks, and those of "high-quality" companies, have produced better returns, with lower risk, than other stocks. It is highly likely this is a persistent feature of the market, based on the flaws in market psychology. Give me a simple portfolio that exploits that.
I'm on a quest to construct the perfect "all-weather" portfolio. Stay tuned.
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When the rubber meets the road, really the ONLY thing holding up this house of cards is that fact that the dollar is the reserve currency of the world, and we can print money and borrow money from others based on that reserve status.
Given our level of debt, that is a very shaky foundation at best. If a few major players start heading for the exits and decide they will no longer lend to us, or declare that some other form of currency is now going to be their reserve, we are going to be in a heap of trouble. We will look like any other broke country in very short order.
The sad part is that until we went off the gold standard, the USA was a creditor nation. Today, we are the biggest leech on the planet, thanks to our politicians who use our own money to buy our votes to keep them in office. Unfortunately, there are still too many who live in a delusional fantasy world where this debt will never have to be paid back, or believe you can just grow your way out of it. That would be fine but for the reality that the spending of the politicians far outpaces whatever historical averages of growth are reasonably possible.
We now have a byzantine Federal Government structure where the tentacles of that monster entrap every state in the union with the goodies provided by that massive debt. Everyone wants the the debt to be addressed.....as long as they don't have to give up the Federal Government jobs, projects, grants, and agencies in their state.
This attitude of let someone else take the hit, because I don't want it to hurt our state, is going to be what finally brings the house of cards down on all of us. I haven't voted for an incumbent in over a decade, because all of them want to keep growing the amount of Federal debt money buying goodies in their state, so they can keep getting re-elected. Except for the few of us out here who refuse to vote for incumbents, we will have done it to ourselves. Few politicians have the courage to tell the truth and say "stop!! we are going over the cliff"....they are all too worried about getting re-elected. And unfortunately, the people are all too willing to comply.
Unless we make drastic changes to our economic structure, we are within a generation of total collapse. You can not tax your way out of this and keep spending at these levels. If you think you can, you may as well scream at your children and tell them you hate them, because they will be the ones who will be left responsible for dealing with your selfish ignorance.
America is set up to become an Economicly Segregated Country. This generation of politicians have single handedly SOLD our country to the rest of the world for a one-time personal profit to the greedy. All of our jobs are over seas because of trade agreements that have benefited corporations and ignored the "people" of this country. The only sector creating jobs right now are the resource companies. Otherwise all our money is being sent to China, Mexico, ect ect... with none coming back in. The QE's only replenished our cash holdings to what they "should" be, at the cost of enormous debt. This is why inflation hasn't happened. We were short on money because we have been blowing it oversees.
If Washington really cared about this economy, it would close the boarders. Not only to trade with other countries, but also the money flowing south from all the cheap illegal labor we have become addicted to. Yet the Corporations run the lobby groups, who buy our representatives, who write backdoor and eartag laws into our system, completely unknown to "we the people".
Look at what percentage of Washington representatives leave office to work for these lobby groups, for medical companies, for oil and gas companies, coal, insurance companies, investment companies. You should be Outraged. Some go work for the same company they were against in office. Some go work for companies they were personally investigating. The conflict of interest should be ILLEGAL, yet is completely legal. No one is standing up against them... only sitting in these comment rooms, and blogging. No one is organizing rallies or sit-ins. No one is marching on them... Everyone is expecting someone else to do it....
It's a sad time for this country.
O.k. I'll get right to work on my tin foil hat.
Granted. It's bad. Study history. Crashes and disasters are as old as the human experience.
Somehow we always muddle through.
And if not? Then it's random chaos. Might survive. Might not.
Prepare best as you can.
And try to relax a little once in awhile. SHEESH.
WTF? I dont manage my OWN money but I am going to write an article telling YOU how to do it...
Does this kids Momma know he is playing on the internet again??
That just ignores the FACT that the other Major countries are actually in worse Shape than us. The entire premise of these types of naive arguments is just plain nonsense. Yet we hear it on a daily basis. Go ahead and ignore the far worse issues in Russia, Japan, China, and the Euro-zone. If we go down, they go down with us, that is how things will play out, regardless.
The poster also conveniently decided to ignore the Record Wealth but the Record Poverty issues. Not surprising seeing how clearly he preferred that GM and Chrysler failed. Every other Country is doing everything in their power to makes sure there Auto Industry survives/strives but some Americans are doing just the opposite. Yet they call themselves true Americans, true to what I would ask. Certainly not to Christian Values and Certainly not to the values of the Constitution.
The Reason America has seen such success is also the reason it's buried in Debt. Our Fiat Dollar has allowed us to print and tax our way to prosperity. That's right, having the ability to basically print to infinity has allowed us to Build the Most Advanced Military to ever Exist. That in turn has allowed America to enforce it's will and Fiat Dollars wherever it chooses. Naive just wants to ignore this Reality and focus on Government and certainly not Corporate Greed.
We have seen Record Wealth Creation for both Corporations and a small segment of SuperRich individuals. But instead of focusing on the problems of the Great Wealth Divide, it's easier for the usual suspects to focus 100% on Government when they are hardly 100% of the problem. That's why it's so easy for the same bad charcters to get reelected. The Corporations can always buy any Government official and they have. Both parties are Bought and Paid for but keep thinking otherwise.
While it's true that you can't get out huge Debt issues if you never address far too excessive Waste and Corruption, it's not entirely true otherwise. The Global Powers as we speak have colluded for quite some time on these issues of Global Debt. More folks would know that if they actually paid attention to what's actually happening.
If you address Waste and Corruption, it's still not too late to Grow our way out of it. But that will never happen because of unfettered GREED from basically everyone. Everyone has their hand in the Cookie Jar but Everyone wants to blame someone else.
Never pay it back, well actually it would not surprise me in the least if that happened eventually. The FED could monetize the debt. We just don't know the after effect of such an event. The more likely thing to happen is that all Major Players monetize the Debt and that begins the start of a New World Order and a New World Currency. That's what Big Money wanted all along. If you doubt that, look at the Global Nature of the Biggest Companies. If you doubt that, look at where most of the Revenue comes from and or is expected to come from in those same Companies.
So while the usual naive suspects sit back and whine about Government ONLY, the Government Masters are well along the way in creating their Global One World Currency and Government. And yes, your Kids will yell and Scream at you for one, not seeing it coming, and two, not doing anything about it.
This ship will "Sink" Not stink..
Wall Street and the CEOs have never gotten "RICHER,, FASTER" then ever before..
With "Fed Chairman Yellen" Sorry about that "Chair Person Yellen"
Stating " For Now, the Fed will stay the course and continue on the path Bernanke has set".
We have another year of low subprime,
fake money running amuck
an artificial rise in stock price (due to company stock buy back policies),
a zero return on bonds (government buy back of 75 billion dollars monthly)
a unlimited ceiling debt (17 trillion dollars and climbing)
no defeasance for spending
and the outcome remains inevitable...
Sooner or later "You have to pay the piper"
The Bear is our of hibernation,, only it's wearing a "Muzzle"
The Stock Market is still an iceberg
waiting to break apart after "Government Intervention" fails..
We fed the Bull and the Bull just Dumped on the Working Man.
No increase in production,
NO JOBs.... Just Downsizing and Reductions..
Profits have soared, infrastructures have been left to crumble due to lack of attention.
And the gap between the have and the have not has widen farther then ever before..
So, don't worry if you think it smells a little bit, the real stinker is yet to come..
Diversify and buy survival foods, basic necessities including guns and ammo. They'll have more value than precious metals, stocks and the dollar when a collapse that's likely to happen sooner than later occurs.
Our debt is and failing financial situation is no longer sustainable with the Fed Reserve reflecting that in their rollback of QE's.
The biggest problem is not who benefited in the Short TERM but what are the Costs of getting us here. That is a discussion that only a Mental Midget would avoid. Fatty certainly fits the bill. It rarely makes posts even worth mentioning but this one deserves far deeper thought. That's something fatty simply doesn't have the ability to do.
When Wealth is created at the expense of others, sure you might take advantage but you hardly brag about it like some have. The Global FEDS have intentionally attempted to force Seniors into Stocks by artificially lowering RATES. That's not Free Market Capitalism.
Uncle Ben has harmed the long term survival of both the Social Security and the Medicare Trust Fund as they depend on interest income from Government Treasuries. More so now than ever before due to the Stolen Trust Funds replaced with a bogus IOU.
When you have $500-700Trillion in Scam Banking Derivatives and you have printed $4Trillion in fake money yet never solved the original problem, that's a major problem moving forward. Most sensible folks would think that's important. We have to think more than 5 minutes from now but 15, 25, etc years from now. Not Getting Jacked on Crack-Dollars now since it could well Kill us all later, some folks think that's whining. Most sensible folks would call that commonsense.
In America people say I think....Free enterprise is the best system, I think ...social security is
in trouble, I think....medi-care is in trouble etc. This saying people have never thought. They are not
confident that their idea is true and going to work and solve the problem. Hence they talk like weatherman.
arizona55:The market has doubled since Obama has taken office and you think he`s the problem.
What drugs are you on?
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[BRIEFING.COM] The stock market ended the Thursday session on an upbeat note with blue chips showing relative strength for the second consecutive day. The Dow Jones Industrial Average (+0.4%) and S&P 500 (+0.3%) settled ahead of the Russell 2000 (+0.2%) and the Nasdaq Composite (+0.1%). It is worth mentioning the benchmark index posted its fourth consecutive gain, registering a new record closing high at 1992.38.
Equity indices climbed out of the gate thanks to early strength among ... More
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