Portfolio strategy has been a big focus for us lately here at CrushTheStreet.com. Having a mix of large cap, mid cap, and small cap stocks is optimal when going for the safest exposure for the highest return. Today we are simply encouraging our members to take control of their financial portfolio. Sticking with financial planners and full service-brokers that are getting paid and losing you money is nonsense. We all are capable of losing money on our own, and don’t need to pay someone else to do it for us.
In the portfolio mix strategy, having exposure to broad sectors in the forms of index funds, dividend paying stocks, and large cap companies would fall in the conservation percentage of one’s portfolio. We tend to focus many times on speculative day trading opportunities, but today we are focusing our attention on these areas.
The majority of people who aren’t financial professionals depend on mutual funds and financial planners to invest their money and hopefully see it doing well over the long-term.
The problem, however, is most mutual funds underperform the market or their benchmark index. In 2012, the S&P 500 was up 16%. According to Goldman Sachs, 65% of large-cap core mutual funds rose less than 16%.
In 2011, a mind blowing 84% of mutual funds underperformed the index. Over the past 10 years, the average number is 57%. That means in any given year, you have less than a one-in-two chance of being invested in a mutual fund that simply keeps pace with the market. And for the privilege of likely not making as much money as you should, you get to pay the funds a management fee that reduces your returns even more.
Sometimes, you’re even forced to pay a load, which is a fee just to enter the fund. For example, some funds, often bought through brokers, come with loads as high as 4.75%. So if you give the fund $10,000 to invest, it takes $475 right off the top and only invests $9,525. It’s going to be tough to beat the market when, on day one, you’re down nearly 5%.
Even if in the past your portfolio has been crucified by the large Wall Street institutions, you can still achieve solid returns over the long term.
Here are three steps for resurrecting your portfolio:
1. If you want to stick with mutual funds, own index funds.
They are much cheaper to own and will only cost you a few tenths of a percentage point. Plus, they tend to outperform their more actively managed peers.
For example, let’s say you want to invest in emerging markets. The Vanguard Emerging Markets Index Fund (VEIEX), a member of The Oxford Club’s Gone Fishin’ Portfolio, has an expense ratio of just 0.33%. Compare that to the average emerging market fund fee of 1.64%. Over the past 10 years, the Vanguard fund’s annual return has averaged 15.89%, nearly half a percentage point better than the average of all funds in the category.
If you invest $10,000, the Vanguard fund saves you $131 in fees per year. Doesn’t sound like much, does it? But if you’re saving that money every year and the fund returns 15.89% like it has historically, that’s an extra $3,220 in your pocket over 10 years.
2. Take control of your money.
If you use a full-service broker or financial planner who does nothing but buy and sell investments based on what inventory his bosses tell him to move, or what stocks his firm’s analysts rate a “Buy,” you need to close your account as fast as you can.
A broker or financial planner who understands your needs and really works with you to achieve your financial goals can be well worth the fees you pay – especially if you don’t like to do the work yourself. If the advisor helps you sleep better at night, stick with him or her.
Unfortunately, many brokers and advisors are more like the one described in the first scenario. They are salesmen, and the widgets they happen to sell are financial advice and products. If you suspect that describes the person you’re working with, save yourself a bunch of money and frustration and move your money somewhere else.
3. Invest in conservative stocks that grow their dividends every year.
By purchasing and hanging on to stocks that I call Perpetual Dividend Raisers, you slash your fees. (You can buy stocks for $10 or less with most online discount brokers.)
Perpetual Dividend Raisers are stocks that grow their dividends every year, which gives you an annual raise as the dividends increase. Those dividends help you ride out a bear market as your dividends make up for some declines in stock price – plus, dividend stocks tend to fall less during bear markets.
By investing in stocks that raise their dividends every year, over time your yield increases, and what starts out as a 4% or 5% yield eventually becomes a 10% to 11% yield.
Those kinds of yields alone will be enough to beat the market in most years, regardless of how much the stock price climbs.
Since no financial messiah is coming to save your portfolio, consider taking these three steps to save yourself boatloads of money and improve your performance.
Look out for our wrap-up that we will release on Saturday instead of on Friday in observance of Good Friday.