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Tuesday, September 9, 2014

You May Be Surprised I Agree WIth This Article

The WSJ carries an interesting article making the case for a simple 3 ETF portfolio

Many "Bogleheads"—a group of investors who favor index investing as inspired by Vanguard Group founder John Bogle —suggest a three-fund portfolio consisting of the U.S.-focused Vanguard Total Stock Market Index fund, Vanguard Total International Stock Index, and Vanguard Total Bond Market Index. Together, the three mutual funds, which also offer ETF shares, track more than 15,000 global securities.
One possible allocation is 40% U.S. stocks, 20% international stocks and 40% bonds. That Vanguard portfolio, rebalanced annually, returned an average of 7.14% a year over the last decade, a little less than the 8.07% return of the Dow Jones U.S. Total Stock Market Index and the 8.62% return of the MSCI All Country World ex USA index, and well above the 4.52% return of the Barclays U.S. Aggregate Bond Index.

You might be surprised to know that I have no problems with that advice.
As a reader of this blog can no doubt see I think there are ways to improve on this allocation: tilting the portfolio towards value stocks and holding a different mix of international and bond allocations thatn those in the instruments listed above.
But someone holding such a portfolio would be better off that probably 90% of other investors certainly better off than those that fill their portfolio with actively managed mutual funds and individual stocks.  Not only are portfolios the choice of many "do it yourselfers" they are also the portfolios many clients hold when they are wroking with a broker or advisor.,,,not to mention those that have "special products' or "alternative investments" in their holdings.
Of course there is one other requirement that is noted in the article
Experts also are quick to point out that even a simple portfolio needs tending—investors shouldn't just set it and forget it.
"The biggest pitfall [for all investors who decide on an asset mix and invest accordingly] is behavioral, when people don't want to rebalance," says Brad McMillan, chief investment officer at Commonwealth Financial Network in Waltham, Mass., and San Diego. For instance, if equities have taken a hit, you should consider buying more equities and selling off other asset classes, and "that's extraordinarily hard to do," he says.
In fact it could be argued that one valuable function of an advisor is simply to prevent...or point out and try to prevent...clients from falling into all the behavioral pitfalls in investing ...which seem invatiably to result in buying high and selling low.
One system for choosing what funds to hold in a portfolio clearly ist the right path choosing funds based on the Morningstar "stars" rating sysem.
A WSJ article reviews the record of 5 star funds
Take a list of the top-rated mutual funds from years ago—those with five-star ratings from Morningstar Inc. MORN -0.43% —and look at them now. The sobering fact: You'll see many once-proud, five-star funds have dropped to four stars, three stars or worse.....
a separate study suggests it is even more difficult for a leading fund to stay at the top: S&P Dow Jones Indices analyzed 715 top-performing mutual funds, focusing on U.S.-stock funds for the past four years through March, and found that only two stayed in the top 25% through a four-year period.
A lot of advisers, of course, think everyone should put their money in low-cost index funds because managers can't beat the market over the long term.(Put me in that camp)
But hope springs eternal (and the folk at the WSJ have bills to pay and morningstar has reports to sell).
So the article adds te following
 For those who are looking for more-active managers, though, the Morningstar data offer lots of lessons.
Seems to me the better lesson is to skip the actively managed funds.

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