Getting More From Your Core
The “core” represents the largest portion of your investment portfolio and as such, has the biggest impact on your returns and whether or not you can reach your financial goals. Indeed, many think the core is too important to risk losing, so they protect it by keeping it in “risk-free” investments that barely keep up with inflation. This is a good strategy if your goal is not to lose money. But if your portfolio is not already big enough to meet your financial goals, investing in risk-free securities pretty much guarantees that it never will be.
If you want your portfolio to grow, it usually means investing a good portion of your core in stocks.
One common approach to the core is to use an index fund that mimics a market benchmark such as the S&P 500. Advocates of this approach say that the S&P 500 index has averaged about 11% a year over the past 70 years, so they feel comfortable using it for planning purposes. But so far this decade, those who invested the core of their portfolio in an S&P 500 index fund have averaged less than 2% a year and they are now far behind plan.
Alternatives For Your Core
At the end of 2007, we screened Morningstar's database to put together a list of mutual funds whose current managers have a 5-year track record of beating the S&P 500 with a diversified portfolio without making big bets while protecting the downside in bear markets. Out of almost 11,000 mutual funds only 16 of them met our criteria, and we were proud that our mutual fund is among them! Click here to download the PDF of the report.
Why are there so few good core funds?
It is the nature of investments that good ones start out under-valued and end up over-valued. In order to perform well over the long-term, a portfolio management team needs to be able to exit stocks, and at times whole sectors, when they become over-valued. But few fund managers can bring themselves to pull the trigger when it means selling the stocks they know best. The fact that they might also have to change their investment style and their analyst team increases their inertia. But, the truth is that if a portfolio management team cannot sell their favorite stocks when they are over-valued, their shareholders will at some point need to fire them.
When you have 500 skilled investors from which to choose, and the flexibility to change the team at any time, it changes how you think about an analyst team. We have seen over and over again that the people who understand an industry best are those who have significant firsthand experience in the industry. The problem is that no one has firsthand experience in all industries. Consequently, as industries and sectors move from under-valued to fully-valued to over-valued we have learned to adjust the team.
We have more flexibility than any other firm to change the analyst team to adapt to the market’s changing opportunities. The one thing we know for certain about the market is that it will change. The more the market changes, the bigger the advantage we believe our flexible team will have over other active funds with a static team and index funds with a static list of holdings.
The reason so few core funds exist is because no single investor has the expertise to do well in every industry. Consequently, in order to provide diversification and still have a chance to outperform the S&P 500, you need more than just one skilled investor, you need a team. That’s why I would rather have the m100 as my team instead of just hiring the one person with the best track record. Because we have so many skilled investors under contract with us, we are better able to run a core fund than almost any other firm.
The Acid Test
The acid test of any core fund is whether clients get a better return than an index fund. Since November 5, 2001, we have put this strategy to the test by using it to manage a mutual fund. I cannot say much about the fund here, however, I can give you navigational links to the information you need to determine if this strategy passes the acid test. Click here to go to Morningstar. Click here to go to the fund's website.