Sunday Musings: When Less Is More

Occasionally, I have written about the lack of investment choices in 401k plans.

While I manage a number of these, most are with Fidelity and have a wide variety of fund selections although many still have no access to ETFs.

Even though ETFs are all the rage, are you really disadvantaged by not having them available?

To offer a different viewpoint, let me share with you this experience about a client who works for a Fortune 500 company.

When I first took over his 401k account 5 years ago, I was simply flabbergasted when I saw the investment choices. Given the type of company he was employed by, I expected to see, well, a wide variety fund selection covering all of the major markets.

When I logged on to his account, I was downright shocked. The entire 401k plan consisted of the following:

1. Short-Term Fixed Income Fund
2. Growth Equity Fund
3. International Stock Fund
4. The Company’s own common stock

That was it. Additionally, the growth and international selections were not modeled after some well-known mutual fund, but unidentifiable as far as looking at long-term historical trends was concerned.

To me, this was about as skinny as you can get when it comes to fund choices.

Here’s the surprising outcome.

When our international TTI signaled a Buy on 5/11/09, I decided to use my incremental buying procedure by allocating 1/3 of this portfolio to the International Stock Fund. The fund rallied nicely and, 3 weeks later, it had gained over 5%, so I allocated another 1/3 increment. Subsequently, the domestic TTI signaled a Buy and I invested the remaining 1/3 into the Growth Equity Fund on 6/3/09.

The markets bobbed and weaved, especially in July, but the international fund holding never pulled off its high enough to generate a whip-saw signal. Neither did the Growth Equity fund.

As a result, this portfolio has grown over 20% (for the period 5/11/09-11/13/09), matching the S&P; 500, despite the incremental buying process. While the sell stops were in place at all times, we only got as close as -5% at one point.

Here’s a portfolio that had nothing going in terms of investment options, yet it outperformed (much to my chagrin) all others, which had more investment choices in mutual funds, ETFs, sectors and countries.

This is clearly a case when less can be more, certainly in terms of results. It underscores the point I have made before that less volatile funds/ETFs have advantages when used with trend tracking, because they tend to avoid whip-saw signals.

With the intention of the investment world not only being focused on ETFs but also on providing a mind numbing number of choices, it may behoove some investors to review the sometimes casino like behavior that this can promote.

Scale back on volatility and look for a few steady performers because, as in this case, slow and steady has a good chance of winning the race.