Every so often you find a reporter’s story analyzing a fund manager’s portfolio or coming up with his own (in theory, of course) group of mutual fund/ETF holdings allegedly suited for all seasons.
You can recognize this by psychologically appealing names such as “The Lazy Man’s Way,” “Gone Fishing,” or other esoteric ones indicating that this certain portfolio combination is all you need — and you won’t ever have to worry about it.
This happened again a few days ago when a reporter interviewed and analyzed a well known money manager’s portfolio (over $20 billion under management). Apparently, his approach is to hold a variety of 11 inexpensive Vanguard Index funds allocated in certain percentages. Nothing wrong with that.
Investment returns were given for 2006 (about equal to the S + P 500) and over 3 and 5 years, where he outperformed the S + P 500 handily.
Since all ticker symbols and percentage allocations were listed, it would now be easy for the casual reader to imitate this portfolio with the assumption that, the way it was presented, this is a portfolio to duplicate and forget.
That’s the problem I have with this scenario. Fund managers and mutual fund companies are chomping at the bit that 5-year return figures are now showing some positive numbers (without the bear market), with a 5-year reporting period now covering 2002-2006.
Let me make it crystal clear. As great of a performance as this above portfolio has shown over 3 and 5 years, it was a big loser in the last bear market!
How do I know? I plugged in the numbers. Here’s how I did it. As you know, my trend tracking methodology had us on the sidelines in cash from 10/13/2000 until 4/29/2003.
To see a comparison, I applied the closing prices for the funds using the dates above in combination with the Vanguard portfolio. What a surprise! It turned out that this portfolio lost exactly 30% during the dates specified while the S + P 500 lost 33%.
The best portfolio component gained 17%, while the worst one lost 46%.
In Wall Street’s perverse thinking, a loss of “only” 30% is great, because the S + P 500 lost 33%. That’s one way to outperform the S + P and earn recognition among peers.
My point is, be careful when you read these stories. Don’t ever assume that there is a portfolio for all seasons. As much as we all would like one, it doesn’t exist.