In Relation to What?

Anytime that you are looking at the management of your portfolio you want to take a macro view. When you take a micro view, then this is when you get in trouble. For example, let's say you invested some money two years ago. You put a lot of thought into it and invested in a portfolio of investments which could be stocks, bonds, mutual funds, or ETF's. You have completed only one small aspect of the job.

Portfolio management is an ongoing process of research, comparison, evaluation, selling decisions, replacement buying decisions and big picture thinking. What benchmark are you using to compare your portfolio against? What expected level of return are you seeking? What type of risk and volatility are you willing to stomach? How are you going to manage your investment expenses?

Just making the buy decisions in the beginning is only a smidgeon of the portfolio management process. There is constant work to be done along the way.

Occasionally, I meet someone who picks out a time period that has a good return and then they set their expectations at that level. This is a mistake. In fact, investment performance should not be your focus at all. You probably think I am crazy for saying this, but I can prove it to you.

If you invest in an index mutual fund or ETF like the S&P 500 for example, then you will receive the performance of the S&P 500 minus the expenses and the generally miniscule tracking error of the mutual fund or ETF. That's a fact Jack! So, this begs the question, why should you be concerned with the performance of such a mutual fund or ETF if you know it is going to closely track the S&P 500? The truth is that you shouldn't be concerned at all about this particular investment from a performance standpoint. You will get the performance you seek.

On the other hand, if you bought a pool of stocks, or some actively managed mutual funds, then you have a problem. You have just made your life more complicated for one thing. For another thing, now you have to worry about that pool of stocks, or actively managed mutual funds. Is it going to fail to out perform the benchmark? Oh, by the way, what is your benchmark for a pool of stocks or actively managed mutual funds? How will you penalize yourself for failing to meet a benchmark? I doubt very seriously that you would fire yourself, if you failed at meeting a portfolio benchmark, even if you had one in the first place.

Let's take a pool of actively managed stocks, for example. How many stocks are in this pool? Is is 10? 20? 30? or 40? What is the right number? How much are the trading costs going to be? How often will you re-balance? What sectors of the economy are included in your pool of stocks? Did you cover all the major sectors of the economy? What sub-sectors do you have in your pool? Are your stocks value stocks, or are they growth stocks? Are your stocks large company, mid-cap companies, small cap companies, micro stocks or international stocks? Then, once you know what size they are, then again, are they value, or growth tilted? What percentages do you weight towards each stock? Should large company have more than international? Should small cap have more than mid-cap?

Drilling down some more, we want to know how each of these stocks act in a recessionary time period? What can we expect when the market declines? Do these stocks pay dividends? Are we reaching for dividend yields like with preferred stocks that put our portfolio at greater risk? How do they act when the market is doing well? Are we missing out on returns because we are in the wrong stocks? Are we missing out on returns because we are not in the right sectors and sub-sectors? Are we trading too much?

I haven't even covered the statistical aspect of this pool of stocks like what is the beta, alpha, sharp ratio, R squared and other statistical figures that are very, very important to know. Most investors have no idea what any of these are, but they fail to know at their own peril. Yet, people think when they make the decision to buy a pool of stocks, then they can just sit back and watch their money grow. Wrong. There is a whole lot of work that must be done to stay on top of things.

Performance is something to worry about if you are actively managing a portfolio of stocks or actively managed mutual funds. It is nothing to worry about if you are investing in passively managed, low expense index funds or ETF's, because you know that you will get the performance of the index. You see this major difference? It is a huge difference. Believe me when I tell you.

Investors who are actively managing their own portfolios in a bull market fancy themselves as "talented" money managers. Here is the grim reality. When the market goes down, your "talent" goes out the window. You will then realize that this money management stuff is a little harder than you thought. Don't be so proud of yourself when investing in a bull market. Any one can have success by throwing darts at the Wall Street Journal and investing those stocks. It takes more to be a professional. As a professional, I moved all of our clients to cash on October 6, 2008. Do you or your advisor do that? I doubt it. Did they stay in cash until May of 2009? I doubt that also. What is the difference? I am a professional with years and years of money management experiences.

If you picked 40 stocks and diversified them across all the major sectors of the economy, then guess what? You have built yourself your own mutual fund per se that is going to track the S&P 500. Congratulations! Oh, did you know that you could have just bought an S&P 500 indexed mutual fund or ETF and saved yourself a whole lot of headaches? This is the scenario if your pool of stocks performs as it should based on the sectors of the economy that each of those stocks are in. You will simply build your own mutual fund. It's kind of silly, don't you think? It is silly to put all that time and effort into building and managing a pool of stocks when you could have just purchased a passively managed S&P 500 index fund instead. Are you getting the picture now?

What if your actively managed pool of stocks under performs? Uh-oh! Now you are losing money compared to a passively managed S&P 500 index mutual fund or ETF. This not good.

I cannot tell you how many times I see people want to hold onto a small group of stocks, like 3 or 4, for sentimental or emotional reasons. If those 3 or 4 stocks make up more than 30% of your overall portfolio, then your results will be skewed by what those stocks do. Most times, they are crappy stocks or big name stocks where their major growth years are behind them. Look at your account statement. You know that what I am telling you is right. You are sitting there with a bunch of crappy stocks in your portfolio that needs cleaning up. Yet, you are not engaged to do anything about it. That is foolish.

If performance is your main focus, then I would ask a question. In relation to what? I know my plan, process and professionalism is well thought out. Is yours? Quit being so disengaged with your money. Hire a professional with (the three P's) a plan, a process and who is a professional.

Oh, by the way, I am available.

Did you read my book, Meet Wally Street. The Reason You're Stupid? Click the link in the upper right column to buy it at your favorite eBook retailer. Trust me. It is worth all three dollars and ninety-nine cents.