Investment Help

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Friday, April 2, 2010

"1st Quarter Returns 2010" addendum

The Biz of Life has posted "1st Quarter Returns 2010" which shows that a very well diversified portfolio of ETFs achieved a return of 4.26% for the quarter based on Morningstar data. This is worth spending some time looking at and, I believe, is very valuable information. Again, the portfolio is very well diversified. It uses funds indexed to the REIT market, to small cap international, international fixed income and munis, along with more basic ETFs. In all, 15 different indexed funds with their respective weightings are shown.

There are 2 small typos in the data : the VTI fund returned 6.04% rather than 6.4% and VSS returned 4.5% not 4.55%. Also, the ticker symbol for the Wisdom Tree fund is DLS not WLS. These results do not affect the conclusion:  the fund achieved a return of 4.25% for the quarter.

Here's my first question:  What was your return for the first quarter? If you are typical, you'll throw up your hands and say it will take you at least a week, if not longer, to get a number. In fact, you may not be able to come up with a number at all.

Here's my second question:  If you have your money professionally managed, how much did it cost?  I'll help you here. The lowest cost fee-only registered investment advisor will charge you 1% of the market value of your assets. So if your portfolio was $1.0 million, you would pay ($1.0 * .01) / 4 = $2,500. And most people would be glad to pay that because it looks very complicated to set up this kind of portfolio. For the record, I would charge a lot less and seek to show you how to manage it yourself; but that's detailed in other parts of this blog.

The fee you pay your advisor is only part of the story. If s/he is using mutual funds or, even worse, funds of funds, at least 1.4% is coming out before the results are even reported to you. If you are in actively traded funds, there are trading costs piled on. The cost of the index funds examined in the post, on a weighted basis, was .27%!  Not 1.4%.  So, if your advisor's returns are less than 4.25%, it is not necessarily that they are poor performers but could be because of the fees that are taken out all along the line.

Here's the news:  for the first time in the history of markets, small investors can easily get well diversified in many areas of the domestic and global markets at a low fee without a lot of trading restrictions thrown in and worries about capital gains taxes because of active trading.

If you are satisfied that your advisor is a great stock picker or market timer, then by all means stick with him or her. At least, now you have a benchmark to compare them to.

For the record, I want to emphasize that the data here is from sources judged to be reliable but, obviously, cannot be guaranteed and any errors  here are solely my own.


  1. Thanks for catching my errors. :-)

    The conclusion remains the same.

  2. I like dealing with specifics. People in the blogosphere like to debate whether the market is efficient or the merits of tactical asset allocation philosophically. Hey, I say let's get a benchmark and see if the benchmark can be beaten.
    Really good portfolio by the way. More selections than I typically use but tilted toward small cap etc. in line with evidence showing that small cap actually provides excessive risk adjusted performance over time.