Investment Help

If you are seeking investment help, look at the video here on my services. If you are seeking a different approach to managing your assets, you have landed at the right spot. I am a fee-only advisor registered in the State of Maryland, charge less than half the going rate for investment management, and seek to teach individuals how to manage their own assets using low-cost indexed exchange traded funds. Please call or email me if interested in further details. My website is at If you are new to investing, take a look at the "DIY Investor Newbie" posts here by typing "newbie" in the search box above to the left. These take you through the basics of what you need to know in getting started on doing your own investing.

Thursday, February 23, 2012

Is Your Portfolio Down Over the Past 5 Years?

Potential clients are coming to me more often complaining that their portfolio is down over the past 5 years or so.  They wring their hands and express wonderment that they are essentially feeding a trough that is shrinking in size.  Some point out that they would have done better just putting their funds under a mattress.

Naturally this got me to go back and look at market performance for the past 5 years.  To do this, I used one of my favorite data sources--the BlackRock Sector Returns chart.  I first looked at the BlackRock diversified portfolio - one of my favorites because of its low volatility and nice fit for a wide range of risk tolerances and ages.  It is comprised of 35% Barclay's Aggregate Bond Index + 10% MSCI EAFE Index + 10% Russell 2000 Index + 22.5% Russell 1000 Growth Index + 22.5% Russell 1000 Value Index.  These indices are all well known and represent broad parts of the relevant markets investors should be invested in.  Furthermore it can be replicated with low-cost index funds.

So how did this portfolio do over the past 5 years?

2007 +6.0%
2008 -22.8%
2009 +20.8%
2010 +13%
2011 +1.8%

The portfolio increased by 13.7% over the period, for an average annualized return of +2.6%.  Admittedly not a great return, but at least it keeps up with inflation and is well ahead of the paltry rates on short-term Treasuries and money funds.  Importantly, it was not negative - like the returns experienced by the potential clients (many of whom added contributions over the 5 years!) who appear on my doorstep.

So how do they end up with negative returns? After all, someone, somewhere steered them towards high performing funds!  Actually, funds that were purportedly the "best of the best" at one point in time.

The answer is obvious to regular readers of this blog.  The impact of high-fee advisors putting clients in high-expense funds that trade aggressively has been explored on numerous occasions.  Research clearly shows there is no consistency to superior performance.  In fact, the odds are that the best-performing funds of the past 5 years will underperform over the next 5 years! It  reminds me of a young boy I saw at an Easter Egg hunt one time. T he kids would call out "there are eggs over here!" and he would run over.  By the time he got there, the eggs were gone.  Sad to say, at the end of the hunt, he had few eggs to show!

The interesting observation here is not the eggs - it is the impact on portfolios during periods where market returns are not robust.

My job is to get clients invested in low-cost well-diversified funds.  For most clients, it is fairly easy to learn how to manage a portfolio structured along the lines of the diversified portfolio mentioned above. As far as I know, no one else offers to show the novice investor how to structure and manage a low-cost indexed portfolio.  This approach avoids high management fees, expense ratios, trading costs, etc.  It gives the best possible chance of matching the returns shown.  Alternatively, some clients have me manage the assets on an ongoing basis.  This costs 0.4% and would be subtracted from the annual returns. 

The bottom line is that investors who are scratching their heads and wondering about negative performance over the past 5 years should reconsider their investment approach.  They are like the boy wondering why he ended up with so few eggs.  Sadly, many are throwing up their hands in frustration and exiting the market completely - a mistake ,in my opinion!

Disclosure: T his piece is solely for educational purposes.  Individuals should do their own research or consult with a professional before making investment decisions.


  1. Very accurate analogy with Easter eggs! Indexing comes with one other advantage - simplicity. What you hear in the news everyday won't force you to keep checking your portfolio.

  2. Nice take on losing money in the market. What gets me is the idea that theirs two ways to go stocks or some kind of fixed income investments. Preferred stocks and convertble preferred stocks are securities that are really a mix between equities and fixed income securities sort of like a combination of the two. Fidelity investments has a convertable securities fund and its got a great track record. Its level of risk is lower than just a plan old equity fund but its performance is just as good.