ITA Wealth Management

Photograph: Tibet guide (left) with local Lhasa woman carrying her prayer wheel. For those who cannot read, the prayer wheel is a substitute.

“Until he died at age 83 in 1997, Charlie Steadman burned through investors’ assets at a rate unseen in the fund business since the Great Depression–and, we hope, never to be seen again. His last years running inaptly named Steadman Technology & Growth are illustrative: returns of-5% in 1992, -8% in 1993, –37% in 1994, -28% in 1995, –30% in 1996 and -28% in 1997. (The overall stock market rose each of those years.) Just one of his four funds had a positive long-term record–and only by a hair.” So writes Steven T. Goldberg in the May 1999 issue of “Kiplinger’s Personal Financial Magazine.”

Steadman was not alone in racking up a poor performance. He just did it with style. Robert Arnott, Andrew Berkin, and Jia Ye studied mutual fund returns over two decades ending in 1998. During the twenty years covered by the analysis, the average mutual fund underperformed the S&P 500 by an amazing 2.1% per year. The 15-year deficit was 4.2 percent per annum and the 10-year deficit was 3.5% per annum. Those numbers hurt.

Step back and think for a moment. Combine the Arnott et. al. study with the Fama-French and Heartland Advisors results and the problem compounds. How? 1) The S&P 500 is made up almost entirely of large-cap stocks and we know that is not the strongest performing asset class since it is a highly efficient sector of the total market. 2) The S&P 500 is a core or blend holding that includes both value and growth stocks. Remember that the Fama-French study told us to overweight value vs. growth.

Taking all this information into account, if one builds a passive portfolio where value is overweighted compared to growth and small-cap is overweighted compared to large-cap or the S&P 500, one increases the probability of outperforming the S&P 500 as well as more than 80% of actively managed mutual funds. With not too much effort, we can construct a portfolio that will do better than we can do by selecting a top performing mutual fund by chance.

Here is a site that lays out several simple portfolios. What is missing in all these portfolios is the application of research showing value outperforms growth over the long run. Of course, one always runs into the problem of defining value.

http://seekingalpha.com/article/27167-lazy-etf-portfolios-inspired-by-the-gurus

While these portfolios are interesting they also have another drawback and that is, all are too heavily weighted in bonds. If one can possible manage it, keep the percentage in bonds to a minimum. Buy manage it, look elsewhere for income. Will you have a pension when retirement arrives? Will you collect social security? Remember, not everyone collects SS. If you can live off your pension and social security you will not need to depend on the income from your savings. It is then possible to look at the portfolio more in terms of an endowment fund. The annual payout need not be as high.

The “Lazy Portfolios” are designed more to provide a lifetime of income and are therefore set up quite conservatively. Even so, there should be greater weight place on value oriented vehicles such as the following ETFs - IVE, VTV, IJJ, VOE, IJS and VBR.