Do you own a portfolio of stocks and bonds and wonder why your portfolio has not grown over the years. The answer is simple The charges you paid in acquiring the funds and maintaining them are eating into your returns. 75% of mutual funds underperform their benchmarks. Moreover, you probably invested after the market, or the fund had a big run up and you were impressed with their past performance. Except that markets always pull back after a run up. Now you have to wait for it to recover to your initial purchase price and then start growing. The drop may take place over several months and then you need more months to recover. And you also need your investments to rise to recover the fees and charges. Exchange traded funds are a simple and effective way to track the markets. They trade like common stocks. You can buy and sell them anytime. Here is a simple suggestion for a U.S. centric diversified portfolio with minimal costs to you and will track closely U.S. stocks and bonds markets:
- SPDR S&P 500 (symbol SPY) 50%
- I Shares Russel 2000 (symbol IWM) 10%
- I Shares 20+ Treasury Bonds (symbol TLT) 30%
- I Shares 1-3 years Treasury Bonds (symbol SHY) 10%
I am underweighting the fixed income component (from 50-50) because the expected return from bonds and cash are below their historical standards.
Markets rise over time, but they do have periods of weakness. When the bond market corrects, it is usually between 10 and 20%. Stocks are more volatile. The worst we have seen in the last two decades has been around 50% ( crises times). Such market correction are ideal times to invest or to add to investments. You must not wait for extreme decline, because they typically happen once in a decade. When a market drops 5-10% from its high is usually a good time to buy, prudently. My indicators are still positive on the U.S markets and therefore I do not expect any sharp declines in the next 12 months. Should I detect any changes in the underlying fundamentals, I will post an update.