Strategic and Flex Portfolio Performance Through November 2014

Here are the Strategic and Flex portfolio performance #s as of November 30, 2014:

US and Foreign Indexes		3 mo	1 yr	3 yr	5 yr	10 yr	2008
Stock Markets (50-40-10)		-0.4%	8.3%	15.7%	10.9%	7.1%	-39.7%
S&P 500		3.7%	16.7%	20.8%	15.8%	8.0%	-37.0%
MSCI EAFE		-4.0%	-0.2%	11.9%	6.3%	5.1%	-43.4%
US OE Diversified Emg Mkts		-7.4%	0.5%	4.6%	2.5%	8.7%	-50.0%
Barclays Agg Bond--US		1.0%	5.3%	3.0%	4.1%	4.8%	5.2%
Barclays Agg Bond--Global		-3.1%	0.7%	1.2%	2.0%	3.8%	4.8%
Aggressive		-0.2%	7.5%	14.9%	10.3%	6.5%	-36.3%
90 Flex V		0.9%	6.5%	11.9%	9.8%	9.3%	-19.1%
90 Strategic II		0.4%	7.0%	16.2%	13.5%	9.2%	-34.0%
90 Schwab index		-0.3%	6.7%	15.1%	11.7%	7.1%	-35.2%
WealthFront 9		-1.3%	7.3%	12.4%	9.5%	7.4%	-38.0%
Moderately Aggressive		-0.3%	7.0%	13.4%	9.6%	6.5%	-32.0%
80 Flex V		0.7%	6.3%	11.4%	9.6%	9.2%	-16.9%
80 Strategic II		0.5%	7.0%	15.0%	12.6%	8.9%	-30.0%
80 Schwab index		0.0%	6.8%	13.8%	10.9%	6.8%	-32.1%
Moderate		-0.5%	5.9%	10.4%	8.0%	6.0%	-23.1%
60 Flex V		0.5%	6.3%	10.9%	9.5%	9.1%	-13.1%
60 Strategic II		0.3%	6.6%	12.6%	11.0%	8.3%	-23.9%
Goldman Sachs Income Builder		-1.2%	6.1%	11.8%	10.5%	6.7%	-23.3%
American Funds Balanced		1.7%	9.2%	13.5%	10.6%	7.2%	-28.1%
60 Schwab index		0.4%	6.9%	11.3%	9.5%	6.1%	-25.6%
Moderately Conservative		-0.6%	4.7%	7.4%	6.3%	5.5%	-13.3%
40 Flex V		0.6%	6.7%	10.7%	9.6%	9.1%	-13.1%
40 Strategic II		-0.1%	5.1%	9.3%	8.4%	7.1%	-16.2%
40 Schwab index		0.6%	6.3%	8.4%	7.7%	5.3%	-18.8%
Conservative		-0.8%	3.5%	4.4%	4.5%	4.9%	-2.5%
20 Flex V		0.2%	6.4%	9.9%	9.2%	8.7%	-5.2%
20 Strategic II		-0.2%	4.3%	6.4%	6.2%	5.9%	-8.1%
20 Schwab index		0.7%	5.5%	5.4%	5.6%	4.3%	-11.7%
Asset Allocation		USA	x-USA	Bond	Cash	Other
20 Flex V		15%	5%	46%	30%	4%
20 Strategic II		12%	5%	54%	26%	3%
40 Flex V		30%	10%	30%	26%	4%
40 Strategic II		23%	11%	42%	21%	3%
60 Flex V		37%	15%	20%	23%	4%
60 Strategic II		36%	17%	29%	16%	3%
80 Flex V		48%	20%	7%	20%	5%
80 Strategic II		46%	24%	15%	12%	2%
90 Flex V		55%	22%	1%	17%	5%
90 Strategic II		51%	27%	9%	10%	2%
NOTE 1:  Past performance is no guarantee of specific future results.  This data is presented by Potomac Wealth Strategies, LLC.  This data is from Morningstar and should be accurate, but it has not been independently verified.
NOTE 2:  "Flex", "Strategic", and "Index" models are crafted and run by Potomac Wealth Strategies, LLC.  They show history of better returns, lower volatility, or both--or, in the case of the Index models, close tracking--compared to their benchmarks and popular competitors.
NOTE 3:  "XX Schwab index" models are low-cost portfolios.  They are comprised of index funds available free of transaction charges to my clients at Schwab.  This is what many might recommend due to low-costs and portfolio efficiency.
NOTE 4:  Nothing on this blog post represents investment advice to any individual or organization.  If the information hereon is of interest to you, please contact me at Garo.Partoyan@PotomacWealthStrategies.com for a consultation.

Index Funds vs. Actively-Managed Funds: Which Is Better?

I often write about this in e-mails.  Now I'm blogging about it again, as a couple of clients have raised the issue of "index funds" recently...

 

Mutual funds come in basically two varieties:  actively-managed (the normal kind), and passively-managed (the so-called "index" funds).  I prefer actively-managed funds--but only great ones--for most of the portfolios I craft for my clients.

Actively-managed funds are run by a manager (usually with a team, or sometimes a team of several managers and their staff of traders and analysts).  The fund, as directed by the manager's strategic portfolio plan, will invest as well as it can in the area(s) of focus.  For example, the Yacktman Focused Fund I use a lot aims to invest in stocks of large, well-run, financially-sound American companies that are trading at prices below what the fund thinks is "fair value".  If it does well, like Yacktman Focused fund has for a long time, the fund will outperform the benchmark index to which it compares itself (the S&P500 index, in this case).

But actively-managed funds, as a category or breed, usually do not outperform the benchmark.  Estimates are that ~80% of actively-managed funds fail to beat their benchmarks--successful investing is not easy, and the costs of running a mutual fund eat into the hard-fought outperformance a successful manager achieves.  So, many investors and advisors feel the better choice is to simply "invest in the benchmark".  Well, we can't actually buy part of an index, but "index funds" replicate their target benchmark index very closely, and well-run index funds can do so with efficiencies and economies-of-scale that make the funds very low-cost.

Fund performance data is reported net-of-fees (not my advisory fee, mind you, but net of the funds' internal management fees).  So when you see Yacktman Focused Fund compared to, say, the Vanguard 500 Index fund, it should be comparing apples to apples (net of fees).  If Yacktman has beaten Vanguard by 3.15% per year over the past decade, that's accounting for the 1.25% annual internal fee Yacktman takes and the 0.17% fee taken by Vanguard 500 Index fund.  So the Yacktman Focused Fund has a 1.08% fee differential to make up for just to be even with Vanguard 500 Index fund.  Since Yacktman beat Vanguard by 3.15% per year net of fees, it means the managers actually outperformed by 4.23 percentage points per year over that 10-year span.

That kind of cost-justification is the bottom-line that should be sought by investors and advisors.  Of course, if 80% of actively-managed funds don't cost-justify like that (or anywhere near like that), then it's a good bet to go with an index fund...  unless the investor, or their advisor, knows how to find the funds that are likely to cost-justify.

I use actively-managed funds.  I'm one who enjoys the research/vetting part of this job, and I have great tools/resources to help me.  I believe I find the best actively-managed funds for each category and put together portfolios that beat their benchmarks over most or all significant time periods.  Hence my "80 Strategic II" portfolio for moderately-aggressive long-term investors, for example.  It has the following track record compared to its "blended benchmark" (proportionate amounts of the S&P500 and other indexes for bonds and for foreign stocks):

Span      80 Strategic II   ModAggr Benchmark

3mo         0.46%             -0.32%

1yr         7.00%             7.01%

3yr         15.02%            13.41%

5yr         12.64%            9.61%

10yr        8.94%             6.45%

2008 crash  -30.02%           -32.03%

2009 rebound +41.45%          +23.56%

No guarantees this will continue, but the point is that finding and using the few actively-managed funds that do outperform over the long-haul has been a better choice then using index funds.

But for those who don't know how to find the right funds, or for retirement plan administrators that want to play it safer (not risk offering a bunch of funds that turn out to be underperformers), index funds are appropriate tools.