There are two extremely good reasons why your portfolio may not be "performing" (whatever that means) either as well as you would like or as well as your buddies say that they have been doing. But let's define our terms before digging any deeper. None of you have done as well in the equity market as investment-grade value stock investors.
Most of the time, investors are content to observe the steady growth of their portfolio, as income and (unrealized) market value gains add to their ego-friendly asset base — this while the ebb and flow of the markets remains in a relatively boring "trading range." They can see the steady progress being made toward the goals that they established for their portfolios.
Long-term-successful investment portfolios must have both reasonable goals and a plan for moving in their direction. For them, performance is a measure of this movement toward objectives, and it is generally considered a long-term, personal proposition. Income securities are expected only to produce dependable income, and equities are expected to produce growth in the form of realized capital gains.
Unfortunately, Wall Street has created its own definition of performance, one that has nothing to do with the structure and design of your portfolio. Actually, it's difficult to find an investment house that has the courage to encourage the development of an individual equity portfolio.
The idea that an investment portfolio can contain any number of unrelated speculations without itself being speculative is the stuff that Wall Street's alternative investment purveyors are selling. True investment portfolios need none of this, and the numbers prove it true beyond any doubt. There is no need to fight or to counteract the market cycle, which is what alternative speculations try to do.
Easily managed, goal-directed investment portfolios should contain both equity and income producing securities — each with their separate purposes within the portfolio, and each with their own unique reactions to the same economic, political and market stimuli.
Portfolios based on quality, diversification and income keep themselves pointed in the right direction by taking the greed, fear, speculation and derivatives out of the equation.
From mid 2006 through mid 2007, IGVSI investors experienced upward-only account statements — actually, they had experienced a seven-year positive trend that had propelled their market values forward four or five times further than the major averages during the same period.
The IGVSI, a true blue-chip index, didn't fall as far as the DJIA or S&P 500, and has risen to new all time highs far sooner. IGVSI based portfolios, long-term, have done better by far than the dot-com-replacing ETFs, precious metals, and currency futures.
Alternative speculators have a creed that seems to read: "I'm going to jump in at the end of every new trend, gimmick, product and hot number so that I won't ever miss out on anything — and I'll never realize a profit because of the tax implications." Is that what you did in 1987, in 2000, in 2007?
No, of course you don't know that it's the end of the current run up. But it's month 26 of the rally and neither you, your mutual funds or indices, the Dow or the S&P 500 are anywhere near their levels of October 2007.
When investors start to question why their Municipal bond portfolios are trailing the gain in the Dow, or when retirees start to buy gold bullion instead of groceries, something is wrong. And it's the same ole stuff that produces the greed and fear that leads to investment-program-destroying mistakes every time!
So let's look at the performance of the indices to gain some perspective.
The Dow is comprised of just 30 stocks, no bonds, no CEFs or ETFs, gold, currencies or foreign companies. Those 30 stocks are not quite as special as you have been led to believe: few are A+ rated, 60% of the Dow stocks are rated A - or lower and some are not even considered investment-grade. While the Dow remains 12.3% below its 2007 high, the IGVSI surpassed its ATH in February and is at rest more than 5% above that level now.
The S&P 500 contains 165 more stocks than the IGVSI, but less than half are investment-grade value stocks. Although it is more broad based, it is also more speculative, and has not done as well as the DJIA. Still 14.7% below the 2007 high, it would need to gain another 17.2% just to claw back to its 2007 level.
Neither the DJIA nor the S&P are yet in positive territory for the past 12 years. Still, most investors, speculators, gurus and novices are mesmerized by these mystical illusions of portfolio analytical capability. The Dow is worshiped as the Numero Uno blue chip indicator, yet it contains stocks that don't qualify for the IGVSI. Wall Street brainwashing is an amazing thing to behold.
And then there is the abundance of greed food on the Wall Street menu, always designed to make you uncomfortable with what you own and desirous of the new stuff that's ever so tasty. Index funds propel some stocks to higher valuations while others wind up begging for attention.
This is the same spiel people, the same scenario, which propelled the no-value "sector" to prominence in the late 90s. Passive index funds will crash eventually; the more speculative "multipliers" will be banned. What will survive?
Value stocks will survive. Municipal Securities will survive. REITs and CEFs will survive. When will it happen? Will you be safe(r) this time down?
Author of: "The Brainwashing of the American Investor: The Book that Wall Street Does Not Want YOU to Read," and "A Millionaire's Secret Investment Strategy"
About the author:
sanserve (at) aol.com
Professional Portfolio Management since 1979
Author of: "The Brainwashing of the American Investor: The Book that Wall Street Does Not Want YOU to Read", and "A Millionaire's Secret Investment Strategy"