There are three taxable events with a mutual fund: (1) sale of securities within the portfolio, (2) the declaration and payment of dividends and/or interest from the portfolio’s securities, and (3) sale of mutual fund shares. Your clients cannot control whether or not a fund is going to sell one or more securities for a profit or loss. Similarly, they cannot stop the payment of dividends and/or interest. The third event is the only one controllable by the shareholder.
Stanford University researchers looked at if and how the number of stocks in a portfolio reduces risk. Their research showed having a two-stock portfolio significantly reduced risk.
From the beginning of 1980 through August 24, 2015, there have been just 29 instances (29/1851 weeks = 1.5% of the weeks) when the S&P 500 dropped 5% or more in a calendar week.
S&P 500 Weekly Drops of 5%+ [1980-2001]
A number of online brokers provide free online tools for portfolio construction and management. One service known for its simplicity is Motif Investments. Motif offers nine preset and commission-free portfolios; each portfolio is comprised of the same four ETFs from Vanguard and two ETFs from BlackRock (real estate and commodities).
Research from Bain & Co. found 75% of all private equity funds could “legitimately be ‘top quartile’ performers, depending on the type of data used for comparison” (source: WSJ, August 4, 2014). Services such as Preqin, Thomson Reuters, and Cambridge Associates LLC are considered to be objective sources for accurately reporting private equity performance. Professor Korteweg at USC believes high private equity returns are due to mostly luck and some skill.
The table below lists the five largest Dow bull markets as of August 14, 2014 (source: WSJ).
Longest Dow Jones Industrial Average Bull Markets
Is a U.S. stock/bond mix sufficient for most people to reach their retirement goals? Morningstar has addressed this question by creating seven portfolios, each more diversified than the previous one. Returns for the 20-year period ending June 2014 are shown in the table below. It turns out a simple 70/30 mix (S&P 500 + government bonds) is difficult to beat. Each of the seven portfolios was rebalanced at the end of each calendar year.
Portfolio Annualized Returns [all periods ending 6/30/2014]
Barclays Aggregate vs. Money Market
DJIA Bull Markets and Contrary Indicator
Financial advisors typically recommend a portfolio contain 6-12 months of cash savings to cover emergencies. Some mutual fund managers believe opportunity costs begin to outweigh possible benefits when investors hold > 10% of their portfolio in cash.
Over the 14-year period 2000-2013, the average forecaster has usually been a poor predictor as to what the S&P 500 actually returned for the calendar year, according to Birinyi Associates (see table).
S&P 500: Average Forecaster vs. Actual Return
As of June 2014, the TIPS marketplace was valued at just under $1 trillion, representing ~ 8% of the Treasury debt market. TIPS represent the only marketable U.S. debt instrument with an inflation hedge—prices are adjusted twice a year to account for CPI increases.