Mutual Funds

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).

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]

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.

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.

From the beginning of 2013 through the first five months of 2014, the MSCI Frontier Markets Index was up > 50% while the MSCI Emerging Markets Index was flat. Frontier countries such as Bulgaria, up 91%, Pakistan, up 88%, and Nigeria, up 47%, had strong returns over this 17-month period. Research now shows these markets may not be as unstable as suspected.

Since the 2008 stock market collapse, investors have been dumping money into alternative funds. The objective of these funds is decent returns, with limited risk; a pattern of returns not positively correlated to stocks. Alternative fund categories include: long/short equity, market neutral, managed futures, bear market, and multi-alternative (multiple strategies).

There is no standard definition of a small cap stock. The methodology used deciding what stocks are included in a small cap index can result in significant return differences. As of the middle of 2014, The S&P SmallCap outperformed the Russell 2000 for 12 of the last 19 years. The Russell 2000 has been tracking small caps for 30+ years; the S&P SmallCap 600 has been around for 19+ years.

S&P SmallCap 600 vs. Russell 2000

According to a May 2014 WSJ article, after 30 years, a $200,000 mutual fund investment (8% gross annualized return) grows to $1.4 million after paying the typical mutual fund annual fee of 1.25%. This was the average expense ratio for mutual funds for 2013 (source: Morningstar). The same investment grew to $2.0 million if annualized returns were the same but a 0.04% annual expense ratio (source: ETF.com).