This section is intended to provide additional resources or information for investors. Investment topics include: typical advisor and broker fees, Michael O’Higgins’ “Beating the DOW”, diversification, 100-year rule, re-balancing, trading around a position, and buying the dips.
BLOOMBERG – An Investor’s Guide to Fees & Expenses 2014
- Real estate purchases include sales commissions of 6% to 7%.
- REIT’s charge sales commissions of 0.5% to 3%.
- Some mutual funds charge 12b-1 fees (sales commissions) of 0% to 5%.
- Hedge funds charge annual asset management fees of approximately 1.5% + 18% of any gains.
- Financial Advisors charge annual asset management fees of approximately 1.25% to 2%.
- Actively managed funds charge annual asset management fees of approximately 0.65% to 1.35%.
- ETF’s charge annual asset management fees of approximately 0.5% to 1.5%.
- Index funds charge approximately 0.1% in annual asset management fees.
- Discount brokerage firms typically have flat fees of $5 to $10 per trade.
Related article: Advisor Fees
Beating the DOW (Michael B. O’Higgins, 1992 & 2001)
- Up to 95% of professional money managers underperform the market averages.
- 75% of stock funds and money managers underperform market index funds.
- Equity long-term total returns are better than those for bonds.
- Equity long-term total returns are better than those for real estate.
- Equity long-term total returns are better than those for gold.
- Blue chip companies tend to be survivors…Blue chip stocks are usually safer investments than other kinds of stocks.
- “Historically, dividends have accounted for 40 to 50 percent of the total return on the Dow stocks as a group…”
- “The fact that dividends are the driving force in the blue chip segment of the market and that there tends to be a high level of consistency to dividend payments by such companies explains why our yield strategies are not only singularly effective but quite conservative.”
- “Eventually I concluded that by periodically applying a few simple criteria to this small group of 30 top blue chips, I could achieve better results with less risk than the majority of independent money managers and mutual funds with their complex investment strategies.”
Beating the Dow is available from Amazon
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Diversification is typically used to provide balance or stability in a portfolio and may include both equity and non-equity positions. Diversification helps to dilute the negative impact of a specific sector or investment position downturn. Insufficient diversification can put a portfolio at higher risk. The worst case would be holding only a single equity that becomes worthless, wiping out your entire investment. Nearly everyone has heard the quote: “Don’t put all of your eggs in one basket”. This is prudent advice for all but the most aggressive investors. So, why would you want less diversification?
In some ways, diversification can be viewed as a double-edged sword. Despite the added protection provided by diversification, aggressive returns are often not achievable with high levels of diversification. This is because the odds of every stock performing well will diminish as the number of stocks in a portfolio increases. A market index such as the S&P 500 provides a large amount of diversification but, as you might expect, is a benchmark for average market performance. Our research has revealed only a 4.5% annual total return from 2000 to 2016.
Some consider an investment portfolio containing at least 10 stocks representing roughly each of the 10 market sectors is a well-diversified equity portfolio. Others have proposed that equity portfolios should contain 25 or more stocks in order to provide adequate levels of risk protection. In the end, diversification preferences vary from investors and should be based upon the investor’s risk tolerance, portfolio size, age and investment goals. Most investors reduce risk as they get older and there is less time to re-build a significant loss of investment.
The model portfolios contained in the Dividend Total Return Strategy were developed with 7 levels of equity diversification:
– DTRS P-1.4 Portfolio (1-2 stocks)
– DTRS P-2.2 Portfolio (1-3 stocks)
– DTRS P-3.4 Portfolio (1-5 stocks)
– DTRS P-5.7 Portfolio (2-8 stocks)
– DTRS P-7.3 Portfolio (3-10 stocks)
– DTRS P-8.3 Portfolio (4-10 stocks)
– DTRS P-9.4 Portfolio (6-10 stocks)
Please note that these 7 portfolios are not diversified by sector and are intended for investors with moderate-to-high risk tolerance and investors wanting to add performance to an existing investment portfolio. The DTRS P-1.4, P-2.2, P-3.4, P-5.7, P-7.3, 8.3 and P-9.4 Portfolios are the intellectual property of EG Financial, LLC (Copyright 2017).
The 100-year rule in investing:
Often, investors ask the question: “How much of my investment should I hold in equities?” An old rule-of-thumb is the rule of 100. Under this rule, the percentage held in equities is equal to 100 minus your age. Someone 25 years of age would hold approximately 75% of their portfolio in equities. Someone 65 years of age would hold approximately 35% of their portfolio in equities. While this simple approach seems to make sense, some advisors have proposed that this rule needs to be updated to 110 or 120 to account for the aging population and the risk of running out of money in retirement. If you are unsure about what makes sense for your needs, you may want to consult a financial planner.
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Despite the potential performance dilution that results from diversification, there is a way to get a performance boost of up to 4% annually when combined with another simple strategy…re-balancing. Re-balancing is a simple way to enhance the performance of a (partially) diversified investment portfolio. This can be done annually or after a significant run-up in a particular stock.
Let’s take a simplified look at the basis behind re-balancing. With the assumption that all stocks in a portfolio are equal, one could assume that each stock selected using a particular strategy has an equal chance of rising or falling. If one stock runs away from the pack, what is the likelihood that this runaway performance will continue? By re-balancing, you are locking in some of the gains of your stellar performers and investing more in your laggards. Odds are that your lagging stocks will eventually start to outperform the previous high-flyer.
This principal works in reverse if you re-balance after significant declines in a stock as long as the decline is not the result of problems within a particular sector or stock. Please note that the DTRS approach incorporates a systematic annual re-balancing.
Below is an example of how re-balancing can increase the collective investment performance:
During the 44-year back-testing for the model Portfolios, I observed that the annual total returns increased by 0.7% to 3.7% as a result of annual re-balancing of the portfolios.
Note for Taxable U.S. Brokerage Accounts: When re-balancing, consider the holding period of a stock. Long-term Capital Gains (held longer than 1 year) will likely be taxed at a lower rate than Short-term Capital Gains (held 1 year or less). If you trade in and out of a particular stock and you incur a loss from a sale, you should also review the IRS rules on wash sales (a.k.a. the 31-day trading rule) as you may need to wait 31 days to re-buy the stock if you want to deduct the loss on your taxes. Consult your accountant or broker about your specific situation.
Trading Around a Position:
Trading around a position is an investment strategy endorsed by Jim Cramer of MAD MONEY. This basic concept involves first selecting a core stock that you want to buy and hold. If the stock price drops significantly and there is no change in the fundamentals of the stock, the investor may want add to the current holding by buying more of the stock at a discount. Similarly, if the stock price rises significantly and there is no change in the fundamentals of the stock, the investor may want to lock-in profits by selling a portion of the current holding.
Example: If 1000 shares is the target holding of a particular stock, possible trading ranges might be 250 to 1000 shares, 750 to 1250 shares or 500 to 1500 shares. One footnote when adding to a current stock holding, Cramer recommends buying at a price which lowers the overall cost basis of the stock in the portfolio.
Buying the Dips & Selling the Pops:
Once you have decided to employ the strategy of “Trading Around a Position”, you will need be observant of how the stocks in your portfolio are trading in the market. Throughout each trading year there are often multiple drops (“dips”) or rises (“pops”) in a particular stock or market index. Changes of 5% or more are often enough to capitalize on. A series of small investment gains added together can generate significant end-of-the-year returns.
In early 2016, crashing oil prices and fears of a China slowdown took their toll on US equities with a correction in the U.S. markets. Between December 29, 2015 and January 20, 2016, the DJIA dropped from a high of 17750 to a low of 15540 (-12.5%). Three months later, the DJIA had recovered its losses by rising to 18167 on April 20, 2016 (+17.6%). For investors with money sitting on the sidelines, this market correction turned out to be a great buying opportunity which potentially earned them 15% or more in just 3 months.
In late June of 2016, Great Britain was voting to decide whether to pull out of the European Union. This vote created uncertainty in the markets. Between June 23rd and June 27th, the DJIA dropped from a high of 18011 to a low of 17063 (-5.3%). After the vote, the DJIA quickly recovered its losses by returning to 18002 on June 30th (+5.5%). For investors with money sitting on the sidelines, this sudden drop turned out to be a good buying opportunity which potentially earned them 5% in just 3 days.
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