How have your investment returns compared to these “professional” results-average bank trust department, seven-eight percent; very large private money managers, nine-18 percent; and insurance company asset management, six-14 percent-over the past five years? These are not imagined rates of return. They are representative results achieved by professional managers over a five-year period. It is true some have done much better during the roaring bull market of the past several years. Unbelievably, others have done ever more poorly. Why such mediocrity? Many reasons. Two oft-quoted ones are excessive administrative costs and inept investment managers.
My contention is that you can beat the professionals at their own game, and do it handily. Your commitment of time and effort will be minimal (minutes per week) and you can do it using the world’s dullest investment: no-load mutual funds! By following simple guidelines you can attain annual gains of 30 percent over any five-year period, or 51 percent over any 10-year period. (Both those percentages represent 20 percent compounded annual return.)
WHY MUTUAL FUNDS?
Forget the tarnished image earned by mutual funds during the 1960s. Many smart people bought funds and were burned. Principal weaknesses of the failing funds of the 1960s-high cost, the lack of performance information and inexperienced managers-have been eliminated. Mutual funds have come a long way.
The high cost of purchase has been replaced by literally hundreds of no-load (no commission) funds, without any deterioration in performance. In the past, the friendly salesperson and his firm got a hefty slice of your savings, usually eight and a half percent, before the remaining 911/2 percent went to work. That means that the fund had to grow 9.3 percent for you to break even.
No-load funds are successful because they do not employ marketers. You must buy direct from the fund, using the toll-free telephone number.
Performance information was generally unavailable years ago. Investors did not concern themselves with track records in those days, probably because they were not available. As it happened, some of the best selling funds of the ’60s were the worst-performing. Computerization and lightning-fast communications have prompted regulators to require complete public revelation of each fund’s performance at the end of each business day. If you pick a nonperformer now, it is because you simply have not checked public records.
I’d like to emphasize that one major reason for investing in no-load mutual funds is in the public availability of their performance record. Many professionals, such as individual stock brokers, bank trust departments, private money managers, and insurance company asset managers, do not provide a standardized accounting of their performance, so it becomes difficult to check their performance claims. Not so with mutual funds. Inexperienced managers have been replaced with highly paid and highly motivated stock pickers. Many fund managers earn yearly incomes in the $500,000 range. Mutual funds can easily have $500 million to $1 billion in assets and can attract the very best talent to make investment decisions.
When you purchase a front-running mutual fund, top talent goes to work for you. Only the super wealthy can directly hire that caliber of investment manager.
There are two ways to approach successful investing in no-load funds-better and best.
The better method is simplicity itself. Select a low-volatility, low-risk fund that enjoys excellent yearly growth (Figure I lists two of my current top recommendations.) Then practice dollar cost averaging, which is a simple and highly effective path to asset growth. It requires regular contributions, in constant dollar amounts, regardless of market conditions. This tactic succeeds because you are buying more shares when the market is down, and fewer when the market is up.
This may not be the most sophisticated strategy, but even with this low-budget tactic you will do better than most professionals.
THE BEST TACTIC
Here is a method that will certainly outperform the majority of professionals. First, a few facts: History shows that the best-performing funds tend to stay at or near the top for several months at a time; no fund does well all the time; and no matter what the economy is doing, there are always some funds that continue to advance, such as international, gold, bond, or money market funds.
I call this “switch to the leader strategy.” It is aggressive, automatic and high-reward. It is so simple to implement that my clients usually say, “Anything that simple can’t work.” Oh, but it does. It involves only two steps: Identify the fund that is currently leading the pack, and switch to it. There is inexpensive help available to accomplish both of those steps.
Identifying the fund could be difficult if it were not for several excellent advisory services that do the green-eyeshade work for you. Figure II shows a partial list of several services I have found to be excellent. They are well worth the subscription cost. Five minutes per week is all it takes to complete this first step of identifying the front-runner funds.
Switching to the leader is not difficult. A toll-free phone call requesting application forms and prospectus, plus a call to your old fund manager giving instructions to liquidate all shares is about all it takes. Switches occur two to five times per year.
If keeping track of events and all the attendant paperwork is something you dread, there is a recent development you will appreciate. Charles Schwab & Company has launched their Mutual Fund Switch Service. You can now, with a single toll-free phone call, instantly move from one fund to another. Or move from mutual funds into a money market fund. No mail delays; no papers to shuffle. Just one statement at the end of the month. And very low cost.
The figures I have at hand indicate a fee of about $238 per $100,000 of mutual fund value. And this is paid only on the sale. Unlike normal brokerage transactions, which incur a cost for both purchase and sale, the Schwab service charges a fee for only the sale. The purchase of the new fund is without cost.
This Schwab mutual fund switch service is a major new service for investors. Nothing similar has ever been made available to anyone, at any price. I consider it a powerful tool, easily used and highly effective.
Can you imagine a day at the race track where you were able to continually change your bet as the race progressed, moving from one horse to another as each moves into the lead? There’s no doubt you’d finish in the money that way!
Switch-to-the-leader will easily beat most professional investors, and give you 50 percent-plus in annualized gains over a 10-year period. It does away with the need to study markets. It is highly efficient and cost-effective.
IS THERE ANY MORE UPSIDE IN THIS MARKET?
Some may hesitate to become involved with equity-based mutual funds, thinking that this bull market is of Geritol age and due to fade away. That simply is not the case. The fundamental building blocks are in place for a Dow advance to 3600 and beyond. Strident contrary voices only add to the probability.
Consider the following favorable factors: Foreign ownership of U.S. equities is growing, but is still low. Bond funds contain even more cash than equity funds. There is still plenty of merger activity. Secondary issues have yet to participate, and improved earnings keep stock prices advancing.
Standard & Poor’s 400 profits were up 26 percent in the second quarter and further acceleration is evident. Even the appearance of a golden economic age will keep the market going for a year or more.
The dollar is stabilizing. Presidential elections always have some influence, but this coming election could be characterized by the expression, “No new ideas, please.” The U.S. is full of people who are doing very well, or doing quite a bit better than well. “Don’t make waves,” could well be the theme of the winning candidate.
There is excess cash to invest. Mutual funds are 10.1 percent in cash and cash equivalents. The single most reliable market-timing tool over the last three decades has been cash in mutual funds. It indicates a rising market for at least a good number of months.
It’s steady as she goes, well into the next decade. Take advantage of it with the world’s dullest investment-mutual funds.
Stuart F. Barnes is a principal of Siebar Capital Management, a New Orleans-based investment management company. He was formerly a vice president of Prudential-Bache Securities.