Stocks and Mutual Funds versus Index Funds

On a daily basis, I review portfolios of stocks and mutual funds from clients and readers. What strikes me most about all these portfolios is that I rarely come across one that has done better than the market. A large part of the problem lies in their choice of investments. When I say “the market”, normally I use the S&P 500 Index as a benchmark. Sure, there are other indexes I can use, ranging from the Dow Jones Industrial Average to a basket full of regional and global indexes, but most pros use the S&P 500 as the market proxy. The truth is that it is notoriously difficult to beat the market and do so consistently. “But what about Apple?” protests one recent client, who has owned this darling of Wall Street for several years. “It has beaten the market hands down every year.” True enough, Apple, along with a number of other individual stocks, have done better than the market for a year or two or even three, but they have not done so consistently year after year. And even though Apple has done better than the market, I have yet to see any equity portfolio with just that one investment. Normally, Apple is just one of many investments in the portfolio. When all these returns are combined, the gains of an Apple are offset by losses in other stocks. The risk in holding individual stocks is twofold. One, if you hold comparatively few stocks and one or more blows up, your portfolio will suffer dramatically. If, on the other hand, you have a large stock portfolio it...

This Fund is a Winner

From time to time, a really interesting fund will come to my attention. One such fund, the ETF Market Opportunity Fund (ETFOX), has chalked up some impressive returns over the last several years and appears ready to offer investors a rewarding and safe ride out of this recession. Better yet, the manager, Paul Frank, is a local boy living with his family in Old Chatham, New York. Paul, 46, manages his $12 million fund from his colonial farmstead nestled beside one of the many roads of rural Columbia County. It hasn’t been easy for Paul but in May of this year he will have a five-year track record which will be the envy of many fund managers. His fund is already gaining attention. For those who aren’t familiar with Exchange Traded Funds (ETFs) please see my column “Exchange Traded Funds have Come of Age. In brief, an ETF is an index fund that invests in a set number of stocks, bonds, currencies or commodities that mimic whatever index they target. Once established, they don’t change so an investor who buys a share receives approximately the same return as the underlying index. These securities have been around since 1993 and have been my investment of choice for more than 16 years. Over the last few years a handful of managers around the country have created what are called Funds of Funds. These are mutual funds which invest in a portfolio of ETFs but their results have been spotty at best–except for ETFOX. Over the last 14 months it has ranked in the top one percent of 1,800 large -cap growth...

Inverse Securities—How to protect your Portfolio in Down Markets

Traditionally, investors run to cash or bonds, preferably Treasury bonds, when the stock markets decline. They exit, waiting on the sidelines, hoping to re-invest at the lows. Sadly, that strategy has proven to lose investors more money than if they had done nothing. Yet, no one wants to suffer the pain of watching their portfolios go down month after month. My advice is to hedge your investments in dire times like these with inverse exchange traded funds that protect your portfolio in downturns. Exchange traded funds are index funds, which mean they invest in a set number of stocks, bonds, currencies or commodities that mimic whatever index they have targeted. If their underlying index goes up so does the fund and vice versa (for those unfamiliar with ETFs, please re-read my March column “Exchange Traded Funds have Come of Age” for further background on these securities). An inverse ETF does the opposite; it goes up when the markets and sectors go down. Inverse or “short’ ETFs are available on various worldwide indexes including all the major ones here at home like the S&P 500, the Dow and NASDAQ. You can also hedge yourself with various sector and style funds. They are liquid, trade just like stocks and do not require large investments in order to hedge a portfolio. Granted, you can accomplish this same purpose by the more traditional method of selling shares of stock short but that involves borrowing money and stock from your broker, establishing a margin account (similar to a loan), paying an interest charge for the privilege and receiving margin calls when the stocks you...

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