While most of us like to chase higher returns by moving and leaving stocks, ETFs and mutual funds, a few, perhaps smarter investors create a diversified portfolio and just let it work.
It is human nature to try to outperform the market by trying to pick ten tenants or connect to economic growth in India or Brazil. Undoubtedly, high returns are achievable, and the gloomy performance of broad indices such as the S&P 500 has disappointed most passive investors over the past few years.
Although we offer investors six model ETF portfolios, one of the most popular is our “Gone Fishing” portfolio, which was part of our Starter Kit ETF and hasn’t changed at all. It contains 14 ETFs ranging from iShares COMEX Gold (IAU) to an ETF that tracks the S&P Global 100 (IOO).
30% of the portfolio is allocated to three fixed income ETFs such as iShares Lehman Aggregate (AGG), 20% to broad and regional international ETFs such as iShares MSCI Pacific Ex-Japan (EEP). 20% of the portfolio is allocated to U.S. stocks, well balanced between small-cap, medium-cap and mega-capitals.
How did you manage with this simple and balanced portfolio? In 2005, it rose 11.43% against less than 5% for the S&P 500, and this year it rose 6.3% vs. 2.97% for the S&P 500. The key, of course, is the right combination ETFs, so failures are likely to be offset by sectors on fire.
ETFs provide investors with the best tools to build a “Gone Fishing” portfolio because they are low in cost and tax. The weighted annual portfolio fee is 0.58%, and there has been no allocation of capital gains for the iShares family of ETFs for the past four years.
But for those adventurous souls who crave thrills and profit from the pursuit of higher returns with commensurate risk, ETFs are also a good tool. Country-specific ETFs are often highly concentrated due to market capitalization weights, and ETF sector funds also offer exciting but challenging opportunities. ETFs can also be short, and options are available for many.
The Chartwell Global Tactical Asset Allocation ETF service and portfolio ($ 1995 per year) contains a more limited number of ETFs and closed-end funds and does not shy away from risk. Thailand (TF) and Brazil (EWZ) are the two current holdings, and the portfolio grew 23% this year, surpassing the S&P 500 index by a 7 to 1 advantage.
Whether you are a fishing investor or more aggressive and trading-oriented, ETFs should be in your set of investment instruments and can complement stocks and mutual funds well. Make sure you spend most of your portfolio on a diversified conservative portfolio to protect your capital and always have time to fish throughout the day.