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http://ebloggy.com/darinmcleanjg

But here’s the punchline — why did I pick Janus Overseas in the first place? Well while I was doing research on funds to pick, I looked through many different books and magazines listing past performance (no online searchable databases back then) and narrowed my International fund to Janus Worldwide. But when I went open an account for JAWWX, I saw the fund was closed to new investors. So I decided what the hell - pick JAOSX even though the past history (at that time) was not as good as JAWWX. Since then, Janus Worldwide has returned 6.8% compared to Janus Overseas’ 14.5%.

When I re-evaluated all my holdings late last year, I remembered this scenario and realized how much luck was a factor. All my research on what funds to pick — completely useless. Many funds I thought were good (based on past performance) ended up underperforming. Funds picked at random turned out great. So I cashed out of all those funds — if JAWWX could outperform JAOSX 87-96 and underpeform it 97-06, it could easily flip around again — and moved the majority of my holdings to Vanguard. Vanguard is missing some asset classes like International REIT, International Small Cap Value, Micro Cap Value, Emerging Markets Value, Broad Commodities and so on which means a chunk of money spent on ETFs from other companies. Usually though, my general philosophy is that if Vanguard offers a fund or ETF in a category, it will be very hard to beat them for expenses.

I’ve just moved my 401k to an IRA at E*Trade, which had a much greater selection of funds. I haven’t invested everything yet (and don’t mind moving things around if I find something better), so I will definitely take a look at the index funds Vanguard offers.

FWIW, here are the 3 tickers I’m invested in so far (about 25% each with 25% more in cash):
IWS (iShares S&P index), JAOSX (Janice Overseas), RYPNX (Royce Opportunity Fund - same as before).

All numbers I used were from Vanguard Index funds. I like using Vanguard funds as benchmarks because they show real world numbers on how you would do if you invested in the “market” versus specific stocks or funds. If your goal is to beat the market, then you should be looking at your performance against Vanguard to see your results.

Should you be worried about underperforming the market? That’s a tricky question. Yes 16% is pretty good. If you compare it to a 5% savings account, it’s great. On the otherhand, there will be losses in the future and that missing percentage of market gains could be difference between washing out a year of loss or two years of losses. For example, say the market was up 20% and you only got 10%. Next year, both you and the market were down 5%. Somebody who could market returns would still be up 10% over 2 years while 10%-5% would be 0%.

Now, I know 401Ks have limited options. Most 401Ks offer high load and/or high expense funds because they’re competing on price to the employer which they then recoup back from the employee investments. Sometimes all you can do is underperform the indexes just slightly but it is still better than never investing. Add in tax deferral + employer matching and it’s a no brainer. That doesn’t mean I can’t dream about having the full selection of Vanguard and DFA funds in my 401K.

On benchmarks: I’ve been benchmarking against the S&P, which returned 15.8% last year. So my mutual fund returns are in line. I think my fund blend probably had about an equal amount of risk as the S&P last year, so this makes sense. No risk for returns trade off here.

Now how to choose and benchmark and what that means is a bigger question. Maybe I’ll explore it in a future post (Ken Fisher has a lot of smart things to say about this in his book “The Only Three Questions That Count”).

I won’t lie and say that I was “benchmarking” intelligently throughout the year. However, I’m not upset about my returns. Besides the hack HACAX, the funds I picked performed in line or above the other options which were available to me under my old 401k plan. Also, if I did have my choice of all funds, my alternative would have been to invest in an S&P ETF… not a basket of Vanguard funds. Although according to your numbers, the latter looks like a good option, no?

Do you consider that basket of Vanguard funds as a benchmark for you? If not, it’s pretty pointless to simply point out that I underperformed some other portfolio. The Vanguard fund portfolio underperformed the “buy Allegheny Technologies (ATI) and sit tight” fund by about 75%. But that would have come with a bunch of risk, right?

I guess the main point of your post was that I could have had better returns with LESS RISK, since your selection apparently has a more diverse and better hedged collection of investments. I’ll buy it. Although I admit the different in returns (especially for that second group) could also be attributed to better management and/or luck.

Again I’d like to see some more number and the specific funds, but the numbers you post are intriguing.

Thanks for the numbers, Mossy.

Do you have the individual returns for each of those funds? Or do I need to look them up myself?

I’m trying to figure out what’s causing the high returns in that mix.

20% International
20% REIT
20% Small Cap
20% Large Cap
20% Bonds

This portfolio would have returned 20.14% this past year after expenses beating your 100% stock portfolio with less risk.

Let’s say you had a riskier allocation of no bonds — and you believe the data presented about value > growth, small > large, emerging > developed, allocation of different assets to reduce risk, etc. Just off the top of my head, you’re looking at something like the following:

10% Commodities
20% REIT
10% International
10% International Value
5% Emerging Market
10% Large Cap
5% Large Cap Value
20% Small Cap
10% Small Cap Value

This portfolio of Vanguard index funds would have returned 24.96% this past year.

So yes, you’ve underperformed the market quite a bit. Chasing hot sectors, chasing hot funds, chasing hot stocks — that kind of activity usually reduces your returns. What you need to do is read up on the various asset classes, decide on how of each fits your risk/return profile and then stick to the percentages.

I expect to have a much higher net worth as I get older and my earning power grows. I think it is possible for an individual investor get 20-25% gains. The difference between 15% (not a historical average for indexes or mutual funds) and 20% is not so much on my small account size, but 5% of $1 million is an extra $50k… compounded.

So, like I said, I have to give it a try. There were a lot of people who told me I couldn’t make money at poker… that it’s just a game of chance for suckers. But I was able to make money playing poker. I stunk at poker at first too, but I figured it out.

Investing in stocks is a similar activity, based on similar skills. Stock however have the bonus of allowing you to play with a lot of money against opponents that are still weak. It is harder to find a weak poker player playing with a lot of money than it is to find a dumb schmuck (like me) playing in the stock market with a lot of money (not me yet).

And then there is the feeling that you have control over your money. When my individual account was down over 20%, I didn’t feel nearly as bad as when the one mutual fund I picked was down 10%. “What are those frak-heads doing with my money!?” “Okay, I need to step it up and get in gear. At least I’m learning something while my account is small.”