What Drives an Investment Portfolio’s Performance?
April 2nd, 2009First, before I get started, just let me say a heart felt THANK YOU for everyone’s posts – before I even had a chance to start my blog! You’re a bright bunch and it’s exciting to get started.
Does anyone out there have an investment portfolio? Yes, I realize that everyone is feeling the pain. We’re all feeling the pain.
Did you ever wonder what drives approximately 90 percent of the investment portfolio’s performance? I bet some of the things that come to your mind are things like:
- Market timing – when do I get in, when do I get out?
- Stock selection
- The company’s management
- The industry
- If you’re into mutual funds, you’re probably thinking things like the portfolio manager and the mutual fund company influence performance, right? After all, that’s what the television advertisements imply, and we all know they’re accurate, right and truthful. They have to be – they’re on TV!
We could go on extensively, but all of the above factors combined don’t account for 10 percent of your portfolio’s performance. That’s right, surprise, surprise, non-commercial, objective analytical evidence indicates that approximately 90 percent of your portfolio’s performance depends on three factors, and none of the above factors, and none of the above are one of the three factors.
So what are the three factors? It’s simple.
- The relative percentage of stocks and bonds in your portfolio. In three words, stocks versus bonds.
- The relative percentage of large cap stocks (big companies) versus small cap stocks (small companies). In three words, large versus small.
- The relative percentage of value stocks versus growth stocks. This is an accounting measure that is almost always misused for marketing purposes. In three words, this is value versus growth. I’ll make the accounting simple later so that you can easily understand the situation.
Does this surprise anyone? Let me know what you think. Even if you think I’m full of BS (I’m from west Texas and central Kansas, and yes, I’ve literally stepped in it more times than I can count), I’m eager to hear your thoughts. Have a super day!
Thanks,
Rod
32 Responses to “What Drives an Investment Portfolio’s Performance?”
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Hi Rod,
I look forward to your help turning my 201(k) back into a 401(k). This is a topic of great interest to me. You can help people grow their assets and I’ll help them protect their assets from lawsuits and overzealous IRS agents…
Seize the Day,
Rob
Personal Asset Protection For Small Business Owners
Have You Covered Your Assets?
Am interested in learning more. How do you come in on the 20 steps listed in IBD?
Rod:
I am looking forward to waht you have to say about growing our investments. This is quite a time to be writing about investments in general since the situation is so fluid.
Steve
Rod,
This will great to learn about investment performace.
Look forward to it.
Lynn Lane
http://www.Warriorofsuccess.com
This is a great post, I am looking forward to reading more of your writing
Bob Kaufer
If you MOVE like the Tin Man, you will THINK like the Scarecrow and FEEL like the Lion
Interesting post. I should have listened to your advice 10 years ago when I blew $100,000 day trading Mark Glaciermarketing.wordpress.com
Rod,
I believe what you’ve said. However, I don’t have any experience with bonds. I’d like to learn more about them. Are they considered a “safe” or more “risky” investment? What type of return can be expected from bonds? What is their return based upon? Where does one purchase bonds?
Health, Fitness — Darryl Pace
Thanks for the post, I enjoyed it.
The DIY Lawyer
DIY Lawyer – Where you can learn to do your own estate planning2
I don’t know a gosh darn thing about any of this stuff. looking forward to learning.
Lisa McLellan, Child Care Expert – Babysitters, Nannies, and Au-pairs
Hi Rod,
Great Post! I worked in the finance sector trading currencies for the banks and I can tell you based on my experience no matter what anyone thinks…the thing thats drives a stocks or any investment products performance is the amount of emotion attached to it! Fear and Greed…the driving force of human nature
Duane
Learn Winning Persuasion
Techniques that Work Like Magic by Tapping Into the Psychology of the
Mind with Persuasion Expert Duane Cunningham!
Yes!
Great post! If only I had read this before I tried my hand at stock picking!! It would have saved me a fortune!
Thankfully my money is now much more cautiously stored away in index funds, bonds and gold.
Listen to Rob, not that shouty Cramer guy!
Where in Kansas are you from? I spent a year living out in Wichita, doing consultancy work for Cessna finance. I loved it out there. Especially the steak! Yum.
JJ Jalopy
Life Coaching and Home Business Advice with JJ Jalopy
BS stands for you know what;
But BS also can stand for :Belief Systems.”
We are usually prisoners of our mind & bias. Each of us thinks that “I am right.” There is seldom jsut one right answer. Life might be as simple as or as black and white as 1+1 = 2.
In investments, simplicity is usually the best tactics.
So I’m with you on this. Wish I can use Pure Numerology as a financial tools in forcasting the markets.
John Ho
Understanding Personalities for Better Influence & Persuasion
This is a test.
Investing is one of my hobbies. I managed to get most of my stuff out of the market before 10,000. Am now looking at gold. Will you be discussing metals?
Christian Haller
http://www.christianhalleronline.com
Christian,
I realize that Kevin is a big believer in gold, but let’s think about the situation. If you take $1 million and purchase 11,000 ounces of gold (roughly the number of ounces $1 million will purchase), what will you have in ten years? 11,000 ounces of gold. That’s it. How much will it be worth? Probably $1 million plus inflation, but you’ll incur a lot of volatility (volatility = uncertainty and uncertainty = risk) along the way for your inflation adjusted (aka known as “real”) of zero. I don’t know about you, but when I risk a lot I need to have the opportunity to gain a lot.
On the other hand, if you gave a team of say, ten professionals like Kevin Hogan, for example, $1 million and then had the team report in after ten years, I bet the value of the business venture they started would be significantly greater than that of the gold. A well run business can achieve organic growth, whereas commodities have a history of going up at the rate of inflation, but with an extraordinary amount of volatility.
Concerning what to invest in next, if you plan to get in and out of markets, do you know of anyone who’s clairvoyant? I have yet to ever meet a mere mortal who’s truly clairvoyant. Of course, any psychic will claim they’re clairvoyant. However, if they were their office would be in a class A high rise instead of a seedy strip shopping center.
As for the next comment, it’s really getting into chapter of my upcoming book, Great Minds, Great Wealth: How to Raise Your Return, Reduce Your Risk and Cut Your Cost. However something that will arrive sooner and be free is Chapter two of the book, which Pam will market later in the course on our web site as an ebook.
John,
You’re off to a GREAT start. Let’s keep it simple. I see net worths all the time, and those with the largest net worth relative to their personal earning power are usually the ones who kept it simple, just a step or two beyond simply putting their money in CDs.
Stay tuned. You’ll like what you see.
Thanks,
Rod
JJ,
You’re still plenty young to make up for lost ground. Stay tuned; you’ll not only do better, you’ll sleep better, too.
Wichita! I lived in a small town named Lyons, just 95 miles toward the center of the state from Wichita. I went to elementary school in Lyons (population 4500), and before that we lived 20 miles away in a farm town named Bushton (population then: 500, but it’s smaller now). I was born 20 miles in still another direction in a town named Ellinwood (population 3500).
And Cessna! My sister Linda’s first job out of high school was with Cessna. Yes, they do know how to cook a good steak in Kansas. Not a lot to do, cook steak and watch KU basketball.
Have s super day!
Thanks,
Rod
Duane,
Thank you for your kind words! Have a super day!
Rod
Lisa,
We’ll keep it simple. The simpler we keep it, the wealthier you’ll become.
Thanks,
Rod
Thank you for your kind words.
Rod
Darryl,
Great questions. One could write a book answering your questions, but we’ll keep it simple.
The driving forces behind purchasing bonds should be to maintain liquidity, maintain value and cushion the volatility of your equities (stocks). On their own, bonds are often struggling just to keep up with inflation, and most people want and need to do better than inflation.
Additionally, research has shown that one should stick with high quality and short terms (less than 5 years to maturity) to get the best risk-adjusted return on your bonds. What are the risks of investing in bonds? Several things, but default risk; call risk and interest rate risk are the biggest risk factors.
As for where to buy them, your local bank’s CD is backed by bonds. You can also purchase bonds in a mutual fund (short term bond index type funds or DFA bond funds are the best). On an individual basis, you can open an account at TDAmeritrade and purchase individual bonds, typically $1,000 bonds in lots of 10 – 30, and buy them there, as well as at other discount brokerage houses. However, to do this and truly spread your risk appropriately you need to get in with a multi-million dollar bond portfolio.
Since my business, Schulz Financial, is an institutional investor at TDAmeritrade, I sometimes get involved with purchasing or selling individual bonds. However, usually it’s best to take my clients to one of the aforementioned bond funds.
Does all this help?
Thanks,
Rod
Mark,
One learns from experience. Unfortunately, the highest tuition in the world isn’t at Harvard; rather, it’s in the arena of investing, particularly if you haven’t invested thousands, yes, thousands, of hours studying the situation.
But don’t get discouraged. Read, think and challenge, both me and your personal paradigms.
Stay tuned.
Thanks,
Rod
Bob,
Thank you for your kind words. I’ll do my best to keep it succinct, interesting and FUN! Yes, fun with investing.
Have a super day!
Thanks,
Rod
Lynn,
Thank you for your kind words. I look forward to getting my free ebook posted. I hope you find it fun and interesting.
Rod
Steve,
Yes, the underlying drive of all I discuss is growing one’s investments at the greatest amount of risk adjusted return for the lowest cost. That’s my clients all want: raising one’s return, reducing one’s risk and cutting one’s cost. Stay tuned.
Thanks,
Rod
Christian,
Since I haven’t read them, I can’t say how at this point. However, knowing what I know about IBD, which isn’t much, their points are likely to be commercialized to the extent that it promotes their mission of selling more papers.
Conversely, the main focus of my research and experience is non-commercial analytical findings concerning real world, proven applications. The strategies and tactics I apply are well worn and well proven, but one doesn’t hear about them on TV or other media outlets because they’re not the methods that make the investment house the most money. In contrast, they do make the investor the most risk-adjusted money for the lowest possible cost. That’s what we want.
Stay tuned; I’ll have another post soon.
Thanks,
Rod
Rob,
I laughed out loud when I read your comment about overzealous IRS agents. It’ll take some time, but stay tuned and yes, we’ll grow your 201k back into a 401k.
Thanks,
Rod
Interesting stuff for a non-financial mind!
SunnyMarie
Glamour and Glitz
http://www.sunnymarie.vox.com
I’m looking forward to gaining some insight; I know essentially nothing about investments and the like-one of the biggest reasons I am here is to get back control of my financial life. I like the idea of being able to DO something-or maybe it’s because I just don’t understand. I watched my 87 year old father in law lose roughly $10,000 a day [stock market a few years ago] from a porfolio he had spent a lifetime working on. But he always worked for some else. Sorry didn’t mean to ramble……
JC JC
Thank you for such a clear and informative blog post to teach us about great wealth and true wealth.
My 2nd cousin is with Advent Capital (bonds man) in NY.
Cheers!
April Braswell
Dating Expert and Online Dating Coach
Online Dating Sites Review, Internet Dating Sites Guide
Oh my goodness, do we have another Lisa in the bunch? Looking forward to more posts!
Lisa McLellan, Child Care Expert – Babysitters, Nannies, and Au-pairs
Like your post Rod. Keep it up with sound investing advice as we all need help during these times!