You Are Smarter Than Your Advisor!

1. You Are Smarter Than 90% of Mutual Fund Managers!

2. Index Funds Will Beat Managed Funds 90% of the Time.

3. This Means that You Have a 90% Chance of Beating Every Financial Advisor in the World!

If this is true, why do we spend so much time and money on the search for the alpha of mutual funds for our investments? Because we all want to be Warren Buffets? Or because we are too scared to imagine going it alone?

I think the average Canadian investor feels the stock market is far too complicated for mere mortals to understand. To imagine we could do better on our own in the Bay or Wall Street Jungles is simply preposterous!

What Does The Millionaire Teacher Say?

In his financial blog of March 13th, Andrew Hallman,  author of The Millionaire Teacher, reports cashing in $700,000 of individual stocks and reinvesting this cash into index funds. He admits to beating the indexes with his stock picks consistently over the past 10 years, yet his research brought him to this grand decision.

The Enemy of Good is Better

"No matter what happens, going forward, my investments will be in the 90th percentile, in terms of performance", says Hallman. He goes on to write, "the enemy of the great plan is the perfect plan".

" Reaching for that perfect plan (at least in the world of investing) is like reaching over the edge of a ravine to pluck a pretty flower.  You might fall.  Do it enough times, and you surely will.  I’d rather have 90% of the cliff’s flowers brought to me each morning, rather than trying to collect all of them by venturing precariously over a railing".

I can't wait to read his book The Millionaire Teacher.

Meet "Harry"

Hallman reports on a retired friend, who in 2008, fired his financial advisor and opened an account of Index ETF's which he says make the actively managed mutual funds "look silly". "Harry", not his real name, keeps 40% of his portfolio in bonds, rebalances his portfolio occasionally (three times in a couple of years or so), doesn't bother watching the thing daily and owned the following as of October, 2010: XDV, XSB, XBB, XIN, XSP, and XIC. See details here.

 "Harry's Rules" as listed by Hallman include:

1. Keep costs and taxes low by purchasing index or exchange traded funds.

2. Diversify your eggs across a variety of baskets instead of gambling on individual stocks or sectors--and hold, don't trade.

3. Be greedy when others are fearful and fearful when others are greedy. Stick to your set portfolio allocation no matter how smart everyone else appears.

"I'm Smart Enough to Understand the Odds"

Hallman writes that 70% of his personal investments lie in index funds. He says: " I’ve never bought a lottery ticket in my life, and I haven’t wasted so much as a dime at a casino, yet I have immensely enjoyed giving the indexes a beating over the past decade.  That said, I keep track of every dollar I have invested.  And if the market indexes catch me, I’m going to sell the stocks that I own, and run with an investment portfolio that is 100% indexes. I may not be a genius, but I’m smart enough to understand odds".

See Andrew Hallman's Blog and Complete Story HERE.

What Would Warren Buffet Say

As usual, I must run this information through my Buffet-O-Matic Screener. And I find that Hallman isn't the only alpha investor touting index funds. Guru Warren Buffet in his 2004 letter to Berkshire Hathaway Investors writes:

"Over the 35 years, American business has delivered terrific results. It should therefore have been easy for investors to earn juicy returns: All they had to do was piggyback Corporate America in a diversified, low-expense way. An index fund that they never touched would have done the job. Instead many investors have had experiences ranging from mediocre to disastrous."

So Now What...Back to the Couch Potatoe?

Yawn. I've been trying to find a nice sleepy-ish portfolio that covers the indexes in a way in which would be unique and interesting and manageable to some degree in spite of all the advice to "buy and forget".

I like looking at the markets. I like trading. It's fun. So forgive me for wanting to be part of the action.

I love watching the news and tying it to the markets, making predictions and watching the reveals, plotting charts and finding winners, then eating crow or basking in the glow of my screen at the end of the day.

I'm not a day trader. But I check my portfolio every evening to see the proportion of green to red and fret for a bit, or pay myself on the back. It's fun!

Argh! is what I say to Hallman and Buffett

...and guru x, y and z... knowing they are right, but wondering where to draw the risk/return line for myself.

I admit that the majority of my investments lies in unmanaged index funds through ING Direct and TD.

And I admit to having a small graveyard of dead penny-once-pound stocks haunting my broker account from the early 2000 tech bubble that for some reason won't go away no matter how many times I zero out the book value!

So what is the perfect balance for me? What will keep me interested in the markets, involved in the day to day bells and chimes, yet invested well enough to ensure a healthy and happy retirement in 20 years or so?

Answers anyone?

It All Boils Down to Diversification

Just as I diversify my index investments between markets, I think I'll diversify my time between investment styles. I need 80% low stress, 10% moderate stress and 10% roller coaster. Don't we all?

My Diversified Investment Style Portfolio

Low Stress (80%): Index Investing:

                ING Streetwise Funds (automatic monthly contributions)
                TD e-series funds (Can Index, US DJ Index, International Index--I have enough bond exposure through ING)

Mod Stress (10%)
                 My ETF portfolio of sector related indexes to watch regularly incorporating buy/sell signal analysis, guru intervention (my doityourselfinvesting.com friends) and other sources of information such as world events and sector news.

Rollercoaster Stress (10%)
                My Canadian Venture Exchange! I enjoy these little prospector gems where news and technical analysis combine to thrill or chill those who dare to enter.

Find your own balance, but be smart--smarter than 90% of the Financial Gurus out there and invest in the indexes!

Happy Investing!