Resurrecting Your Portfolio?

Marc Lichtenfeld, the Oxford Club’s Chief Income Strategist and author of Get Rich with Dividends, wrote a great article last March, Three Simple Moves to Resurrect Your Portfolio:
This week is a big one for the Jewish and Christian faiths.

On Monday and Tuesday, Jewish people celebrated Passover, commemorating their ancestors' escape from slavery by the Egyptians. The story, immortalized on film in the classic movie The Ten Commandments, features Moses (played by Charlton Heston) telling the Egyptian Pharaoh (Yul Brynner) to "let my people go."

On Friday and Sunday, Christians celebrate Good Friday and Easter, marking the crucifixion and resurrection of Jesus.

Investors can use the themes of the holidays to resurrect their portfolios if they aren't getting the performance they want.

Like the slaves in Egypt whose hard work benefitted someone else, many investors' capital doesn't work hard for the owner, but instead makes big profits for mutual fund companies.

It's time to tell your mutual fund, "Let my money go."

Mutual funds are easy places to invest in if someone has neither the time nor willingness to conduct their own research.

The problem, however, is most mutual funds underperform the market or their benchmark index. In 2012, the S&P 500 was up 16%. According to Goldman Sachs, 65% of large-cap core mutual funds rose less than 16%.

In 2011, a mind blowing 84% of mutual funds underperformed the index. Over the past 10 years, the average number is 57%.

That means in any given year, you have less than a one-in-two chance of being invested in a mutual fund that simply keeps pace with the market.

And for the privilege of likely not making as much money as you should, you get to pay the funds a management fee that reduces your returns even more. Sometimes, you're even forced to pay a load, which is a fee just to enter the fund. For example, some funds, often bought through brokers, come with loads as high as 4.75%. So if you give the fund $10,000 to invest, it takes $475 right off the top and only invests $9,525. It's going to be tough to beat the market when, on day one, you're down nearly 5%.

Even if in the past your portfolio has been crucified by the large Wall Street institutions, you can still achieve solid returns over the long term.

Here are three steps for resurrecting your portfolio:

If you want to stick with mutual funds, own index funds.

They are much cheaper to own and will only cost you a few tenths of a percentage point. Plus, they tend to outperform their more actively managed peers.

For example, let's say you want to invest in emerging markets. The Vanguard Emerging Markets Index Fund (VEIEX), a member of The Oxford Club's Gone Fishin' Portfolio, has an expense ratio of just 0.33%. Compare that to the average emerging market fund fee of 1.64%. Over the past 10 years, the Vanguard fund's annual return has averaged 15.89%, nearly half a percentage point better than the average of all funds in the category.

If you invest $10,000, the Vanguard fund saves you $131 in fees per year. Doesn't sound like much, does it? But if you're saving that money every year and the fund returns 15.89% like it has historically, that's an extra $3,220 in your pocket over 10 years.

Take control of your money.

If you use a full-service broker or financial planner who does nothing but buy and sell investments based on what inventory his bosses tell him to move, or what stocks his firm's analysts rate a "Buy," you need to close your account as fast as you can.

A broker or financial planner who understands your needs and really works with you to achieve your financial goals can be well worth the fees you pay – especially if you don't like to do the work yourself. If the advisor helps you sleep better at night, stick with him or her.

Unfortunately, many brokers and advisors are more like the one described in the first scenario. They are salesmen, and the widgets they happen to sell are financial advice and products. If you suspect that describes the person you're working with, save yourself a bunch of money and frustration and move your money somewhere else.

Invest in conservative stocks that grow their dividends every year.

By purchasing and hanging on to stocks that I call Perpetual Dividend Raisers, you slash your fees. (You can buy stocks for $10 or less with most online discount brokers.)

Perpetual Dividend Raisers are stocks that grow their dividends every year, which gives you an annual raise as the dividends increase. Those dividends help you ride out a bear market as your dividends make up for some declines in stock price – plus, dividend stocks tend to fall less during bear markets.

By investing in stocks that raise their dividends every year, over time your yield increases, and what starts out as a 4% or 5% yield eventually becomes a 10% to 11% yield.

Those kinds of yields alone will be enough to beat the market in most years, regardless of how much the stock price climbs.

Since no financial messiah is coming to save your portfolio, consider taking these three steps to save yourself boatloads of money and improve your performance.

For those who celebrate, I hope this week's holidays are happy and meaningful.
This is the best advice I've read on how the average investor should invest their own money. And I bring this up because I received a nice email from one of my blog readers which I will share with you:
I just wanted to say thanks for the Pension Pulse! It is amazing and very well written and researched. I am one of those Canadians in my early 60's that do not have a defined benefit plan or any pension at all other than CPP and of course OAS when I reach 65. I do have a large sum of RRSPs that I have been buying since I was 30. However, my retirement account is not yet large enough in order to allow me to retire.

However much I enjoy your articles with jaw dropping respect and admiration, there is nothing there for the average Canadian that does not have a DB plan. Please give us some ideas on investing, asset allocation, tax splitting and anything else that the average person can use who does not make a six figured salary. You are amazingly brilliant....start using your gift and knocking it down a notch for the rest of we poor folk.

Sincerely, Mike Turner in rural Nova Scotia, Canada
Well, I decided it's high time I bring it down a notch and give hard working folks like Mike some sound advice on how to invest their retirement savings.

First rule is never underestimate the power of diversification and always remember to rebalance your portfolio. Many years ago, I gave one of my buddies, a cardiologist at Stanford, a copy of Bill Bernstein's book, The Intelligent Asset Allocator.

This is one of the best books and should be required reading for anyone looking to invest over the long run. Bernstein explains why low cost ETFs are the way to go but he also explains why it's crucial to rebalance your portfolio so you don't get caught concentrated in any one sector or geographic region.

Unfortunately, in the historic low interest rate environment we are in, and with everyone chasing yield, the truth is diversification isn't as powerful as it used to be. Nowadays, computers run markets, which means that sectors and regions all move in unison in a flash. Still, don't underestimate the power of diversification and always rebalance your portfolio at the end of every year.

Second rule is to stick with high quality dividend stocks but don't chase high dividends. In the current low interest rate environment, everyone wants yield, especially people looking to retire. The problem with some high yielding stocks is they can fall hard fast and you'll lose more on capital than you gain on yield. Also, a lot of high yielding companies have yields that are unsustainable, and when they cut them, watch out below!

As such, it's best to focus on solid and profitable companies that grow their dividends gradually every year. If you need ideas on top dividend paying stocks, I recommend a site called Top Yields, but I warn you if you chase the highest yields, you'll get burned. Instead, have a look at what the top value funds I regularly track every quarter are buying and selling. They don't churn their portfolio as frequently as hedge funds or mutual funds and they seek high quality companies which grow their dividends gradually.

For example, check out Leon Cooperman's high dividend picks or the holdings of Letko, Brosseau and Associates, one of the top value funds in Canada. You will see solid companies like BCE, Sun Life, Suncor, Bank of Montreal, etc. The added advantage of dividend shares for Canadians and U.S. investors is you get taxed less on dividends than on capital gains. My dad once told me Lord Thompson, one of the richest men in Canada, used to clip millions in dividends every day. The ultra wealthy make money off dividends, not speculating in stocks.

The third rule is to forget about market timing. Unless you're a born trader who has a consistent and outstanding track record, forget about market timing. Even the best of the best will get the wind knocked out of them on any given year, especially in these markets dominated by dark pools and high-frequency trading.

Go back to read my comment on why market timing is a loser's proposition. You might be tempted to trade momentum stocks and buy out of favor stocks or sectors thinking your timing is impeccable, but nine out of ten times your timing will be way off and you'd be better off following the first two rules above.

How do I know? Go back to read my comment on hot stocks of 2013 and 2014. With few exceptions, almost all of these hot momentum stocks got clobbered hard in the last market selloff. Biotech stocks, the sector I now trade, got hit the worst because it led the NASDAQ on the way up. As I wrote in my recent comment on The Big Unwind, I think this presents a huge buying opportunity but I am not God and have no idea when or if they will turn up in the short term.

Fourth, bonds aren't dead and they might save you when disaster strikes. Even though market strategists have been bearish on bonds forever, the reality is if you invested in zero-coupon bonds in the last ten years, you did a lot better than most people. Bonds are what saves your portfolio when disaster strikes. Also, if deflation does hit, a lot of people investing in the iShares 20+ Year Treasury Bond (TLT) will do just fine, but if inflation hits, they will get hit hard as long bond yields rise.

Fifth, macro matters now more than ever. I find it amusing when people tell me macro doesn't matter when investing in stocks. Nothing can be further from the truth. If you don't have a firm hold on inflation, deflation, the Fed, central banks, currencies, sovereign bond risk, you're going to get killed investing in these markets. Now more than ever, macro matters a lot.

I'm constantly reading to understand the macro environment and relate it back to markets. I have tons of links on my blog, many of which need to be updated but the key point is that markets aren't static, they're constantly evolving to reflect changes in macro expectations. One strategist I like reading is Michael Gayed, co-CIO at Pension Partners. I don't always agree with him (read my Outlook 2014) but I find his comments on MarketWatch are well written ad give me good macro food for thought which I can relate back to investment themes.

But I'm constantly reading articles on macro, hedge funds, private equity, real estate and a lot more to gain insights on markets. I like seeing where top funds in private and public markets are placing their money and ignore what they say on television.

Finally, take control of your money but if you can, find a good broker. It might sound counter-intuitive but taking control of your money and finding a good broker aren't mutually exclusive. There are good brokers out there who offer good advice but there are far too many sharks looking out for themselves, not your portfolio. In a perfect world, there would be complete alignment of interests between brokers and clients but we don't live in such a world so be careful and be skeptical.

If you don't want a broker, do what a smart buddy of mine does and buy the iShares Growth Core Portfolio Builder (XGR.TO). It's a low cost ETF based on many ETFs and uses sophisticated factor modelling to rebalance. He told me it produces steady returns with low volatility which is what he wants. I don't know the U.S. version, but I can also recommend the Global X Guru Index ETF (GURU) for retail clients who can't afford to invest with top hedge funds but want a portfolio that wraps up their best ideas in terms of stocks.

Drilling down into stocks. I love tracking and trading stocks. I now track over 2000 stocks in over 80 industries (focus mostly on U.S.). At the end of each trading day, I look at the most active, top gainers and losers and add to my list of stocks to track. I also like to know which stocks are making new 52-week highs and lows, which stocks are being heavily shorted, and which ones offer the highest dividends.

I don't recommend anyone trade stocks, options or futures for a living but if you can stomach the swings, go for it. You will only learn to make money when you trade and lose your own money. Period. You can pick up all the trading books in the world but in my opinion, nothing beats getting your head handed to you a few times to learn how to trade.

Finally, read Marc Lichtenfeld's most recent article, his advice on the "coming crash," and enjoy the long weekend. Happy Passover and Easter and please remember to kindly donate to this blog because I do put a lot of time and effort in informing you on what is going on in markets and offer a unique perspective you simply won't find elsewhere. You can donate or subscribe by going to the right-hand side at the top of this website. All you need is a PayPal account.

Below,  S&P Capital IQ 's Scott Kessler discusses the outlook for tech stocks with Julie Hyman on Bloomberg Television's "Bottom Line."