Model Mutual Fund and ETF Portfolios: Combined Update, Different Strategies
by James B. Cloonan
As promised in my May column, both the Model Mutual Fund Portfolio and the Model Exchange-Traded Fund ETF Portfolio will be covered four times a year from now on. They both will be covered each March, May, August and November. Of course any changes will also be reported on AAII.com.
The two portfolios will be treated separately—not combined into one overall portfolio—although members can certainly choose investments from either or both. It seems an excellent time to emphasize the difference between the approach taken in the Model ETF Portfolio and that taken in the Model Mutual Fund Portfolio.
In this article
- Comparing the Two Portfolios
- The Model Mutual Fund Portfolio
- Model ETF Portfolio
- Looking Ahead
- Model Mutual Fund Portfolio: Selection Rules
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Comparing the Two Portfolios
In the Mutual Fund Portfolio, the emphasis has been finding funds that meet the criteria, regardless of what specific area of investment they are in. The portfolio only invests in U.S. general equity funds, although a slight exception is made this month. Diversification across different sub-areas is only a secondary consideration, such as value versus growth or capitalization size.
I feel this is the appropriate approach because mutual fund managers have a great deal of discretion, and mutual funds are not always defined by the classification given to them by analysts. To some degree managers are free to time the market and vary their strategy over time. The objective is not to try to select the funds that have had the best performance over recent years (the hot funds), since the highest short-term performance usually comes from an approach that will not be best in future market scenarios, but to select funds that are likely to do better over the long run than the market, absolutely and relative to the level of risk, under all market conditions.
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Discussion
Please ask James,ie Jim, if he has ever used the Bayes rule/theorem----and if so what his ]
opinion is for forecasting.
If not, have him look at the NY Times book review section, 8/7/11, page 14, for a new book
by Sharon Bertsch McGrayne.
I wonder if this theorem has any possible qualitative
application in what he does in preparing his
portfolios.
Regards
Sid Cohen
posted about 1 year ago by Sidney from Arizona
Bayesian statistics can and has been used in investment decision making. There has been renewed interest following all the criticism of Modern Portfolio Theory (Black Swan, etc.) It can be used to change probabilities based on additional info or to add judgements to historic research results. Unfortunately it depends on inputs, such as historical returns and variance, as well as future estimates and these have not proved reliable. The rule of garbage in, garbage out still exists even with more complex models. James Cloonan
posted about 1 year ago by James from Arizona
For James: If you were to "classify" the Model Mutual Fund portfolio, ranging from conservative/income-and-preservation oriented to aggressive/growth- oriented, where would you consider this Model portfolio to lie?
Thank you.
posted about 1 year ago by Michael from New York
The Mutual Fund Portfolio is intended to be for the stock portion of a portfolio. As it stands today it is fairly aggressive but diversified enough to avoid extreme risk. If t-bills are "1" and the Shadow Stock Portfolio is "5" it would be "4". James Cloonan
posted about 1 year ago by James Cloonan from Arizona
I just turned 71 been investing our family assets all our lives.(6 portfolios with substantial assts) Enjoyed this challenge most of the time. But as i get older and older, any chance of seeing AAII offer a mutual fund e.g. for your shadow stocks portfolio for your faithful subscribers? Motley Fools did that a few years ago with their fund offering. Many of their subscribers signed on.
I know you feel this will "violate" your mission of teaching folks to be better investors. But your subscribers may be reaching a different stage in life and NEED your help more. I will never let "sales oriented" money managers manage our money.
Please be more flexible with your "mission". You can make it simple and restrict it to minimum of $25K or whatever. But begin with your best performing trade mark shadow stocks. Thank you and Amen. Hope you will take this seriously and say yes.
P.S. I am actually the wife who manages and invests all of our finances all our married lives. Began investing when I received my first pay check. But we are all getting OLDER! I and many others would truly like to lighten our loads a bit and have AAII help us out a bit.
posted about 1 year ago by Kaimay from Minnesota
Thanks for your thoughts. We have considered this before but there are problems with micro cap stocks in a mutual fund. When the market goes down significantly many investors sell. Forced selling in a mutual fund with micro caps that have a wide bid/ask spread when you should be buying can be deadly. The same is true with an ETF. The answer is to have a closed end fund but they are so out of favor it would be difficult to raise emough capital to make it practical. There are some unusual format funds but we just have not found a solution as yet. A hedge fund with lower fees and limited withdrawals might work. We will keep thinking about it. James Cloonan
posted about 1 year ago by James from Arizona
Closed end funds seem to have little following and likely to be rewarding if one knows all the major issues. Why are they not more popular?
posted about 1 year ago by Ted from California
