How to Invest Smarter: The 5 Reasons Your Portfolio Isn’t Growing

By | March 23rd, 2013 02:03 AM EST | posted in CIO Letters, Conservative Strategy Insights, ETF Education, Growth Strategy Insights, Press Releases, Spotlight
“Why isn’t my investment portfolio growing?!”

I am frequently asked this question by intelligent professionals who have conscientiously saved and made regular contributions to their retirement portfolios throughout their successful careers. They want to know why their 401ks and IRAs haven’t meaningfully increased in value beyond their contributions. I’ve organized the answer to this question with 5 simple reasons and 5 recommendations of how to invest successfully. These recommendations will help any investor facing the “zero growth” problem.

How to Invest Smarter: The 5 Reasons Your Portfolio Isn’t Growing

Reason #1: You’re paying large and unnecessary fees

You prevent your portfolio from realizing its growth potential by paying excessively high (and unnecessary) management fees for your mutual fund investments. This seems like a “no brainer” but most investors don’t realize that they are paying the equivalent of $15 for a $4.62 gallon of milk every time they buy mutual fund shares. The average U.S. Large Cap mutual fund charges 3.25 times more than the average Large Cap ETF fund. So what, you ask. Well let’s add up the costs that build up in a typical retirement portfolio from when you buy the rest of the “groceries” for your retirement basket.

You are probably paying 3 times more for eggs (International Funds), 4 times more for bread (Small Cap), and likely double for meat (Bonds). That adds up to a grocery bill every month that is nearly triple the cost it should be. Would you feel the impact if your grocery bill was tripled from now until you retire? Sure you would. Regardless of how wealthy you are, you WOULDN’T pay $15 for a gallon of milk when the exact same milk was available for $4.62 and was sitting right next to it. What makes this impact worse is that these excessive and unnecessary fees are charged to you not just when you buy the mutual fund, but every single month that you own it. You’re duplicating excess costs regularly instead of growing value.

How to invest intelligently by saving on management fees

(click on image to zoom) Typically, the average investor “throws away” about 20% of their initial portfolio value over a ten year period by paying mutual fund managers excessive fees to try to match an index that you can access through Exchange Traded Funds (ETFs) without paying for a manager at all.

Solution #1- How to invest correctly to limit management fees:

Replace the mutual funds in your portfolio that are designed to perform against an index (nearly 78 out of 100), with ETFs that track the same index. You will save money immediately, as in right now! That extra money can go in your pocket or be reinvested to buy more of the funds you want.

Reason #2: Your risk management strategy is insufficient (or non-existent)

Most people understand why auto insurance is mandatory. With millions of people driving, the statistical probability that you will be in an accident of some type, at some point during your lifetime is nearly 75%. Based on this known fact, most financially responsible people would insure their cars even if auto insurance was not mandatory.

Based on this assumption, if most people knew that there were ways to protect themselves from market volatility, they would. Oddly, despite more than a decade of increasing volatility, market collapses during 5 of the previous 5 summers, and the fact that the Dow is lower than it was 5 summers ago, the majority of investors still just don’t,or don’t even know that they can, protect themselves against significant financial losses within their investment portfolios.

How to invest: Get preemptive protection from inevitable market corrections

In the S&P 500, from January 1926 to December 2010, declines of 5% or more occurred an average of 3.7 times per year. Declines of 10% or more occurred 1.3 times per year, while declines of 20% or more occurred only 0.5 times per year.

Solution #2 – How to invest correctly to manage risk:

There are numerous ways to protect your portfolio from market volatility and extended periods of declining prices. Stop-losses, portfolio hedges, inverse investments, and various other “bear market” tactics and products are used by smart investors to ensure that losses are limited when markets head south. Set aside a portion of your portfolio funds for any of these tactics. That way, you’ll have a “rainy day” fund for the eventual market correction. When the correction happens, you or your advisor can deploy this capital to fund the bear market tactics that will best help to reduce the overall loss in value to your portfolio.

Reason #3: You are earning “negative money” from your dividend paying funds

Some investors strictly want income from their mutual funds and can ignore market volatility because they don’t ever plan to sell the fund. Theoretically, if you save and invest correctly in the right mix of equities and bond funds over an extended period of time, you could build up enough dividend income to live off of in retirement, and then pass the stocks on to your kids and grandchildren. This sounds great, but many investors following this plan never bother to look at the fees they are paying to the funds they earn dividends from. Still, others look at the fees without realizing they could own the exact same asset and earn a higher dividend payout, and pay a substantially lower fee.

You might be paying a mutual fund manager 2% a year to manage your dividend fund, but the fund is paying you a dividend of only 1%. That means that you are losing 1% a year on that fund. It sounds hard to believe, but I see this in roughly 2/3 of the portfolios I analyze.

How to Invest - Negative Money vs. Positive Money

(click on image to zoom) In this snapshot of a negative money portfolio, 13 out of 16 dividend paying equity mutual  funds have a higher expense ratio cost than dividend yield benefit. Over a few years this negative money adds up to tens of thousands in performance impairing costs. If  the ETF based positive earning money portfolio is employed instead, the positive money compounds and grows into tens of thousands in portfolio boosting gains.

Solution #3 – How to invest correctly when owning dividend paying funds

Get rid of any dividend paying fund that charges you more than it pays you. The easiest way to do this is to replace mutual funds with Exchange Traded Funds (ETFs), since ETFs have such low costs. With over 1,400 exchange traded funds available, it is highly unlikely that you wont be able to find an ETF that offers the exact same exposure — but with a higher dividend and lower fee.  There are also some mutual funds that pay higher dividends than they charge in management fees, but you’ll likely find yourself running into reason #1 why your portfolio isn’t growing which will obviously hold your returns back unnecessarily.


Reason #4: Your plan isn’t your plan, it’s everyone else’s

Most people understand that financial markets are complex. Despite this understanding, the typical investor will seek out advice or products that are ‘simple’ (often equating simple with ‘hassle-free’). The brokerage industry preys on this tendency to avoid complexity. Major firms with the most complex financial operations employ things we associate with as simple and positive feelings such as talking infants, paternalistic actors, and or cartoons like Snoopy to convey how they will manage your investments. Typically, along with the visual reassurance there will be a personal promise to invest in a way that is right for you. In reality, any personalization of the products and services offered by these firms is tokenistic at most.

How to Invest Correctly

Every investor needs his or her own strategic and tactical portfolio strategy with a very specific plan of execution for different market scenarios or changes in personal circumstances.

Solution #4 – How to invest correctly to achieve your own objectives

If you are a self-directed investor, educate yourself about how to invest for growth in flat or down markets, how to minimize fees, and how to select securities whose underlying assets are expanding, not contracting. Also, read about the escalation of volatility and correlation in financial markets. Keep in mind that what was true 15, 7, or even 3 years ago may be entirely false today. If you don’t have the time or interest to become an expert on the present environment of investing, hire an expert who has a command of the issues that drive markets today.

Reason #5  Complacency or procrastination have won over your desire to make money from your investments

Let’s face it, we don’t always exercise, eat right, or practice perfect manners even though we could, and we know we should. Furthermore, as ‘creatures of habit’, we humans like to repeat what is familiar, even if it is bad for us. Reason #5 is somewhat understandable, because for decades, a certain way of investing worked, but that era is over. In the modern era of investing, you really need to pay attention to what you own and what you’re paying for it, if you expect results beyond unpredictable market movements.

How to invest: Look at your statements or have an advisor look for you

Most investors just assume that they can’t improve without taking on more risk, or that it is too much trouble to “deal with’. The reality is that there are likely less risky investments that will yield more for you than what you own. All you need to do is direct a professional to find out for you. In this regard, complacency and procrastination are the only thing preventing a positive change.

Solution #5: How to invest correctly and get immediate results

Take lessons #1-4 and follow through, now! These 4 actions will increase your portfolio returns regardless of your portfolio’s size or risk exposure, and regardless of what direction the market is moving. Email your advisor (or schedule an appointment with me) to get to the bottom of why your portfolio isn’t growing. You now have 4 specific, corrective measures you can take to immediately get your portfolio growing faster than it would have otherwise.

The information on this web site is intended for U.S. residents only. The information provided does not constitute a solicitation of an offer to buy, or an offer to sell securities in any jurisdiction to any person to whom it is not lawful to make such an offer.

Sources: Index Strategy Advisors, Inc.. This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of its stamped publication date, and may change as subsequent conditions vary. The information and opinions contained in this material are derived from proprietary and nonproprietary sources deemed by Index Strategy Advisors to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. Past performance is no guarantee of future results. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this material is at the sole discretion of the reader. Investment involves risks. International investing involves additional risks, including risks related to foreign currency, limited liquidity, less government regulation and the possibility of substantial volatility due to adverse political, economic or other developments. The two main risks related to fixed income investing are interest rate risk and credit risk. Typically, when interest rates rise, there is a corresponding decline in the market value of bonds. Credit risk refers to the possibility that the issuer of the bond will not be able to make principal and interest payments. Index performance is shown for illustrative purposes only. You cannot invest directly in an index.