Dian's Column
Dian's Archive


Tips on managing your holdings

- Alan Lavine and Gail Liberman

What determines most of your investment returns? Is it the types of investments you own or your personal investment prowess?

The answer, particularly for mutual fund investors, lies in the type of investments you hold.

Landmark research, published in the Financial Analysts Journal in the 1980s, has shown that 90 percent of the return is determined by the "asset class," or type of investments. Asset classes may include such investment categories such as undervalued stocks, growth stocks, U.S. bonds, overseas bonds, cash, real estate and precious metals. The other 10 percent of your investment return is based on a combination of skill in picking securities, market timing and pure luck.

Suppose you own bonds and large company, medium company and small company stock funds, run by managers who like to buy cheap stocks, based on future earnings growth. Say your holdings gain 10 percent in one year. The sole fact that you held stocks and bonds in general contributed 9 percent of your 10 percent return!

Check out this hypothesis for yourself. Compare your fund's performance against the published index that most reflects your mutual fund holdings. The S&P 500, for example, represents large company stocks and the Russell 2000 represents small stocks.

Chances are that your own mutual fund returns are right in line with the corresponding index.

Does this mean you should just buy index funds that track the markets?

- Yes, if you want to buy and hold for the long term. Index funds generally are low-cost. They historically have outperformed 60 percent of all actively managed funds, according to Morningstar Inc., Chicago. You also can invest in exchange traded funds that track specific markets. With an exchange traded fund, which trades through a broker on a stock exchange, you own a basket of securities.

- No, if you have the skills to pick individual securities or mutual funds. Stock and bond picking ability can contribute more to the return on your investments, according to research by Mark Kritzman, published in the Summer 2003 Journal of Portfolio Management. But you had better be a great stock picker to profit, that study stresses.

So how do you make good stock, bond and mutual fund picks?

One clue may lie in research published by Eugene Fama, in the Journal of Finance. Fama shows that by buying undervalued stocks that are mispriced based on a company's earnings, you can outperform growth stocks over the long term.

Good luck!


Spouses Gail Liberman and Alan Lavine are syndicated columnists. You can purchase Alan Lavine & Gail Liberman's latest book Quick Steps to Financial Stability (QUE Publishing 2006) online at www.moneycouple.com or at your local bookstore. E-mail them at MWliblav@aol.com.

To read more columns, please visit the column archive.

[ top ]