The Traders Journal

My 3-Prong Recipe for the Safe Growth & Outperformance of Your Portfolio

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There is a seismic generational displacement happening in the investment landscape. Many investors are shifting their assets into indexes and ETFs as they move away from stocks and mutual funds. Due to this shift, a number of investment firms are having to make enormous changes themselves in order to remain relevant and profitable.

I maintain that these investors’ misplaced beliefs that individual investors cannot outperform indexes and that active managers are incapable of outperforming passive managers (after fees) will cost these investors dearly in the long run. Let me label it for what it is. This new mantra for lazy investing by lethargic investors will produce meek unassuming gains in the 6-8% range over the long term.  


I submit that particularly for younger investors who are not saving as much as they perhaps should and who I feel are unlikely to ever receive Social Security, the real need is to get comfortable with moving beyond passive index investing — at least with a portion of their portfolios. This is what I refer to here as their Explore Portfolio and their Super Explore Portfolio.

I will concede that the investment world is indeed changing. I’ve always maintained that there is a place in your Core Portfolio for these types of indexed investments, but always alongside and in parallel with your Explore Portfolio as well. It is this Explore Portfolio that offers investors the growth component to reach beyond the passive 6-8% returns.  

The troubling perspective I see more and more is that investors are flocking to indexing because of the modest fees and the attraction of validating the ease of an inattentive hands-off money management methodology. They have succumbed to the popular notion that mutual funds charge high fees and that these portfolio managers cannot outperform the indexes. Both of these beliefs are embraced by the lackadaisical listless investment crowd. Point of fact, both beliefs are inaccurate and outright wrong.

Yes, it can be done, but it takes diligence to rummage through scores of mutual funds, ETFs and stocks, scrutinizing their fees, performance and management.  But I’ve done that successfully for 25 years. In essence, the market has rewarded me for that diligence and it’s why my portfolios outperform the market. Consistently superior mutual funds do exist, and I’ve found them for nearly every asset class. True, there are a few asset classes which are better served with 5-star ETFs, but we can identify those winners too.  

There is another seismic shift from which I myself have profited enormously. With so much money now focused on indexing, the remaining money managers seeking to outperform these indexes are all gravitating to a pool of fewer and fewer leading stocks.  I have written about this before, but for example in 2016, if you did not own the four FANG stocks (Facebook, Amazon, Netflix and Google), whether you were a money manager or an individual investor, it was highly improbable that you outperformed the indexes.   

The present reality is that the 10 - 100% gains are coming from a pool of fewer and fewer equities. I maintain that big future gains are going to continue to come from a relatively small select pool of individual stock winners. Yes, we individual investors can identify these equities.  

The lackadaisical lethargic index investors will be left standing with only their 6% index gain, wondering why they did not catch the big waves. Here’s the bottom line:

  1. Index investing is still investing, and I applaud you for putting your assets to work.
  2. Challenge yourself to save more.
  3. Passive indifferent investing will cost you big money over the long term (are you millennials listening?!). Make an effort to pay attention to your portfolio.  It will pay off handsomely. Approach it as a hobby.
  4. When talking head preacher-types sermonize to you that no active managers can outperform the indexes, they are wrong. That is simply not the case.
  5. With some diligent research, you, too, can uncover great mutual funds and ETFs which have low fees and a history of outperformance.
  6. With the tools available to us today as individual investors, we can continue to identify the FANG equivalents for 2017 to achieve impressive profit and growth objectives.

My 3-prong recipe  for safe growth in your portfolio is the following.

  • CORE Portfolio ( 0 - 100%) — Index ETFs, Blue Chip Mutual Funds
  • EXPLORE Portfolio (0 - 20%) — “Best of Breed” per each of your selected asset classes, either ETFs or mutual funds.
  • SUPER EXPLORE Portfolio (0 - 10%) — A select basket of the leading stocks.

This recipe offers you diversification, index-beating growth, and fee minimization. Beyond that, it simply asks for a little love and attention once in awhile!

Trade well; trade with discipline!
- Gatis Roze, MBA, CMT

StockMarketMastery.com

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Gatis Roze
About the authors: , CMT, holds an MBA from the Stanford Graduate School of Business and is a past president of the Technical Securities Analysts Association (TSAA). He is also the co-author of Tensile Trading: The 10 Essential Stages of Stock Market Mastery (Wiley, 2016). A full-time investor for over 25 years, Gatis has taught sold-out investment courses throughout the Pacific Northwest and beyond since 2000. Learn More

Grayson Roze
is the author of Trading for Dummies (Wiley, 2017) and Tensile Trading: The 10 Essential Stages of Stock Market Mastery (Wiley, 2016). He has worked in the financial services industry for StockCharts.com since 2012, and now serves as the Business Manager for the company. He holds a Bachelor's degree from Swarthmore College. Learn More
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