A Explanation of What Most Portfolios Are Comprised Of & Why

A Balanced Portfolio
There is a general belief that a balanced portfolio is the safest way to invest. This is a variant of the mistaken belief that ‘Buy and Hold’ is a good policy. In a future blog, I will quote statistics and research showing the generally poor results that are achieved by investing in a range of mutual funds for a so-called ‘Balanced Portfolio’. For now, for the sake of brevity, I will restrict my comments to saying that investing in mutual funds is a fool’s game. More on this later.

Putting a Small Percentage of Your Holdings in ‘Speculative’ Stocks
Another widely held belief is that a maximum of 10% of your portfolio should be allocated to so-called speculative stocks, and 90% should be held in ‘blue chip’ and allocated among the various sectors.

Again, statistics show that this results in generally poor returns over any reasonable period. I will quote statistics published in The Wall Street Journal in August 2010 to back up this assertion, but in a future blog. There have been many claims of stellar returns over specific periods by investing in ‘safe’ ‘balanced’ ‘blue chip’ mutual funds, but I urge the reader to note the time periods selected, and to compare those periods to the actual movement of the general stock market indexes during the periods selected.

What you will find, is that stocks behave like a boat in the ocean subject to the rising and falling tides. In a period of a rising tide, almost all decent stocks rise, and in a period of a falling tide, almost all decent stocks fall. To claim that mutual funds are a secure investment is to claim that tides do not rise and fall.

Investing in ETFs and Other Instruments That Mirror Segments of the Market
If one does wish to invest in instruments that mirror the general market, or mirror segments of the general market, at a minimum, one should only purchase ETFs or any other instruments that do not have an enormous management fee attached. Statistics show, that the 2 or 3% that managers of mutual funds charge, ensure that over 90% of mutual funds do not do as well as the general market.

Why Do Advisors Say ‘Buy and Hold’?
Firstly, one has to discard all of those old clichés and start understanding the motivation of those that are giving advice. When you leave money in a mutual fund, the person that sold it to you receives a commission every month forever – so long as your money stays in the mutual fund. It is called the ‘Rider’. Does that give you any understanding of why the statement ‘Buy and Hold’ is repeated so often?

When you leave money in a mutual fund, the Managers of the Fund receive a large fee every month forever – so long as your money stays in the mutual fund. It is called the ‘Management Fee’. Does that give you any understanding of why the statement ‘Buy and Hold’ is repeated so often?

When you buy an ETF, these same people make money, but a lot less because they are admitting that they only follow the market and are not supposedly choosing specific stocks. Usually you pay a fee to purchase and a fee to sell ETF’s, and generally the manager charges only 20 to 60 basic points. A basic point is 1/100 of 1%. 20 basic points is 20/100 x 1%. Compare this to the average 2 ½% paid to a mutual fund manager which is roughly 10 times as much. If you buy a specific sector, that ETF always mirrors that sector.

Next – Some comments on what mutual funds invest in

By Larry Cyna

Mr. Cyna is an accomplished investor in the Canadian public markets for over 20 years, and has managed significant portfolios. He is a financing specialist for private and public companies, and has expertise in real estate and debt obligations. He has assisted private companies accessing the public markets, has been a founding director of public companies and continues as a strategic consultant to selected clientele. He is and has been a director, a senior officer and on the Advisory Board of a number of TSX and TSXV public companies in the mining, resource, technology and telecommunications sectors, and the Founding Director of two CPC’s with qualifying transactions in mining and minerals. He was an honorary director of the Rotman School of Management MBA IMC program, has completed the Canadian Securities Institute Canadian Securities Course & Institute Conduct and Practices Handbook Course, was a former Manager under contract to an Investment Manager at BMO Nesbitt Burns, a roster mediator under the Ontario Mandatory Mediation Program, Toronto, a member of the Institute of Corporate Directors of Ontario, a member of the Upper Canada Dispute Resolution Group, and the Ontario Bar Association, Alternate Dispute Resolution section. He obtained his designation as a Chartered Accountant in Ontario in 1971 and was the recipient of the Founder’s Prize for academic achievement together with a cash reward. He became a CPA in the State of Illinois, USA in 1999 under IQEX with a grade of 92%. He is a Member of the Institute of Chartered Accountants of Ontario and the Canadian Institute of Chartered Accountants. He holds certificates in Advanced ADR & in Civil Justice in Ontario, Faculty of Law, University of Windsor, certificate in Dispute Resolution from the Ontario Institute of Chartered Accountants. Previous accomplishments are Manager of Cymor Risk Consultants LP specializing in Risk Management Assessment; CEO of Cyna & Associates specializing in mediation and ADR; Founder & Senior Partner of Cyna & Co, Chartered Accountants, a fully licensed and accredited public accountancy firm with international affiliations; and was a partner in a large public accountancy firm. Mr. Cyna is well known in the Canadian Investing community. He is invited to, and attends presentations given by public companies usually 3 or 4 times each week. These presentations are intended by the various hosting companies to present their inside story to sophisticated parties and Investment Managers for the purpose of attracting funding, or of making parties more interested in acquiring shares of those companies. Being a part of this keeps Mr. Cyna deeply involved in the current market and leads to numerous investment opportunities.

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