I have invested in most exchanged-traded securities over my 35-year investing career: individual stocks and bonds, royalty trusts, master-limited partnerships (MLPs), real estate investment trusts (REITs), exchanged-traded funds (ETFs), closed-end funds (CEFs), and options. If you can buy it through your brokerage account, I've bought it.
For the past 30 of those 35 years, I have avoided one investment class as if it were the gossipy, nose-always-perched-atop-the-fence, meddling neighbor. I refer to mutual funds.
Perhaps my snobbery is grounded in educational hubris: My degree is in finance. The degree is augmented by a Chartered Financial Analyst designation. I can analyze stocks, bonds, et al. on my own, thank you. Why pay a percentage point or two annually when I can pay a few basis points a targeted index-based ETF charges? Why pay a percentage point or two annually for a mutual fund that fails to beat its respective benchmark?
Until recently, I had no answers that would persuade me to consider mutual funds. Today, I do. The answers come courtesy of business and finance personality Dave Ramsey.
You get what you pay for. Mutual funds are no exception.
Contrary to efficient-market hypothesizers (Burton Malkiel being most prominent), you will find mutual funds that consistently -- over years and decades -- beat their respective benchmark and the broad stock market as measured by the S&P 500.
Performance comes with a price (as it should). You frequently will need to pay more than a percentage point annually for the superior performance. The price for the right mutual fund is worth paying. It's worth sacrificing dimes to collect dollars.
Income has been a dominating feature of my investments throughout my investing career. Most everything I have owned has paid income -- dividends, interest, distributions, or royalties. My stock portfolio has been dominated by high-yield and dividend-growth stocks. Growth stocks have been given the short shrift.
Income stocks are dominated by value, which has trailed growth by a country mile over the past decade. Exxon Mobil (NYSE: XOM) and Altria Group (NYSE MO) or Google (NASDAQ: GOOGL) and Amazon (NASDAQ: AMZN) for the past decade? The choice is so obvious it's hardly worth mentioning (but I'll mention it: Google and Amazon).
To be sure, market sentiment can shift to embrace value, but it's unlikely to abandon growth. The investing zeitgeist is imbued with a growth mentality.
Income and value stocks still reside in my investment portfolio; I have reallocated the majority portion to growth. Because I'm a bit naive on matters new and trending, I'm willing to let someone more attuned to the times take the reins. What's more, I'm willing to pay for a superior jockey. My growth allocation is allocated all to mutual funds.
Okay, so how do I allocate my growth allocation?
I return to Ramsey, who recommends allocating to four growth-dominated mutual-fund strategies: growth, aggressive growth, growth and income, and international. Ramsey's allocation recommendation -- backed by extensive research -- is appropriate not only for the growth allocation, but for the entire portfolio allocation.
After some research of my own, I have amended Ramsey's four-prong growth strategy to five prongs: large-cap growth, mid-cap growth, small-cap growth, growth and income, and international. Twenty percent is allocated to each category.
After additional research, I conjured what I believe is a strong amalgamation of mutual funds (open to everyone) to populate each category. I present the following mutual funds with an allocation percentage for each:
- Franklin DynaTech Fund (FKDNX) (Large-Cap Growth) (10% Allocation)
- American Century Focused Dynamic Growth Fund (ACFOX) (Large-Cap Growth) (10% Allocation)
- Artisan Mid Cap Fund (ARTMX) (Mid-Cap Growth) (10% Allocation)
- DF Dent Midcap Growth Fund (DFDMX) (Mid-Cap Growth) (10% Allocation)
- Congress Small Cap Growth Fund (CSMVX) (Small-Cap Growth) (15% Allocation)
- Vanguard Dividend Growth Fund (VDIGX) (Growth & Income) (12.5% Allocation)
- Vanguard Equity-Income Investor Fund (VEIPX) Growth & Income (12.5% Allocation)
- Franklin International Growth Fund A (FNGAX) (International) (10% Allocation)
- Brown Capital Inter. Small-Company Fund (BCSVX) (International) (10% Allocation)
Ramsey claims his mutual-fund portfolio has returned 12% annually on average for the past 30 years. Perhaps he fudges a bit to the upside, but if he does, the fudging is little more than an incidental thumbprint. The mutual-fund portfolio above as recommended has returned roughly 12% annually on average (an average calculated over many years).
To be sure, past performance is no guarantee of future performance, but the data show it's frequently smart to invest as if it is. Keep in mind, I'm not your personal financial advisor. This portfolio could work for you, or it could work against you. Guarantees are few and far between in our brave new world. I advise to do nothing until you know what you are doing.