I have invested in most exchanged-traded securities over my 30-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 25 of those 30 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 (NASDAQA: 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 a 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 are the best mutual funds to populate each category. (The recommendations are free to you, but they cost me to produce.) I offer to you the following mutual funds with an allocation percentage for each:
- T. Rowe Price Blue Chip Growth Fund (TRBCX) (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)
- Wasatch Ultra Growth Fund (WAMCX) (Small-Cap Growth) (20% Allocation)
- Vanguard Dividend Growth Fund (VDIGX) (Growth & Income) (10% Allocation)
- Vanguard Equity-Income Investor Fund (VEIPX) Growth & Income (10% 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.
To be sure, past performance is no guarantee of future performance, but the data show it's frequently smart to bet as if it is.