Investment Strategy

Now that we know we’re seeking a return greater than 7% per year (and hopefully much greater), and can bear the volatility imposed by market cycles that typically last around seven years given the relatively long retirement horizon, we’re left to construct a portfolio that pursues high returns while managing volatility. We know that stocks have returned 11-12% per year on average, and bonds have returned an average of 5.5% over time.  We will therefore seek a diverse mix of stocks, bought using mutual funds and ETFs to reduce transaction costs and research needed to maintain a diverse portfolio.

High volatility is often associated with high returns, but we will seek to pursue high returns with a diverse mix of mutual funds or ETFs (which are themselves typically each less volatile than stocks due to the diversity of stock holdings within a fund) to manage volatility, being careful to spread assets among three or four high-performing funds that are desirably not strongly related or correlated with one another.  The relatively small number of funds reduces the risk of diluting returns from strongly performing funds with poorer performing funds, while diversity among funds helps reduce volatility of a portfolio that may have only a few relatively narrow asset classes represented.

Funds are sorted based on a few criteria – no sales loads or excessive fees for selling within a few months of purchase, and recent performance over the past year.  Preference is given to funds that have stronger performance over recent months, in an attempt to identify funds that are near the beginning of a positive cycle rather than near the end of a cycle of outperforming the market.  We therefore use a weighting of 1, 3, 6, and 12 month returns, similar to what is employed in the No-Load FundX newsletter, with additional attention given to diversity among funds, market conditions and events, and other factors.