Simplifying Your ETF Portfolio for Better Returns2015-06-24
We often tell investors there is no shame in a simple portfolio – advice that is easier given than followed when it comes right down to it. Among many retail investors, there is a sense that owning but a few securities makes for a portfolio that is too simple, lacking in complexity.
That stigma, however, is based on little fact, as a simplified portfolio often outperforms a more complex and active one.
Woes of the Average Investor
To be perfectly frank, the average investor is relatively ineffective when it comes to generating stable and solid returns. A recent study from JP Morgan cited that the average return for retail investors over the last two decades has fallen to 2.3%; inflation averaged 2.5% during that time, which means the average investor was actually losing money each year (as far as purchasing power is concerned).
Over that same stretch, the S&P 500 and its three major ETFs (SPY, IVV, VOO) averaged a return of 8.2%. Stretch out that time period and the S&P 500’s average annual return is even higher, coming in at approximately 9%.
A 9% return each year is something that most portfolios can only dream of. At that rate, one’s money is doubled approximately every eight years.
See also A Closer Look At S&P 500 ETF Options.
Despite the staggering difference in these two returns, investors continue to fall prey to their emotions, chasing after markets with little discipline and an overly complicated set of holdings. Investors must remember that just because an investment is available, doesn’t mean it’s appropriate for a portfolio’s objectives. This rings most true with leveraged ETFs; they are designed for complex traders and should almost never be used as part of a long-term strategy.
Diversification aside for a moment, an investor holding solely SPY for the last 20 years would have quadrupled his or her initial investment as returns would’ve been significantly higher than for the average investor. This is demonstrated in the table below:
|Value||S&P 500||Average Investor|
The numbers speak for themselves. While many investors put time and dedicated research in to their holdings, the majority end up shooting themselves in the foot when all is said and done.
Improving Your Portfolio
We are certainly not suggesting that investors own only the S&P 500 fund, but the numbers do not lie. A relatively diverse and powerful portfolio is possible with just a handful of ETFs. It’s always a healthy exercise to re-examine one’s investments and see where fat can be trimmed and positions improved for the long term. Investors might discover a number of unneeded positions that can be captured using a broad ETF. ETFdb.com has a set of model ETF portfolios to help investors of all disciplines and interests get started.
Remember, simplicity is not a bad thing and as far as the numbers show, it just may be the key to improving your portfolio.
Follow me on Twitter @JaredCummans.
For more ETF analysis, make sure to sign up for our free ETF newsletter.
Disclosure: No positions at time of writing.