Mad Money Machine

ETF Portfolio Crosses 20%!

Wow, the ETF Portfolio crossed the 20% gain mark for the first time today. It is time to take a step back and talk about this some.

As of today, the ETF Portfolio is up 20.1% and the 2006 Portfolio of Select Jim Cramer Featured Stocks (Cramer Portfolio) is up a sickly 1.1%. Why? There are many reasons for the downfall of the Cramer Portfolio. First, they were most all US companies. As you can see from the returns of the ETF portfolio, the European and Emerging Market countries were the places to be for big big returns. Next, the Cramer Portfolio didn’t have REIT exposure. Holy cow, who would have thought the REITs would have put in yet another fantastic year? A 35.6% gain as of today is phenomenal, astonishing, miraculous.

Next, some of the stocks in the Cramer Portfolio had gains, but only after we sold it. Like Crocs (CROX). We bought it on the Cramer hype at $29.21. Sold it on his call for $21.48. And it currently rests at $42.12. Nobody can time the markets or individual stocks, not even Cramer. I’m convinced that if we look at the aggregate of Cramer’s calls, we would find that he is correct no more often than the market itself; his picks don’t beat index funds. (You can have a look at cramerwatch.org, or yourmoneywatch.com, or caps.fool.com search for trackjimcramer, for detailed tracking of all of his picks). Also, I have a feeling that his ActionAlertsPlus account is trailing the S&P 500 this year. If he can’t pick them, what chance do we have?

Yourmoneywatch.com has the results like this so far:
Cramer’s Total Portfolio Performance: +8.77%
DOW +13.92%
S&P 500 +12.37%
NASDAQ +10.84%
Russell 3000 +13.34%

I realize that if you took 1000 people and had them pick some stocks that Cramer suggests, that we’d get 1000 different results. But take a look at the Investment Guru Challenge. Since the beginning of the 2nd quarter people have been playing with $100,000 in play money. Out of 233 entries, the ETF Portfolio is currently in 24th place. That is the top 10 percentile. Said another way, 90% of the other stock pickers did worse than the simple asset allocation buy and hold plan.

If you were skeptical of me, you may say that I have picked poor performing stocks for the Cramer Portfolio on purpose to make this point. No, these were Cramer’s featured stocks! I started out the year wanting to show how much MORE the Cramer Portfolio would make than the ETF Portfolio. Along the way I read Index Funds: the 12 Step Program for Active Investors and lots of other books and realize that nobody can pick stocks to beat the market. To minimize risk, you need to own everything. Live on the Efficient Frontier.

I got interested in investing because I wanted to make sure I could get on a path to financial independence (some call it retirement). I thought that to make the most of my money I had to be smart, do an hour of homework per week per stock, and listen to conference calls, read annual reports, calculate PE ratios, on and on. How ridiculous is it that the best way to invest is the one that takes the least amount of work?

Having said that, I do have a real chore ahead of me in trying to get all of my accounts properly allocated across assets. Two 401Ks, four IRAs, accounts at four investment firms, stupid investments in individual stocks that have gone up and now I’d have to pay the gobmint capital gains taxes if I sell them. Good problem to have in a bull market I guess. I think in the long term, it is better to pay the tax and get into the right asset allocation portfolio than risk my money on a single company. And if I buy something like an index ETF, I won’t need to sell it until I need the money, and therefore won’t be paying taxes until then. I like keeping my own money, do you?