2007 Portfolio Update: Mostly Managed Portfolio Outperforms

From the beginning of my experiment with 6 hypothetical portfolios, through the end of 2007, the WylieMoney 20 Mostly Managed portfolio of 20 mutual funds I hand picked, all available through a single brokerage, all with no loads or fees each available for an initial purchase of $2500 or less allowing $100 or less subsequent additions, was the clear victor.

The WylieMoney 20 portfolio beat a portfolio of 3 Vanguard index funds matching its coverage of domestic stocks, international stocks and bonds by over 1%. It did this, despite the fact that one of the funds in the WylieMoney portfolio was a real estate fund which was down 17.59% while the 3 fund Vanguard index portfolio had no comparable real estate exposure.

Comparing a portfolio of 20 Vanguard funds against the WylieMoney 20 portfolio category by category, showed the WylieMoney approach even more successful with WylieMoney beating Vanguard over 2%. Not bad for 2 equally weighted portfolios in less than a year.

I set these up as hypothetical non-retirement accounts. The minimum purchase amounts for mutual funds are often different for retirement vs non-retirement accounts. Also, non-retirement accounts are taxed annually so taxes owed as a result capital gains distributions can eat into performance.

I have not come up with a good way to account for the hypothetical tax impact of these funds. The "Tax Cost Ratio 3 Year %" for the WylieMoney portfolio is 1%. For the 3 Fund Index, the 3 Year Tax Cost ratio is 0.57%. If this were the actual tax cost for 2007, WylieMoney would still be the clear victor.

Those of you who own a number of mutual funds and saw the sizable capital gains distributions made this November and December have good reason to suspect that this year's tax bill will be much higher than the previous 3 years. My understanding is that the major reason for this is that 2004-2006 saw significant capital gains, but fund managers were, on the whole, able to offset gains with losses from 2001-2003. Into 2007, the gains were still strong, YTD the diversified portfolios earned 8-12%, but there were no more losses on the books to offset the gains, thus the distributions.

So even though the WylieMoney portfolio is in the lead, the three fund portfolio is well worth watching, both for its tax advantage and its simplicity.

The 3 Year Tax Cost Ratio% of the Lazy 20 Mostly Index portfolio was 0.8%, much closer to the Mostly Managed portfolio.

WylieMoney 20 Mostly Managed

Three Fund Index

WylieMoney Slowly

Lazy 20 Mostly Index

ETF 20

S&P 500

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