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Funds you can own forever? Ha!

When you have a constant need to create financial content, you read a lot. And you file a lot of what you read. You never know when a well-done interview, bit of research, or historical review might come in handy. (I just know that a week after I throw it away, I'll need it and won't remember the author or source.) Over time, it piles up, creating something of an organizational nightmare, requiring a periodic purging of the older material.

This is something I'm not particularly good at. I hate going through old files, looking for what might still be useful. It's very time-consuming because you have to briefly read the material you're sorting through. After a few hours you have a thinner, better organized file (one down, several dozen to go), which doesn't seem an adequate reward for the somewhat boring, unpleasant time invested. So, you may not be surprised to learn, I don't do it very often. No, not often at all.

Yesterday, the chaos reached the tipping point and I forced myself to begin the process. Almost immediately I got distracted. I came across a 1993 article from Kiplinger's Personal Finance magazine titled "Funds to Hold Forever" (a laughable idea if I ever heard one — that must be why I kept it). The article named six funds — four actively managed stock funds, one bond fund, and one Wilshire 5000 index fund.

I couldn't resist checking up on the four stock funds to see how investors would have done taking Kiplinger's advice in the late summer of 1993 and holding them the past 18 years (through May 31, 2011).

At first, they seemed to have done better than I expected. First, all four are still in existence, which is no small thing. And second, while they trailed the market, they didn't do so dramatically — they collectively returned, on average, 6.9% annually during the period compared to 8.3% for the market.

But of course, compounding over almost 18 years makes that seemingly small 1.4%/year difference into a pretty significant gap. $100,000 invested in the Wilshire 5000 would have grown to $412,000 compared to only $324,000 for a portfolio equally divided among the four funds. Hmmm...not so great after all.

As SMI readers know, we believe that attempting to pick good funds that can be held for the long haul is a fool's errand. That's why we "upgrade" among the current performance leaders. During the same almost-18 year period, SMI's Fund Upgrading portfolio returned 10.4% per year, which would have grown a starting portfolio of $100,000 to $575,000. That's $251,000 more than the portfolio made up of "funds to hold forever."

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