Wall Street, as well as numerous other financial institutions, spend enormous amounts of money trying to persuade the investing public that their products and/or expertise can beat the market. Makes sense if they make money whenever you, the public, buy, trade or sell something. My extensive reading of academic investing articles has convinced me that the sanest way to invest (as opposed to gamble) is to construct portfolios using index mutual funds or exchange traded funds (ETFs) that try and capture the best risk/reward profile for a given client's risk tolerance and time horizon. Research has shown convincingly that frequent trading by an investor leads to under-performance in the long run. The main idea behind index investing is over the long term an investor can expect to receive the market return for a given asset class minus the expenses paid. To beat the asset class performance over time means the investor has access to something the market as a whole does not..usually information. The only information that is not public in the information age is inside information.

Another important component of growing your portfolio is a low annual expense.  By this, I mean the fees that are taken out from the gross return of the investment before you receive the net return.  According to the Investment Company Institute's 2009 Fact Book, the average actively managed US stock mutual fund charges investors 1.46% per year.  This is the fee you pay for the fund manager to hopefully "beat the market".  In comparison, the Vanguard Large Cap ETF (VV) is composed of 733 companies and levies .13% per year after you pay a $9.95 brokerage fee to buy it.  The mutual funds and ETFs I use to construct portfolios range from .13% to .38% per annum.  Most of them are .35% and under.  If you have a $100,000 portfolio an extra 1% in fees would be $1,000 annually.  Compound that out 20-30 years and the investor will take a pretty heavy hit.  Even with my usual 1% management fee added in, an investor usually pays less per annum with PDM Advisors than he/she would trying to build an intelligent portfolio of actively managed mutual funds and monitoring them alone.

So, what are you getting for the 1% annual management fee?  Using computer programs and knowledge of how asset classes can be intelligently constructed, I compose a portfolio consisting of 6-10 asset classes which I believe matches the client's risk/reward profile.  Once established, I monitor all my portfolios on a daily basis.  Changes to the portfolios are infrequent.  Rebalancing once a year and some minor tweaks here and there to reflect the changing marketplace are usually the norm.  The most common thing my clients tell me is "thank goodness you are watching and worrying about my money, I don't have the time or interest".  If that sounds like you, maybe we need to meet for coffee.

Once a quarter, I send reports to my clients and deduct .25%.  The reports show the clients performance against the S+P 500 and the Russell 3000 and include a Commentary from me on economic topics which effect the markets.  Of course, clients are encouraged to e mail or call 7 days a week (try and reach most financial advisors on the weekend!) with any questions or concerns.