New User?FREQUENTLY ASKED QUESTIONS
YOU ASKED, WE ANSWERED. THESE ARE THE QUERIES WE GET MOST OFTEN FROM USERS OF THE POWERFUND PORTFOLIOS.
WHAT ARE THE POWERFUND PORTFOLIOS?
Powerfund Portfolios put into action the MAXfunds way of investing in mutual funds. The Powerfund Portfolios are two well-diversified model portfolios composed of 10-15 no-load, low-fee mutual funds and Exchange Traded Funds (ETFs). The Conservative Powerfund Portfolio is designed for moderate-risk investors; the Aggressive Powerfund Portfolio is for (you guessed it) higher-risk investors.
We tell Powerfund followers the percentage of their money to invest in each fund, and they assemble the portfolio they're following in their own brokerage accounts. When we make a trade in a model portfolio, followers of that portfolio mimic the trade in their account.
WHAT IS A POWERFUND?
Powerfunds are mutual funds ignored by most investors, but are the very funds with the best chance to outperform in the coming months and years. Studies show that individual investors generally decide which mutual funds to buy based primarily on recent performance – the best performing fund of the last few years will probably be the best performing fund going forward too, right? The problem with this strategy is that, for various reasons, these top performing funds are not only unlikely to continue outperforming going forward, but actually more likely to underperform the average fund. Individual investors often buy funds at exactly the wrong time. They then watch their funds decline in value, and (to add insult to injury) give up and sell shortly before a big turnaround. Then they do it all over again.
Powerfunders do the opposite. We use our proprietary MAXfunds rating system to weed out good funds in the most out-of-favor fund categories by analyzing where the buy-high sell-low crowd is going, and then going in the other direction. Our goal is to buy mutual funds before they post big returns, not after, and hold them until they become more popular.
HOW MUCH MONEY DO I NEED TO BUILD A FOLLOW A POWERFUND PORTFOLIO?
The minimum investment requirement (the least amount of money you'll need to assemble a Powerfund Portfolio) in a regular taxable account is currently $42,000 (as of 7/1/10). However, in nearly every fund category, we supply alternatives with lower minimums so you can follow our model portfolios with a smaller investment. With a few changes, you should be able to go as low as $20,000, if not lower. If you're using an IRA account, you might be able to invest as little as $15,000 or even less, since most mutual funds lower their minimum investment requirements for IRAs.
HOW MUCH DOES IT COST TO OWN A POWERFUND PORTFOLIO?
Since there is no charge to subscribe to Powerfund Portfolios, you only pay your broker's fee to buy and sell ETFs and mutual funds that are not available for no transaction fee (NTF) AND what the funds themselves charge to own.
The Powerfund Portfolios have a weighted fund operating expense (management fees, other expenses, etc) of about 0.90% for our Aggressive portfolio and 0.87% for our Conservative Portfolio. If you choose more NTF funds, which generally have higher annual operating costs, this amount could go up slightly. If you select lower fee favorites and have a larger portfolio that can take the hit of extra commissions to buy cheaper funds, you could see the annual fee drop significantly to well below 0.70%.
We expect actual commissions to buy and sell funds to fall in the $50 range per year on average, with an initial allocation cost of about $75. This assumes you buy the funds in the portfolio and pay approximately what we pay in our real money account, which is $9.99 per ETF or closed end fund, $24.99 for non-NTF funds like Vanguard funds, and no fee for NTF funds.
Since we're using real money, we'll detail exactly what the costs are to own and invest in these portfolios as time goes by. Keep in mind our quoted performance figures beginning on 6/30/10 include actual trading costs in addition to fund charges, but before that date, we only included fund operating expenses (which represent the bulk of the total costs).
There could be short-term redemption fees either at the brokerage level or fund level, but we generally avoid these by owning funds long enough to avoid those extra charges.
HOW OFTEN DO YOU TRADE?
As rarely as possible. Trading increases costs. The Powerfund Portfolios don't use a complicated fund timing scheme or difficult-to-follow trading system. We manage high-quality portfolios for long-term investments, and keep turnover low. Generally, we make just a few trades a year. From 2002 until 2010, we held the typical fund in the model portfolios for two years. We made a trade about every year on average, but it was for a few funds, not a complete changing of the guard. Note that we tend to trade more if the market moves substantially up or down. If we’re in a Dow 10,000 rut for three years, we may trade only once. If we go from below Dow 7,000 to over 11,000 in a year like we just did, you'll see more trading. We traded more in the last three years then we did during the relatively calm mid-2000s. That's because we try to sell high and buy low by cutting back on stocks after a big run up, and increasing our stake after a drop. We also shift categories around, so even with no market action, if say, Small Cap Value funds beat Large Cap Value for a few years, and investors pile into smaller cap funds, we may shift from one to the other.
HOW DO I KNOW WHEN YOU'VE MADE A TRADE?
Join our mailing list. We send an email alert whenever we make an adjustment to a model portfolio. You can also visit each portfolio's Trade Center to review the latest trade and get caught up if you've missed one. You do not have to sign up, but it will make following the trades easier. We do not sell your name to the highest bidder or spam our list, although it is entirely possible we may note new features on the MAXfunds.com site or our fabulous managed account service in our own infrequent emails.
WHY DO YOU HAVE DIFFERENT FUNDS FOR THE SAME CATEGORY IN DIFFERENT MODEL PORTFOLIOS? I THOUGHT THERE WAS ONLY ONE BEST FUND IN EACH CLASS.
In some cases, there are funds that we don't pick for our "Favorite Funds" list simply because they're too risky. That doesn't mean those funds don't have a place in a well-diversified portfolio. In the Aggressive portfolio, for example, we try to add a bit more risk in order to potentially increase the return.
We also try to make the portfolios as "investable" as possible. A fund that's a favorite might have a $10,000 minimum investment requirement. If our portfolio calls for a 5% or 10% position in that type of fund, an investor would need $100,000 to build that portfolio. That's more than many investors can invest. In such a case, we may go with our second favorite pick if that fund has a $1,000 or $2,500 minimum.
We sometimes use a lower risk fund in the same fund category for our Conservative Portfolio, and a higher risk favorite in the Aggressive Portfolio.
The two Powerfund Portfolios are carefully assembled groups of funds designed to give the majority of investors the highest risk-adjusted return with the lowest upfront investment requirement. When we devised our list of favorite funds, we didn't take minimum investments into consideration (although we don’t consider institutional grade funds we use with clients that may have minimums of $25,000 to $1,000,000 or more).
Think of it this way: the Powerfund Portfolios are optimized for total investment in the $40,000 to $100,000 range. For larger or smaller portfolios, we use different funds, usually just to save on fees.
SOME OF THESE FUNDS AREN'T AVAILABLE AT MY DISCOUNT BROKER - WHAT SHOULD I DO?
Click the View Fund Alternates link at the bottom right corner of each individual Powerfund Portfolio holding. That link will take you to a list of our favorite funds in that category, one of which almost certainly should be available at your discount broker. Keep in mind all ETFs are generally available at all discount brokers, and we include an ETF alternative as well as a fund typically available for NTF at most discount brokers. Always check to see if a fund is available at your broker, and what the cost is to buy and sell.
SOME OF THESE FUNDS AREN'T AVAILABLE IN MY 401K - WHAT SHOULD I DO?
Probably the biggest problem investors have following the Powerfund Portfolios is that their company 401K may not offer the funds we're recommending. Today, it's not uncommon for companies to be served by just a couple of large fund families, which leaves 401K investors with limited choices.
There are two ways to solve 401k compatibility issues: First, you should look at the fund category allocations. Our model portfolios are created using a "top-down" approach: we choose the types or categories of funds we want, then the percentage allocations, and then the actual funds. For example, when we include Vanguard High Yield Corporate, we're recommending you have 10% of your money in high-yield bonds, and this happens to be our favorite fund for this risk level portfolio. You may only have one high-yield bond fund available to you, in which case you should invest 10% of your portfolio in that fund.
Some categories, like utilities or real estate, won't be available in your 401k. In that case, just replace that allocation with a stock index fund, or something similar, in order to match our overall stock allocation.
I ALREADY OWN SOME FUNDS - DO I HAVE TO SELL THEM TO FOLLOW THE POWERFUND PORTFOLIOS?
Not necessarily. There are thousands of funds out there. In our opinion, around 20% are worth hanging on to if you already own them; particularly, if you would incur a taxable gain, contingent deferred-sales charge (CDSC), or short-term trading commission at your discount broker if you sold. You might also be unable to buy our pick for one reason or another (maybe the minimum is too high, or your 401K does not offer it). Our portfolios are composed exclusively of no-load funds. When we created them, we didn't even consider load funds. If you own a high-quality load fund equivalent of one of the Powerfunds, the only negative may be the load, which you already paid (with an A class front-end load, not a B or C class "level" load), so you might want to stick with your choice. You may also have access to load funds with no load in your 401k. Some are decent choices. When in doubt, check your fund's MAXrating on the MAXfunds.com site by typing in the ticker symbol.
On the other hand, we keep careful tabs on the funds we include in our model portfolios, and we might swap a fund in a particular category for another if we have reason to believe there could be trouble ahead - such as a management change, or dramatic rise in assets under management. This kind of monitoring is obviously something we can't do for substitute funds. Also note that if we're in emerging market stocks, and you previously elected to keep your emerging market stock fund, and we sell out of emerging markets entirely, you'd need to sell your fund as well.
WHY SO MANY BOND FUNDS? DON'T STOCK FUNDS OUTPERFORM BONDS IN THE LONG TERM?
Many pundits will remind you that during any long time period, say 10-20 years, bonds won't perform as well as stocks. Now after a decade of bonds beating stocks, experts are quiet on the matter. Ten years ago, we were more optimistic about bonds than stocks. We’re slowly changing course, but bonds still play a role in our Portfolios.
Certain bond classes are risky enough (with commiserate yields) to be useful in diversifying a higher-risk/higher-return portfolio with a long time horizon. We often use high-risk bond funds in our higher-risk portfolios, and lower-risk bond funds in the lower-risk portfolios.
In 2002, we wrote here, "Just because stocks have outperformed bonds in the past does not mean they will in the future, especially after adjustment for risk. In fact, market valuations of the last few years make it less likely the future gap between stock and bond returns will be so wide. So expect to see some bond fund allocation in both of our portfolios for quite some time." Now that these bonds have fared so much better than stocks this past decade, we’d expect to have lower allocations to bonds than we had on average since we started these portfolios in early 2002, but we'll still use bond funds to reduce total risk of a crash, and as a parking place to have something to add to stocks when stocks tank again, as they eventually will.
NOT ALL OF THESE FUNDS ARE AVAILABLE ON THE NO TRANSACTION FEE (NTF) SUPERMARKET AT MY DISCOUNT BROKER. SHOULD I STILL BY THEM?
Although fund supermarkets provide an easy one-stop mutual fund shop, they also have some drawbacks. First of all, investors need to know there are two ways to buy a fund from a fund supermarket. Some funds are part of what's called a no transaction fee (NTF) list, which means fund buyers can buy into and out of a fund (as long as they don't trade often) for free.
Other funds may be available, but investors must pay a commission to buy or sell, similar to trading a stock. You can almost always buy these same funds directly from the fund family without paying a fee.
Should you ignore all funds not available on the NTF systems? There's no such thing as a free lunch. Funds get onto the NTF system by paying a fee to the supermarket. That's why the broker can afford to let you buy and sell certain funds for nothing.
Funds pay NTF supermarket fees out of the expenses they collect from shareholders. Funds on the NTF systems almost always have higher fees than funds not on them. Since MAXfunds chooses funds for our portfolios based partially on low fees, it shouldn't be surprising that some of them are not available on NTF systems.
Most of the funds in our portfolios are held for at least a year, so don't fret too much about NTF availability unless you're purchasing less than $7,500 or so (in which case, the fee can be quite large in percentage terms, and raise the total cost higher than the lower non-NTF fund) or adding money regularly. Don't forget you can always buy any of these funds directly from the fund company and pay no fees, although there is a loss of convenience. A $20 commission on a $7,500 fund purchase is 0.26%, so the fund should cost quite a bit less to warrant getting hit with this fee at a broker.
DO YOU TAKE ANY MONEY FROM THE FUNDS YOU RECOMMEND?
No. Unlike most brokers and many advisors, we don't accept money from fund companies based on the funds you buy. Unlike brokers, we don't "sell" funds. You'll see advertisements in the Powerfunds Portfolio from various financial services companies, including mutual funds, but our ad sales and recommendations are completely separate. We don't sell the ads. Google does.
We build our Powerfund Portfolios out of funds we like, not funds that advertise with us. As with all magazines and newspapers, there may be some funds we like that advertise with us (although we don’t know who they are until the ads appear on our free website). That's because we have one of the largest all-mutual-fund audiences anywhere (which appeals to mutual fund marketing departments), not because they receive special treatment or recommendations.
WHICH RISK LEVEL PORTFOLIO IS RIGHT FOR ME?
To determine which risk level portfolio is right for you, read our guide by clicking here.
WHY ARE THERE SO MANY FUNDS IN THE POWERFUND PORTFOLIOS?
We feel the best way to safely achieve good returns, year after year, is to diversify into several distinct asset classes. We chose the 10-15 funds that are the most attractive to us, and that work well together to moderate risk (i.e., they offer true diversification). We also chose the bare minimum number of funds we feel are necessary to achieve these goals while letting us control the categories we invest in. You'll likely be surprised how low each portfolio's risk is compared to owning just a few similar funds. There are plenty of good funds that own bonds and stocks (balanced funds) that would let you own fewer funds, but we like to target out-of-favor fund categories ourselves. Investors with less than $15,000 would need to make some compromises we don't make in these portfolios.
WHY ARE THERE SO FEW FUNDS IN THE POWERFUND PORTFOLIOS? I THOUGHT THERE WERE 40 TYPES OF STOCK FUNDS ALONE - DON'T I NEED TO OWN MORE?
We build portfolios composed of categories that complement each other in order to lower portfolio volatility. We also try to have less overlap between funds. We wouldn't own both a global fund and a large-cap growth fund, since they're likely to overlap on certain stocks (global funds own stocks in the US and abroad). Most importantly, we select the categories we believe have the greatest opportunity for growth and are attractively priced. We may own a small-cap value fund now, but move into mid-cap growth in a year if the prices run up too far in small-cap value compared to underlying fundamentals. This is part of our "top-down" portfolio-building process. We find a selection of 10-15 mutual funds does the trick.
