New User?HOW TO MARRY A MODEL.
Our Powerfund Portfolios have posted solid returns since we launched them in early 2002, but they won’t make you any money if you don't actually follow them. To make the model portfolio investing process as easy as possible, we’ve developed this short guide.
STEP 1 - CHOOSE A PORTFOLIO
Both our model portfolios were designed to be diversified, low-cost, and deliver good risk adjusted returns. Follow the model portfolio that's appropriate for your risk level, and you’ll have a sound, low-cost mutual fund investment portfolio for years to come.
There are two Powerfund Portfolios: one for moderate risk investors (Conservative), and one for higher risk (Aggressive).
Please read our guide to determine your risk level and identify the appropriate model portfolio by clicking here.
You should NOT choose a portfolio to track solely based on the past performance figures here on our site. The fact that our Aggressive Portfolio gained more than our Conservative portfolio over the past year doesn't mean it's intrinsically better.
The Aggressive portfolio takes more risks to generate its returns than the Conservative portfolio does, and although it might make more in an up market, it will often lose more in a down one. Our worst one-month, three-month, and 12-month figures are all worse for the Aggressive Portfolio. From the beginning of April 2002 until the end of September 2002, for example, markets were weak. The S&P 500 fell 28%, and our Aggressive Growth portfolio dropped 15.6% during that period. Our Conservative portfolio retreated just 5.2%.
Although Wall Street wants investors to focus on how much they can make investing, you need to understand how much you can lose as well. Our current estimate of how much an investor can expect to lose, in the absolute worst-case scenario, in a single very bad year, is 30% in the Conservative Portfolio, and 40% in the Aggressive Portfolio. If you can’t stomach the idea of losing that much, you shouldn’t invest in that portfolio. For more on downside risk, check out our guide to choosing the right model portfolio.
Note: Our worst-case scenario is based on what we might expect to happen in a hypothetical year in which the market as a whole declined more than 35%. Our portfolios are more diversified than a U.S. stock market index, and often use bonds and stocks from around the world, so we wouldn't expect them to drop as much as the stock market alone would in bear markets.
STEP 2 - BUILD YOUR PORTFOLIO
We've done all we can to make building our model portfolios in your own brokerage account as easy as possible.
First, we choose mutual funds that nearly anyone can invest in. That means no funds with $50,000 minimums, and few funds that aren't available at most popular discount brokers, like TD Ameritrade, Scottrade, E*Trade, Firstrade, Schwab, and Fidelity. You should be able to build a complete portfolio with around $45,000 – even less in an IRA account, which usually has lower fund minimums. By using some lower minimum alternates you can start with much less than $45,000.
We also don't trade our model portfolios often. You won’t have to log into your online trading account every other day if you invest in a Powerfund Portfolio. We don’t ask that you follow some bewildering market timing scheme. At MAXfunds, we usually make allocation adjustments that last a while. We're not short-term traders, but not quite buy-and-holders. Since 2002, our average fund holding period has been two years.
When we do trade, it's usually to move money from an overheated category into an out-of-favor category. The funds we buy remain in our portfolios until something either changes for the worse in some fundamental way (i.e., a talented manager leaves, there's too much money in the fund, etc.,) or we believe there's not much value left in the category.
When you're ready to take the Powerplunge, your first stop should be your portfolio's Initial Allocator (you'll find the Conservative Portfolio's Initial Allocator here, and the Aggressive Portfolio's Initial Allocator here. Input how much you're going to be investing (at least $45,000 for non-IRA accounts, the minimum investment requirement for both portfolios,) click the button, and you'll see how much you need to invest in each fund.
Note: we have alternative choices in each fund category that will let you allocate less than $45,000 to the model portfolios IRAs should also be able to buy into most funds at lower minimums. Please review the minimum you need to buy at your chosen broker, as well as the fees and commissions they may charge, when weighing your options.
Although you can buy all of the funds in our model portfolios directly from the fund companies that run them for no commission (except exchange-traded funds (ETFs), which require a brokerage account for purchase), that process can be slow and inefficient. We recommend going with a mutual fund supermarket at a discount broker (we built our real money portfolio at TD Ameritrade, but Scottrade is another sound choice).
Unfortunately, there are also disadvantages to buying from fund supermarkets, not the least of which is cost. Most brokers offer a good selection of NTFs (no transaction fee funds) in which the fund pays fees out of higher annual expenses) but some charge much more than others to purchase low-fee funds like those from Vanguard and Dodge & Cox. If you haven't found a discount broker you're comfortable with, we suggest you comparison shop. Due to high costs for non-NTF fund ($49.95) trading, we can’t recommend Schwab, but you could buy our funds there and focus on alternatives with lower commissions, ETFs, and NTF funds.
STEP 3 - FOLLOW OUR TRADES
We don't trade much in the Powerfund Portfolios, but when we do, you'll want to know it. That's why the first thing you should do after building your portfolio is sign up for the Powerfund Portfolios mailing list. It's optional, since you don’t need to supply us with your email address in order to follow the portfolios, but then you won’t know when we make changes. We send email alerts to all list subscribers when we make a trade, update our monthly Powerfund commentary, or feature article content.
When you receive a trading alert, head over to your portfolio's Trade Center. You can take a peek at the Conservative Portfolio's Trade Center by clicking here, and the Aggressive Trade Center is here. The Trade Center features a chart displaying the moves we've made along with a link to a trading calculator you can use to determine exactly how much you need to sell of X in order to buy enough of Y.
Ideally, each investor would trade the same day we do. In practice, however, this can be difficult. There are two main reasons why you can’t (or shouldn't) always make a trade when we do: taxes and fees.
Sometimes, a new Powerfunder builds a brand new model portfolio only to discover the next week that we've sold one of the funds they just purchased. Although we've owned the fund for over a year, they just got in, and may have to pay a short-term redemption fee in order to sell it.
This is one of the unfortunate realities of following a model portfolio – there's simply no way we can time our buys and sells for Powerfund followers as we do for our Private Management clients, and some investors are going to build their portfolios at exactly the wrong time.
If you turn out to be one of those unlucky few, don't worry. Our advice is to wait a month or two to sell if it will save you a bundle in redemption fees. Check the updated short-term redemption fee status from the fund company in addition to what your broker may charge before making any sales. Note that most NTF funds will incur a broker's commission if sold within 90 days of purchase.
The other problem is taxes. For those following our portfolios in an IRA-type account, this is a non-issue, but for taxable accounts, long-term gains (securities held for a year or more and sold at a gain) are taxed at a lower rate than short-term gains (profitable sales made in less than a year). We don’t know your personal tax situation, or if you have other losses to offset those gains, but in general, you don’t want to realize a taxable gain in say, 11 months, if you could simply wait a month to sell and pay less in taxes.
You'll have to use your best judgment here, but often you'll have opportunities to follow our overall strategy and be tax and fee favorable. For example, if we go from 60% to 55% stocks by selling a stock fund due to the market's strong performance, and you want to follow us from 60% to 55% stocks but need to wait for a few more months to sell the fund we are selling in order to avoid fees or lower your taxes, consider selling a different stock fund that isn’t at a gain or that you've held for over a year.
The good news is that the longer you stick with the Powerfund Portfolios, the less you'll have to concern yourself with short-term trading consequences. It’s worth noting that we're now using real money in our model portfolios, and trying to minimize short-term redemption fees and trading commissions. Once you've been in a model portfolio for a year, you'll see we make very few tax inefficient trades, and almost never incur short-term trading fees (and if we do, it's for a very good reason).
