Don’t worry, go fishing

While most of us enjoy chasing higher returns by moving in and out of stocks, ETFs, and mutual funds, some perhaps wise investors build a diversified portfolio and just let it run.

It’s human nature to try to beat the market by trying to pick one bagger out of ten or taking advantage of economic growth in India or Brazil. There is no question that outsized returns are achievable, and the dismal performance of broad indices like the S&P 500 in recent years has frustrated most passive investors.

While we offer investors six model ETF portfolios, one of the most popular is our “Gone Fishing” portfolio, which has been part of our ETF starter kit and hasn’t changed a bit. It contains 14 ETFs ranging from iShares COMEX Gold (IAU) to an ETF that tracks the S&P Global 100 (IOO).

30% of the portfolio is allocated to three fixed income ETFs, such as iShares Lehman Aggregate (AGG), 20% to broad international and regional ETFs, such as iShares MSCI Pacific Ex-Japan (EEP). 20% of the portfolio is allocated to US stocks with a good balance between small cap, mid cap and mega cap.

How has this simple and balanced portfolio fared? In 2005, it was up 11.43% vs. less than 5% for the S&P 500 Index, and so far this year, it’s up 6.3% vs. 2.97% for the S&P 500. The key, of course , is the right mix of ETFs so that the failures are likely offset by the burning sectors.

ETFs present investors with the best tools to build a “Gone Fishing” portfolio because they are low cost and tax efficient. The portfolio’s weighted annual fee is 0.58% and there have been no capital gains distributions to the iShares family of ETFs for the past four years.

But for those adventurous souls who crave the thrill and rewards of chasing higher returns with commensurate risk, ETFs are also a good tool. Country-specific ETFs are often highly concentrated due to market capitalization weighting, and sector ETF funds also offer interesting but challenging opportunities. ETFs can also be shorted and options are available for many of them.

Chartwell’s Global Tactical Asset Allocation ETF Portfolio and Service ($1,995 a year) contains a more limited number of ETFs and closed-end funds and doesn’t shy away from risk. Thailand (TF) and Brazil (EWZ) are two current holdings and the portfolio is up 23% this year outperforming the S&P 500 Index by a 7-to-1 margin.

If you are a “Gone Fishing” or more aggressive, trading-oriented investor, ETFs should be in your investment toolbox and can complement stock and mutual fund holdings very well. Be sure to allocate most of your portfolio to a conservatively diversified portfolio to protect your capital and always have time to fish throughout the day.