Although 2009 was loaded with recovery green shoots, mostly in battered industries such as finance and retail, investors are best to be diversified during the later stages of recovery.
Green Shoots Give Way to Forests
When green shoots give way to forests, stocks that lagged the market during the bull run typically move with momentum, rising higher and quicker than the pre-recovery superstars. Much of the differential comes from individual industries. For example, banks flourished as rates plummeted during the recession and their margins increased. On the other hand, luxury goods makers and durable goods producers rallied, though not to the same degree as the greatest driver of demand: consumers, who still find themselves jobless.
Although this may seem as common sense investing advice, fund managers are often quick to ignore it. Many funds listed as “large cap value” mutual funds ultimately take on positions outside the namesake of the fund, choosing to follow the quick and easy returns of advancing industries with complete disregard to their main agenda. Fund managers, like any other employee or contractor, know that the success of their fund often relies on year to year returns, which help bolster marketable 3-5 year returns.
Playing it Smart
It is no secret that the fund industry has its flaws, especially when it comes to playing Wall Street by the book. In these uncertain times, investors are best leaving their retirement funds in their own hands with exchange-traded funds rather than mutual funds. ETFs are less costly, and investors know exactly what it is that they're buying. Unlike mutual funds which publish holdings quarterly, ETF holdings are published daily for the public to see.
Picking the Best
In moving forward, diversified portfolios are historically better positioned for recovery as hot sectors wane and new markets open up. One of the best, and most diversified investments is an ETF none other than Vanguard Total Stock Market VIPERs (VTI), which tracks the total stock market and offers an unbelievably low annual expense of .07%. A similar mutual fund may cost 5-10 times more yet provide little, if any, benefit to buy and hold investors.