Are Mutual Funds the Best Investment Vehicles? Think Again!

Mutual funds are very good investment avenues for the average investor. There is a popular belief that mutual funds are terrific investment vehicles because they potentially diversify risk away. A look at some of the best mutual funds in the recent past paints a rather interesting picture:

source: spotalpha.com

What is interesting in the above chart  is that the returns above closely track each other. Funds that take high risk deliver higher returns while funds that take lower risk deliver lower returns. Thus it appears that none of the funds are consistently generating excess returns relative to the risk they are taking.

So how do we solve this problem? Why not consider an optimized portfolio of stocks that can produce significantly superior returns for a given level of risk? Enter the portfolio optimizer tool from Spotalpha.  Set your maximum risk profile (say -10%). Identify stocks and keep optimizing till you find a portfolio that provides maximum performance within identified risk profile. Allocate to these stocks and comeback every 15 days or so to check if there are any new re-balancing suggestions to the allocation. You are now on the path to superior returns.

 An optimized portfolio of stocks like this one delivered +154% return at a lower draw down risk of -5%, when compared to the best mutual fund which delivered +28% return for a draw down risk of -10% on an annual basis: