By Tom Madell

When you invest in a managed fund, as opposed to an index fund, you are acquiring the services of one or more presumed investment professionals who analyze and select which particular individual investments will be included in the fund's portfolio. With an index fund, the investments are merely a large sample, or perhaps all, of the investments that make up a pre-defined set. Since a managed fund requires more effort to run than an index fund, you will incur a greater expense in the choice of the former.

However, the argument rages that since managed funds have only a very mediocre record in doing better than index funds, that perhaps investors should forget the former and only invest in low-cost index funds and/or ETFs. Those investors who do invest in managed funds are expressing the hope that the skill of the manager(s) will enable them to do better than an unmanaged index.

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Our total recommended Jan. '10 portfolio allocation for Moderate Risk investors was 57.5% to stock funds and 37.5% for bond funds. The rest was in cash.

Funds from Five Years Ago (Jan. 2008)

Five years ago this January, my Model Stock Portfolio consisted of 12 funds from 7 different categories. However, I show only the single fund from each category that we most often recommended in prior Newsletters up to that point. The last column shows each's annualized 5 year performance through Dec. 31, 2012.

The Stock Portfolio, when weighted as we recommended in Jan. 2008, returned 0.9% annualized over the 5 year period. This compares to a return of 1.7% for the S&P 500 index. Once again, the shortfall was entirely due to our 3 international picks. But diversification suggests that all but the most conservative of investors should maintain an international position. This should remind readers that

The Model Bond Portfolio from 5 years ago consisted of 5 funds shown below. The bond portfolio, when weighted as I recommended in Jan. 2008, returned an annualized 6.6% over the 5 year period. This compares to a return of 5.9% for the bond benchmark index (AGG). The last column shows each's 5 year performance through Dec. 31, 2012.

Our total recommended Jan. '08 portfolio allocation for Moderate Risk investors was 52.5% in stock funds, 30% in bond funds, and 17.5% in cash.

Funds from Ten Years Ago (Jan. 2003)

Normally, we wouldn't expect recommendations made any further than 5 years ago to still be useful to investors. That is because so much can change over such a long period as to render such judgments on funds hardly worth considering.

For example, one of the 6 funds we recommended 10 years ago no longer exists as such, and was merged into a series of other funds. Another went from being a great fund with a great long-term manager to a relatively poor fund with a revolving door of managers, the Fidelity Growth and Income Fund.

However, the 4 remaining funds would have turned out to be great picks. Here the funds are with their 10 yr. annualized return. (Compare returns to the 10 yr. annualized return of 7.1% for the S&P index.)

• Vanguard Emerging Markets Index (VEIEX) 16.2
• Fidelity Low Priced Stock (FLSPX) 11.1
• Tweedy Browne Global Value (TBGVX) 9.4
• Vang. Equity Income (VEIPX) 8.1

All 4 of our 2003 bond fund picks, if held over 10 years, did better than the annualized bond benchmark of 5.2%

• Vang High Yield (VWEHX) 8.1
• Amer. Cnt. Intl Bond (BEGBX) 6.0 (Note: As stated above, we now prefer PFRAX)
• PIMCO Total Return Instit (PTTRX) 6.8
• Vang. Inflation Prot (VIPSX) 6.4

At the time, our overall allocations were 50% to stock funds, 50% to bond funds, and 0% to cash.

To Recap: Good Funds Can Usually Be Identified In Advance

While most stock funds held over the last 5 years have barely been positive through Dec. 2012, ten year returns have actually been quite good. And being well diversified between stocks and bond funds and many fund categories certainly paid off during the 5 year period that stocks did relatively badly.

I believe the above data justifies the following conclusion: When one has access to information which allows him/her to usually be able to identify so many excellent funds in advance of their subsequent performance, one should feel assured there is less reason to constantly worry about market conditions, or what funds' are "hot" and those that are not. You should note though that, for the most part, such excellent returns are typically served up only to those willing to hold these funds for long periods.