In the jungle of funds and ETFs available, many long-term investors, both relatively seasoned and those newer to the game, typically are uncertain what kind of funds they should put the most emphasis on. Especially given the proliferation of ETFs, it may have become all too easy to select choices that focus quite narrowly on particular sectors within the stock or bond market at the expense of having investments that are invested across a broad spectrum.

Investors should realize that too much focus on specific sub-sectors of the overall market can leave you with a higher likelihood of attempting to manage what may amount to an undiversified portfolio. For most investors, therefore, if you do choose one or more funds to hone in on highly specific subsets of the market, this should be done mainly to supplement your broader-based funds. An over-emphasis on such so-called "sector" funds in effect suggests one is trying to guess which segments of the markets are going to offer the best return, something that is extremely difficult even for investing professionals, as you will see shortly.

It should be remembered that most diversified stock mutual funds and ETFs, whether index funds or actively managed, already include investments across a wide spectrum of sectors. And among these funds that are actively managed, the manager will already be engaged in selecting which sectors appear the most promising from his or her perspective.

If you are an investor who likes to do research and follow the markets regularly, then a small to moderate amount of investments in funds/ETFs focusing on specific market niches can make sense

You May Not Need These Funds/ETFs in Your Portfolio, continued on page 5

Since we lowered our allocation to stocks for Moderate Risk investors from 65% of an overall portfolio to a still substantial 55% this past October, the S&P 500 has continued to rise approximately 10%, including dividends (all data cited is through Dec. 27), or over 3% per month. While what appear to be close to promises of continued low rates by the Fed remain a positive for stocks, one's best strategy, even as a long-term investor, may be to nail down some of your excellent returns when they present themselves because over your investing lifetime, you won't see a repeat of such returns very often. In fact, returns of the magnitude seen over the prior 5 years, namely nearly 18% annualized for the S&P 500 index, have occurred only 13 times out of the last 83 years, or 16% of the time.

While leaving one's entire stock portfolio on hold while the market basks in this extended winning streak will be the likely path chosen by many investors, eventually, all such returns regardless of which funds they were achieved in will, with an extremely high probability, be whittled down to a lower average annual return. While it is true historically that once returns as large as we've seen over the last 5 years are reached at the end of a calendar year, the pace has sometimes continued for one additional year, only once in the last 83 years has the same level of outperformance lasted for two further years. Assuming the same is true for all funds, not just the S&P 500, I recommend that some portion of such a large annualized 5 year return, such as is so widespread now, should be captured by the prudent investor - it's unlikely to be around long.

Need more to convince you? Looking at historical instances where the S&P has averaged at least 18% over the prior 5 years, that is, close to what it has done between the end of 2008 and the end of 2013, the average return the following year was only 2.84%; the average annualized return over the subsequent 5 years slowed to 6.14%. If returns over the next year, or even 5 years prove similar, investors may be disappointed. While historical results can't guarantee these below par results, they certainly should inject a heavy dose of reality reflecting what has indeed happened under similar circumstances going back to 1931. That said, however, assuming alternative investments such as bonds

continued below