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The Tortoise and the Hare

I recently saw a tweet from Morningstar Stocks that was touting their "amazing success" at how their Tortoise and Hare portfolios were outperforming the S&P over their 10-year history which ended on July 6, 2011.   So the obvious questions I had to ask were: is that a fair benchmark for their portfolios, and does stockpicking really do better than just properly diversifying? The data that I could find on these portfolios is from http://bit.ly/mTr0xY [link now requires login] which only lists the current holdings and, unfortunately, doesn't share turnover rate, standard deviation or other facts that would help determine suitability for an investor. One caveat I must disclose is that their 10-year history doesn't match up to the calendar year, so the numbers below are not an exact comparison.  However, the time periods that do not line up are -8.02% on the front end and +6.49% on the back end (this is the S&P return) so I think the comparison - while not exact - is reasonable. Below are the annualized returns for the portfolios and some indexes/blends to compare (sources outlined at bottom of article):

TortoiseHareS&PRussell 3000Russell 2000US Small CapDFA 60/40DFA 100/0

Versus a large-cap centric index like the S&P, their portfolios appear to have done well when looking only at raw returns.  And it appears that the tortoise portfolio is primarily large-cap whereas the hare has much more penetration into small and mid cap.  However, without more information as to their cost, tax implications, volatility, etc we can't use other MPT measures to see if they're getting paid based on the amount of risk they're taking. What I can say with a high degree of certainty is that their all-stock portfolios have performed no better than the DFA global balanced indexes, including the DFA 60/40.  I would be remiss in not saying that past performance is not guarantee of future results and that you cannot invest directly in an index, but this is still a reasonable conclusion. The moral of this fable, if you were to ask me, is that you don't have to spend a lot of money on research and take specific risk as the M* portfolios do. Very healthy returns can be earned by just being well-diversified globally and taking risks that for which, historically, have been compensated. Returns sources: Morningstar Analyst Research, Russell.com, DFA Matrix Book 2011