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Give 'Play the Market' a New Meaning: Try a 'Rotisserie' Portfolio

September 14, 1997|Charles A. Jaffe | Charles A. Jaffe is mutual funds columnist at the Boston Globe. He can be reached by e-mail at or at the Boston Globe, P.S. Box 2378, Boston, MA 02107-2378

The pressure of managing money turns some people into nervous wrecks, driving them to distraction, self-doubt and mistakes.

One way to overcome that problem is to literally "play" the market, approaching the investment world as a game, its elements as teaching tools for those who want to learn how to construct a mutual fund portfolio.

So here is an idea to play with: "rotisserie" mutual funds.

The idea is simple: Pick a hypothetical portfolio of funds and set a performance goal. Then manage the portfolio over time to see if you can hit the target.

"There is a lot of value in going through exercises with imaginary money," says Michelle Smith, managing director of the Mutual Fund Education Alliance, a nonprofit group formed by no-load mutual funds that lets investors build hypothetical portfolios on its Web site (

"A lot of investors are cowards when their money is on the line," Smith says. "They don't trust their judgment or inclination. A hypothetical portfolio shows them what they do well and badly, so they learn from both."

Sports fans play hypothetical games all the time, creating Rotisserie, or fantasy, leagues of imaginary teams composed of real ballplayers whose statistics determine the outcome of the rotisserie season.

Instead of choosing players and using their statistics to play out a "season," an investor could build an imaginary portfolio from scratch, picking funds and managing the holdings over time.

As with the sports leagues, rules for a rotisserie fund league can vary. The idea is to create a fun learning experience for investors.

"This lets you try new things, test your nerve and review how you make decisions," says Gerald Perritt, editor at the investment newsletter Mutual Fund Letter. "Many investors don't make conscious choices. Ask why they own a fund and they have no answer."

Until someone invents rules and a score-keeping system for rotisserie mutual funds, you'll have to create those yourself.

Here are some suggestions for dealing with the essential elements of the game:

Players. This is a game you can play alone or with friends.

If you do it on your own, you can manage the hypothetical portfolio so as to compete against your real investments, or try several different investment styles to see what you'd be most comfortable with in the future, when you have money to actually implement your strategy.

Target. It's tempting to shoot for top returns, but keep in mind that this game is for a limited period and that you would be taking risks you never would in real life.

If you are playing solo, look at your objectives and pick a goal. If you need, for example, a 12% average annual return to comfortably reach your goals, make that your target.

Season. The fantasy sports leagues usually last a few months. In fund investing, though, the season should run for at least three years.

You can reward yourself for having good quarterly or annual performance, but this game is a marathon, not a sprint.

Rules. Most investors don't buy funds all at once but rather pick new ones whenever they have money to invest. Studies show, however, that asset allocation--more than fund selection alone--is the biggest determinant of an investor's performance.

That makes portfolio-building a crucial skill. Work on that discipline by limiting your choices to one fund per category. A basic portfolio, then, might include one choice in each of these categories: aggressive growth, growth, growth and income, bond, international, and sector fund. Or you could do it by asset size, with each portfolio including one fund from the small-, medium- and large-capitalization arenas, plus, say, an international choice.

As for the money you are "investing," make it a realistic amount. If you are competing against your real holdings, invest the same amount of money and be sure to include whatever you currently hold in cash. It's possible your hypothetical portfolio could serve as a lesson about how much a too-conservative approach is costing you.

Last, list three reasons for picking each fund. As the game progresses, you will see how your logic stands the test of time.

Trading. There's often a price to pay for changing your mind. If you make a trade in your imaginary portfolio and the fund has made money for you, pay the tax bill. That means subtracting taxes due before reinvesting proceeds from the sale. And if sales charges, redemption fees or anything else would take a bite of your money, make sure your imaginary portfolio has the teeth marks to prove it.

Prizes. If you play in a group, a small entry fee might liven things up a bit.

Whatever the circumstances, though, the lessons learned--about investing and about yourself--will be the most valuable prize of all.

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