The High-Tech Poll Report

Was It Really a Lost Decade?

Over the airwaves since 2008 we've heard repeatedly that buy-and-hold, indexing, and passive strategies to create wealth are dead.  The "street experts" claim that only clever active management, using their clever strategies, can cure the investment nightmare so many dread may happen again.

What's the real truth?

From my October 2010 Dentaltown article[i]:

We all know that the S&P 500 lost money from 2000 to 2010.

Few are aware that if a 50-year-old dentist invested $500,000 in January 2000 in the Fund Advice "moderate" [stock and bond fund] tax-deferred model portfolio seen in [the article's included table], and added nothing over the years, he would have ended up with $874,000 in January 2010. All that was necessary was to reinvest all dividends and rebalance once a year.  And this was a do-it-yourself free plan, docs!

If that same dentist had invested $30,000 per year into the plan, he would have ended up with $1,275,000 in January 2010.

How did our hypothetical dentist react to the huge drops in 2002 and 2008?  He ignored them.

So much for the lost decade!  What the "experts" fail to mention is that any competent financial planner would not have all of a client's money placed in one large cap fund or only a few stocks. A diversified portfolio of stock and bond funds, as seen in that article, or my upcoming April 2011 Dentaltown article, has performed well over any ten-year time frame, including the "lost decade."

Burton Malkiel, author of the famous book, A Random Walk Down Wall Street[ii], now in its eleventh edition, was recently was interviewed by Charles Rotblut for the American Association of Individual Investors Journal.[iii]  Excerpted material is below:

Charles Rotblut: ...the one question I hear---and I'm sure you've heard the same thing---is that indexing didn't work over the last decade.  What is the answer to people who have the perception that indexing has failed?

Burton Malkiel: ... The thing you needed to do was to have some bonds in the portfolio and you needed to be diversified internationally, including in emerging markets... What I show is that if you used the allocations that I've had in my book over the years, then even during the "lost decade," using index funds, you doubled your money.  You had to be very broadly diversified, with not only stocks but stocks and bonds, and not simply U.S. stocks, but U. S. stocks and foreign stocks, including a very strong allocation to the emerging markets of the world, which are growing much faster than the developed world.

So why the dire reports from all the media "experts"?  Unfortunately, many so-called gurus tried to time the market in 2008, lost client's fortunes, and are now fishing for new suckers.  It's that simple, financial warriors! 

Please be wary of active management, tactical asset allocation, and anyone or anything that touts to beat the market.  Over time, your chances of beating buy-and-hold indexing are nil.  It's been proven mathematically over and over by the likes of Dr. Malkiel.  Even Warren Buffet advocates index investing for individuals.

Simple, time-proven asset allocations are shown by Dr. Malkiel in his book. Merriman Advisors sample allocations shown in my September Dentaltown 2010 article or by visiting http://www.fundadvice.com/portfolio.html#TD and Paul Farrell's Lazy Portfolios at http://www.marketwatch.com/lazyportfolio are great examples of allocations to protect and grow your wealth.

Over the years, my investments have been in buy-and-hold index mutual funds or ETFs in a Vanguard Account.  Currently, my asset allocation is a hybrid of the moderate Fund Advice Sample Portfolio and the Coffeehouse portfolio found at the above Fund Advice and Lazy Portfolio sites. To use any discount broker is fine, yet I find that Vanguard has the lowest management fees with great diversification.

Please note that I do not invest people's money and I operate only in an educational capacity.  The above information should not be construed as financial advice.  Any investor should seek advice only from a competent financial advisor.  And please, be most careful of anyone touting to beat the market. 

   

Sound Investing TV #89: Don't try and beat the market, BE the market

 

For additional information, click on the image above for a three minute video from Paul Merriman.  No, I don't have any financial relationship with Merriman; he provides great educational resources.

 

Have a great Holiday Weekend! 

 

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