1/9/2013 6:45 PM ET|
Best investment call ever? Sit tight
Trying to outwit the market is usually a loser’s game. While there's no easy way to get rich quick, the formula for building wealth is pretty simple.
Five short, mostly brutal, years ago, Henry Blodget made what I think is the best call of his career. In a candid series for Slate, the former stock analyst ragged on the Wall Street marketing and fee machine that he once cogged, urging readers to "invest in a low-cost equity index fund for 50 years. Yes, it's not a get-rich-quick scheme, and there is fine print: This performance is not guaranteed. You must reinvest all dividends. You must make the investment in a tax-free account. Inflation will maul you. But no investment strategy is more likely to make you rich than this combination of low costs, equity returns and time."
I was thinking about Blodget's advice last week, when the Standard & Poor's 500 Index ($INX) visited levels it hadn't reached since the end of 2007. Mind you, the milestone has few investors out there walking on sunshine. The market, after all, is still shy of its October 2007 high, which is only a nominal peak when you consider it was pretty much at the same spot at the turn of the century, when the Cult of Equity was actively indoctrinating millions.
But this is only a one-dimensional read. In reality, those who stayed sober, diversified and total-return minded (and bothered to remember their brokerage log-ins) should be feeling ecstatic. Indeed, many had reason to celebrate three years ago. Thing is, ecstasy -- like panic -- does not often visit this cohort.
To understand why, consider this exercise: I had Morningstar run a sample $10,000 invested on Dec. 31, 2007, and never since rebalanced, 60% in the SPDR S&P 500 (SPY) and 40% in the iShares Core Total US Bond MarketETF (AGG), to represent the most commonly advised stock-bond combo. While the broader market went on to have its single worst year in 2008, en route to the worst decade since the Depression, those who stuck with this simple, do-it-yourself, no-financial-adviser-needed formula were back above water just a year and change after equities set their generational low. By the end of 2011, the original $10,000 was worth close to $12,000.
According to research from Vanguard published in March 2011, despite the ravages of 2008-2009 on defined-contribution plans -- i.e. 401k's -- savings continued to grow for most participants from 2005 through 2010, with the latter year's account balances hitting their highest levels since Vanguard began tracking the data in 1999. The study "found that participants' tendency to take no action on their plan accounts seems to have had a beneficial effect, in that participants did not overreact to market volatility during this period." (Since the report was released, the S&P 500 has returned an additional 18%.) It all underscores Vanguard founder Jack Bogle's exhortation: "Don't just do something. Sit there."
Indeed, on that total-return basis, including reinvested dividends, the S&P 500 set new all-time highs last year. As Josh Brown, the tweet-happy "Reformed Broker" blogger, succinctly put it, "And then we erased 2008." The hardened Long Islander offered rare, tender handholding: "At a certain point," he wrote, "it's okay to stop licking one's wounds and reliving the horrors of the past -- while retaining the lessons learned and the wisdom hard-earned through experience. Move on, the markets have."
"Getting wound up by a crisis is the worst thing investors could do," says Morningstar's Russ Kinnel. "You end up selling low, and if you waited for positive signs at a certain level you either bought high or not at all. Markets rebounded rapidly, well before the economy started to show signs of recovery."
And so my mind is transported back to all the relatives and co-workers who approached me when the market was in its free fall, swearing it off for good. Insisting that this was different, young man, very different.
What's sadder: That they missed out? Or still have yet to realize it?
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Like pocketprotector, I use Vanguard (my wife, TRP) - just a small handful of no-load mutual funds. We won't get 'rich' because we've started so late; but by the time we retire, we should be comfortable. Slow and steady...
Oh, and it helps to stay out of debt.
Best investment call ever? Invest in yourself, not the fickle stock market.
Put your money into something that cares about your future - you. Get trained for a better job or to progress in your field. If you've got the stones for it become an entrepreneur. Pay off your debts so you’re not a slave to the treadmill. Build something to sustain yourself instead of hoping that people and companies whom you don’t know will be there for you.
Wall Street keeps demonstrating that you cannot trust it so quit feeding it. If you know the insides of a company and its industry then maybe you can invest in it (at least that’s not a blind investment). But if you do not have the time and insight to investigate investments and schemes fully then you’re just gambling.
77% of the middle class just got a tax increase, the admin is sending out thank you letters to social media operatives for helping them avoid raising taxes on the middle class by selling the fiscal cliff deal INSANITY.
Why are my co workers standing around looking at their pay stubs and scratching their heads at reductions in take home pay? If it werent so tragic it would be funny.
As a reader osted elsewhere, invest in guns, ammo, non perishable food, bollled water and body armor.
Seriously, I agree. The volatilility and our fiscal mess looks like someone trying to find a destination in Chicago with a map of New York.
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