Ron Paul recently addressed a group of 200 financial advisors in Orlando, Fla. He noted that his own investments were concentrated in gold and property. He disparaged "buy and hold investing," stating: "If you had bought the Nasdaq in 1999, you'd be down 40 percent."
Mr. Paul's investment advice is premised on flawed data and a complete misunderstanding of fundamental principles of investing.
I looked at the performance of the Nasdaq from 1999 to date. I don't know what month he began his computations, so I started with the month that would give us the lowest total returns, which was December 1999. If you invested 100 percent of your money in the Nasdaq in December 1999, you would have a loss of 1.3 percent through December 2012. That's not great, but it is a far cry from a loss of 40 percent.
Opponents of buy and hold (like Jim Cramer and others), often misstate data or use incorrect benchmarks to make their point. In Mr. Paul's case, he assumed a buy-and-hold investor would invest all of her assets in the Nasdaq. I am unaware of any responsible investment advisor who would make this recommendation to their clients. The Nasdaq consists of a mere 20 percent of the U.S. stock market. Why would any investor put 100 percent of her assets in stocks consisting of one-fifth of the domestic stock market?
Mr. Paul most likely fell into the trap of others who deride "buy and hold" and reference the mythical "lost decade." As noted by Allan Roth in his excellent blog on this subject, returns data often ignores dividends paid from the stocks in the benchmark. The inclusion of dividends can have a meaningful impact on returns. As Roth indicates, investors who diversified their portfolios between domestic and international stocks, and added bonds to the mix, had positive returns during the decade mistakenly designated as "lost."
Mr. Paul's decision to limit his investments to gold and property are ill-advised. As Larry Swedroe stated, there are long periods of time when gold has produced negative returns. In January 1980, gold was trading at $850. In January 2002, more than 20 years later, it was trading at less than $300. Swedroe notes that over the very long term, "gold has provided virtually no real return."
I don't know the details of Mr. Paul's property holdings, but I would be surprised if they weren't affected by the recent housing collapse.
Mr. Paul would be far better advised to follow the advice I give to all investors: Focus on those factors you can control, like costs and taxes. Invest in a globally diversified portfolio of low management fee index or other passive funds in an asset allocation suitable for you. This portfolio may include commodities and real estate, but won't be over-weighted in them.
I can understand why Mr. Paul might not want to follow this advice, but he should refrain from lecturing us about an area in which his views are contradicted by 84 years of risk and returns data and hundreds of academic studies.
As a financial advisor, Mr. Paul is a good politician.
7 Steps to Save Your Financial Life Now is available on Amazon, B&N, and iTunes. Dan Solin is the director of investor advocacy for The BAM ALLIANCE and a wealth advisor with Buckingham Asset Management. He is a New York Times best-selling author of the Smartest series of books. The views of the author are his alone and may not represent the views of his affiliated firms. Any data, information, and content on this blog is for information purposes only and should not be construed as an offer of advisory services.
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