Smart Advice for the HuffPost Investor: Is This the Time to Dump Stocks and Sit On The Sidelines (Part 3)?

Many readers had a strong reaction to my advice that you should determine your asset allocation, invest in a properly allocated portfolio of low cost index funds and stay the course during these turbulent times.

Here are some excerpts from those who disagreed with my views. Beneath each excerpt, I have set forth some information for your consideration.

Time has clearly proven that for many people for many reasons variations of buy and hold whether indexed or not run into several problems.

Time has actually "clearly proven" the opposite.

Investors who had an appropriate asset allocation and who invested in a globally diversified portfolio of low cost index funds have prospered.

Check out this data of average annualized returns for a 60% (stocks)/40% (bonds) portfolio of passively managed funds. To avoid any claim that I am "data mining", I am going to use 3, 5 10, 25, 35, 50 and 80 year periods, ending December 31, 2007:

Years                Annualized Returns

3                        8.29%

5                        12.78%

10                       8.16%

25                       11.26%

35                       10.94%

50                       10.63%

80                        8.89%

It is more than a little frustrating to have someone compare anything about the 1970's to today, especially media.

Are you talking about the end of capitalism as we know it?

Do you believe that 442 industries in 192 countries, with over 60 million employees, sales of over $36 trillion a year and net profits of over $2 trillion a year will stop growing?

If these are the assumptions that cause you to ignore 80 years of historical data, then I would be a loss to recommend any investment alternatives that would suit your view of the world's economy.


I'm staying in cash for awhile.

If you will need more than 20% of your cash within 5 years, you should not be in the market at all. Instead, you should invest in FDIC insured CDs or U.S. Treasury bills, notes or bonds.

If you are suggesting that you have the risk tolerance to assume some market risk, but are waiting for the market to "bottom out," the data indicates that your efforts at market timing will likely significantly reduce your returns over time.

Don't dump stocks but cash in your 401k's now.

Your 401(k) plan is an important part of your retirement portfolio. If you follow this misguided advice and are under 59 1/2 years of age, you will be taxed on the distribution at your ordinary income rate, and you will be assessed a 10% penalty. In addition, you will decimate your retirement nest egg.

I bought Southwest Air stock right after 9/11/2001. Sold in 2003. Made out pretty well, thank you.

Planning to buy B of A and JPMorgan/Chase now.

I also bought IGT, which makes slot machines. It only took me a couple months to rake in substantial gains from those.

Are you also going to tell us about the stocks you picked that lost money?

The record of "stock pickers" is dismal. By picking a small number of stocks, you are increasing your volatility by as much as 100%, but your expected return is the same as if you bought an index fund with a comparable risk.

This seems like the perfect storm for an investor: Much more risk, with no greater expected return.

I wouldn't have one U.S. dollar in your portfolio and it would be spread with physical holdings of gold, silver, and mining stocks and Asian currency.

The U.S. is approximately 42% of the world's economy and remains the world's largest economic power. U.S. stocks may or may not outperform other geographical sectors in the future. No one knows.

Smart Investors do not make any assumptions that have no data to support them. Instead, they own a globally diversified portfolio that takes into account the contribution of each country to the world's economy.

Take it from me, an American in his eighth decade...
SELL now, before it's too late.

I am not prepared to "take it" from you. But I do not recommend that anyone limit their portfolio to U.S. stocks. My recommended portfolios assume that you can sustain market risk and that you have determined an appropriate asset allocation. The make-up of your portfolio is a globally diversified portfolio of stocks, using low cost index funds, and an index fund for the bond portion of your portfolio that benchmarks the Lehman Bros. Aggregate Bond Index.

If you have data indicating that there is a better way to keep pace with inflation and taxes, I would like to see it.

The average investor would do better to just settle for cd interest than invest in the stock market at all.

You are correct. The "average investor" earns only one-third of the market returns that are hers for the taking. The culprit here is the securities industry which touts its purported expertise in market timing, stock picking and manager picking and the media which inundates investors with a steady drumbeat of confusing economic news. Investors who rely on these sources for investment guidance would be better off investing in CDs.

Intelligent, well-informed, investors understand that Smart Investing is very easy. They don't lessen their returns with expensive advice from "market beating" brokers or advisors.

The views set forth in this blog are the opinions of the author alone and may not represent the views of any firm or entity with whom he is affiliated. The data, information, and content on this blog are for information, education, and non-commercial purposes only. Returns from index funds do not represent the performance of any investment advisory firm. The information on this blog does not involve the rendering of personalized investment advice and is limited to the dissemination of opinions on investing. No reader should construe these opinions as an offer of advisory services. Readers who require investment advice should retain the services of a competent investment professional. The information on this blog is not an offer to buy or sell, or a solicitation of any offer to buy or sell any securities or class of securities mentioned herein.

Comments

[moAb]

Hmmm...a lawyer/author with an official role at an investment advising firm giving investment advice...not just any advice but "Smart Advice" (disclaimer noted). Harken back to part II, early on, and note the strong comment regarding potential conflicts of interest. Advice noted.

[Unrepentantliberal]

Dan. At some point in the next ten years I will be receiving an inheritance from my parents which contains a number of mutual funds from a well known company. My question is; What would be the tax implications of switching those funds out of those mutual funds and into a group of globally diversified group of index funds? Is there a way to manage this inheritance that decreases the tax burden?

[DRaymond]

I am a big fan of index funds (or index ETFs) but generally I have not worried too much about the 'globally diversified' part. Why?

Look at the firms in the S&P 500. Nearly ALL of them have major presences worldwide. So your Large Cap US investments get you some play in every economy in the world. I'm not saying that a little play in a foreign index would be a bad thing, but the presumption that if you are buying the S&P 500 you are only involved in the US economy is false.

In my opinion where you really have to look at diversification is small vs large cap. Most of the 'total market' indexes are so heavily weighted by large cap stocks that they almost might as well be large cap funds. You have to make the choice to get a small cap only index.

On the other hand there are now some small cap international funds that may be interesting buys.

[emerywood]

Your 80 years of data on returns are not for globally diversified stock portfolio. They are for U.S. stocks ( and bonds ) , right ? Do you have any data on globally diversifed stock portfolio and it's return of any duration ?

[joebaggadonuts]

If it's for market indexes, they are aperiodically adjusted to remove dead wood. GIGO.

[Godfearing]

Additional advice on the overall economy at: http://mwhodges.home.att.net/

[Onefamily]

Here are the secrets to my non-investor fairly uneducated frugal investing.

I love my low cost Vanguard Index funds with a splash of Warren Buffet (Fairholm FAIRX)
Toss in our friend Ginnie Mae and iBonds and I am pretty much a happy camper.

I am totally with you...asset allocation first from the top (all your assets...then just park your money and time will be your friend. The more stock market leaning the better while still sleeping at night.

Last arm wrestle your mind to think in no less then 5 year increments...ignoring today and trusting the tenacity and creativity of corporations over time. The rich will keep the rich rich.

Then when you get laid off after 18 years sell everything and live in an RV like we did last year. Oh yes and count your blessings. My new life: http://www.thatwhichisgood.com.

[JimHancock]

First, I am very curious where you found a "a globally diversified portfolio of low cost index funds" that goes back 80 years. I'm not sure if the S&P 500 even goes back 80 years. At the very least it is not a valid sample since global ETFs have only been available in the past 5-10 years or so.

Second, you are ignoring the fact that there are often VERY long periods where stocks go nowhere. Here are a few examples:
- After 1929 it took 25 years for the DOW to return to it's previous peak.
- From 1965 to 1980 the DOW was down after 15 years. The S&P was up barely over that period.
- Since March 2000, the NASDAQ is still down 55%.

Third, the example above doesn't even consider inflation. If you BOUGHT in 1929 and HELD for 25 years after inflation the value of $1 was probably worth 50 cents. The reality is you never got your money back really.

[worldtraveller]

Yes,
But you do not know when those times are...

[TrollDiddy]

Dan - I had left the comment about making a quick bundle on IGT. The intention of my comment was NOT AT ALL to gloat about my ability to pick the right stocks at the right time, but rather to drive home the point that buying steadily and continuously (to include when the market is low) is a proven strategy.

I did well stock picking for years, but just got reamed in late 2007 and am now a strict "market returns" guy. Take this from a guy who bought BAC, AXP, and SBUX a little over a year ago...

[Jocalo]

Great advice... I think? I'm new at investing, so I don't know if I am missing something, but I can't tell which are Mr. Solin's views, and which are excerpts from detractors. Perhaps some quotes or boxes would clarify the different "voices." I am getting the main point, but I want to get the smaller points too. Thanks.

[Jocalo]

Thank you! The italics are great.