I challenge two sacred beliefs: Actively managed funds will outperform index funds in a bear market and your portfolio should become more conservative as you age.
Thank you for your insightful questions. Please keep them coming and I will do my best to answer as many as I can.
Question: A few months back you advised buying Vanguard. Now I hear they took a big hit in the sub-prime fiasco. What's your opinion of Vanguard now?
Answer: My advice to investors is to determine your asset allocation and to invest in a globally diversified portfolio of low cost index funds. Among the funds I recommend investors consider are the Vanguard Total Stock Market Index Fund (VTSMX), the Vanguard Total International Stock Index Fund (VGTSX) and the Vanguard Total Bond Index Fund (VBMFX). Similar funds are available from Fidelity, T. Rowe Price and other fund families.
My recommendations are limited to these funds. Investors who follow my recommendations own a slice of the entire global market -- the good, the bad and the ugly (sub-prime investments have been very ugly!).
These recommendations remain unchanged.
It is interesting to review how investors who followed these recommendations fared in the first quarter of 2008. Performance in down quarters is every bit as meaningful as performance in bull markets.
Here are the results for investors who followed the Vanguard fund recommendations and invested in one of the portfolios noted:
Returns: January 1 - March 31, 2008
You should compare these results to the performance of your hyperactively managed portfolio.
Conventional wisdom is that actively managed funds will outperform index funds in a bear market. You would think that this would be true because active fund managers have the flexibility to adjust to changing market conditions. Index fund managers do not.
The data does not support this belief. One study of six bear markets over a 12 year period found that the average loss for the S&P 500 was 15.12%. However, actively managed large-cap growth funds racked up losses of 17.04%. Yet the myth persists.
Question: Could you remark on the article "Hitting or Missing the Retirement Target" by Harold Schleef and Robert Eisinger that was written about in the New York Times recently? I found it depressing.
Answer: The Schleef/Eisinger study challenged a fundamental tenet of asset allocation: Your portfolio should become more conservative (e.g. have a higher percentage of fixed income) as you age.
The bottom line of the study is that investors might be better off if they picked an asset allocation while they were young and stuck with it through retirement, rather than slowly transitioning to a more conservative portfolio as they age.
The findings in this study are consistent with another study done by Gary Smith and Donald P. Gould, entitled: Measuring and Controlling Shortfall Risk in Retirement.
This study supports the view that the portfolios of older investors should have an optimal allocation of between 50 and 70% stocks in order to minimize the risk of running out of money.
Research in these areas is ongoing. However, based on these studies, it would be prudent for investors to consider whether their portfolios are underweighted in stocks.
The good news is that this research is causing the focus of investors to be where it belongs: On their asset allocation.
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.
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Thank you for an informativ
The goal seems to be to act like a university endowment and pay out (depending on which fund) 3%, 5% or 7% of the investment value each year.
Do you have any thoughts on this strategy?
My father is 80. My G*D is that possible?
He had a company retirement and 401K plan He also had some money in the savings account. When he retired he owned his small 3 bedroom brick ranch house and had no debt. He and mom have survived quite nicely on. He has never touched his 401K money except to start doing the mandatory roll over to a taxable account so Uncle sam could start taxing it.
They have gotten by on social security, company retirement
So if you are like my wife and I, feverishly stuffing money into our 401K plan...con
You know what they say? Retirement money is money you save in case you live too long! Average life span is only an average. Half of us will die BEFORE the average. We all have to prepare for the worst, we might live to 103 but we should at least understand that we most likely will be fine and die before our money runs out if we are responsibl
Unless democrats continue to refuse to fix Mediare, Social Security, and to balance the budget.
You lost me at "Unless democrats.
You may have been away the last seven years.
Fercrissak
Useless. All of them. Nothing but empty promises. Democrats will of course not admit they are failures. They point to their food to fuel (ethanol) bill as a triumph (while the worlds poor starve to death because their food is now going into our gas tanks). And now that they have their deadly ethanol bill to celebrate as "change" we see no intention at all to balance the budget, Fix Medicare, actually be fiscally responsibl
My wife and i have invested 50% of our assets overseas. If Obama gets in and starts raising taxes and punishing businesses and expanding government as he has promised to do, we will send another 25% of our assets overseas. No need to sink with the rest of the ship.
And that was before a $500B war paid for with DEBT. etc.
I appreciate your wanting to throw out all da bums, but not all bums are created equally... bummy.
Except in love of life, nature, family... and the US Constituti
(Salma Hayek and Uma Thurman would be there, but in the interest of avoiding spats...)
When I go on vacation..
When I go to the pharmacy..
When I go to my car... I grumble about the repair bills on a 10-yr old POS.
When I get credit card offers... I look at how many months the balance-tr
When I take my kids to a baseball game... despite living in NYC, it's the Newark Bears.
When I go out for dinner.... I pass on dessert.
And when I go for my annual review... I pray the "raise" matches inflation.
I dare say that regardless of income, no American making those calculatio
If only ALL Americans could sock away "25-30 percent" of their incomes -- without getting berated for starving our credit-car
P.S. My family's share of the Iraq War's *direct* costs to date -- $6,880 for the four of us -- dwarfs the $1,200 tax rebate I may or may not qualify for.
Oh wait, there's future interest on the combined $8k; there's no such thing as a free lunch, when you have to borrow it.
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Cheers.
So, no I don't give advice, otherwise I'd have my own little column on investing. Seriously, everybody is different with different needs and levels of risk they can take. But you knew that. That's why for folks who like the fund idea, Dan's advice is great. It's just not the only way to go.
What about all the one who picked the losers? We are not going to be hearing from them anytime soon.
It's a mathematic
At the risk of being a math dick, I beg to differ. But not in spirit.
You are assuming the entire market is held in actively managed portfolios