The Missile You Never Saw Coming

Do my eyes deceive me? As of the close of business on August 14, 2009, a globally diversified portfolio, invested 100% in low cost stock index funds, was up over 25% YTD. Of course, that portfolio is too risky for most investors. What about a more prudent portfolio invested 60% in stock index funds and 40% in bond index funds?

That portfolio is up over 14% YTD.

Please check your returns. Comment below if your portfolio has matched these returns at the same level of risk.

Most of you read and watch the financial media. You have the benefit of advice from brokers and advisors, and all of the analytic resources of these financial experts. It is this advice that I refer to as "the missile you never saw coming."

To achieve the returns noted above, you really didn't have to do much. No stock picking or market timing. No calls to your broker or advisor. No need to wonder if Cramer's rants add or subtract value. No need to lie awake at night obsessing over "Dr. Doom's" latest apocalyptic predictions.

Just determine your level of risk and buy low cost index funds.

As I said in an earlier post, it's so easy your broker could do it.

But he won't and that is the subject of this week's video:

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.

Dan Solin is the author of The Smartest Retirement Book You'll Ever Read.

Follow Dan Solin on Twitter: www.twitter.com/DanSolin

Comments

[ForSolutions]

Dan I agree with your strategy of investing in index funds for the long term. However, I'm really concerned about what Warren Buffett said in his editorial the other day. If congress does not get the debt under control then we will become a banana republic. He is not just another Dr. Doom. How can anyone have any faith in investing in US for the long term after these comments? I would be curious to hear your thought on this.

[dansolin]

I am not suggesting that anyone confine their investments to the U.S. The portfolios of low cost index funds that I recommend give investors a globally diversified stock portfolio. Ideally, investors would be globally diversified in both the stock and bond portions of their portfolios. However, currently, there is no index fund I am aware of that investors can purchase directly that will give them a globally diversified portfolio of bonds.

[ForSolutions]

I do invest in globally diversified index fund. Currently, it is Vanguard Target Retirement 2045 Fund which breaks down the following way:

Vanguard Total Stock Market Index Fund Investor Shares 71.8%
Vanguard Total Bond Market II Index Fund Investor Shares 10.0%
Vanguard European Stock Index Fund Investor Shares 9.2%
Vanguard Pacific Stock Index Fund Investor Shares 4.9%
Vanguard Emerging Markets Stock Index Fund Investor Shares 4.1%

My concern is all these assets are denominated in US dollars. If the debt is not controlled then the dollar might become worthless and all the return gains are wiped out. I guess I'm asking if there is a diversified stock index fund that is denominated in other currencies? That way, I will have some money in US dollars in case this thing turns around; and some in other currencies like euros, yuan, etc.

[Ameriki]

The bankers are crooks and liars. The fund managers are crooks and liars. The financial media are crooks and liars. The government regulators are crooks and liars.

[comicpro]

I am doing great as I never listen to the talking heads on TV and they are usually wrong. I have my 401K and another portfolio at Schwab. Had at one time over $500K in that alone but now down to little over $350K. What is a man to do.

[DismayedRepub]

Buy gold and silver! If you are down 30% and can say you're doing great you must be a huge optimist. I’m down only half of that. I feel fortunate its not worse.

[Corpania]

ERROR ALERT -

It sounds like you're saying "ten year" when referring to 1987 - 2006.

Small mistakes like that tarnish your message.

Here's my opinion...
http://corpania.blogspot.com/2009/04/why-i-fear-impending-giant-bull-market.html#links

[Dan Solin - Huffpost Blogger]

You are right about the error. The correct time period is 1997-2006. Thanks for pointing out the error.

[TryToBeFlexible]

For 20 years, I would work with a financial advisor, then I would get "suspicious" of their advice, disagree with them. They would start getting nasty, then we would argue, then I would fire them. Then the process would repeat. I would always feel guilty, because after the fact, I would question my suspicions, and my anger.

Now we see that they are all indeed incompetent at best, and dishonest most likely. I should have done what my parents said, and put all my savings into CD's. No 401K's, no mutual funds, etc.

[ty2433]

what do you mean when you say choose your level of risk? life and investing would be easy if we get to choose risk, but much more complicated then that.

GE was a great stock for 20 years, good returns with little volatility. Should I buy it in 2007?

How about Bank of America? Or Countrywide, one of the top performing stocks of the past 25 years.

Or maybe the S&P 500, which dropped 40% in 2008.

Your model, like most models in finance is dangerous.

You are asking people to pick their risk level, when risk is changing.

Like diving off a cliff, where based on the tides, the water depth can change from 3 feet to 60 feet.

And basing your jump on fact that last guy who jumped survived. But we don't no if he jumped into 3 feet or 60 feet of water.

[Dan Solin - Huffpost Blogger]

I am referring to the asset allocation that is right for you. Start by taking the asset allocation http://smartestinvestmentbook.com/question/questionnaire.phpphp.

[ty2433]

Please check here if you would like Dan to contact you to discuss your investments (minimum account: $100,000) or have him do an analysis of your 401(k) plan (if you are a business owner or in charge of your 401(k) plan).

any charge?

[GarryK]

Yes, I think you succinctly nailed it.

[dadw5boys]

Only making single bets here.

[Sundialsvc4]

I always try to keep in mind that your expectations for what you get OUT of the money that you "lend," in the act of investing, ought to more-or-less match those of the businesses as they apply the money that you loaned them.

The money that is raised from stock, or that is borrowed by a company using its stock as collateral, is often used in long-term development. Building physical plant, developing new product, and so on. It's the sort of spending that's done with the full expectation of a return, "but not next week, not next month, maybe not even next year." But if the company is sound and well-managed and knows what it is doing, a return will come. Business takes money, time, wisdom, and just a little bit of luck.

"If you helped them plant and nurture the crop, and stuck with them particularly through the days that were so hot and so dry, one day you will help them eat the bounty of their harvest."

[dadw5boys]

Credit card companys will also use your good credit to improve their credit standing. They will issue you a 2nd or 3rd card and never send the card to you. Thus it looks like more paid accounts and lower percentage is late.

[Sundialsvc4]

Well, that's a new form of fraud to me, but as thoroughly criminal as (certain) banks have become, it would not surprise me at all... *sigh*

[dadw5boys]

With people out there like Ichan few businesses can actually care about the stock holder .

[radiojunkie]

Thanks Dan.

[billkarwin]

Yes, my investment portfolio is up 16% YTD. Nice!

But even with this partial recovery, the balanced fund I'm invested in is still 40% below its peak, 22 months ago.

It's going to take a lot of staying-the-course to recover that value fully. If the rate of recovery we've seen YTD maintains, I'll break even (0% gain or loss) by October 2, 2013.

[Dan Solin - Huffpost Blogger]

I am not sure it is accurate to compute your gain or loss from the date when your investment peaked. More relevant would be the annualized return from inception.

[doogiedude]

I think it is no less correct or arbitrary than calculating returns from the first of the year.

[billkarwin]

Thanks, that's a good point. I guess that's why they call them "bubbles" -- they're empty inside! That is, the gain is anomalous, rather than a realistic value of the investment.