Wall Street as we knew it has disappeared. A huge bailout may happen. This is a fine time to assess what works and what doesn't.
Here is a list of some of the biggest names in the index fund world. I call it the "good" list.
Vanguard
Barclays
State Street
Fidelity
Dimensional Fund Advisors
T. Rowe Price
Schwab
Here is a partial list of troubled firms that have been affected by the recent financial meltdown. You can guess what I call it:
Lehman
Goldman Sachs
Morgan Stanley
Wachovia
Bear Stearns
Merrill Lynch
Many observers believe this is only the tip of the iceberg.
It is not entirely surprising that the shocking lack of competence of these firms resulted in their downfall. One study found that 94% of 50 major brokerage and investment banking firms continued to recommend investors buy or hold shares in failing companies right up to the day those companies filed for bankruptcy.
None of the firms on the "good" list need a bailout.
These firms sell investment products everyone can understand. They use a benchmark. The fund tracks the benchmark and captures the returns of that benchmark, less low transaction costs.
Their products don't have "sizzle"--unlike complex financial instruments like collateralized mortgage obligations, initially created for the defunct Freddie Mac.
The boring firms are now in the position of bailing out the really exciting ones.
What we are witnessing is more than the restructuring of Wall Street. It should also fundamentally change the way we invest and the kind of information upon which we rely.
Even the most committed returns-chasing investor must pause and reflect on a system in which trusted sources of investment advice have been so wrong. One of the most egregious examples is Standard & Poors analyst report on Washington Mutual issued September 24, 2008, one day before WaMu was taken over by the FDIC. Its deposits were sold to JP Morgan. The report advised investors to "hold" the stock and set a 12 month "target price" of $4 a share.
WaMu is currently trading at 16 cents a share.
The silver lining in the dark clouds is that the new paradigm for investors is so clearly in their best interest.
Just because the government is thinking about bailing out Wall Street doesn't mean you have to continue to follow suit.
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