THE BLOG
08/19/2007 10:04 pm ET Updated May 25, 2011

Breaking News: The Markets Aren't Volatile!

I broke some news on Fox & Friends last week. I said the markets are not volatile.

This came as a shock to my genial hosts. But think about it this way: On September 17, 2001 (the first day the markets opened after 9/11), the DJIA fell 684 points and closed at 8920.

Since that time, the perfect storm for stock market disaster has occurred...or so it would seem.

* We are engaged in an unpopular war in Iraq, which has sent our deficits soaring

* Oil prices have zoomed above $70 a barrel and $100 a barrel is no longer considered to be a crazy prediction

* The housing market is severely depressed

* The much hyped hedge fund sector is faltering badly

* "Sub prime loans" has become part of the daily lexicon and it is uttered with the same disdain as "Britney Spears," or other celebs behaving badly.

So what happened to the DJIA? It is presently above 13,000, having sharply retreated from 14,000.

The markets really are not volatile. Over the long term, they always go up. We have 80 years of historical data -- through wars, recessions, a depression and calamities of all kinds -- to prove it.

Even over the relatively short term, the markets still go up. In the past 50 years, we have only had one period of two consecutive years when the markets declined.

All the incessant blathering about "buying opportunities" and "historic losses" completely misses the point.

Investors should always be in the market. But not the way most individual investors currently invest.

Smart Investors focus on their asset allocation. They don't care about short term volatility because the bond portion of their portfolios will help them weather the bumps in the stock market road.

Since these investors do not have to liquidate their stock holdings in a down market, they do not incur losses during these times.

Instead, they can hang on and reap the superior long term returns that equities will give them over the long haul.

These investors use low cost index funds for the stock and bond portions of their portfolios to capture market returns (less low transactions costs) 100% of the time. Without much time, stress or effort, their returns place them in the top 5% of all professionally managed money.

Often, they do so without using any broker or advisor. If they use an advisor, it is a passive advisor who assists them with asset allocation and helps them put together a portfolio of index or passively managed funds consistent with their investment objectives and tolerance for risk.

The vast majority of individual investors are only getting a fraction of market returns on their investments. For these investors, it is useful to blame "market volatility" for their dismal performance record.

That is a lot like blaming your television set for all of the investment pornography that masks as financial news on television.

The cause of your losses is most likely your broker or advisor who invested your funds in a portfolio that is too risky for you.

And you must also share the blame for not being wise to these machinations. There is no shortage of information that would put you on the right path.

Short term stock market volatility does give you a "historic opportunity." You should use it to reassess how you invest and resolve to play by new rules which are in your best interest.

If you wait for your returns-chasing broker or advisor to put you on this path, you can be confident that future market volatility will be the least of your financial woes.

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.