THE BLOG
07/30/2008 05:12 am ET Updated May 25, 2011

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.