Hang Tough as the Market Turns

[Bylo Selhi]

Hang Tough as the Market Turns [Wall Street Journal, 05Jun05]

If you combine indexing's relative certainty with an awareness of investor mistakes, you will find it easier to hang tough through the inevitable short-term market turmoil -- and you are more likely to stick around long enough to notch the impressive long-run gains that stocks can deliver.

[dakota]

To be sure, instead of freezing, it would be better if we kept our nerve and bought more as share prices plunged. Often, however, we can't bring ourselves to act until share prices bounce back

If Mr Clements had been in the precious metal stocks this year he would have had plenty of oportunities to use his "self knowledge"

[yielder]

Hang Tough as the Market Turns

Clements has been around long enough to know that he's writing porn with this kind of article. He alludes to diversification when he talks about being 25% foreign stocks and 75% US stocks so it's not as if he doesn't know better. Even if 100% equity is one's preferred portfolio, you have to incorporate rebalancing to maintain the 25/75 split. Outside of Scott Burns very few journalists seem to under stand, or at least, write about how to use index funds to reduce risk.

[Bylo Selhi]

He alludes to diversification when he talks about being 25% foreign stocks and 75% US stocks so it's not as if he doesn't know better. Even if 100% equity is one's preferred portfolio, you have to incorporate rebalancing to maintain the 25/75 split.

I think you're being way too harsh here. He starts the piece with "Making money in the stock market..." There's no mention of bonds, REITs, etc. because that's not the topic. In many other pieces he stresses the need for other asset classes besides stocks, including TIPS (RRBs), commodities, annuities, etc., the benefits of diversification, risk control through rebalancing, low-cost indexing, etc.

He probably assumed that his audience wasn't reading this piece in isolation. Go here, search on Clements and read what he has to say. (A couple of examples are "Why My Portfolio Changes Constantly -- And Why That May Not Be All Bad" and "Eating His Own Cooking: Our Columnist Details How He Invests His Portfolio.")

Outside of Scott Burns very few journalists seem to under stand, or at least, write about how to use index funds to reduce risk.

Well, I can think of at least two of the top of my head, Jason Zweig and, er, Jonathan Clements. Both work for organizations that derive a lot of revenue from "the dark side." It's a testimony to their integrity, audacity and talent that they continue to get away with biting the hands that feed them.

[Bylo Selhi]

Another Clements gem.

Five Money Ideas That Really Add Up [WSJ, 09Oct05]

Take five.

When it comes to investment ideas, veteran investors often play favorites. You will hear them sing the praises of supposedly surefire notions like "free cash flow," "200-day moving averages," "growth at a reasonable price" and "intrinsic value." But this stuff strikes me as unnecessarily clever -- and way too likely to get people in trouble.

Instead, I hang my hat on a much simpler set of ideas. What follows are, I believe, the five most important concepts in investing. If you aren't using them in your portfolio, I think you are making a big mistake.

1 Saving
Tout the virtues of saving money and folks tend to look a little weary and grumble "well, duh." But the fact is, saving money is the surest way to make your portfolio grow -- and there isn't enough of it going on.

Many retirees, if they bothered to run the numbers, would probably find that more than half of their nest egg is represented not by the investment gains they earned during their working years, but by the raw dollars they socked away. And yet, despite the obvious need to save a heap of money, most people don't.

Over the past five years, the annual savings rate has run at between 1.8% and 2.4% of disposable income, well below the 8% to 10% that was common in the 1960s, 1970s and 1980s.

Meanwhile, families have gone deeper into hock, with mortgage debt jumping 70% during the past five calendar years and consumer debt climbing 38%.

2 Time
If you are just out of school, you may not have much money. But you do have time, which can be just as valuable.

Want to amass impressive wealth? All it takes is a modest savings rate, modest investment returns and a heap of time.

Suppose you sock away $300 every month and those savings clock 5% a year. After 40 years, you will have accumulated almost $460,000.

3 Diversification
Diversification is sometimes described as Wall Street's only free lunch, because it allows investors to slash their portfolio risk without hurting long-run returns.

How does it work? Different parts of the global market fare well at different times. By combining a fistful of market sectors in a single portfolio, you will smooth out performance, as losses in one part of your portfolio are offset by gains elsewhere. For most folks, mutual funds are the only practical way to get this broad diversification.

Unfortunately, however, diversification is anathema to many. Overconfident investors shun the idea of spreading their bets widely, preferring instead to focus their dollars on the market's biggest winners.

Yet picking winners is a lot tougher than it seems -- and those who try typically incur hefty investment expenses and run the risk of picking wrong. And if you pick wrong too often, you could end up spending your golden years with miserably little to spend.

4 Rebalancing
Diversification is great for reducing risk. But to bring some rigor to the strategy, while simultaneously profiting from the market's turmoil, you need to combine diversification with rebalancing.

The idea is to set target portfolio percentages for key market sectors, such as large U.S. stocks, small U.S. shares, real-estate investment trusts, developed-foreign-market stocks, emerging-market stocks, high-quality bonds, high-yield "junk" bonds, foreign bonds and money-market instruments.

Once you establish these portfolio targets, you should tweak your investment mix every year or so to bring your holdings back into line with your target percentages. For instance, if you have earmarked 5% for junk bonds and the sector has a rotten year, you would add to your holdings to get back to your 5% target.

This rebalancing is best done in your retirement account, where you can trade without worrying about the tax consequences. What if you are rebalancing taxable-account investments? Try to get back to your targets by directing dividends, interest and any new savings to your portfolio's underweighted sectors.

Rebalancing keeps your portfolio's risk level in check, by ensuring you don't end up with too much money in any one sector. There's also a potential bonus. Rebalancing could boost your portfolio's performance, by forcing you to buy into depressed sectors that are ripe for a rebound while cutting back on highflying markets that could be set to crash.

5 Indexing
When one of your portfolio's funds gets hit hard, it can be nerve-racking to add more money. While you are buying, everybody else will seem to be selling, scathingly dismissing the sector as "dead money" that will "never come back." To make matters worse, there is always the worry that even if the sector returns to favor, your fund won't go along for the ride.

That's one of the reasons I am such a fan of index funds, which simply buy the stocks or bonds that constitute a market index in an effort to match the index's results. With an index fund, you can be confident of capturing the results of the underlying market.

Moreover, if you index, you are guaranteed to outperform most active investors who dabble in the same sector. It is a matter of simple logic.

Before investment costs, investors collectively match the market's results, because together we are the market. After costs, we are destined to lag behind. In fact, as a group, we will lag behind the market by an amount equal to the investment costs we incur.

That is where index funds get their edge. By seeking to match the market while incurring minimal expenses, index funds ensure that they outpace most competing investors, who are burdened by far higher costs.

But it gets even better. If indexing looks good before taxes, the strategy's results are almost unbeatable once you figure in Uncle Sam's cut. Indexing is highly tax-efficient, because the funds don't actively trade their portfolios and thus they are slow to reap capital gains.

Looking to buy investments for your taxable account? If you want decent gains without big tax bills, you won't do much better than stock-index funds.