Here's a statement of the obvious: The opinions expressed here are those of the participants, not those of the Mutual Fund Observer. We cannot vouch for the accuracy or appropriateness of any of it, though we do encourage civility and good humor.
I do want to read everything and learn, but when the following contradictory statements start the article...
Conventional wisdom suggests a well-diversified stock portfolio will generate reasonable returns over time.
Unfortunately, over the past 12 years, conventional wisdom failed.
A portion of this failure stems from lack of diversification.
The author will do himself favor by removing gratuitous highlights like that. Needless to say the 401k machine is at issue here. Keep people invested predictably and consistently is how asset managers make their revenues and bonuses.
My real problem with the article is it is pretty darn impossible in 401ks to achieve the kind of sector diversification the author thinks is possible. It is darn hard enough to do it using a NTF brokerage platform. If the index itself is not sector diversified properly, HTF do I find active funds with necessary combination of sectors in each market cap and then keep rebalancing because the managers funds do well causing their sectors to overweight, or they may simply change their mind on sectors, and the fact that while index information is current, fund information is stale in annual reports.
This is academic intellectual superiority complex, which offers no practical advice and complicates life for the investor when they should be simplifying it. On the one hand while active management - rightly for the most part - is criticized, indexing itself is challenged here. It would seem to me author wants everyone to invest in individual stocks or sector ETFs and keep rebalancing monthly - the only way to achieve what is being suggested. I suspect author is or related to lot of CPAs, because this will only make it complicated for tax management for individual investors. Surely what is being suggested cannot be okay for 401ks while not apply to regular accounts.
One of the ways I check and measure my own portfolio's performance, which consist of a good number of mutual funds, is against the Lipper Balanced Index as my portfolio is widely diversified holding cash, bonds, convertibles, stocks and other assets. At times, I lead my boggey mostly during market downdrafts and at times I trail it by a small amount during strong market updrafts as I usually sell down, at a measured pace, my risky assets (mostly stock funds). I buy on weakness and sell on strength. Overall this strategy has worked well for me as I am building my cash position along the way during the bull market run and have accumulated plenty of cash by the time the bear makes its appearance. This might not be for everyone just as dresses for the ladies and pants for the gents come in difference sizes, colors and styles.
From my thoughts, one should do what they feel works best for them. Weather this is a buy and hold type strategy or some type of timing strategy ... or, a combination of both ... or even something else. Do what works for best for yourself and within your own capacities. There are going to be those that get paid to write articles like the one just read. Understand, they themselves might not be doing what they have written on ... but, it gets someone to read it ... and, it brings a check to themselves from writing it.
Ask yourself ... Do they themselves pratice what they have written?
That is why I hold a good number of mutual funds as these fund manages brings a wide variety of assets, strategies, and thinking to my portfolio. Something to think on.
Reply to @Desota: I 401k I agree. Select ONE Target Fund and hope it does the trick. It may not be "sector" diversified. But then what author is suggesting IMHO is patently ridiculous. Cannot be achieved in 401k.
This is like me writing an article. "Why did VF lose hair". I may be able to articulate various reasons (a) all members of fairer sex in family who refuse to do anything with investments (b) simply the sheer overweight in numbers of members of the fairer sex (c) stupidity of people in general (d) gratuitous hair pulling trying to improve one's situation
None of the above can be addressed in any shape or fashion that will regrow my hair. I can get a hair transplant, but then that does not change a, b, c or d above.
Reply to @Skeeter: Thanks for sharing your buy-and-sell strategy. I too use similar approach and let the cash build-up until opportunity comes alone.
Besides Lipper balanced index, is there other index you are using for small caps, foreign equity and other asset class exposure? Also what is your metric(S) for doing okay?
Reply to @Desota: That Is Only True If You Are Buying Funds That Are All Buying The Same Type Of Stocks And Bonds. If You Buy Funds All Buying Different Things You Will Do Better Than Holding Only A Few Funds!!!!!!!
The article makes sense to me, but is true only in very general terms. One must still do their own due diligence, homework, research and make their own choices, based on their own circumstances. The headline is an attention-grabber. There's nothing new here, except for the uninitiated.
Comments
Conventional wisdom suggests a well-diversified stock portfolio will generate reasonable returns over time.
Unfortunately, over the past 12 years, conventional wisdom failed.
A portion of this failure stems from lack of diversification.
The author will do himself favor by removing gratuitous highlights like that. Needless to say the 401k machine is at issue here. Keep people invested predictably and consistently is how asset managers make their revenues and bonuses.
My real problem with the article is it is pretty darn impossible in 401ks to achieve the kind of sector diversification the author thinks is possible. It is darn hard enough to do it using a NTF brokerage platform. If the index itself is not sector diversified properly, HTF do I find active funds with necessary combination of sectors in each market cap and then keep rebalancing because the managers funds do well causing their sectors to overweight, or they may simply change their mind on sectors, and the fact that while index information is current, fund information is stale in annual reports.
This is academic intellectual superiority complex, which offers no practical advice and complicates life for the investor when they should be simplifying it. On the one hand while active management - rightly for the most part - is criticized, indexing itself is challenged here. It would seem to me author wants everyone to invest in individual stocks or sector ETFs and keep rebalancing monthly - the only way to achieve what is being suggested. I suspect author is or related to lot of CPAs, because this will only make it complicated for tax management for individual investors. Surely what is being suggested cannot be okay for 401ks while not apply to regular accounts.
Thanks for posting the article.
One of the ways I check and measure my own portfolio's performance, which consist of a good number of mutual funds, is against the Lipper Balanced Index as my portfolio is widely diversified holding cash, bonds, convertibles, stocks and other assets. At times, I lead my boggey mostly during market downdrafts and at times I trail it by a small amount during strong market updrafts as I usually sell down, at a measured pace, my risky assets (mostly stock funds). I buy on weakness and sell on strength. Overall this strategy has worked well for me as I am building my cash position along the way during the bull market run and have accumulated plenty of cash by the time the bear makes its appearance. This might not be for everyone just as dresses for the ladies and pants for the gents come in difference sizes, colors and styles.
From my thoughts, one should do what they feel works best for them. Weather this is a buy and hold type strategy or some type of timing strategy ... or, a combination of both ... or even something else. Do what works for best for yourself and within your own capacities. There are going to be those that get paid to write articles like the one just read. Understand, they themselves might not be doing what they have written on ... but, it gets someone to read it ... and, it brings a check to themselves from writing it.
Ask yourself ... Do they themselves pratice what they have written?
That is why I hold a good number of mutual funds as these fund manages brings a wide variety of assets, strategies, and thinking to my portfolio. Something to think on.
Skeeter
This is like me writing an article. "Why did VF lose hair". I may be able to articulate various reasons (a) all members of fairer sex in family who refuse to do anything with investments (b) simply the sheer overweight in numbers of members of the fairer sex (c) stupidity of people in general (d) gratuitous hair pulling trying to improve one's situation
None of the above can be addressed in any shape or fashion that will regrow my hair. I can get a hair transplant, but then that does not change a, b, c or d above.
Besides Lipper balanced index, is there other index you are using for small caps, foreign equity and other asset class exposure? Also what is your metric(S) for doing okay?
Thanks.