Wednesday, August 29, 2012

Staying the Course
Source:  Stocktwits

Recent conversations with clients have largely centered on what could go wrong in the market over the next few months.

My response to all of these concerns has largely been centered around the chart shown above.

Over the very long time period, stocks have historically provided the best returns for anyone with a long term time horizon.

The market swoons of 2002 and 2008 were outliers, as the above chart shows. Both market tumbles were related to specific events (9/11, in the case of 2002, and the credit crisis of 2008) which have been relatively rare in our country's history.

Stock returns have generally ranged between -10% and +30% since 1825, as you can see from the chart. That doesn't mean that the market will always move higher, but it does mean that the odds are with you.

Yes, stocks could go lower in the next few weeks.  The S&P 500 is up more than +13% for the year. With the exception of May, returns for most months in 2012 have been positive, so a correction of -5% or so would not come as a surprise.

But relative to nearly every other viable investment alternative, stocks still offer the best chance for longer term gains.

Thanks to CBS MarketWatch, I will also begin to reference a new book out by Vanguard founder John Bogle.

Titled "Clash of the Cultures: Investment vs. Speculation", Bogle offers simple, common sense approaches to investing that will serve nearly every investor well.

What I like in particular is Bogle's 10 rules of investing, which offer some of the best advice for investors that I have read in a long while (reprinted from Allan Roth's column in CBS MarketWatch):

1. Remember reversion to the mean. What's hot today isn't likely to be hot tomorrow. The stock market reverts to fundamental returns over the long run. Don't follow the herd.

2. Time is your friend, impulse is your enemy. Take advantage of compound interest and don't be captivated by the siren song of the market. That only seduces you into buying after stocks have soared and selling after they plunge.

3. Buy right and hold tight. Once you set your asset allocation, stick to it no matter how greedy or scared you become.

4. Have realistic expectations. You are unlikely to get rich quickly. Bogle thinks a 7.5 percent annual return for stocks and a 3.5 percent annual return for bonds is reasonable in the long-run.

5. Forget the needle, buy the haystack. Buy the whole market and you can eliminate stock risk, style risk, and manager risk. Your odds of finding the next Apple (AAPL) are low.

6. Minimize the "croupier's" take. Beating the stock market and the casino are both zero-sum games, before costs. You get what you don't pay for.

7. There's no escaping risk. I've long searched for high returns without risk; despite the many claims that such investments exist, however, I haven't found it. 
And a money market may be the ultimate risk because it will likely lag inflation.

8. Beware of fighting the last war. What worked in the recent past is not likely to work going forward. Investments that worked well in the first market plunge of the century failed miserably in the second plunge.

9. Hedgehog beats the fox. Foxes represent the financial institutions that charge far too much for their artful, complicated advice. The hedgehog, which when threatened simply curls up into an impregnable spiny ball, represents the index fund with its "price-less" concept.

10. Stay the course. The secret to investing is there is no secret. When you own the entire stock market through a broad stock index fund with an appropriate allocation to an all bond-market index fund, you have the optimal investment strategy. Discipline is best summed up by staying the course.