One needs to time the purchase of fund buying as well.It is believed that no one can time the investment perfectly.Still one need to invest systematically over time and at different price levels. Preferably when markets are trading at historically undervalued price levels and opposite in case of selling.

I really love the style you put into every post, Trent, but I think the topic of investing needs more than “index funds; diversify.”

My two cents: do index funds and diversification work? Absolutely.

Are there other investments/investment strategies that work better? Absolutely.

Should you use them? Maybe.

I’m hoping to cover the topic of investing while still young over at my new blog (www.younginvesting.com), because I’ve always felt that personal finance authors and bloggers fall desperately short in explaining thoroughly the strategies for investing.

Without a sound investment strategy, all we are are frugal penny-pinchers at worst, and happy “just-getting-by”ers at best.

Not to rain on anyone’s parade, I just think I have a bone to pick with the whole “personal finance” industry (as well as the public education system!) for not helping to educate us how, when, and why to invest after we’ve learned to save more and spend less.

I disagree that index fund investing is the most efficient for this. How about just accumulating your annual investment amount every year and dropping the whole load on one stock that’s in the DOW or the S&P 500? Do this either once or twice a year. Mark on the calendar what your investment month is. Talk about tax efficient and low-cost in terms of loads. one $10 brokerage fee on $5,000 equates to 2/10 of a percentage point. That’s your total investment cost for the year, 2/10 of one percent. Now hold the stock for say 10 years. For 9 of those years you’ll pay NO investment cost or management fee.

Every year, buy a different stock, in a different sector. Within 10 years you’ll be fairly diversified. Within 20 years you’ll be very diversified.

You will, of course, at times want to rebalance your portfolio, but that’s another topic. My point is that if you have a long term horizon, buying stock directly is the most efficient and low cost method, at the initial disadvantage of low diversification. But within about 10 years you’ll be as diversified as you really need to be.

Investing doesn’t need to be complicated.

Diversification is not a fail safe plan. There is no such thing. With the possibility of return comes risk. So no matter how you invest you are going to come up against some risk, yes even govt bonds, even though they are said to have no risk, technically they do have some risk.
Diversification does work the way it is designed to work. Even though I believe there is such a thing as over-diversification, diversification itself is a good idea for the average investor.
I have read a few articles that speak about the 2008 collapse and how financial advisers need to come up with a different strategy because diversification doesn’t work. This is just simply not true.
There are two types of risk out there, idiosyncratic risk and systematic risk. Idiosyncratic risk is risk that affects only a certain area of the market. Systematic risk affects the whole entire market. The collapse in 2008 is considered Systematic risk and diversification by definition is designed only to protect against idiosyncratic risk (which is why it’s also called diversifiable risk). For example if I diversified by buying 1000 shares of GM stock and BOA before the collapse I would have nothing left of the 1000 I had in GM stock. However I would still have my 1000 in BOA. You’re saying that BOA is worth a lot less than it was 2 years ago. Well this is true because the systematic risk brought the whole market down. However if I didn’t diversify and bought a 1000 in GM and 1000 in Chrysler (both in the auto market) I would have nothing. So diversification works but it will not protect you against a total economy collapse.
Saying that diversification failed in 2008 would be like building a sand bag wall around your house and then complaining because it didn’t stop water from leaking through your foundation. It’s just simply not meant to protect against that.

Good choice if you don’t know if you son/daughter are going to go to college.

How about Total NET WORTH diversification which includes debt, assets outside of the Stock Markets along with 100% safe Cash, real estate etc. When ALL of your assets are considered and liabilities deducted from Debt you have a complete picture of where you are and you MAY see you are totally reliant on one of several classes of assets or Stock Market investments.

If your Net Worth isn’t growing and you have $$$ in the Stock Market its a belief that you are doing the right things? Wrong! My point is that all of the debt reduction schemes one can come up with is only one small part of total diversification. The word itself can mean a much wider scope than simply Stocks, Bonds, Cash.

You will NOT find this Net Worth approach in most Mutual fund or investment guidance because they want ALL of your money.

Example is Madoff investors who sold all assets and put all money in his investments and lived off the income! Totally naive people and you gotta WORK at this stuff to assure that no single sector or asset class is succeptable to a major loss or downturn.

Also, downside limited investments with 50-60+% of an upside market could leave one with 20-30% losses versus 50-60% losses. Calculate the “get back to even” on these and you can see that limiting losses is an important strategy. 5yr recovery versus 10+ years is important for people to know about.

There is much more involved with this approach but you will NOT see most investment companies or mutual fund companies using a total net worth approach.

No matter what you pick for a retirement #’s it makes little difference if you arrive there and have what has just happened 20 years from today!

That thought is way too narrowly discussed and simply starting saving early is not the answer. Start early and recognize you MUST be totally diversified through out your life. Debt is one HUGE influence on your success for sure but ending with everything in the Stock Markets only puts your money where somone else profits daily, weekly monthly with continual fee erosion, even when you are losing money. Even inflation erosion on cash in 2008 was about 40% less loss than being in the Market.

I was -34% in the market in 2008, -30% housing equity and with cash building for the last 9 years end up with a total Net Worth related loss of -18%. Market recovery is 5.4 years at 7.5% returns versus 10.3 years for others. Housing recovery is not even predictable……… Stock Market assets are only 26% of total net worth.

Zero debt.

66yrs old, still can retire tomorrow morning if I want to. Could NOT have achieved this without the net worth approach. 10+ Years ago did an ongoing analysis and found 50%+ of net worth was in my HOME. Rest was in Markets at that time. Huge appreciation of real estate skewed the numbers.

Calculated that I had enough “deferred investments” that I will pay taxes on in retirement This is another aspect for the 20 somethings to be told about! You can have too much in deferred 401K and IRAs at some point.

No one is gonna tell you this from Mutual fund company…………..

Ken Swift

My take is $750K (inflation eaten or not) is better than nothing, and $30K a year is better than $10K, and goals can grow or change as your own circumstances do. You don’t have to save at the max now. Save what you can and work to build it. I started with 5% of my salary for retirement, then inched it up over the years to 15% now. Will it be enough? I don’t know, but it’ll be a hell of a lot better than if I didn’t save anything or waited until I thought I could start with the 15%. I also realized there was no way I was going to fully fund my children’s college (and a mortgage, and car payments, and retirement) but I wanted to save something. So when each was born I started with $20 a paycheck and added $5 every raise or COL increase. My oldest starts state college in the fall and she’ll be taking out loans. But we are better off for what I managed to save, even it only pays for about half.

The main point of the above article is to start saving and don’t fall into paralysis of analysis in looking at all the options. My point to add is save something, anything, and try to regularly grow that amount over the years as you can because all the estimates, projections and advise mean squat if you don’t have something to work with in the end.

How did we go from the premise “Don’t Over Think Your Investments” to a rant about whether $750k is enough or what impact inflation will have or whether social security will be around or how much someone needs to live on?

I think Trent makes a sound argument and comments like these further this belief. None of us know what tomorrow will bring, neither do the experts nor the clowns on wall street that tell us they do.

Far too many people get wrapped up, and subsequently confused, by the messages sent by the financial industry (all with the aim of selling a product and taking your money) and it really does not need to be that way. Keep it simple is a great strategy.

And as they always say, past performance is no guarantee of future results… say an investor researches funds with a good 5-10 year track record and goes with one of them; what happens if the manager who led that fund retires in two years? I used Magellan to help pay for college back when Peter Lynch was the manager, and I’m glad he hadn’t retired sooner! (Magellan today isn’t nearly the fund it was under Lynch.)

I’ll shoot for average and happily take the above average results.

Everything else (bond funds, REITs, stocks, foreign currency, oil, gold, etc.) got clobbered in 2008 as highly leveraged concerns had to sell their assets to raise cash in order to pay their bills.

Thanks for the clarification. The point I was trying to make was that $30,000 per year (which is like $12,000 in today’s dollars) plus whatever Social Security you get is not very much to live on. If you only had to withdraw $30k off of $750k then you wouldn’t run out of money–your standard of living would just be really low.

Anyway, as poor investors like Trent and J.D. Roth move their money into indexes and encourage other poor investors to do the same, the average skill in the market will rise and active investing will become more difficult. The new group of poor investors might leave for index funds as well, creating an interesting cycle that makes active investing very difficult.

On the other hand, indexes are predictable and it’s easy to make money trading shares before the prospectuses of index funds force them to trade. This especially happens when a company becomes large enough to join the S&P 500. Someday half the money in the market might be in indexes, and if they have to add or sell a security, trade in that security will be so imbalanced (as not enough active traders exist to take the opposite bet) that returns will greatly suffer.

Thanks for the clarification. The point I was trying to make was that $30,000 per year (which is like $12,000 in today’s dollars) plus whatever Social Security you get is not very much to live on. If you only had to withdraw $30k off of $750k then you wouldn’t run out of money–your standard of living would just be really low.