I want to make the case for actively managed funds as well. Thereis a very good rationale for positing that past performance can identify funds likely to outperform in the future. Actively managed mutual funds are decision-making machines. Their decision-making capability is the bottom line result of people, processes, approaches, and tools that they use every day to make decisions. Good machines are more likely to make good decisions than bad machines. This capability to make consistently good decisions can be inferred from past risk, return and persistence behavior. Persistence is the tendency of a fund to exceed S&P500 return at lower than S&P500 risk. A tool that provides this analysis is available at http://www.FundReveal.com and a free trial is available.

I like the rule of thumb to own a percentage of your equity holdings in bonds equal to your age. In other words, if you are 35 years old you should own 35% of your holdings in bonds with the other 65% being in low cost index funds. In that way, you are lowering your risk as you get older.

I am still back and forth about whether there is value in active investing. I might set aside a little money next month to play the stock market with a designated strategy such as Buffett-style value investing or the Motley Fool strategy. I’m only 29, so I have a little tolerance for risk.

1. Investing in your own debt(in other words reducing and eventually eliminating your debt. In my opinion that’s where you start.

2. Financial Literacy/Education. Properly educated you won’t be at the mercy of the entire financial industry. It is a daunting task but does provide one of the best returns on time and energy expended.

I agree that you should work on getting rid of debts first before anything else. Very sound advice.

Don’t be afraid to break the “traditional” investment mold either. Putting everything in mutual funds or index funds and then hoping they go up is NOT an investment strategy despite the fact that this is what the majority of the unsophisticated public do. You would have had no growth at all over the past decade with this strategy even before inflation is taken into account. And there is no guarantee that this will change. Interest rates have no where to go but up, which is historically bad for equities.

No one can predict the future, but one can find favorable risk/reward setups in the markets that limit your risk, which is what successful trading/investing is all about. I strongly recommend anyone new to investing read the following books to get on the right path (there are some more advanced ones out there too for when you are ready).

Secrets for Profiting in Bull and Bear Markets-Stan Weinstein

How to Make Money in Stocks-William O’Neil

Winning on Wall Street-Martin Zweig

Trend Following-Michael Covel.

Good article. Perhaps the parts where you talk about negative numbers could be better expressed as “negative 10%” rather than “-10%”. When the line breaks, sometimes the “-” is left on the previous line, so on the next line it looks like “10%”.

Also, when you use the “-” as both a negative and a clause separator, you can get confusing statements like this: “Other years will have a -30% return. Over some decades, it’ll average out to a nice positive – 10% or so.” It took two readings to see that you weren’t exposing -10% as a “nice positive”.

Thanks for the article.

Many look to those employed in The Stock-Selling Industry for advice. This is a mistake. The Stock-Selling Industry is all about selling stocks. You need to look for more independent sources of information on how the stock market works.

Rob

I would definitely agree that paying down debt right now is very important, especially considering it is hard to find yield anywhere. However, if you do not need the money you have allocated to investments in the next five to ten years, don’t be afraid to look at alternative investments. For years, modern portfolio theory has preached diversification, but that extends beyond just holding equities from different sectors. You need to diversify amongst several different asset classes, including exposure to stocks, bonds, commodities, currencies, and even real estate. You can do this through ETFs nowadays, or if you have enough capital, invest directly.

Don’t be afraid to investigate products such as long/short funds too if you meet the qualifications. A lot of these “risky” investments have had a more consistent appreciation over the past few years than long only mutual and index funds.

Your portfolio can recover from short term fluctuations in the markets when you’re younger.

I’m middle aged and plan on keeping my portfolio as aggressive as possible at least till I’m 55.

After you’ve paid off all debts, including mortgage(s) and any personal loans, then and only then you can start thinking about how to invest free cash.

Of course this leaves open the question how you should invest tax-deferred funds. So, where should you put your 401K and IRA money?

I’ve been working in the investment field for 30 years and yet I find the correct answer to that question elusive. One possible answer is a carefully-selected target-date mutual fund.

If people allow their obsessions with savings to affect their happiness, then the obsession is the problem, not the accumulation of a lot of savings. You’re taking Trent’s words totally out of context.

-Jimmy