As stocks are now at all time high territory persistently, we are seeing investors are becoming more and more attracted to stock markets. Along with this trend, we have observed some ‘irrational’ behaviors or arguments. Here are some examples:
- You are missing a gigantic fortune in the stock market. BusinessInsider.com has this article How Millennials Missed Out On A Gigantic Fortune In The Stock Market, for example. All of this type of articles will make people truly regret about their investments. Some of them might hold out because of fear, some of them have never thought about investing in stocks. All of sudden, you have this urge to invest and go all in to stocks so that you won’t miss out a big fortune.
- Some users told us that they aren’t sure what values our service brings to them anymore: for them, a strategic portfolio like Six Core Asset ETFs Strategic Asset Allocation – Optimal Moderate does not even out perform a simple balance fund such as VBINX (Vanguard Balance (60% stocks/40% bonds), let alone investing in a single S&P 500 index fund such as VFINX (Vanguard (S&P 500) Index)!
- Some users who are more advanced are also puzzled. They begin to question the need of Tactical Asset Allocation strategy: the strategy has been busy monthly for the past 5 years but portfolios like Six Core Asset ETFs Tactical Asset Allocation Moderate has lagged behind the simple balanced fund VBINX (Vanguard Balance (60% stocks/40% bonds). It is really “much ado about nothing“!
Here is what we would like to respond:
- Missing out a gigantic fortune! Well, it turns out that if you have held out merely because of fear of stock markets, this article does have its valid point: investing in stocks for a long period of time is always rewarding as long as you are clear about what the ‘long period of time’ means. See, for example,
However, if you are only reading articles or claims like this at this moment when the stock markets are highly overvalued, chances are that your long term period will need to be extended by another 5 or even 10 years, if you decide to get into the markets only right now. For example, for people who invested in S&P 500 in August 2000, for almost 14 years up to today on 7/28/2014, their annualized return is just about 3.8%! If an investor invested in S&P 500 in October 2007, the annualized return would be 5.7%, for almost 7 years. These two periods happen to the two peaks of S&P 500:
- Regarding whether there is a need to use a diversified portfolio instead of just investing in US stocks and bonds, let’s look at the following chart:
It is clear that in all other periods, VBINX had under performed the portfolio until July 2013!
- Regarding “much ado about nothing” on our tactical portfolios, we believe that anyone who would like to use tactical should recognize that the out performance and risk reduction a tactical portfolio delivers (see the following chart) come with a price: more frequent (we estimate on average, one needs to perform 4 to 5 times rebalances a year, even for a tactical portfolio with monthly rebalance schedule). We suggest our previous newsletter July 22, 2013: Tactical Asset Allocation: The Good, The Bad And The Ugly.
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