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CFIT

Keeping The Indexing Faith?

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For quite a while now, my main 403(b) vehicle has been a low cost 500 index fund. I am a "Random Walk" believer although it has been harder to keep the faith lately. At the end of last year, the system I work for eliminated my 403(b) provider and I have since enjoyed two nice paychecks that are fatter for having no 403(b) deductions. I've been on the verge of opening a 403(b) with Fidelity, but somehow watching the meltdown has made it easy to procrastinate. I don't know if the Boggle way conceived or was meant to deal with a meltdown of this scale. I am no economist, but I read a lot, and I cannot see any development that will stop the destruction.

 

I'm doing well now. It seems likely that I will keep my job since I've recently added the duties of a departed employee to my own. I don't see needing my 403(b) until twelve or fifteen years, and I have non-retirement assets that would tide me over for a decent amount of time. I have cut back on my discretionary spending for reasons of psychology and not financial necessity. Millions of other people are doing the same, and the vortext just gets deeper and faster.

 

Maybe the trick is to be a contrarian. I certainly was in regard to the housing bubble, and that worked out well for me. If the masses are flooding towards the exits, maybe this is the time to buy more of the market. Hard to find the conviction to do that after reading the papers.

 

Interesting times, eh?

 

-John

 

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Hi CFIT,

Yea, I hear you. If all you had was the S&P 500 index, you would have lost money since 1999.

 

In all of these years I heard, read and discussed diversification, rebalancing, having bonds roughly equivalent to your age, use low cost funds, have indices as a core investment in both equities and bonds. I was prepared for this bear because I had a plan and I stuck with it because I knew ahead of time that if the bear struck, I would be OK.

 

I went through what you are experiencing now ten years ago, during 00-02. I never sold but all of the gains from 95-00 were gone. I never want to go through that again.

 

The main problem I see with people is not having enough in bonds. Learn about bonds, it is not trivial but they are essential. Larry Swedroe’s book is excellent.

 

Have a plan and stick with it. My plan has been 30% equities and 70% bonds and I stuck with it over the last five years. I did not make as much of during the bull market, but I was able to keep when I did make. Having a plan takes most, but not all, of the emotion out of both bull and bear markets. During bull markets, you do NOT want to get over confident and during bear markets you do not want to panic sell. During the tech bubble I got over confident but during the bear market I did NOT panic sell, but waited patiently, with an enormous amount of pain, for the market to recover, learned from my mistakes by making a ton of adjustments (get out of 100% equities) and had a plan ever since.

Holding only the S&P 500 index is not diversification. But with 15 years to go, you have time, as I did, to correct your portfolio and achieve your goals. I retired last year.

2 cents worth,

Steve

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I think this is a great time to buy. I heard an interview with George Friedman on Michael Medved's show recently, and he makes a compelling case for looking at current market conditions that way. Not directly, of course, but if America continues to dominate, it probably won't be bad for our markets.

 

You need a paid subscription to hear the interview that Medved did with Friedman, so the v i d e o at Amazon will have to suffice.

 

Anyway, in the next ten years or so, I think REITs will do well, as will commodity- and energy-oriented investments. Many funds that focus on these sectors are beaten down, and you can get them cheaply now. Even if there may be more downside risk, I'm pretty well convinced of the foolishness associated with joe sixpack (I include myself) trying to time the markets, so I'm moving forward, and I even increased my 403(b) deduction by 60% late last year. I'm still considering another 25% increase, even though my wife and I have lost about $150K in our investment/403(b) accounts since they peaked last year.

 

I'm in my early 40's, and God willing, won't be needing this money for another 20-30 years, so I think now is a great time to invest, whether you invest in index funds or sector funds.

 

Consider:

 

“Most investors, both institutional and individual, will find that the best way to own common stocks is through an index fund that charges minimal fees. Those following this path are sure to beat the net results (after fees and expenses) delivered by the great majority of investment professionals.”

Warren Buffett, 1997 letter to shareholders

 

And:

 

“[...] those index funds that are very low-cost (such as Vanguard’s) are investor-friendly by definition and are the best selection for most of those who wish to own equities.”

Berkshire Hathaway 2003 Annual Report

 

“Over the 35 years, American business has delivered terrific results. It should therefore have been easy for investors to earn juicy returns: All they had to do was piggyback Corporate America in a diversified, low-expense way. An index fund that they never touched would have done the job. Instead many investors have had experiences ranging from mediocre to disastrous.”

 

There have been three primary causes: first, high costs, usually because investors traded excessively or spent far too much on investment management; second, portfolio decisions based on tips and fads rather than on thoughtful, quantified evaluation of businesses; and third, a start-and-stop approach to the market marked by untimely entries (after an advance has been long underway) and exits (after periods of stagnation or decline). Investors should remember that excitement and expenses are their enemies. And if they insist on trying to time their participation in equities, they should try to be fearful when others are greedy and greedy only when others are fearful.”

Berkshire Hathaway 2004 Annual Report

 

 

Appearing Monday morning on CNBC from Berkshire Hathaway's annual shareholder meeting in Omaha, Neb., Chairman Warren Buffett reiterated his view that for most small investors who don't have time to research individual companies, cheap index funds are the best way to invest in the stock market.

 

"The best way in my view is to just buy a low-cost index fund and keep buying it regularly over time, because you'll be buying into a wonderful industry, which in effect is all of American industry," Buffett told CNBC anchor Liz Claman.

 

"If you buy it over time, you won't buy at the bottom, but you won't buy it all at the top either," the billionaire investor said.

 

CBS MarketWatch, 5/7/2007: “Buffett gives nod to index funds over ETFs”

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Facts! Facts! Facts!

 

Faith has no place in making logical or rational investment decisions.

 

So, do the facts support your previous opinion that the markets follow a "random walk"?

 

Second, can you devise a strategy that will perform significantly better than a buy and hold strategy? If not, then continue with your buy and hold strategy.

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