Catching Every Rally Is Easy
Catching every rally is actually easy. All you have to do is buy a basket of index funds and hold them. Of course doing so will occasionally result in losses of 40% or greater as happened in 2008.
Had you bought the S&P 500 10 years ago and held on for dear life, you would have caught every rally and over those 10 years you would be about even. Had you done that in the Nasdaq, you would be down 40% still.
Of course, had you put everything on gold, silver, and energy and walked away you would have been a huge winner. However, that is not the way general funds invest or should invest. Secondly, that may have been a quite reasonable thing to do a few years back, it is much tougher to make the same case now.
Diversification No Savior
Diversification did not help in 2008. Given similar market correlations, it is highly unlikely that diversification in a basket of US and foreign stocks will do much better on the next move lower.
via Mish’s Global Economic Trend Analysis: An Awful Time to Invest; Reflections on “Lost Opportunities”.
As it happens I recently dipped into a book arguing for index funds over mutual funds. It was conveniently published in 2006 I think. It makes the above quotation jump out at me because it is what has been tormenting me lately.
I’ve been listening to a lot of Dave Ramsey lately (his radio show is from 2-4am so I get him coming back on a couple of my night shifts). Ramsey’s case for getting out of debt due to the huge negatives that are involved in that way of life is totally convincing. Ramsey’s case for investing and saving and building a fortune beyond cash accumulation sounds as unconvincing and stupid as his other argument is convincing. I’m glad he got the mutual funds on the bubble. I’m glad he got into real estate when it was going up and did so without leverage. But that artificial economy is over.
So what is left?
The Fed has destroyed interest rates. One might as well keep cash in a pillow case as use a savings account. Playing the stock exchange mirage is the only possible way to even hope to beat inflation, let alone compound your money. And that game is now over.
So what do you do? I have no idea. As far as I can tell, frugality and thrift, while still better than the opposite, are nowhere near as rewarding. The possibility of real wealth building seems to be over.
It’s a brutally hard question, indeed. One of my long-time beefs with the current system is that it punishes the prudent and rewards the profligate and foolish. Such is the life of a totally debt-based economy which is about to undergo a currency meltdown–you are practically forced to take exceeding risk, just to stay even.
That said, I do not believe the profit in precious metals is over by a long-shot, but the volatility ahead will churn your stomach. Significant appreciation is almost assured (even at $1400 gold and $30 silver), and anyone who buys today will almost assuredly be very happy in the next year.
[I am convinced gold will cross at least $1650 next year… which is an 18% rise from here–and that’s a very conservative estimate.]
Another point: There are many wise men of times past who have identified eras such as these as those where men who merely preserve what they have will be better off than many; it’s not so much a matter of getting big gains as making sure you don’t take massive losses. Being primarily invested in a depreciating currency is one way to end up a big loser. http://edegrootinsights.blogspot.com/2010/12/weimar-experience-cant-happen-here.html
If you don’t have, or can’t acquire without leverage, income-producing assets… and if you don’t have the time or expertise to really investigate companies in industries that should do well in the days ahead of us… then it is best to focus on making sure you have essentials for living stocked up, and invest heavily in human relationships of those who will stand with you when the winds blow.
Wish I had a magic solution, but I don’t think there is one at this point. A massive train-wreck appears to be coming fast, as the bond markets are signaling right now (and Moody’s warning about downgrading America’s credit rating is most ominous for a nation with as much debt as America has).
If what comes causes us to stop trusting in everything but God it will be worth it.
Bob
Here is the answer to your Dave Ramsey question. Learn what this phrase means in the investing world: Value Investing.
See here: http://tilsonfunds.com/
I’m no expert, but I follow the Panic/Euphoria chart of Tobia Levkovich and Smith Barney. See:
http://www.smithbarney.com/research/investment_ideas/portfolio_strategist/
Doing that, I move my money out of stock when we are in “euphoria” and back in when we are in “panic.” I made about 22% gains this year.