These articles went into the preparation of the podcast.
- Battered stocks put ‘blue-chip’ label in doubt
The dizzying slide of some of Wall Street’s most ironclad stocks has called the entire concept of blue-chips into question. . . . “This market brings into question a lot of widely held assumptions like buy and hold, and the concept of blue-chip is one of those,” said Richard Sparks, senior equities analyst at Schaeffer’s Investment Research in Cincinnati.
- An End To Buy-and-Hold Stock Investing?
All this means a hypothetical 1969-to-2009 investor might lose money after inflation even if he bought and hold stocks over his or her entire working lifetime. Keep this in mind the next time someone assures you “stocks always go up in the long run” — yes, they do if you wait long enough, but as John Maynard Keynes noted, in the long run we’re all dead.
- ‘Rebalancing’ Your Portfolio Can Be a Tough Ride
For younger investors with horizons of several decades, rebalancing is probably a chance worth taking. But you shouldn’t feel compelled to rebalance constantly; once a year is plenty. Pick a date that will never vary and that you will always remember, like your birthday. If you are retired, rebalancing into stocks could hurt more than it may help; catching a butcher-block full of falling knives is a risk you mightn’t be able to afford to take. I will still rebalance on my next birthday, because I am nowhere near retirement and I know I don’t know what the future holds.
- Fidelity Contrafund FCNTX
1 year -39.07 vs. SPX – 43.32
- Legg Mason Value Trust Class C LMVTX
1 year -57.70
- The Growth Fund of America® Class A AGTHX
1 year -42.31%
- Capital World Growth and Income Fund Class A CWGIX
1 year -44.61%
The Wisdom of David Swensen
The CIO of the Yale Endowment Fund speaks.
February 18, 2008:
Keep It Simple, Says Yale’s Top Investor
For most people, he recommends a very basic approach: use index funds, exchange-traded funds and other low-cost instruments, and stick to your long-term asset allocation — even when the markets are in tumult.
Don’t be distracted by market forecasts, he said. “You have to diversify against the collective ignorance,” he said. “I think nobody is in a position to react to these big macro-issues. Where is the dollar going to be or what is G.D.P. growth going to be in China? For every smart person on one side of the question, there is another smart person on the other side.”
February 18, 2009:
Yale’s Financial Wizard, David Swensen, Says Most Endowments Shouldn’t Try to Be Like Yale
On why indexes aren’t much fun: Yeah, they love the excitement. And they all think that the next guy is making it happen. Because that’s what they hear at cocktail parties, so they want to make it happen too. But it’s just basic arithmetic. When you pay out a point and a half or two points or two and a half points, and you give away 20 percent of the gains, that gets extracted from you the investor. If you’re in an index fund, you’re paying tenth of a percent and no percentage of the profits. But the assets that you get when you index are pretty much like the assets that you’re invested in with all these fancy fee schemes. So it’s just basic arithmetic. It’s not complicated.
David Swensen’s Guide to Sleeping Soundly
Asset allocation is the tool that you use to determine the risk and return characteristics of your portfolio. It’s overwhelmingly important in terms of the results you achieve. In fact, studies show that asset allocation is responsible for more than 100 percent of the positive returns generated by investors.
It’s because the other two factors, security selection and market timing, are a net negative. That’s not surprising. They’re what economists would call zero-sum games. If somebody wins by buying Microsoft, then there has to be a loser on the other side who sold Microsoft. If it were free to trade Microsoft, the amount by which the winner wins would equal the amount by which the loser loses. But it’s not free. It costs money. It costs money in the form of market impact and commissions if you’re trading for your own account, and it costs money in terms of paying fancy fees if you are relying upon an investment advisor or mutual fund to make these security-specific decisions. For the community as a whole, all those fees are a drag on returns.
That’s why the most sensible approach is to come up with specific asset allocation targets that you can implement with low-cost, passively managed index funds and rebalance regularly. You’ll end up beating the overwhelming majority of participants in the financial markets.
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I also recommend that investors rebalance. Rebalancing is even more important amidst these huge declines in the stock market because it presents a great opportunity. People can sell the Treasury securities that have appreciated dramatically to bring their allocation to the 15 percent target, and they can redeploy those funds into domestic equities and foreign equities and emerging market equities and real estate investment trusts, all of which are now much cheaper, and therefore have higher prospective returns.
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