Admittedly, finance is tricky.
I just realized today that I think I made a mistake in my IRA funding where I had intended to have 60/40 split going to stocks and bonds, but I noticed this afternoon that in fact I have been directing 40/60 to stocks & bonds, respectively. This isn't the end of the world, obviously, since I still had money going into both stocks and bonds the past six months. Likewise, it turned out my "mistake" was a smart move since stocks were appreciating and now I can buy in that they have retracted in value quite a bit while moving out of the bonds which have had a steady increase the whole time. Hence the reason I said, "I think I made a mistake." It may have been my original design six months ago, and I didn't remember thinking so strategically in advance. Plus, I'm not used to my short-term strategies actually panning out correctly.
But this reinforces my stubborn belief that no investor of any age should ever be 100% stocks. Stocks and bonds are inversely related, so when one trends upward, in theory, the other is going down. While you're never going to be able to time which direction each will be going in a given day/week/month/year, if you invest wisely in both, it is a relatively good substitute for being omniscient.
I don't look any further than Vanguard STAR Fund to support my belief. When the markets tumbled in March 2000, the Vanguard Total Stock Market Index fund felt the brunt of its impact while the STAR fund staved off its negative effects. When the markets turned around in the following years, the Total Stock Market Index fund never caught up to the STAR fund. Not even close. Why? Because the STAR fund is a balanced fund invested in both stocks and bonds. When the markets tumbled again at the end of 2008, the STAR fund was posting a negative 10-year return. Not as bad as the one on the Total Stock Market Index fund. When the so-called "lost decade" ended (titled as such because the DOW ended the decade at the same level it started it), the Total Stock Market Index fund was posting a -1% return. The STAR fund had a 5% return. It benefited from some profits of the bond market during this time.
Compare the returns of the Total Stock Market Index fund to the STAR fund on Vanguard.com and you can see that the Total Stock Market Index fund beat the STAR fund in the 1-year return with 28.7% to 24.85%. But the 3-, 5-, and 10-year returns favor the STAR fund (3- = -5.1% to -.11%, 5- = .91% to 3.64%, 10- = -.27% to 5.11%, respectively). That extra 4% from Total Stock Market Index fund this past year hardly seems worth pursuing.
I know that I am the only one here with this level of interest in finance, investing, and the markets, but if you have a 401(k) at work now or later and they offer fund selections that include the "Target Retirement Funds" or all-in-one funds, then those options are definitely worth the benefit. They are split between stocks and bonds, AND (in the case of the TRFs) the split between stocks and bonds changes annually as you near retirement.
In other market news, I was checking my IRA because the markets were on pace to close below 10,000 for the first time since November. In fact, the DOW had fallen 150 points below that mark when I started composing this entry yesterday. Then, the market closed and I checked the damage: 10,012, so even despite going as low as 9840.98 during the day, it closed up slightly. Amazing!
