Happy New Year!
If I could suggest one New Year's Resolution to the world (at least the English-speaking portion of it), it would be for everyone to find another insult to replace "retard" in all forms. That word is very offensive to actual politicians.
But seriously, if you were an investor who was slammed 10 years ago by the Tech stock bubble and/or a buyer who was slammed by the housing bubble a few years ago, then odds are that you're considering investments in either bonds or gold for this year.
Honestly, it's quite interesting to me because I'm not sure which one is going to pop. Most experts expect bonds to have a below-par 2011. For some reason, I was leaning towards gold and precious metals as the next bubble to burst. Then, I considered the unique possibility that 2011 could see a "double bubble." If there's ever been a scenario like it in the past, then it was before I had a portfolio (maybe even before I had a savings account), so it would all be new to me, but so much has changed in the past 20 years that a lot of scenarios that seasoned investors or financial experts would dismiss as "unfeasible" could have a higher probability than mere potential.
I started in the financial industry in June 2000. By October, I had a stable entry-level job servicing retirement plans, at which point I noticed an in-flow of participants moving to bonds because the performance of stocks were horrid. Bonds were more than holding their own, in fact it would be fair to say they were flourishing. But easy $ come, easy $ go, and bonds retreated. Hard. Nothing like the year-end returns from stocks in 2008, but for a more conservative investment, any loss is amplified.
Therefore, I remembered that fact when the market crashed in October 2008, so I focused a larger portion of my holdings into bonds the next year. Not because of their superior returns at the time (a mild 5%), but to create a solid hedge for my asset allocation. Additionally, I boosted my payroll deferral percentage (PDP) and one year after February 10, 2009, the date of my first financial blog entry, my 401(k) balance had doubled. More than doubled.
Honestly, 2010 wasn't too shabby for my 401(k) either. Of all the funds offered in my 401(k), one of my funds was the second highest performing fund! And it wasn't a fund where I hold 5% or 10%. It was my fund where I allocate 30%.
Having seen one full cycle first hand already, I feel better equipped to make the right choices in future markets. What's the "right choice" in terms of investing? Knowing yourself and how you will react to the rises and falls to invest in vehicles with the most bearable risk. Obviously, more press is given when the markets react negatively so it seems like more mistakes are made then, but I think the rising markets bring out more stupidity (if not more, then just as much).
For me, investing in individual stocks is out for me. I'm too loyal. I'm too conservative. And quite simply, I don't like paying fees (including taxes) on my strategic moves. Besides, I don't need them. There's a lot of negativity towards "buy & hold," but I think that's misleading. "Buy & hold" is still an extremely effective strategy. It's just that instead of buying and holding one company's stock ("hold-and-hope" as Mo Ansari would say), you need an "all-in-one" mutual fund that will do complex investing for you.
This is where age-appropriate retirement funds excel. If you want to "buy & hold," or "get & forget," then find a fund with your retirement year and buy that fund. If your actual retirement year is in between two available funds, then you can buy the two closest funds. One thing to avoid is buying more than two of these funds! These mutual funds are "funds of funds," which is to say that they are a mutual fund investing in other mutual funds, which are the ones with the individual holdings.
Let's take a quick look at these levels of investment. First come individual stocks, and everyone should know what they are. They are publicly companies traded on the stock market, so when you think of "Corporate America," these companies come to mind. Almost every chain retail store is traded on the market either under its own name or through its parent company. Shares of ownership trade in units of stock. To have a diversified stock portfolio, you would have to invest in dozens of different companies to cover several industries of business, and that does not even include bonds.
Conversely, mutual funds exist as a single investment where a group of investors have pooled their money together in order to have a professionally managed stock portfolio invested in several dozen companies. The benefit is that each dollar stretches a lot further than it would outside of the mutual fund. Without mutual funds, you need to invest $400 to own a single unit of stock in 10 different companies each priced at $40 (and that's negating any other costs, as well as the uselessness of owning a single share in a company). With mutual funds, you invest in infinitely more companies with less money upfront.
Another type of mutual fund available are indexed mutual funds. They are basically the same thing, sans the professional management. Instead of relying on a fund manager's expertise (i.e. "intuition"), the fund manager uses the money to mirror an index, like the S&P 500 Index for example, so if one of the 500 largest companies in America today falls in value tomorrow, the fund manager will sell that stock and invest in today's 501st largest company tomorrow. Vanguard founder John Bogle championed index funds as "the only investment that guarantees you will capture your fair share of the returns that business earns." Note the underlined text, because these funds eliminate any opportunity to "beat the market." Small price to pay, in my opinion, for an investment eliminating the risks of individual stocks, market sectors, and manager selection, so that only market risk remains.
Even indexed mutual funds come in many different forms, each with an intentionally different purpose. There are indexed mutual funds for bonds just like there are indexed mutual funds for stocks. There are separate mutual funds for small-cap markets, large-cap markets, and mid-cap market. Therefore, investing in a single mutual fund would not fully diversify your portfolio.
Enter "all-in-one" or "fund of funds" mutual funds. These funds exist as a single investment where the fund manager invests in several different mutual funds. The most popular (and arguably, most successful) funds-of-funds are "balanced" funds invested in both stocks and bonds. In short, the fund managers would be required to maintain a set allocation, such as investing 70% in stocks and 30% in bonds. Therefore, the focus of these funds is on the asset allocation of its investments, which, after full consideration to both time and money, is the most successful way to invest.
The most popular forms of "all-in-one" mutual funds today are age-appropriate retirement funds. These are so popular that Congress has recently approved their assignment as the default fund in qualified retirement plans. This is a huge shift from the previous requirement of having a stable money market as the default fund. Instead of a guaranteed return protected against losses, this fund invests money in such a sophisticated manner that as retirement approaches, the fund itself becomes a more conservative and less risky investment.
Having these funds as a default fund has its pluses and minuses. If you were a 25-year-old whose first corporate job lasted only 2 years, then you may have a 401(k) in which you put 4% of your money with a 50% match on the first 3% and if, knowing nothing about investing, you were placed in a Target Retirement fund, then you could be looking at a 401(k) where you put in $500 of your own money and got $400 back in February 2009.
So my only problem with these "all-in-one" funds as a default fund is that investing could be grossly misrepresented to an unsophisticated investor by one bad situation. Otherwise, these funds are true gems! If "buy-and-hold" (or "get-and-forget") is all the more effort you can put into your portfolio, then this investment is perfect for you! Just be aware that risk exists in these investments so losing in the market is almost as likely as gaining. Also, and almost equally importantly, be aware that these funds will be invested in an identical fashion to recommendations from a seasoned professional if you were able to pay someone hundreds of dollars each year for that amount of attention.
For the record, the strongest argument against my cited issue with these funds as a default fund in qualified plans is that the person in my above example could have gotten $1,000 or more back in February 2010 by working 3 years instead of 2, and then that person would be more likely (maybe even motivated) to invest in a qualified plan at the next job. I believe this argument is how its supporters got these funds approved by Congress, and it is perfectly valid.
Compare this investor who did nothing (except NOT cancel his/her participation in the qualified plan at work) and gained 100% to an investor who heard about the .com stocks and moved into a tech fund just in time for it to fall 50% and then heard real estate was on the rise and moved into a REIT fund just in time for it to retreat. Now, that investor has probably heard that gold is on the rise. Guess where that is headed in 2011.
Abhay Deshpande (First Eagle Investment Management) voiced his guess on a recent Money.CNN.com article: "We have no view on the future direction of the price of gold. Generally speaking, in a fiat-money world we believe it's almost a mathematical identity that the value of gold will go up. Gold ETFs, such as GLD (GLD), have of course risen. GLD may be the fifth-largest holder of gold in the world, after the central banks of the world. So people from the ground up have chosen to put some of their reserves in gold as a hedge against the currency. To me, it doesn't feel like speculation like in the late 1990s with Internet stocks, or the credit bubble. This seems to be rational behavior. Whether we're ahead of ourselves temporarily or not, I have no clue. What we've said for ages is keep 5% to 10% of your assets in gold, just in case."
Although, James Swanson (MFS Investment Management) quickly voiced concern with maintaining any percent of assets in gold: "(Presume I pay) $1,400 for gold today because I hope someone will pay more for it next year. And what will they do with it? They hope someone else will (pay more). Eventually you end up with a psychological asset class that I'm not comfortable with. Even if they're devaluing the currencies of the world, you have to ask yourself, where does this end? And I do know the price can fall. It does when the Fed funds rate rises above 2%. So I'm not a fan of gold. I don't know how to value it."
We will know the reality of what the 2011 markets were like in 365 more days, but whether the DOW is up or down (I think it will be up less than 10% myself), successful investing is measured in years and decades. I myself just happen to enjoy watching the day-to-day. I will have a quarterly update in mid-February!
Ref: http://features.blogs.fortune.cnn.com/2010/12/13/5-experts-where-to-invest-in-2011/
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