Best argument yet for index-fund investing
If you think you are (or your broker is) smart enough to beat the market, be sure to read Bloomberg’s analysis of recommendations by the top Wall Street analysts. Reporters Lynn Thomasson and Adria Cimino go back to March, just before the stock market began its biggest rally in 70 years, and looked at what the analysts were recommending. The result:
An investor who used $10,000 to buy companies in the highest-rated industries and bet on declines in the lowest since the advance began on March 9 lost everything and would owe as much as $6,000 to cover bearish trades, the data show.
That’s right: You wouldn’t merely have lost money during this rally, you’d have lost everything — and then some. The analysts were telling clients to load up on U.S. drugmakers and European energy companies and to dump banks and retailers. But the downtrodden financial and retail shares have soared in the past five months, while drug and energy stocks have been laggards.
Bottom line? We all need to keep repeating Larry Swedroe’s mantra:
Simply put, it’s impossible for investors as a group to beat the market, because collectively we are the market.
(3 votes, average: 5 out of 5)
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David Nicklaus has covered St. Louis business for more than 25 years. His column appears three days a week on the Post-Dispatch business page. 
Isn’t this more about diversification than index investing?
What kind of fool would ONLY invest in one or two specific sectors while completely ignoring sectors that got hammered in the downturn?
No load index funds are a great way for individuals to diversify their investments. The financial “advisers” who get paid to churn your accounts always go berserk when they see something like this.
Just bought a bunch of “build America Bonds” from Edward Jones. 7.4% interest.
Amazedbythelunacy
You are making a common error of confusing indexing, or better passive asset class investing, with the use of a single index fund like the S&P 500 Index.
Prudent investors know that diversification is the only free lunch. If you diversify in an efficient way, you reduce risk without reducing expected returns.
The way to do that is for example to build a globally diversified portfolio that might look something like this for the equity portion of the portfolio.
50% US total stock market index fund
40% MSCI EAFE index fund
10% MSCI Emerging Markets index fund
Or you can diversify further, adding other asset classes by using index funds. For those seeking higher EXPECTED returns they might add an allocation to small caps and value stocks (both large and small). For those looking to diversify further you can add a REIT index fund. And you can do the same thing internationally.
By books, including The Only Guide to a Winning Investment Strategy You’ll Ever Need, show how to do this.
Larry, I don’t think there was any confusion on my part. Mr. Nicklaus was comparing the poor performance of “companies in the highest rated industries” versus index investing. He is comparing, using hindsight of course, analyst recommendations with better performing sectors. That doesn’t fly.
All I ever learned about investing stresses a diversified portfolio. This article is pitting poor performing sectors such as drugmakers and Euro energy cos against banking and retail. Anyone that made a decision to abandon their diversified investment portfolio in favor of a few sectors looking to capitalize on a rebound needs their head examined and quite frankly, deserved the consequences of their decisions.
In order to have “lost everything and then some” by following the advice of “experts,” an investor would need to have sold securities short. This is an EXTREMELY HIGH RISK strategy that does not even conform to the standard financial paradigm that risk increases expected return. (Perhaps it would if investors could sell Stock A short and use the proceeds to purchase Stock B, but they can’t.)
Just about everyone in financial/economic academia agrees with the principle that the expected return of a portfolio for a given level of risk is maximized through diversification between and within stocks and bonds. What is less generally agreed upon is whether re-balancing between these various asset classes will increase the return. My opinion is that it will reduce the volatility (risk) of a portfolio over time, but not increase its return.
I’m not sure whether an investor who re-balanced their portfolio during the recent stock crash would be better off now than if they had simply held onto their stocks (as I did) but they certainly would have needed a strong constitution to have been buying stocks as they were plummeting. And it makes no sense to calculate how much somebody could have gained by buying stocks just as they bottomed out, because nobody could have identified that point with any certainty.