DON’T SWITCH FROM LOW COST INVESTING WHEN THINGS HIT A BUMP. STAY ON TARGET!
In this week’s Globe and Mail, wise words from one of our All Stars Dan Bortolotti at Canadian Couch Potato. I’ve made similar comments before but it never hurts to hear good advice again and again. After all, the enemy (regular financial services industry) is bombarding us daily with their propaganda. Here are the highlights and the link to the full article.
A reality check for newbie index investors
“As a long-time advocate of index investing, I’m pleased that more and more people are adopting this strategy. But I’m worried many of these new indexers may be bandwagon fans, swept up in the euphoria of this long bull market. When stock and bond indexes finally stumble – as they must, eventually – these investors may not show fortitude.
Indexing always shines during periods of prosperity. But here’s the thing: The good times can’t last. I’m not being bearish here but I do feel comfortable saying that 10-per-cent returns with little volatility won’t continue forever, and I hope new indexers aren’t naively expecting them to.
Markets can get ugly quickly. Bear markets are not usually slow, gradual trends: More often, they see a series of sharp losses over brief periods, followed by panic that causes prices to fall even further. Active managers will prey on the opportunity. Money managers and advisers love to say that indexing only works well during bull markets, and tough times require a more hands-on approach.
But can active managers be expected to consistently outperform during bear markets? The evidence suggests otherwise. The annual SPIVA reports from Standard & Poor’s found that during a difficult 2011 period that fewer than one in six U.S. equity funds outperformed the broad market. Most active funds also lagged their benchmarks during the bloodbath of 2008, as well as the three-year period (2000-02) following the dot-com crash.
Indexing works in all markets, it’s an all-weather strategy.
Indexing works not because stocks always go up, but because it relies on low cost, broad diversification, tax efficiency and a disciplined process. The strategy does not guarantee absolute returns, but it does offer your best chance at capturing whatever the markets deliver.
As long as you don’t abandon it along the way.”