The Losses of a Money Magazine Portfolio

WSJ's front page story from last week, Big Slide in 401(k)s Spurs Calls for Change, is yet one more milestone in the ongoing "401k Deathwatch", an issue that began simmering shortly after equity markets peaked back in 2007, now apparently coming to a boil in 2009.

Something that I've been wanting to do for a long time now is to put together a historical return graphic for the current decade based on one of those Money Magazine investment portfolio pie charts. You know the ones - 65% U.S. stocks, 15% foreign stocks, etc.

The miserable results are shown below.
Four thousand dollars in eight years is what you'd have to show for your efforts if you'd followed their advice back on the first day of 2001.

This is based on the last asset allocation provided by the nation's most popular personal finance magazine (with a circulation of about two million) from this article back in August for a 35-year old single mom as shown below.
I had to go flipping through about the last five issues as, for some reason, these pie charts don't show up in any of the more recent ones...

Admittedly, if you'd started back in the 1980s or 1990s, you'd still be way ahead, but the results from starting anytime in this decade are pretty pathetic.
If you'd piled in when there was "blood in the streets" back in 2002 or 2003, you could have bested that stable value fund in your 401k plan by a percentage point or two.

Conventional wisdom has failed your typical investor in this decade and no longer can it be legitimately argued that we're just in a little bit of a bad stretch.

Amazingly, nearly everyone continues to think that we are stuck in a 26-year old bull market in stocks rather than being about 8 years into a long-term bear market that is likely to persist until sometime well into the next decade.

Yet, in our "ownership society", where individuals have become responsible for their own retirement planning, people have continued to plow money into the investments recommended by the likes of Money Magazine.

Four thousand dollars in eight years!

Comments

[axelrod608:]

One lesson that every investor should have learned in 2008 was to take with a grain of salt the "advice" of all the media "experts". The BUY side is continually pushed and months can go by without a short recommendation. There is simply no coverage of the short market and buying is pushed regardless of market conditions.

And for those who, like me, pay money for advice from "experts", we should have learned that the amount one pays often makes no difference. Several of my advisories were pushing the buy side all year and missed entirely the opportunity to take profits before mid-year.

The analysis and advice I use now comes from sources that are recommending trailing stops and other strategies to protect against losses. Current market gains may well be just a bear market rally. Protection is essential. People who didn't get that message last year may be reminded again this year.

Jan 11 09:59 AM

[FETZ:]

I agree. Just like with sex, protection is critical. This past decade has not been a buy and hold market.

Jan 11 10:37 AM

[BillyBear:]

I had to search your article, then infer that the initial investment is 100K. Using a percentage, or giving us the original amount would have clarified things.

That said, I think your point is important, unfortunately, our culture has become so "professionalized" that we want to be able to "hire" someone to do everything for us.

I began managing my own money back in 1999 after being burned by a "professional"........... lost money, but gained an education in 2000-03.

Managing my own money, I am ahead this year so far.......barely, but that's better than friends who have lost 40% of their life savings so far.

Perhaps this catastrophic economic collapse will return us to ideal of individual responsibility and integrity. If so, it will have been worth the price.

Jan 11 11:23 AM

[regionswork:]

The scale looks like for every $100 invested at the start, you'd be at $104 at the end of eight years. To be up $4,000 you'd have to had invested $100,000. To make $4,000 on $10,000 would be decent in these times, though not the near doubling in seven years that is the vision of compounding advocates. The financial engineering of companies appears to have weakened the corporate landscape. When Sears, GM, Ford, etc began to make more money financing purchases than in cash sale of the items, probably back in the 1970's - and after the tight credit of the early 1980's, the magic of interest and fee income from creditors of all types, preferably those who carried large balances ended up putting money creation in the hands of the private sector, that is - money as debt. We are headed for inflation to avoid deflation. What assets can keep up with that?

Jan 11 02:13 PM

[Phil Trupp:]

Billy Bear (above) is on the money. Those "experts" to whom you pay a fee are expert at little more than extracting that fee from you. As for the Money magazines, including Kiplinger's, you are relying on amateurs who rely on other amateurs. I can tell you this from experience: I've been a professional journalist for nearly a half century. One of the golden and perhaps most painful rules for investors is this: LEARN TO DO IT YOURSELF!

In the end, it's the safest choice.

It's not easy learning the market's mysterious ways nor is it always pleasant staying up on the gloomy macro economy. It requires great gobs of time to be current. There's a steep learning curve and the homework is more intense than anything you'll encounter in a Harvard MBA program. Yet your financial health, like your physical well being, is a matter of sometime difficult personal, hands-on choices.

I will admit there are a few truly competent market experts among us; I've met them, and mostly they are obsessive-compulsive individuals for whom the market is everything. But these managers are hard to find outside the most expensive hedge funds. And speaking of hedge funds, it is by now clear that their presumed collective genius is mostly an illusion. They are being crushed by their own internal limits and external forces beyond anyone's control.

By now you've discovered that your personal stock broker is primarily a salesman. Yes, he or she has resources beyond those of the average "retail" investor. Your broker works from a Bloomberg Station (a $1500-a-month rental charge, plus additional fees to plug into the network). Your broker also has the advantage of being around other brokers, and so there is a collective wisdom of sorts from which to draw. How how much is this presumed wisdom worth to you? How much gain did it buy for you last year?

Jim Cramer, the former hedge fund manager and Goldman Sachs veteran, is much maligned by many of his peers as a "clown" and a "fool." In truth, he is neither. Cramer has deep knowledge of the markets and the men and women who run them. He has deep Street credibility. He openly admits to the manipulation of the markets by hedge funds, and he understands the nexus of corruption between government regulation and Wall Street sleight of hand. Cramer frequently is "pantsed" (to use his term) as an entertainer--he's a TV personality. Yet for all the rotten eggs tossed at him, he is a grounded realist who knows an investor's best chances for success in a rigged casino is to take matters into ones own hands and learn how the casino works. (Note: Cramer's charitable trust is underwater despite his expertise.)

I am not setting up Cramer as a model; the point is that he believes gaining personal knowledge is essential to maintaining your wealth and hopefully profiting from it. The do-it-yourself road can be a disheartening journey but what's the choice? "Managed money" translates most often into "lost money." No one does you a favor when they sell you stocks or bonds, and Forex is the province of a global Pronzi scheme that makes Bernard Madoff's alleged crimes seem like a petty theft.

Bewared. Be informed. You, personally, must be in charge or you surely will pay the consequences.

Jan 11 03:26 PM

[Thomas Smic...:]

Well done.

Jan 12 10:51 AM