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Posts Tagged ‘Rebalancing’

The Perils of Indexation (Revised and Updated)

In Investments on 01/01/2010 at 5:36 am

(Been thinking more about this since I blogged on this topic a few weeks ago. This is an expanded and revised version.)

This writer agrees with Warren Buffett that buying low-cost index funds  is the best way for most people to invest in equities.  http://www.fisca.sg/financial_education?mode=PostView&bmi=189571

But he is not blind to the problems with index investing.

Even over 10 years, things can go wrong

– The return of the Dow to 10,000 (10428 on NY’s eve) serves as a reminder that US stocks have gone virtually nowhere, on balance, for more than a decade. It was in March 1999 that the Dow first climbed above 10,000, before reaching a high of 14,164 two years ago and falling to a low of 6,547 in March 2009.

– In 10 years the FTSE is only 25% lower. A lot better than the Dow but it too has been very volatile.

And longer term : “For those seeking solace in the conventional wisdom that stocks rise in the long run, consider this: 20 years after Japan’s stock market peaked, share prices are still less than 25 percent of their top values, ” from NYT article in March 2009.

All the above means is that buying index funds is fine if you are a young person with an investment horizon of 30-40 years, and a plan to regularly rebalance your portfolio, so as to take $ (or add $) to yr equity index funds. (I hope to blog something on rebalancing in early 2010). In the meantime, an example of rebalancing http://www.fisca.sg/product_reviews?mode=PostView&bmi=210476

But not if you are a retiree or someone 60 going on 70, when your investment horizons are shorter (you may need to draw on yr capital). Especially if you have not invested in shares when younger: the volatility may weaken yr heart or demoralise you.

“It’s sadly ironic that the boom in tracker [index] funds at the end of the 1990s came at the most inappropriate moment possible,” says a BBC writer.

But the article implicitly points out that the alternative could have been a lot more worse. Read about the stocks that lost value and have little chance to recover.

At least an index fund can bounce back.  Look at STI: STI started 2000 at around 2000. Went to a high of just below 4000 and on 31 Dec was at 2897. Just in March 2009, it was at 1455.

The moral of this piece: index but rebalance periodically. As I said, I will blog on rebalancing soon.

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