According to a study by Fidelity Investments,

"Participants in 401(k) savings plans who dumped stocks from Oct. 1, 2008, to March 31, 2009, when the Standard & Poor’s 500 Index fell 31 percent, and hadn’t returned to equities as of June 30, 2011, had an average account balance increase of 2 percent, according to the study released today. Those who maintained some equity allocation during that period saw their balances rise 50 percent on average."

And this happens consistently as countless studies have shown that investors returns trail fund returns and fund flows confirm investors predisposition to buy high and sell low.  Sigh.

Read the whole story:  Selling burns 401(k) investors who dumped stocks

The largest gains often occur when they are least expected.

"Consider the case of an investor who found out that he was overconfident of his ability to stand the stress of the kind of bear market we had in 2008. By November 20 of that year, he realized he had overestimated his willingness to take risk. He sold out of stocks with the S&P 500 closing at 752. His plan was to wait until the market had been up for more than 30 days (or when the green flag would be up).

With the S&P 500 closing at 903 at the end of the year (and having missed out on a rally of 20 percent), he buys again, believing that it was now safe to get back in. Unfortunately, the market dropped another 25 percent by March 9 and he had enough. Do you think this investor will ever be able to buy again? And of course, unless he had, he missed the greatest market rally in 70 years. One of the problems with market timing is you have to be right twice, not just once."

The state of Washington scored the highest marks (3.92%) over the last decade for state pension funds with greater than $20 billion in assets, according to a Bloomberg survey.

Sadly, they all woefully underperformed the Vanguard Balanced Index fund (4.79%) over the same period (lost decade?  really?).  An indexed strategy that included small allocations to the Vanguard REIT index fund (10.99% over the decade) and the Vanguard Small Cap Index fund (7.41%) would have blown the state pension funds away by an even higher margin.

As usual, there's more money to be made "selling the system" than there is in the system itself.

Three rock star fund managers, Bruce Berkowitz, Kenneth Heebner, and Bill Miller, are competing for last place as "their bets on an economic expansion backfired."

"Bet" is the operative word.  Heebner's fund was 36% invested in auto stocks at the end of 2010.  Berkowitz's fund had 74% of its holdings in financial stocks as of Feb. 28.
Miller's fund fell 0.5% through June 9, trailing 94% of rivals, according to Bloomberg data.

"Managers don't go from geniuses to idiots overnight" said Russell Kinnel, director of mutual fund research at Morningstar.

True. Gambling has little to do with intelligence and much to do with luck.  And apparently theirs has run out.

Investment News:  Berkowitz, Heebner, and Miller in tight battle -- for last place

For the past several weeks, there has been much hand-wringing going on over the continuing "debt ceiling deadline."

Yet the excessive amount of political rhetoric can't conceal two obvious conclusions:

If only we had seen it coming, we could have socked our money safely into "bear funds" and made some serious returns over the last decade, right?

Sadly, no.  "Bear funds" were the worst performing funds over the last ten years (down 10% on average) and over the last five years (down 13% on average), according to Morningstar.

Why?  Because market timing doesn't work, "bear funds" are egregiously expensive, and because it's dangerous to bet against capitalism.

A recent article debunks several risk tolerance myths such as "people all have a high risk tolerance when the market is going up but when the market starts to crash their risk tolerance suddenly goes to zero," and "asset allocation depends on the investor's risk tolerance only and this will ultimately determine whether the investor succeeds or fails in meeting his or her investment objectives."

Read the whole story

I recently received an email from a high school student asking for advice on winning a stock-picking contest.

Here's my reply:

Dear <name changed>, 

I came across an old email (dated February 2009) from a one-time planning client who didn't agree with my investment philosophy (it's very rare that people pay me for my advice and then don't take it but it occasionally happens).

John,

I trust that all is well with you and yours.   

<Names changed> are doing well in <name changed> and just bought a new deck boat.  (Someone has to spend money these days!)

 Are you still recommending the same slice of ETF's, etc.?  

 I have looked at your recommendations several times but have yet to act.  I am still at the same place, thinking the market is going to 5000 or below.  I am still in treasuries and short ETF's with some funds in a bullish US dollar ETF and some in a short of the Austrailian dollar.  They are doing OK.  I am probably going to buy some more of the short ETF's today and some <gold ETF> and <silver ETF>.
 
I think things are much worse than when we first met and we have another few trillion (a lot of boats) of debt with nothing to show for it.
 
I firmly believe in your method of diversification.  However, there is no short side options.  Therefore, I will be watching when to jump in.
 
Come up and go fishing.
 
Regards,  <name changed>

In his recent book, Stop Acting Rich, Thomas Stanley (author of The Millionaire Next Door), describes his "wealth index," a measure that he says gives people a good indication of whether they are on the right track to financial independence.

The formula is:  Invested assets should be greater than or equal to 10% times your age times your income.

So, according to the index, if you are 50 years old, you should have 5 times your income in invested assets.

Is this a valid formula?

In my experience, this formula is a reasonably good "first look" for people under the age of 50.

For example, a 40 year old making $100,000 per year with $400,000 invested is probably doing pretty well, assuming he accumulated that amount via a frugal lifestyle, and continues to save and invest.

Like most rules of thumb, though, it is too simplistic and doesn't capture the myriad variables associated with financial planning.

Is he married?  How many kids does he have and is his wealth going to be used to send them to college?  Does he have any income sources during retirement?  How long does he plan to work?

Additionally, the formula tends to fall apart for most people over age 50 (the formula is linear but the mathematics of retirement investing are not).

Example:  according to the formula, a 65 year old making $100k should have $650k invested.  If he retires at that age, he can reasonably expect to safely draw 4%, or $26k from his portfolio in the first year.... way short of the $100k he's used to earning.  Social Security, pension, and other income sources might make up the difference but as in the case of the younger person, it depends greatly on a number of variables that are specific to each person.

In Dr. Stanley's defense, the point of the WX indicator is to segregate large samples of people into different categories to further study the behavioral traits that characterize certain groups.  It is not intended to replace an individualized financial plan.

Bottom line:  The WX indicator is a fast, easy way to see if you are falling short of a prudent savings path.  It should only be used as a negative indicator-- if you fall short, you are likely NOT on the right track, but if you exceed the threshold, it doesn't necessarily mean that you are on the road to financial independence.