What About the Big Bad Bear?
Bear markets are nothing to fear - they have happened before and they are a normal and necessary part of the markets' cycle. You can clearly see the 1929 crash below, the oil crisis of the 70's, the tech-bubble of the 90's and the adverse current market conditions reflected on the top right quadrant in this graph. Yet each time the market fell back, in time it resumed a steady move forward. Sadly, most investors did not share this experience because they chose active management over strategic index-based investing.
The Case for Indexing:
Debunking the Active Management Myth
Index-based investing is backed by Nobel laureates who have provided unbiased, rigorous, empirical analysis. Research shows that over a 10 year period, 90% of active managers and mutual funds underperform their benchmark indexes. You may be astounded to learn that portfolios selected by throwing darts routinely outperform the professionals' selections. While individual stock-picking is like looking for a needle in a haystack, with index investing you buy the haystack.
Tax Savings and Cost Savings:
Removing Layers of Fees and Costs
Active investors pay substantial transaction costs and management fees - and profits tend to be taxed when earned, at ordinary income tax rates. Index funds on the other hand are very efficient since they aren't bearing these heavy costs of management and there are no high-paid Wall Street types involved. In addition, there are far fewer transactions so gains accumulate tax-free over long periods of time, and when they are ultimately taxed it's at far lower long term capital gains rates.
You Always Own a Piece of the Best-of-breed Companies
Of the original 30 companies included in the Dow Jones in 1926, only 3 companies have survived. In these rapidly changing times, selecting which companies - if any - will make it into the future is more difficult than ever. Diversification is a cornerstone of sound investment. Investing in an index reduces the risk that an individual company will fail and impact performance.
Market-timing Doesn't Work:
You Probably Already Know This
Research indicates that most of this long term upward thrust occurs in surprisingly short intervals. In fact nearly all of the market's total return over this 80 year period took place in just 37 months. Index-based investing ensures that the investor is exposed to these strong but brief spurts. The cost of being out of the market during these surges is almost always far greater than the cost of being in during a cyclical bear market. A recent study reviewed performance of the 32 leading market timing newsletters and found that not one had beaten the S+P 500 over a 10 year period.
The Added Value of Non-correlated Investing
Although the most well known indexes are the Dow Jones 30 and the S+P 500, they cover only the largest companies There are indexes for many distinct groupings within the market. For example there are indexes for mid-sized and small companies. And the smaller companies frequently perform far better than the larger ones. Over 50% of global equities are now located outside the USA and trade on the bourses of Europe, Japan, and Australia. Each of those has an index fund associated with it. There are also indexes to reflect commodities and resources such as gold, oil and metals. In addition to providing the safety of additional diversification, these sub-markets frequently move independently of each other, thus providing insulation from excessive volatility. For example in 2000 the S+P 500 Index declined by 9.1% while the Russell 2000 Value Index which includes smaller asset-heavy companies grew by 22.8%.
What About Bonds?
The Safe and Secure Element Within Your Portfolio
You will note from the right side of the graph on this page that while equities grew to over $25m, the bond portfolio only amounted to $900,000 over the same period. However bonds certainly have their place in a portfolio because they work in exactly the opposite time horizon to equities. Bonds are best for shorter term needs and for those needing a greater measure of safety. They're contractually guaranteed to pay interest regularly and repay principal on a given date so you have certainty of both income and principal. We invest your funds directly into bonds that are highly rated, avoiding the costs and risks associated with bond funds. The real enemy of bondholders is inflation. So the further out the time horizon, the worse bonds look. Which is why bonds and equities work so well together - equities really shine over the longer term.
The RVW Approach:
Combining Equities and Bonds
We have designed a diverse grouping of index funds with a primary orientation towards value (AKA "Buffettology") geared for long term wealth optimization. Bonds included are appropriate to your willingness to reduce risk. RVW Investing is much like a bicycle wheel - with the hub held securely in the center by the tension of the multiple spokes.
The RVW Promises:
You will avoid the 3 most common pitfalls of investing: (1) Waiting for the perfect time to buy ; (2) Chasing last years winners (which is like driving down the road while looking in the rear view mirror); and (3) Panicking during market volatility. You will own a piece of successful businesses in a variety of groupings. And you'll have some exposure to natural resources and commodities. You will also have some exposure to bonds as the secure rudder guiding the ship – which we guide by the stars and not the prevailing winds. Most importantly, you can sleep peacefully for 20 years.
Source: Ibbotson Associates Inc Copyright . NOTE: Past results may not be indicative of likely future performance. Never invest without carefully reviewing all offering documents and prospectusses. Information contained herein cannot be relied upon and should be independently checked. RVW Investing is a registered investment advisor and utilizes the above strategy for equity investing. Allocation to other asset classes is suggested to ensure diversification.