In the latest edition of the Sound Investing podcast, published by FundAdvice.com, Paul Merriman, Tom Cock and Don McDonald discuss stock pickers failing during bear markets, why you should buy stocks now, and myth or reality - professionals beat amateurs at investing.
One warning, the radio show is 51 minutes in length and will use up 47MB of download.
If these constraints are not a problem, I recommend you take a look at the latest podcast - Sound Investing - November 14, 2008
For those who have limited time and/or limited download capability the following is a brief summary of the more relevant material that was covered:
Stock Pickers Fail During Bear Markets
The presenters discuss a recent piece of research conducted by the Vanguard group which shows that in 3 of the last 6 bear markets since 1970 the majority of active managers have failed to beat the relevant market index.
Paul Merriman comments that investors do need to become active, actively taking responsibility for their investments by making changes to decrease expenses, turnover and taxes and to get into asset classes that are in your best interests.
Why should you be buying shares now?
The presenters comment on a recent article written by Knight Kiplinger suggesting now is a great buying opportunity and a wise approach is through dollar cost averaging.
Pau Merriman commented that we can not absolutely depend on the past as a guide to the future. However, in 1973-74, if you adjusted the losses for inflation a 40/60 strategy has experienced almost the same losses as now. After 73-74, a diversified portfolio over the next 2 years provided a 34% per annum return. After October 1987, a diversified portfolio provided a 24% per annum return over the next two years and after the declines of 2001-02, a diversified portfolio provided returns of 25% per annum over the next 2 years. Finally, after the 1929-32 period the next two years saw a compound rate of return of 23% per annum over the next two years and 47% per annum over the 4 years after 1932.
The key point, investors with staying power won the day.
Back to the Basics
Don McDonald reminds listeners not to invest in investments which you do not understand.
Merriman's Simple Steps
Paul Merriman listed his simple steps to success:
- Own the right asset classes
- Own the right amount of equities and fixed income investments
- Control expenses
- Control hidden charges
- Know your risk tolerance
- Know how to take money out in a low risk way
- Have enough information so that you understand your investments
- Allow markets to do their thing
Myth or Reality: Professional investors have an advantage over amateurs
The presenters suggested that the proxy for professional investors were mutual funds (actively managed funds in our language). From 1980 to 2005 mutual funds provided investors a compound annualised rate of return of 10%. If an investor had invested in the S&P 500 they would have received a 12.5% compound rate of return.
The conclusion an average amateur investor who invests in an index fund is likely to be more successful than professional investors.