Monday, July 27, 2009

Investment Advice

I recently picked up this little book on investing at the library after seeing it at B&N and wanting to read it. I talk investing a lot with my dad and was interested in Solin's insight on investing. Solin has put together a very simple strategy for keeping up with the market and not losing money to overactive money managers. His main premise is that most money managers (who oversee mutual funds) do worse than the overall market when compared over long periods of time, and they charge you fees to do it. In light of this observation, Solin advises the normal investor to simply choose a combination of index-funds that fit their tolerance for risk - more in stocks when they can handle larger market swings and more in bonds when they need more stability.

For the young investor (like me at age 30), Solin would argue for a higher-risk combination of stock index funds (from Fidelity or Vanguard which charge very low fees for these types of index funds) and bond funds. For me, he would recommend 60% in a US stock index fund, 20% in an international index fund, and 20% in a US bond fund. Solin's arguments make sense and his data is well presented.

My biggest problem is trying to make the case for his position when looking at the last ten years (which has been a flat time for the market - way up during the first 7 years and way down the last 3 - so that the index-fund investor would have broken even). Fidelity actually has a fund that approximates the combination of index funds that Solin recommends - it is called Fidelity's four-in-one fund (FFNOX). This fund has done better than the market over the last ten years, so it works according to plan. It's expense ratio is low - 0.22% - and it has averaged 0.21% per year over the last ten years. So, while the S&P500 has averaged -2.22% over the last 10 years, Solin's recommendation would have had us breaking even over the last ten years. While this is okay, is this really good?

At the same time, Fidelity's Low Price Stock Fund (FLPSX) - one of the so-called overactive managed funds that Solin decries - has averaged a return of 8.43% per year over the last ten years. While it does have a higher expense ratio (0.99%) than index-funds, it has done considerably better than the market over the last ten years. Maybe this is one of those few exceptions that outperforms the S&P 500 over long periods of time, but right now it is looking better to me. And while I know that past performance does not guarantee future performance, the numbers are interesting.

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