Stock and bond markets are off to a great start in 2012, despite continued pessimism surrounding the Greek debt conundrum. What I find interesting is how last year's terrible news had such a tiny negative effect on diversified investors. For all the hype and hand wringing, the index of global stocks was down only 6% (and global bonds were up about that much).
If you want to learn more about diversified investing, here are some articles you might find useful"¦
Index Funds Beat "Professional" Investors, Again
This shouldn't be news but it is: another study proves that passive investing beats active investing. When professionals pick stocks in an attempt to outperform the market as a whole, they're betting against the index. It seems counterintuitive, but professionals armed with education and experience have a tough time beating the market on a long-term basis.
This latest study, conducted by Merrill Lynch and reported by Larry Swedroe, a respected author and investor, notes that only 23 percent of all U.S. stock fund managers outperformed the S&P 500 during 2011, meaning that three-fourths of them failed to earn their pay.
"The question is simple: when the odds are stacked against you, why play the game?" Swedroe asks. "You shouldn't base investment decisions on what's almost certainly nothing more than an exercise in data mining "“ torture the data enough, and it will confess."
How to Build a Portfolio with Core Funds
Every investment portfolio needs a solid foundation that balances risk and reward. To build this foundation, we often use two mutual funds: a broadly-based global equity index fund (a "stock fund") and a broadly-based global fixed income fund (a "bond fund").
With that foundation in place, we may add other funds to "tilt" the portfolio toward small cap stocks, value stocks, a shorter duration in bonds, or a different exposure to international securities.
This article from CBS News MoneyWatch explores the ins and outs of how to build a portfolio using core funds and how some investors are building in their tilts using index funds.
The Moral to These Stories
Sometime, somewhere, something is going to be blowing up. When you pick stocks, or markets, you're betting that you won't pick the next one to blow up, which seems a little bit silly when you look at the numbers. It's better to accept the reality of uncertainty and diversify broadly.
When you diversify, you might not have bragging rights at the party, but you are certain to be in attendance.
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