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Diversification and the simple man

March 29, 2010

I loved the “Index fund buy-and-hold” investment approach for its simplicity and its clear-headedness.

But I felt pretty betrayed in 2008-2009 when my well diversified holdings all tanked in unison. Now they’ve all come back in unison so it is hard to understand why diversification matters.

Was 2008-2009 crash a complete anomaly (sigh… yes… a “black swan”…ack) and the only thing capable of tearing down the protective financial fortress of diversification? If that is the case, and the crash is (hopefully) behind us, can we now go back to our simple investment strategies?

Maybe, but it seems likely that the diversification will deep-six again, especially if we can’t get the financial reform we need.

But ultimately, it feels to me like “Index buy and hold” strategy is a little like democracy, it is the wost investment strategy out there, except for all the others.

Anyway, here are a few quotes:

The short version: Invest consistently and for the long haul in a widely diversified portfolio of stocks and bonds. Pay attention to taxes and costs. But leave your investments alone.

Buying individual stocks is a loser’s game, he adds. Mutual fund managers, who invest for a living, can’t pick their investments consistently enough to beat the market as a whole, he notes. And it’s even less likely that the average investor is going to be able to do any better.

The fund is only as good as the manager who directs its investments, and managers come and go. The average stock fund manager lasts about five years, Bogle said, so if you have five funds, you’ll have gone through 20 fund managers in 10 years and 40 managers in 20 years.

“The idea that this wide array of managers could consistently beat the market is just absurd,” Bogle said.

Old-fashioned investing advice still applies – latimes.com.

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