A "dare to de dull" decade of investing

(MoneyWatch) The last 10 years of investing have been an emotional roller coaster, filled with new paradigms that have risen out of the ashes of the traditional way of investing we've been told is dead. In actuality, it's believing any of this nonsense that has proven to be the most harmful to our portfolios. What worked in the last 10 years was having the courage to stick to a simple, boring investment strategy. Here's why.

A dull strategy

With only three funds, an investor can own the entire global stock market and most U.S. investment grade bonds. How you weight each one depends on how aggressive you want to be. Below are the three low-cost funds -- I call them the "second grader" portfolios -- and possible weightings.

All three portfolios turned in great returns over the past 10 years. The conservative portfolio earned 6.45 percent annually, the moderate gained 7.54 percent and the aggressive surged 8.26 percent, or a 121 percent gain for the decade. Lower-cost share classes did even better.

The investors who achieved these returns dared to dull, as I'll now explain.

Investing should be dull

Nobel Laureate Paul Samuelson said it best.

Investing should be dull. It shouldn't be exciting. Investing should be more like watching paint dry or grass grow. If you want excitement, take $800 and go to Las Vegas.

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Without question, these three index funds fit the bill dullness-wise. Nothing could be less exciting. And nothing could be harder to do than buying boring index funds when all of our emotions, whipped up by the media and Wall Street, are telling us what the economy will be doing and where we need to invest. Naturally, our advisors are willing to hop on board this "outsmarting the market" train, while charging us handsomely.

This desire to outsmart financial markets is practically impossible to resist. Yet in reality it's not the market investors are trying to outsmart -- it's simple arithmetic. Considering that 90 percent of investors think they are beating the market, I think it's safe to conclude that there is an epidemic of fuzzy math.

Few dare to be dull

The other critical part of "dare to be dull" investing is rebalancing (Note: My lawyer requires me to disclose that "dare to be dull" is a registered trademark.) Few investors have the tolerance to go down this less-traveled path, as it pushes us to go against the herd. For instance, after a fifth bullish year in a row of stock market gains in 2007, we would have been forced to sell some of our stocks to get back to our target allocations. And after the so-called "death of capitalism" at the end of 2008, rebalancing required us to buy stocks. Instead, just the opposite occurred with the majority of investors.

Admittedly, it was very difficult for me to buy equities in late 2008 and early 2009. As willing as the dull spirit was, the flesh was painfully watching my nest egg drop into a sinkhole. Yet buying stocks at the half off sale turned out to be the right thing to do.

Dare-to-be-dull investing went against every instinct in my body, against every bit of Jim Cramer, radio guru, doom-and-gloom financial author's advice. Maybe they were right, maybe this was the next Great Depression, maybe this time it really was different.

Despite all the second guessing, and despite the beating "buy, hold, and rebalance" investing took in 2008 and early 2009, it ultimately prevailed -- again. The idea of a "new normal" in investing turned out to be just as silly as the beliefs that caused the crash in the first place ("Real estate values can never decline.")

One of the few predictions I can make with certainty is that experts will be giving us new paradigms on how to invest our nest egg -- we should ignore them. If your portfolio isn't at least 20 percent above its 2007 year-end close, maybe you're ready to give simple and boring a try. I dare you to be dull!

[jvinijvini]

Hi Allan, thank you for this article which serves as a confirmation of my investment strategy. I have a relatively exciting job (Write TV commercials like the old ETRADE baby spots, ironically), but my investing is very boring and very robotic.) I try to spread this philosophy to my colleagues who ask. Fortunately, quite a few do. Total U.S.(broken down between large, med. and small so it doesn't skew large. And it is free to trade on Fidelity), Total international ex U.S.(VXUS), and Total Bond (BND). I invest monthly into my 401k and am fortunate enough to invest more in a taxable account (but BND stays only in the tax advantaged). I rebalance once a year and/or when market shifts over 12% occur. My bond allocation is my age - 12 and I will likely end when there is a 60-40 bond to stock ratio based on the money I've saved and the conservative way we spend. Anyway, this has served us very well. Thanks!

[Atlasshruggedify]

Allan,
What a great article. It's so easy to forget that we are our own worst enemy when it comes to investing.
I would love to see a similar article that includes how these three portfolios would return when doing systematic contributions (like in a 401k or 403b) over this timeframe.
Since most investors do not have a single lump some of money that just sits without contributing over time, I think that would be more applicable.
Thanks, and I look forward to your next article.

[Allan_Roth]

Hi Steve and thanks for the kind words. I think your asset location is perfect & most people get it reversed. In general, I would pay the 15% cap gains (plus you live in California with a high state tax) to rebalance. I certainly would consider waiting a month or two for a lower rate if you have only short-term gains.

If you are still in the accumulation phase, you put new savings into fixed income. Also, if you have a Roth, it often pays to have equity in a Roth IRA / 401(k)

You ask a very good question and there is no clear cut answer. In general, I feel asset allocation is more important than tax deferral.

I've always said investing should be simple but I've never said taxes were.

[stevevernon]

Hi Allan.

Thanks for another great article. I'm a big fan of your dare to be dull investing philosophy.

I'd like your view on one aspect that is challenging for me, and that's rebalancing. While rebalancing has no tax consequences in 401(k) plans or IRAs, it triggers capital gains taxes for assets held outside tax-advantaged vehicles. I tend to hold fixed income assets in tax-advantaged assets and equity investments outside tax-advantaged vehicles, to take advantage of lower tax rates on capital gains and dividends. Most of the equity investments I have to sell in order to rebalance would generate capital gains taxes. Unrealized gains on assets bought at the 2008-2009 lows are quite significant. So I'm hesitant to rebalance. Any thoughts?

Thanks, Steve Vernon