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March 23, 2011


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FMF - meant to ask you this sometime back, but do you have any investments that are not in the stock market? Things like investment real estate, privately owned businesses, etc.

Ever since I reached the point where I have a pretty good amount of money to invest each month, I've been weary about putting every dollar of that into the stock market (or bond market). I like the element of having control over a certain portion of my investments, that's why I have started investing in income producing real estate.

I just don't see how huge publicly traded companies truly have my best interests at heart as a shareholder. I hate to depend 100% on companies over which I have zero control.

Bogey --

Yes, I do. I own my home outright as well as participate in a Real Estate LLC with other investors buying/selling mostly commercial property (I'm a minor player in the group, but it's a decent amount for me.)

I also have some invested in private businesses (not mine).

Your review and comments hit the key point. I like the bullet points, to the point. REIT ETFS and index funds, both national and international are a low cost easy way to take advantage of additional diversification into the real estate markets.

I've got to admit I have no idea how to practically apply the steps above.

Buy low cost broad index funds and then:

1) "rebalance" (so I should buy more of my losers and sell some of my winners),

2) but "don't sit back and accept losses out of fear of missing later gains (so I should sell some of my losers and buy more of my winners).

Strick --

On #2, I believe he's talking about getting into and out of the market as a whole depending on whether you think it is undervalued or overvalued. As you know, I'm in the market no matter what, but many do get in and out based on their assessment of valuations.

As an investment advisor, I would agree that the average mutual fund manager struggles to beat the broad indexes.

I tend to disagree that broad index funds (although great at diversification) are best for protecting defensively during large draw downs in the market.

I prefer a more actively managed approach that many third party portfolio managers take to protect principal on the downside so that they don't have to swing for the fences in the up years.

Thanks for your insights and articles.

Derrik Hubbard, CFP

One of the very few index funds that has a long history is VFINX. This is Vanguard's fund that tracks the stocks in the S&P500 and it includes the reinvestment of all dividends received.
The database that I subscribe to has data starting from 9/1/1988 which is about 22.5 years.

Here's the performance of VFINX overall and then between major high and low points. VFINX has a low expense ratio of 0.18%.

9/1/1988 to 3/21/2011 ------ APR = +9.68% ---- 22.5 years - Overall

9/1/1988 to 9/01/2000 ------ APR = +18.67% -- 12.0 years - The DOT.COM bubble

9/01/2000 to 3/02/2009 ----- APR = -7.17% ---- 8.5 years - The collapse of the DOT.COM bubble & the Great Recession.

3/02/2009 to 3/22/2011 ----- APR = +37.41% -- 2.0 years - The effects of the TARP and other recovery programs.

One other thing to bear in mind is that "History never repeats itself where the stockmarket is concerned."
Nobody has a crystal ball and nobody has any idea what the next 22.5 years have in store for the US economy.
However there will always be Bull and Bear markets and that if you are a good enough investor to be able to take advantage of both you will always do very well. This is especially true now that there are so many BEAR funds available (A BEAR fund moves in the opposite direction to the market).

I should have also added that using BEAR funds in the market can be very treacherous.
After the market has been going down for many days you may start feeling very smart and happy that you are playing the short side of the market. However there are often very sharp rallies during Bear markets that are caused when the many traders that have sold short lose their nerve and have to buy back their short positions. These short covering rallies come out of nowhere and you can lose lots of money very quickly if you hold short positions.

I consider myself a pretty shrewd investor but I gave up trying to go against the grain of the market because it really only works well for experienced "Day Traders of stocks" and cannot be used at all well for investors of mutual funds that only trade at the closing price of the previous day. I tried a few times but was never successful. I also gave up using margin after a couple of unsuccessful attempts, that's another dangerous technique that involves borrowing money from your brokerage company to increase your leverage.

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