Mutual Funds and Asset Allocation

Some experts say the percent of your investments that should be invested in the stock market should be no more than the number 100, minus your age. Some say 120 minus your age, and others use the number 125. I agree that this will protect your money, but I guarantee that if you listen to such nonsense, you will never reach anything but very modest investment goals.

I'll bet you didn't know that bonds have bear markets too. In the past 28 years, 8 have been losing years for bonds, and from Dec '76 to March '80, even U.S. treasuries dropped 33%. As recently as 1994 and 1995, the average bond fund lost money.

You see, when interest rates go up, nobody wants existing bonds, even government bonds, because they pay the old, low interest rates. To sell a low interest rate bond, the price of the bond has to be cut to a discounted price that gives an investor the same effective percent return that a new bond does.

But I'm drifting away from our discussion on asset allocation. Let me give an example of how much money you may be throwing away by following the expert's advice on asset allocation.

If you had put $10,000 into an S&P index fund on Dec 31, 1980, it grew at an average 18.5% to $295,883 over 20 years.

If you had been more conservative and put 3/4 of your money in an S&P fund and 1/4 in a government bond fund, your average 14.8% grew to only $152,000, passing up $143,000 in profit.

If you had invested $10,000 in the S&P 500 in 1974, in 15 years it would have grown to $612,543. If you had been conservative and placed half of your money in a government bond fund, your investment would only be worth $353,251 in 1999.

As we saw in this book's introduction, from 1926 to 2000, T-Bills returned 1.67% (total $3.46 on $1 invested) long term government bonds 4.28% ($23.17), corporate bonds 6.05% ($81.90), and $1 in stocks grew to $2,845 (with dividends reinvested). If your time horizon, which is the number of years before you need your money, is less than 10 years, then asset allocation does make sense. Otherwise asset allocation is for fuddy-duddies, not smart investors.
 

Other Stock Market Basics Topics:

1. Mutual Fund Advantages
2. History of Mutual Funds
3. NAV
4. Dollar Cost Averaging
5. General advice about choosing a fund
6. Mutual Fund Ratings
7. Evaluating Mutual Fund Investment Risk
8. Mutual Fund Share Classes
9. Mutual Fund Fees
10. The Mutual Fund Prospectus
11. How important is the manager's length of experience?
12. Why is the prospectus hard to understand?
13. Mutual Fund Annual Report
14. Comparing your fund to the competition
15. Comparing funds on an after-tax basis
16. Average Return on Investment
17. How Not to Pick a Mutual Fund
18. Cashing in Your Fund
19. When to Sell Your Fund
20. Mutual Funds and Asset Allocation
21. When to get started with a mutual fund
22. Types of Mutual Funds
23. Value Stock Funds
24. Growth Stock Funds
25. Small and Micro-cap Stocks
26. Mid Cap
27. Large Cap Companies
28. Income Stock Funds
29. Mutual Fund Index
30. Enhanced Index Funds
31. Sector Mutual Funds
32. Stock Market Sectors
33. Defensive Stocks
34. International Funds
35. Real Estate Mutual Funds
36. Socially Responsible Funds
37. Balanced Funds
38. Tax-Efficient Funds
39. Bond Convertible Funds
40. Junk Bond Funds
41. Mixtures of stock types
42. Closed End Funds
43. Exchange Traded Funds (ETF’s)
44. Stock Picking Strategy - Picking your own stocks?
45. Fund names, and what they really invest in
46. How to get started
47. Where can I start investing with no money?
    

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