Monday, March 26, 2012

Sane Investing: Avoid extremes and stay diversified

Excellent advice from Craig R...
I just read about a Vanguard retirement planning calculator recommending someone put 100% of their money into the stock market. Well, 100% in any asset class is gambling, not investing.

The Vanguard questionnaire assumes many things about the future that history simply doesn’t support in terms of market risk. The past does not predict the future. Just because U.S. markets have had good runs in the past does not mean they will have those runs on your particular timetable.

The last part is important because the investment industry will often show a chart with 200 years of U.S. stock returns (or some similar very long time horizon). But these charts make a lot of assumptions:

1) That U.S. stock market history will repeat the exact same way (it won’t).

2) That any person or organization was able to capture those returns consistently (they didn’t).
Read the rest here.

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