Reader Nitin sent in a link to an article called “Protecting the Investments of the Bad Investor,” which was recently featured in Yahoo Finance.
I agree with the overall premise that there are many investors who are not doing well, getting below average returns by buying, holding and selling at the wrong time.
The article goes on to state that “the Pension Protection Act of 2006 is encouraging increased use of asset-allocation funds, such as target-date and lifecycle funds, particularly as defaults in defined-contribution plans.”
I guess the idea is to protect investors from themselves, and their untimely decisions, by establishing a group of “default” investments. What that means is that someone decided that a default investment will do better than you could do on your own.
This may be correct in some cases, but the problem is with the default investments, which are pegged to be asset allocation funds like target-date and lifecycle funds. However, the study admits that asset allocation funds severely under-perform equity funds, but they “have prevented significant losses due to fear-based selling.”
Huh? I am simply dumbfounded by the fact hat one study can come up with that much garbage.
Are you now supposed to invest in underperforming asset allocation funds, which then will lose as much or more in a bear market scenario? Translation: Get less of a return but lose more since the obvious conclusion is to Buy and Hope through any type of market environment.
Don’t believe it?
I wrote the article “Do Lifestyle Funds Provide More Security” in early 2003, just before the bear market ended. It clearly confirms that Lifecycle and other allocation funds suffer just as much in a bear market scenario as equity funds but, in a bull market, you don’t get nearly the upside potential.
The article goes on to make other moronic statements like “this analysis shows that asset-allocation funds deliver what they promise — lower risk, no switching and real returns for the investor.”
Suuuure; and I have some subprime loans I’d like to sell you for top dollar…
Let me make it clear again: The biggest danger to your portfolio is the re-occurrence of another bear market and not whether you are in the best performing fund during a bull market. If you can avoid the bear by being safely on the sidelines, your investment returns will beat just about any equity mutual fund, index or stock that was held to oblivion.
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