This issue is raised yet again by a Chicago Tribune story on how "buy and hold" investors get screwed by following the advice of so-called experts.
In a column which appeared in print and on the Trib website, Gail MarksJarvis did an excellent job of alerting readers to the cyclical nature of investments, the long time it can take to recover from poor market conditions and the lackluster performance of asset allocation funds which are claimed to provide some level of investment protection from long cycles of poor market performance.
Column snippets to whet your appetite:
Investors who thought they could count on the stock market to make up for the mediocre savings they have socked away in 401(k)'s and IRAs are having an awakening.The print headline did a good job of summarizing the reporter's review of the facts and the conclusions she drew, including material which indicates that even target-date asset allocation funds have their problems:
And it's not a happy one.
For eight years now, the stock market hasn't cooperated. Instead of providing the 15-percent-a-year returns people enjoyed in the 1990s, the market has turned into a Scrooge.
Not only hasn't the stock market lived up to its historical average of 10 percent annual returns, but the benchmark Standard & Poor's 500 stock market index stands significantly lower today than it did at the start of the decade...
"It's a lost decade," said Howard Silverblatt, a senior index analyst at S&P...
There has not been a decade this bad for investors since the Great Depression. During the 1930s, investors lost 5.26 percent on average per year, not including dividends, Silverblatt said.
And the next worst period in history, the 1970s, gave investors a 1.6 percent annual return, he said...And the stock market took more than seven years to recover from the losses...
"The 2000s have been the poster child for diversification," said Michele Gambera, Ibbotson Associates chief economist.,,
An investor who would have assembled a classic portfolio, with 60 percent invested in the S&P 500 and 40 percent in a broadly diversified bond fund that mimicked the Lehman U.S. Aggregate index, would have turned $1 invested on Dec. 31, 1999, into $1.32 at the end of last month, noted Gambera....
Investors don't have to assemble complex portfolios on their own...they can buy target-date funds in which a fund manager combines diverse stock and bond investments in proportions geared to preparing a person to retire on a certain date...
Investors should not assume, however, that those funds will not lose money. While the S&P 500 lost about 17 percent between Oct. 9 and March 17, the average target-date fund geared for people retiring in 2010 lost 7.9 percent, according to Morningstar Inc. For the last eight years, the average 2010 target-date fund tracked by Morningstar has averaged a 3.7 percent return a year.
"Many can't find gains in 'lost decade'"Unfortunately, her excellent insights were blunted by the editor who okayed the online version of the column headline:
"Diverse portfolios take the edge off a rough market"Sophisticated readers know that there is an art to writing good headlines that attract, inform and even amuse a reader. They also know that the best headline writer in the world cannot produce a perfect gem every time he or she puts fingertip to keyboard. From this perspective, it's not a profitable expenditure of time for us to carp about headlines that are less than perfect. The writers work under constant pressure to produce quickly and its unrealistic for us to demand a home run every time they walk to the plate.
But when a headline in the financial press spins an article along the lines that favor Wall Street boosterism - a practice that many claim plays an important role in the creation of investment manias - the producer should be called on the carpet.
The truth of the matter is that investors who followed the advice to buy and hold mutual funds or, for that matter, stocks in the last 10 years might require many years to recover from the bad effects of that strategy.
You would never know that from the calculatedly misleading headline on the Chicago Tribune website.
Frugal Ben Says:
In general, don't go postal over bad headlines. Even if the headline is bad, by the time you complain, the matter is such old news that it makes no difference.
At the same time, don't ever forget that our business/financial/economics reporting is a travesty which needs to be reformed!
When you see a headline writer bias the reader so as to deform an honest story into a piece of bubble-supporting Wall Street propaganda, express your discontent!
Here's hoping Gail will track down the person who wrote the headline on her internet story and give them a good spanking!
The fun of blogging is learning something new as you post.
Some links to what I learned about headline bias in the media:
Bias by headline: