Are stocks a losing proposition?
By Gordon Powers, Sympatico / MSN Finance
Retired neurologist William Bernstein has pursued his hobby of statistics and portfolio theory with such passion that he first created an online publication, The Efficient Frontier, and then wrote two popular investment books The Intelligent Asset Allocator and The Four Pillars of Investing.
His latest message to investors who feel betrayed by the devastation of wealth they’ve witnessed over the 18 months: You’re right, it’s not just you, most stocks do actually lose money over time.
Citing research from the investment management firm Dimensional Fund Advisors, Bernstein notes that from 1980 to 2008 the top-performing 25% of U.S. stocks accounted for all the gains in the broad market. What’s worse, the bottom 75% collectively produced annual losses of around 2% over the past 29 years, he says.
Why not then just buy these superstocks? Because, with those odds, even your "carefully chosen" portfolio could easily wind up with none of them. Trying to trying to optimize your investment performance by seeking out these needles in the haystack is a sure way of becoming, well, poor, Bernstein maintains.
The only solution is indexing, he says. Buy the market, as cheaply as you can. Even though it's been a tough decade for the world's benchmarks, you're still better off owning a wide mix of them rather than try to pick a small number of big winners, he believes.
Echoing Bernstein’s comments is long-time Vanguard Group guru John Bogle. Backing individual stocks means placing a big bet on buying them from those who don’t know how much they’re worth and selling them to somebody who thinks they’re worth more, he recently told CNBC. That’s a supply and demand issue, he says, and has relatively little to do with the actual worth of those companies whose value lies underneath that stock price.