Always Barbell?

After reading the previous post on implementing a barbell investment strategy, a friend asked:

“Would you always recommend the barbell or No Lose strategy to people, or would you sometimes recommend investing at minimum in an index fund that tracks the market?”

I would always recommend a barbell strategy.

I would recommend NEVER investing in an index fund, or mutual fund, or bond fund.

This goes back to my view of the stock market. I think it’s all a scam, or a pyramid scheme of sorts.

I’d rather see someone put money in a bank account than in a fund.

But again, that’s me. Most financial advisors would say I was crazy…but then they get paid whether you lose money or not…

Case in Point

Take a look at this chart pulled from BigCharts.

DJIA 2000 to 2013

Look at year 2000 (00). That’s when it “peaked” for the dot com boom.

On the day that it peaked (and the weeks leading up to the peak), there was no reason to think that this was “the peak”.

This means any other day could just as easily be the peak…like, for example, TODAY.

So any time you decide to invest in the market, you could be investing at the peak.

Peak Problem

Why is that a problem if, as they say, “the market always goes up”?

Take a look at that red line.

Investors that put money in the market at the 2000 peak don’t make money until the market is above that line…and STAYS above it.

If you track across that line, the market doesn’t STAY above the line until 2012…SO FAR.

If the current bull run ends and the market again drops below that red line, then those investors will again have lost money from where they started.

12 Years For Nothing

So, if you had bought in 2000…only 12 YEARS later would you have made any money.

But when you were doing your investment planning, you probably based all your calculations and plans on making 4% to 6% per year. And you based how much you would save each year on that assumption.

Now you have 12 years of NO GAINS.

12 years of expected 4% to 6% gains is an overall expected gain of 60% to 100%.

So your plan called for having 60% to 100% MORE money than you do after those 12 years.

Basically you’re WAY short of where you thought you would be.

And to get to where you wanted to be, you have at least another 12 years to go…assuming the market doesn’t drop again.

And if you look at that chart again, you can see that over those 12 years there were indeed more drops.

Always

So, yes, I would always recommend a barbell strategy.

If the market drops, the most you can lose is what you are risking. The 10% to 15%.

As Taleb pointed out, we know that we ARE taking on risk, it’s just really hard to estimate how MUCH risk we are taking on.

Putting everything at risk by investing in a fund is TOO much risk.

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