Making Money Alert: The Buy-and-Hold Grandfather’s Warning

When Jack Bogle speaks, the market usually stops and listens. That’s because the grandfather of buy-and-hold investing, and the founder and chairman of mutual fund stalwart Vanguard Group, is thought of as a sagacious, steady and calming voice that sooths those who want to buy stocks, and then just simply forget about them for a decade or so.

On Monday, when Bogle was interviewed on CNBC, he raised more than a few eyebrows with his prediction that the next decade could indeed be extremely turbulent for investors. Bogle basically said that investors need to prepare for at least two declines of 25-30%, and maybe even 50%, in the coming decade.

What was even more interesting is that Bogle really didn’t think this situation was too much of a concern for investors.

Bogle almost cavalierly said that bear markets just come and go. “The market goes up, and the market goes down. It’s never failed to recover from one of those 50% declines.”

The Vanguard chief then went on to chronicle the bear markets that he’s lived through, including ones in 1973-1974, 2001, 2002, 2003, 2008-2009.

Here’s the money quote from Bogle on this issue of bear markets: “They’re kind of scary — often terrifying — but it’s typical. Why it doesn’t bother me is if you hang on through the cycle, that’s the only way to invest. Trying to guess when it’s going to go way up or way down is simply not a productive way to put your money to work.”

Well, I would like to see Bogle look into the eyes of someone who just lost 50% of his or her 401(k) value in the same year they were planning to retire. I doubt these folks would be comforted by his historical perspective.

Sure, Bogle might be able to weather a 50% downturn and still be well off, but most normal investors simply cannot do that. Most of us cannot afford to lose that kind of wealth, and that’s the reason why I think that buy and hold is a bad philosophy.

Hey, you don’t have to try and time the market exactly when investing for the long term. You do, however, need to be able to sidestep bear markets when they occur. If you don’t do so, then the gains you made during bull markets could be wiped clean precisely at the worst possible time in your investing life.

The Domestic/Emerging Market Disconnect

One big concern I have right now about the U.S. equity market is that most foreign markets aren’t participating in the domestic rally. In fact, since January, we’ve seen the emerging markets decline more than 7% and, of course, European markets continue to grossly underperform U.S. markets.

The charts here of the S&P 500 and the iShares MSCI Emerging Markets (EEM) tell a clear tale of two markets.

As you can see, the U.S. markets have been collecting investor dollars and going higher while investors in EEM have steadily run for the exits so far in 2013.

The reason this situation concerns me so much is that it appears as though the U.S. market basically is the only game in town. As you know, I’ve been in the investing business for more than three decades, and that means I’ve seen this situation before. In fact, the U.S. was effectively the only game in town in 1997, and again in 2000 and in 2008.

Well, we know that these bullish periods were followed by big market meltdowns and, dare I say it, near-market crashes that wiped out trillions of dollars in savings and investment.

One goal here in the Making Money Alert, and in my Successful Investing and High Monthly Income advisory services, and with my money management firm, Fabian Wealth Strategies, is to help you manage your money in such a fashion that you will never be defenseless against the pernicious effects of a major market correction.

This focus on safety is one of the prime directives in my investment philosophy, and it’s a core principle of mine that will never change.

Money in the Head, not in the Heart

“A wise man should have money in his head, but not in his heart.”

–Jonathan Swift

When you’re in the investment game, it’s easy to obsess over making money. That’s why it’s good to remember what the great satirist Jonathan Swift said. You see, while we need to think about money and the pursuit thereof, we also need to remember there’s more to life than just the head.

Wisdom about money, investing and life can be found anywhere. If you have a good quote you’d like me to share with your fellow Making Money Alert readers, send it to me, along with any comments, questions and suggestions you have about my audio podcast, newsletters, seminars or anything else. Click here to ask Doug.

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P.S. Las Vegas Money Show, May 13-16: Join former Fed official Robert McTeer, many other experts and me at this big investment conference. Tickets are complimentary for my subscribers. Call 1-800/970-4355, and mention code # 031169.