Caveat emptor

“It [is] a common defect of men in fair weather to take no thought of storms.” — Machiavelli

Monday’s impressive stock market gains seem to validate expectations for strong 2nd half economic growth. Stocks are basically trading flat today with no signs of a major pullback.

Some words of wisdom to help keep 2003’s double-digit gains in perspective:

“To invest successfully over a lifetime does not require a stratospheric IQ, unusual business insights, or inside information. What’s needed is a sound intellectual framework for making decisions and the ability to keep emotions from corroding that framework.”

Warren Buffett, in his introduction to “The Intelligent Investor” by Benjamin Graham

In practical terms, for most fund investors this means: buy the whole market, focus on low costs and tax efficiency, and don’t chase returns.

And continuing that train of thought…

The most fundamental decision of investing is the allocation of your assets. According to a recent study, that decision accounted for an astonishing 94% of the differences in total returns achieved by institutionally managed pension funds.

The results of this study have been reaffirmed in countless others. There is no reason to believe that the same relationship does not hold true for individual investors (i.e. non-professionals).

The 94% figure suggests that long term fund investors might profit by concentrating more on the allocation of their investments between stock and bond funds — and less on the question of which particular stock and bond funds to hold.

John C. Bogle, “Bogle on Mutual Funds”

A final note on the importance of costs and taxes: Over 20 years, through the magic of compounding, a mere 2% increase in returns (by selecting low-cost and tax efficient funds) can result in a 50% greater portfolio value.


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