Money Wins Over Grass!

I was invited to speak at an investment club inauguration. The group represented several distinct age groups. Toward the end of my presentation, I asked for a show of hands from people who would prefer to watch money grow rather grass.

Fortunately, the consensus was that, as a spectacle, grass was less attractive.

Although, I knew what to expect from my compliant audience, I was also not surprised to find out that less than half of the attendees knew whether or not CitiGroup would be considered a growth stock. Worse than that, only four people had reviewed their investment accounts within the past thirty days. Yet, these same investors were excited about the new investment club they had just organized. There were nearly fifty members present.

“Why do you want to start an investment club?” I asked.

The spokesperson reiterated what she told me during our first conversation. Most of the members did have an ambition to learn more about investing in stocks. Their premise was correct. The few that approached me at the end of the meeting confirmed that they were happy about the knowledge they received in forty minutes.

In my opinion, this story reflects the disposition of thousands of Americans who, either because of busy schedules or social distractions, domestic or otherwise, are not in touch with their investments. A quick “drive by” at any lay financial forum on the Internet confirms this view. If index funds were band-aids, Johnson & Johnson should shut down all of its non-band-aid operations and go vertical.

I use the plastic strip analogy to build an image of how thousands of people relate to index funds and diversification. You might want a better metaphor. Nonetheless, facts show that billions of dollars have been transferred away from other investment vehicles, in favor of market tracking funds. This behavior has created a dilemma for investors who plan to retire soon or rich or both.

Just like drivers who don't look in the rear view mirror, investors use diversifaction (same as index funds) as the wherewithall to their monetary goals, and it is a mistake.

I measured the 5-year performance of the popular Vanguard 500 Index Fund from January 2, 2001 to January 3, 2006. The total gain in the net asset value (NAV) of the fund was a paltry 8.84%! And that's for the enitre 260 weeks. (Of course, in retrospect it was a good time to buy the shares.) But, stop and think what numbers can do for a mutual fund sales brochure, depending on which numbers you choose. It is true, that [eliminating the months immediately prior] this portfolio has averaged a little over 6% per annum during the most recent five-year term. Dozens of intermediate bond funds funds have done better.

Of personal concern is whether or not the share price will get back to, or exceed its February high and for how long.

I rest my case.

Hudster