"What do you think is the wisest way to invest and get a good return on your money -- without putting yourself at a big risk?"

Right now, it's still in flipping houses in the $100 - $200K range, in South Carolina. Yes, you do have to wait, and be able to sit on them. Before the big hysteria, SC was a fast-growing housing market because of the low cost of living, as well as the low cost of housing. The place you park your Insight would be on an acre, with woods, for a fifth of what you'd pay for it there in LA - of less.

Note that housing is a market in which it pays to diversify. As you might guess, there are a buncha houses in the Augusta, GA / Aiken, SC area in the $500K - $1M range up for sale now, and not moving.

I can't figure out where the market is going to head because there is so much government intervention right now that it will have massive unintended consequences down the road... The housing market and the automobile industry should have been left to correct, and the government should have a savings account (as opposed to the credit card) that it can draw upon for public works/fiscal stimulus.

I worry about the federal deficit, but Republican presidencies have always (in my lifetime) ramped up the deficits at about the same rate they are right now... (and I can supply Amy with the OMB data for you skeptics out there...)

Eric -

It isn't the president that ramps up the deficits, it is the Congress.

This is not to say that your argument is invalid. However, it would be more correct (if my memory is right, and I suspect that it is) to state that when both houses of Congress are controlled by the same party, government spending tends to increase at a greater rate.

Furthermore, when the same party controls both houses of Congress AND the White House, spending increases faster still.

This spending increase will occur regardless of what tax revenues do. And it will do so regardless the parties involved.

Everyone blames Reagan's tax cuts for the deficits of the 80s. However, his tax program caused a massive increase in federal revenue. The Democrats in Congress demanded certain things in exchange for lowering taxes - and they increased spending at a rate of 2:1 over increases in revenue.

If we wish to control deficits and spending, it behooves us to have the houses of Congress divided between parties.

Hi, Amy

I'd like to respond to your question and the following quote: "Even the most seasoned investment professionals running mutual funds perform worse than the indexes on average."

Most mutual funds under-perform when compared against their benchmark index; maybe two-thirds to four-fifths of all funds in a given year. The costs of managing, marketing and selling the fund reduce net returns to the unit holders. Accordingly, the unit-holders generally do much better with mutual funds that keep these costs very low.

One of the ways to keep expenses down is to do without active management of the fund. Fire your expensive management team and instead pay a relatively cheap licensing fee to Standard & Poors (or another financial publisher) to use one of their indices. You'll save a lot of money and beat your former managers most of the time.

Tyler

Now I have to go research what an index is, and check out our holdings. I know we have lots of GE stock because that's what GE pays it's 401k match in. I also have some mutuals. Sounds like I might need to research a change?

We have decades before we need this money, and I am confident it will recover and grow. But I try to keep many eggs in my basket, just in case. I also check my mutuals periodically to make sure they aren't all investing in the same places.

Any other tips for the little investor?

One other thing- investors and lenders are skittish now and are will be for some time because of the deregulation that has occurred in the financial markets. I read with seething anger (literally Crid) the other day that the FBI has had to pull agents away from finance counter-terrorism to deal with the Madoff Ponzi scheme. Meanwhile Madoff is camping out in his $7MM condo, seemingly basking in his notoriety as the world's largest conman.

http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aAZwa1ACdRbc

"What do you think is the wisest way to invest and get a good return on your money -- without putting yourself at a big risk?"

You'd have to define "good" and "big". In a normally functioning market, by definition, the more risk you take the more potential you have for bigger returns. The flip side to that is that it's impossible to make "good" returns while taking a "small" risk. With the govt involved these days, risk, at least for some classes of investors is being diminished which distorts everything.

Having said all that, anyone who tells you that they know what's going to happen or how the markets will perform is either a liar or a fool.

I can tell you that if I was in the position of acquiring a large sum of money in the near future, let's say I wrote a book or something, I'd be thrilled at my timing. Everyone, with the exception of the people who shorted the financials or the market in general, is down. And down big. At the risk of sounding like a realtor, it's a "great time to buy". Or it could be. There's no guarantee that the markets won't go down further but at least you missed the first 40%. You got that going for you.
One investment that's held up pretty well has been Gold. With the Fed printing money, inflation and a cratering Dollar are real possibilities. I'd make Gold, both physical (Coins - you can keep them in your gun safe) and the mining companies (I like ABX) should be part of your portfolio. How much is up to you.

You can even buy a Gold mutual fund. Fidelity has one in their stable of sector funds that consists mostly of Gold miners. Of course you can buy a Gold ETF if you want a stock like play on the price of gold.
Another sector that I like is Energy. The current price of oil is unsustainable. The next price spike will be caused by physical shortages and it will make the last spike look tame. Energy stocks have been crushed and unlike the gold miners they've yet to see any recovery. Fidelity also has a couple of energy related Sector funds that I like.
I've heard people talk about the potential for fixed 30 year mortgage rates of 3.5% next year. Again, if I didn't have a house I had to sell I'd be thrilled with my timing on this too. As long as you're not planning to flip a property you could do well buying a house too.
Good luck with the book.

Anyone with cash they can risk should buy stock indexes, or funds that act like indexes. Buy in increments over the next several months. Then plan to sit on the investments for 20 years.

If all goes well, you will realize a nice profit when you sell. You may want to emigrate first, given where capital gains taxes are likely to be by then...

Just to emphasize a point that pertains to almost anyone, not just Amy. You can't overstate the opportunity that unbelievable cheap fixed mortgage rates represent. When inflation ticks up again, and it will, paying off long term debt at something like 3.5-4% is a steal. If the Fed is unable to pull a rabbit out of their hat and tamp it back down and God forbid we reach Jimmy Carter like inflation levels you'll need to wear a ski-mask + gloves each month when you write your mortgage check. You'll be stealing from the bank/mortgage holder. After the 1st of the year I'm going to start the process of refinancing and hopefully be ready to pull the trigger if/when the rates drop below 4.

Oddly, I have an MBA. More odd, so does Scott Adams. Completing the trifecta, it's from the same school: UC Berkeley.

The classic MBA answer (and I think it's actually correct) is to go for a market index fund with very low overhead.

The first of these, and the best of these, is the Vanguard 500, created by John Bogle based on his *undergraduate* thesis.

Bogle is a very interesting guy and has written many books on investing.

So the no brainer (which is good because most MBAs have no brain) answer to the question, how do I get maximum return and reasonable risk when I don't want to follow the market at all is:

1) Invest (according to your age) in Vanguard 500 (or similar Fortune 500 index fund.)
2) Invest (according to your age) in bonds.

So Amy, you're early 40s, so you should be 40% in bonds, 60% in Vanguard 500.

To the question of what is a market index fund, it's a fund that invests in EVERY company in the market in the proportion of that company in the market.

If you had a market of three companies,
A = 100 shares of stock each worth $2
B = 100 shares of stock each worth $4
C = 100 shares of stock each worth $4

So the whole market is worth $1000

Then a market index fund would have stocks in A, B, and C, to the proportion

1/5th A, 2/5ths B, and 2/5ths C.

Why? Because there is some maths and some nonsense pertaining to "Modern portfolio theory" about your utilization and "efficient frontiers" that reduces in the end to saying that if you define your desires and risks the way some ph.ds in finance and econ do, that the best way to invest to get max return for min risk (and effort) is what I said above.

The problem is that day to day as stock prices go up and down you have to sell some of your stocks and buy more of others in order to keep your portfolio in the right proportions. That's time consuming and can be expensive.

So an index fund will do all that work for you. The Vanguard 500 and just a few others will try to do it in a way to keep your expenses as low as possible.

In contrast, many money managers live off your transaction fees, and will do what they can to increase your transaction fees.

Bogle realized early and often that it doesn't matter how well you invest, those high transaction fees will kill you. And in fact, that's why most funds are complete crap. Doesn't matter how they invest, they charge too much and you lose.

So. If you want to get maximimal returns with minimal risk as defined by finance and econ pukes, then go look at the Vanguard 500 and read John Bogle's works.

Much of the finance community HATES Bogle. Amy, he is probably as important for people to read as any of the books you occasionally mention belong on everybody's shelf.

I mention Vanguard 500 only because it was the first and is the best known and is considered the no brainer investment by the MBA class. Apart from that, I have no connection with the fund.

HTH

Speaking of the financial community hating Bogle, Monday on CNBC, Gary Kaminski called out Bogle. He pointed out that over the last 12 years if you used Bogle's indexing strategy you lost money. Bogle was touting how well his strategy was doing "this year" which Kaminski rightly pointed out is a poor way to look at it when you're advocating a "buy + hold" type strategy.

Sean's basically right.

Bogle does advocate buy and hold. Warren Buffet I think advocates buy and never sell.

And it is also true that if you put all your money into the market and the wrong time (2007 or 1928) it may take years (or decades) to recoup.

So the classic response is:
A) Don't put your money in all at once, but use techniques like dollar averaging
B) Investing in a (fire and forget) market index fund is for the LONG TERM, not for the short term
C) Get better regulation and more transparency so we can spot the crooks in advance and keep them from stealing our money in the first place.

Lots of people got wiped out this year, lots of people with very active investment strategies got wiped out. Presumably the Vanguard 500 only lost half its value. (I don't know). That may be considered a win given the year and all the crime that went on.

But Amy's question was "What do you think is the wisest way to invest and get a good return on your money -- without putting yourself at a big risk?" to which I added "without having to read the business report everyday and actively manage my portfolio". And if that's the question, Bogle's way is the way to go and much better than listening to people say, "put it in MY fund" or "put it in MY company."

Can you do better than a market index fund? Yes, and it's surprisingly hard. Hard meaning rare, and hard meaning you have to learn a great deal about the companies and you have to spend a great deal of time, and there is still no guarantee of success.

Market index fund is for one thing: max return, min risk, (min effort and long term investing.)

"The problem with doing your own research on stocks is that you must rely on the information coming from the management of a company...Brains and research can't overcome the fact that much of your data is deliberately tainted at the source."

No you don't, and yes they can. Case in point: the Bre-X gold mining scandal. Bre-X was a tiny mining company in Calgary that announced a huge gold discovery in Borneo in 1993. The claims kept getting bigger & bigger (first 2 million ounces of gold, then 30 million, then 60 million) and the penny stock was up to $ 280 a share by March '97. Then in May '97, an independent company got a hold of some of Bre-X's ore samples & proved that they had all been salted with gold dust (they'd actually shaved gold off jewelry & mixed it in with the rocks & mud!). Trading in Bre-X was suspended on the Toronto Stock Exchange, and quite a few Canucks lost their life savings overnight. Some committed suicide.

Now according to Dilbert, all these poor saps were completely at the mercy of the Bre-X crooks, & had no choice but to blindly believe everything in the glossy brochures the company sent out to prospective investors. But that's not true. Many folks smelled a rat right from the beginning. The ore sample testing results that Bre-X published showed totally different chemistries, as if the samples had come from different parts of the world instead of from the same mine. Other companies published their own analyses of the results, showing that the chemistry & the statistics just didn't add up, and often coming right out and saying that they suspected fraud. Anyone with some amateur knowledge of gold mining could tell that something was very wrong. People got suckered by Bre-X for the same reason that they got suckered by Madoff: because their greed overwhelmed their common sense.

Company prospectuses are like the "Dear Amy" letters that form the basis of your weekly column. Do you just take everything in these letters at face value & pull something out of your ass, or do you apply some common sense, experience, & knowledge of evolutionary psychology to the situation? Thoughtful investors who do their research might still lose money sometimes, but they don't face casino jackpot odds, and they're not helplessly at the mercy of swindlers.

Oh and

D) That's why you're invested in boring old bonds to your age or personal risk comfort.

It's okay to be 100% in stock if you're young or have lots of other assets and resources you can fall back on. Otherwise, TANSTAFL.

Ahhhh, Warren Buffet. When is the next annual shareholders meeting for Berkshire? I wonder if the "Warren is a God" ass-kissing will be down 33% like the stock is.

I agree with Amy's sources about the wisdom of index investment. I think the investment principles Amy's describing are still the way to go, because they're conservative... They approach risk as something to be faced squarely and contained, not to be avoided completely. These investments are where the vast majority of my money is.

Was.

I got creamed like every one else this year. (Just like that poor little pizza-maker from Amy's post yesterday, my retirement dreams have been brutally punished.) Anyone who considers the advice seriously, (and I still think you should) deserves some discussion of what's happened.

Two principles guided my understanding of 2008.

First, "Wealth is created when assets are moved from lower- to higher-valued uses." (That's straight out of Econ 101.) If someone hands you a patty of raw ground beef, it's worth a certain amount. If you grill it and hand it back to them, it's worth a little more, because someone who's hungry right now will pay more for it. You've created wealth. Good going!

Second, 'financial services' is now the largest sector of the US economy. (I learned that from this guy.) Got that? More people make money doing that than doing anything else. More than flipping burgers or growing lettuce, more than manufacturing cars, more than teaching classes, more than anything else. Financial services is what our country is about.

So then, like, how do people in the financial services industry move assets from lower- to higher-valued purposes? How do they earn money? Most of the people we're talking about aren't fancypants bond traders... They're people sitting in small offices running spreadsheets on Excel '97 and Windows 2000.

(If I remember correctly, and maybe not!, Eric's job probably falls into this category. But nothing in this comment is about Eric... That's just meant to point out how many people we're talking about here. I bet there are other people reading this who're in the category as well.)

The truth is, adding value to a transaction between two other parties isn't an easy thing to do. You have to be really clever and you have to work hard. (And again, Eric's an honest businessman, I'm sure he does both those things.) But I'd bet a lot of computer-mouse jockeys don't do that, and there are a lot of computer-mouse jockeys.

We know that real estate is an important component of this. A lot of people who were tired of waiting tables in Los Angeles in the 1990's got into the real estate business, but they're not all creating wealth. I bought my place from an upper-middle class empty-nest housewife who wanted a little income and something to do. She probably sold ten properties that year, earning a respectable income, but not sustaining her whole family. This isn't a complaint about her work or her prices. But she never really created much, or elevated the worth of anything. She just stepped in front of the transaction and cut off a slice as it moved past her.

(Continued next comment to avoid spamfilter)

Pulling out of this crisis may require a few adjustments to our regulatory processes. We need to figure out why the ratings agencies decided to rate mortgage-backed securities from some of the weakest home-borrowers in history as AAA. (That link is essential reading. Why aren't people from Standard & Poor's and Moody's walking into prison this afternoon?)

But I think the horror we're seeing in the economy right now is that most of us are recognizing that a lot of these financial services people aren't really doing anything all that useful. We need to come to grips with how pervasive this shift in our economy has been. Consider this post from McCardle:

| Detroit turned from making money on cars
| to making money on financing. Detroit
| didn't make a big profit by selling you a
| Ford Taurus. It made money on financing
| your Ford Taurus; often, the car was sold
| at a loss in order to get the finance
| business. The Big Three were banks
| manufacturing cars as a loss leader.

Long-assed comment, let's wrap it up... If there's good news, it's that people are waking up to what it means to create value. Investing broadly in the American economy is still the most responsible thing you can do with your money... It's just that in recent years, we'd packed on a lot of fat without realizing it. On Christmas afternoon I took a drive through some nice areas of LA and saw a lot of closed storefronts. I think we're coming to grips with the meaning of wealth again.

Ahhhh, Warren Buffet. When is the next annual shareholders meeting for Berkshire? I wonder if the "Warren is a God" ass-kissing will be down 33% like the stock is.

Yeah, I know. Can you believe that guy? Talk about overrated. Puh-leaze!

I believe Jerry has Sean's number. The DJIA's down 35.8% for the year. BRKA's down 34.04%. I'm no wizard, but I think the term for such a man is "genius", especially if he's carried you up 1200% over twenty years.

Second, 'financial services' is now the largest sector of the US economy. (I learned that from this guy.) Got that? More people make money doing that than doing anything else. More than flipping burgers or growing lettuce, more than manufacturing cars, more than teaching classes, more than anything else. Financial services is what our country is about.

Crid, I am not saying what you wrote isn't true. But some now think that what you wrote was true and will no longer be true.

People being relatively smart individuals, did flock to the financial sector as jobs were outsourced and industries lost. And we did heavily reward money managers and the like.

Some think that's not some reflection of some real value the way a cooked meat might be, but an artifact of our particular form of capitalism/regulation and things like Bretton Woods and getting off the gold standard and repealing Glass Steagall.

That if this crash does make us get off our butt as some claim and create a different international financial system, that people in the financial sector will not be getting the vast rewards they had been, where a secretary at Goldman Sachs can get multiple six figure bonus.

If 1980-2008 finance system rewarded at A, and 2009-20XX finance system rewards at A/10, would it be accurate to say that the earlier industry created 10 times the value?

That answer would be yes to some people who can only compare money and nothing else. And no to others who might look at the bigger picture and see what has been created in other industries: engineering, computers, medical, .... and see what happened to the rewards for them.

Anyway, I have my doubts we'll learn anything from this crisis enough to change how we do business as many claim we will, but I admit to being fond of the notion that more high school and college students will gravitate back into the sciences and engineering and anything other than financial services. (A bunch of B Arkers if you really want to know how I feel.)

Crazy carlos doesn't understand incorporation. Incorporation is a synonym for Limited Liability - in other words it is the ability to invest in a corporation without assuming personal liability for the losses.

Without that limit, it's a fair bet that most companies and the jobs and products they provide would not exist.

> would it be accurate to say
> that the earlier industry
> created 10 times the value

It would if that value were present, but a great deal of it seems to have vanished... And the vast majority of the goodwill that ensured those incomes is vaporized as well.

A tremendous number of those financial services people are wondering how they're going to earn a living next year. Our government, while despicably profligate in these months, has neither the resources nor the inclination to bail them all out. (Again: The largest sector of our economy.) As McCardle and many others have noted, we're not bailing them out these Wall Street firms because we like them more than we like automakers, we're bailing them because our children might starve if we don't.

If she's right, and the Big Three have been operating as banks, they're probably kicking themselves for not being more straightforward about their interests in recent years. But I'll always think of GM as a car company, so fuck 'em. When I needed a rental car during visits to other cities, I'd rent a GM/Ford/Chrysler car, not a loan for a car.

People like myself, who almost passively invested in financial services workers --through index investments and by patience in routine transactions (such as the home purchase)-- are going to be much more demanding when they pop up with open palms in the future. From now on, if you wanna be a banker (whether investment or commercial), you better know how to judge the worth of someone who comes to you for money. Because that's how bankers create value: by separating the wheat from the chaff. For a few silly years, they didn't bother doing their jobs.

Concerning the effects these years have had on other industries, I'd (yet) again ask you to understand that it's financial services, and not the engineering, computer and medical enterprises you mention which has become the biggest sector of the economy. Sustaining all those people has flatly proven not to be worthwhile, or this wouldn't be happening.

I do see what you're getting at. I work in a dim and mechanized corner of showbiz, where life is cheap and love is a dish best served cold. There are few unpleasant realities that never go away over here. I may complain that Beyonce (or Pitt or Sandler) or whomever is just not that talented. And I can shriek about it and argue and convincingly make the point using comparative arts both from within showbiz and without. But the bottom line doesn't lie: People will buy tickets for those people and not for other performers. Mr. Katzenberg, despite being taken by Madoff, is no fool. Those stars are worth the money, and the girl at the bagel cart who likes to sing in the shower isn't.

The only, only indicator of what something is worth is what someone is willing to pay for it.

So, yeah, all those financial services people were really important for a while. But if you argue that they should be important again, I'd say, "You go first, buddy." You're the one who has to explain this crisis.

(It's my understanding that in the subprime and Alt-A mess, the premium being charged for risk far outweighs the actual threat. Subprime delinquency rates are only 20%, and defaults are only 9%. ["only"]

But people have lost faith. Like I said, you first.)

Like other commenters, I would feel more confident in the overall economy if the blasted government would simply allow market corrections to take place, instead of throwing good money after bad and trying to bail them out. But, oh well.

Now that the bursting of the mortgage bubble has shown us what happens when people are given too much undeserved credit to buy houses, I wonder what will happen to other credit arenas as well. Auto loans, student loans, credit cards. When people start to default on those, there won't even be any collateral to foreclose on.

And what about Social Security? We know that at some point during the next ten to fifteen years, the baby boomers are going to start draining it dry. It's either going to completely run out of money, or the benefit age will have to be raised to 75. What's that going to do to all the people who planned to retire at 65? Even if the stock market does recover during the next 10-15 years, won't this cause another major selloff, as people try to make up that 10-year gap? I have no desire to plow more money into the stock market, watch it grow, and then yet again lose half its value as SSI goes kerplunk.

Well, buying a place to live isn't a bad idea, especially right now. Rates are low, prices are low, and once you pay it off, you don't have to make any more payments! You're down to property taxes and maybe association dues, if you live in a condo or townhouse. Having your biggest bill disappear certainly makes it easier to live on whatever a crummy job market has to throw your way.

If I had a bunch of money right now, I'd take a trip someplace warm. Just freakin' spend it. It's also not a bad idea to stop and consider, even amidst all this doom and gloom, that we (meaning Americans) still have a hell of a lot to be thankful for. There are a lot of people in this world living in corrugated metal shacks and holes in the ground.

Amy, I just thought of something - if you make a heap of money off your book, why don't you spend it on a place in Paris? Then you won't have to deal with the security-door stuff next time you visit. Use it on something you can use and enjoy - you will always get a return that way.

Amy -- what Scott Adams might be suggesting is that we revert back to times several hundred years ago before there were limited liability companies.

The introduction of limited liability allowed a company to go bankrupt losing only the equity and assets it has. Thus investors lose only the amount they invested in the company and are not liable for debts over and beyond that. Many will argue it is exactly this concept of limited liability that has allowed for our modern prosperity.

I got interested in ethical investing some forty years ago as I believed that when we invest in a company we share in the responsibility for the activities of the company as well as participate in the outcomes of the company's activities. Particularly, anyone valuing their personal or spiritual growth has to take these things into account when investing.

I also believe that if everyone does invest according to their personal values, then, since so many of core values are alike -- and are supportive of higher ideals -- that in the long run, only companies employing these higher values will truly prosper.

For anyone interested I have a site that covers the latest global news and research on ethical investing. It's at http://investingforthesoul.com/

Best wishes, Ron Robins

Amy,

I know I'm insanely late for this post, but you did ask the question and I think I can add a bit of value to these comments.

First, individuals who do their research can outperform the market, just not the majority of individuals. Here's why. What comprises a market? Pension funds, mutual funds, brokers, and hedge funds represent the large majority of market participants. In essence, the participants cannot all be expected to beat the market because they are the market. They also cannot be expected to underperform compared to the market for those very same reasons. The majority of participants, can, on average be expected to make the market return. The problem are the fees. That 1% to 2% per year makes the entire difference.

So who does beat the market? It's those investors that are astute enough to recognize that human beings move in herds and therefore sell when others are buying and buy when others are selling. In essence, these people recognize that paying $25 for a hamburger is way too much ... even if everyone wants it.

Then of course there's the problem of efficiency. Most stocks are followed by thousands of analysts and therefore the prices quickly incorporate all available information. If you want to beat the market consistently, it is usually easier to buy stocks that are not as widely followed and therefore information is not recognized as quickly in the price. But that is a rather difficult task.

Finally, the best fund managers usually do not have a large base of external clients. I'll give you an example. My old firm, in 2000, lost half of its clients because we refused to invest in technology stocks. Most firms caved in and bought the tech stocks to keep their clients happy. Of course, we were right and our performance was excellent, but those clients never came back (people never admit their investment mistakes). A firm, that manages its own capital (like Berkshire) doesn't feel this type of pressure.

So how do you identify a good investment firm? Its almost impossible. You're much better off buying index funds or tracking stocks.

While investing in stock market every one does this analysis part but not that intensively? Investing in stock market needs lot knowledge, plan and strategy and top of it, needs proper ground work. Take suggestions form different persons and go for the best of you results from that to invest.