Index Investing - The Value of Knowing Where you Are

I have continually stressed the importance of knowing performance. Knowing where you are going and where you are at is always important in investing but especially, I believe, in volatile markets.

Investors are emotional.  When news headlines are overwhelmingly negative and stocks drop off a cliff, they sell.  When events are positive and prices skyrocket, they pile in.  And, when the dust settles and they get their performance over the long term, it tends to be well below those who are able to ride out the ups and downs. This is true of DIYers as well as the pros.

Recent events illustrate this well.  Watching the news and the ineptness of our legislators made many investors understandably queasy and want to throw in the towel.  After all, the talk of the U.S. not paying its bills and possibly getting downgraded is unprecedented.  The possibility of a 2008-type financial markets debacle was widely discussed and ratcheted up the discomfort of many investors. On the other hand, there were enticements.  Approximately 3 out of 4 companies reporting earnings did better than expected, and some produced eye popping results. The possibility of a so-called whipsaw was high, with earnings results luring investors in and political events scarring the bejeebers out of them.

But how is the "stay-the-course" indexer doing through all of this?  First off, by using Schwab or a similar service, the indexer  knows up-to-date performance of the specific model they are tracking against using low-cost index funds.  Schwab offers several models.  My clients in retirement tend to use the "Moderately Conservative Model."  This benchmark is comprised of 50% Barclay's Aggregate Bond Index, 10% 3-month Treasury Bill index, 25% S&P 500 (large cap equity), 10% MSCI EAFE (International Equity), and 5% Russell 2000 Small Cap Equity.  This model is basically 40% stocks/60% bonds.

The "Moderately Conservative Model" is up +3.60% year-to-date and + 10.15% over the past 12 months!  These performance numbers are through Friday's close, so they are completely up-to-date. Investors who use Schwab's service or a similar service know exactly where they stand at any point in time.  I believe this is critical for retirees, especially in volatile markets where rash decisions can be harmful.  As always, if drawing down assets, retirees should  have at least 12 months in payments in a cash-equivalents type of vehicle to prevent having to raise funds in a down market.

At the other end of the spectrum are those who can take more risk.  These are generally clients who are accumulating assets.  A popular Schwab model here is the "Moderately Aggressive Model."  It is comprised of 45% S&P 500, 20% MSCI EAFE, 15% Russell 2000 (small cap), 15% Barclay's Bond Aggregate, and 5% 3-month T-bill.  Basically it is 80% stocks/20% bonds.

Through Friday's close, it is up +3.41% year-to-date and +16.44% for the 12 months.  Clients, of course, like being up; but I try to emphasize that, if they are accumulating assets (for example regularly adding to their 401k), they would be better off if the numbers were negative.  After all, as accumulators, they are buying stocks.  What is important is the value of the portfolio when they begin drawing down their assets.  But alas!  People have a hard time understanding that lower prices are best for accumulators.

Sometimes investors in volatile markets say they sleep like a baby - they cry all night!  This isn't true for indexers who know where they are going and where they are at.

Disclosure:  I am not affiliated with Schwab.  This information is intended for educational purposes only. Investors should do their own research or consult a professional before making investment decisions.