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Brett Arends' ROI
June 7, 2011, 12:01 a.m. EDT
By Brett Arends, MarketWatch
BOSTON (MarketWatch) "” Wall Street has a wide array of mutual funds it wants to sell you. "Absolute return" this. "Midcap blend" that. "Small-cap growth" whatever.
Many brokers, advisers and salesmen will tell you that just the right mix of each one will give you a portfolio that's "right for you," with returns perfectly adjusted to your "risk tolerance."
Brett Arends looks at the view of think tank Capital Economics that the housing price collapse is worse than it was during the Great Depression. Photo by Joe Raedle/Getty Images
Phooey.
Before you invest a penny, listen to Bob Haugen.
He's a former finance professor who's spent half a lifetime studying the stock market. He's written a number of books and papers, and is the co-author of remarkable piece of analysis entitled "Case Closed" and available here. Read the analysis .
He looked in excruciating detail at the characteristics of which stocks did best (and worst) over nearly half a century, from 1963 to 2007.
His finding?
Most of these "styles" are a waste of time. And the idea that you need to take on more "risk" to earn higher returns is a total con.
On the contrary, he says, the stock market has a big secret.
Over many decades, "the stocks with the highest risk produced the lowest returns "” and stocks with the lowest risk produced the highest returns." In other words, he says, "the risk/return ratio was upside down ... the payoff to risk is consistently negative over the 45-year period of this study."
Instead of being paid to take risk, you got paid not to.
All those glamorous, sexy "?growth' stocks? All that extra volatility you took on in the desperate pursuit of the next big thing? It was a bad move.
You would have done much better investing in the dull, low-risk, widow and orphan "value" stocks.
These winners were stocks that were cheap in relation to their net assets, earnings, cashflows, and dividends. They were stocks in companies that had big and growing profits today, not pie-in-the-sky expectations for next decade. They often also had recent positive momentum on the stock market.
"Wall Street's biggest secret http://on.mktw.net/jLeXxS" 11:26 p.m. EDT, June 6, 2011 from MKTWArends
"Why Sarah Palin is smarter than her critics http://on.mktw.net/mJJSwg" 11:08 p.m. EDT, June 2, 2011 from MKTWArends
"Why housing is in a depression http://on.mktw.net/ltzQ5T" 11:24 p.m. EDT, May 31, 2011 from MKTWArends
"Look out, stocks are called above intrinsic value http://on.mktw.net/jSQLy9" 11:29 p.m. EDT, May 26, 2011 from MKTWArends
"Rapture's back on! Should I sell my home? http://on.mktw.net/mC8Vo1" 11:13 p.m. EDT, May 24, 2011 from MKTWArends
Brett Arends is an award-winning financial columnist with many years experience writing about markets, economics and personal finance in Europe and the U.S. He has received an individual award from the Society of American Business Editors and Writers for his financial writing, and was part of the Boston Herald team that won two others. He was educated at Cambridge and Oxford Universities, and has worked as an analyst at McKinsey & Co. He is a Chartered Financial Consultant (ChFC) and Accredited Asset Management Specialist (AAMS). His latest book, "Storm Proof Your Money," has just been published by John Wiley & Co.
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