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Sept. 20, 2011, 12:01 a.m. EDT
By Paul B. Farrell, MarketWatch
SAN LUIS OBISPO, Calif. (MarketWatch) "” Warning: 91% of America's financial planners are pushing clients into riskier investments, according to a new Financial Planning Association study on "Alternative Investments." Get it? In today's highly volatile markets advisers appear to be running as scared as their clients, chasing risky returns.
Why? Likely these advisers can't justify their fees, so they're playing the alternatives market: "commodities, managed futures, hedge funds, and more." Warning, that's exactly the kind of investments that triggered the 2008 meltdown.
John Paulson, the most celebrated hedge-fund manager in recent years, is going through the worst period of his career. But he is still bullish on the U.S. stock market.
Don't do it. Avoid playing in that short-term gambling casino. Listen to the long-term advice of a couple respected industry leaders: "Your money will double in 10 years," said Vanguard founder Jack Bogle recently in a Wall Street Journal interview with Jason Zweig.
He sees a solid 100% increase in the next decade on a modest 7% annual return. And no gambling on risky alternative investments, just a simple well-diversified portfolio of three to 11 low-cost index funds.
You'll hear a similar message from NYU professor and financial historian Richard Sylla: "Better days lie ahead," he tells the Journal's E.S. Browning. Sylla analyzed the market from 1790 and concluded: "If past market patterns hold true, as they did in the last decade, stocks should bottom out during the next few years and begin a recovery."
But today "people ought to take a longer view and think in terms of years and even decades," looking past today's excessive pessimism. Sylla warns: "The market may go down from here. It may go up. But if you look at the long sweep of history, this seems like a good time to buy because the average return is down near the bottom."
Get it? Now's a good time to look past all the negativity and selectively buy as stocks settle on a bottom in the "next few years" before heading up.
Yes we're "near the bottom." But how far? And how soon? Remember folks, the Dow Jones Industrial Average peaked at 14,164 in October 2007. Dropped to around 9,000 a year later during the 2008 elections. Then it just kept sinking, bottoming near 6,600 in March 2009 before the bull kicked back in. A huge drop, over fifty percent. Scary stuff.
Worse, that meltdown took an agonizingly slow year and a half before a bottom and rally. Keep that in mind when guys like Sylla talk about a deeper bottom coming before a recovery.
But on the bright side, both these men agree that long-term the 2011-2020 decade will be a winner in spite of today's pessimism. Bogle's a "legendary market skeptic upbeat about stocks" who thinks your money will double. And Sylla's echoing that upbeat prediction: "If the market sticks to its long-term pattern "¦ the DJIA could climb to 20,250 by the end of 2020, up 84% from today. The S&P 500 stock index might hit 2,300, up 99%."
Yes, great news down the road. But you get the feeling the next few years will be risky, filled with the kind of relentless anxiety that makes it tough to pick long-term winners and losers, resulting in lots of sitting on the sidelines building up cash reserves.
In fact, Sylla says "we may not be able to get enlightened government policies until things get worse than they are now, which isn't a happy thought" for investors. But long-term, "the country is going to recover and go on to prosperity again as it always has" since 1790.
Paul Farrell writes the column on behavioral economics. He's the author of nine books on personal finance, economics and psychology, including "The... Expand
Paul Farrell writes the column on behavioral economics. He's the author of nine books on personal finance, economics and psychology, including "The Millionaire Code," "The Winning Portfolio," "The Lazy Person's Guide to Investing." Farrell was an investment banker with Morgan Stanley; executive vice president of the Financial News Network; executive vice president of Mercury Entertainment Corp; and associate editor of the Los Angeles Herald Examiner. He has a Juris Doctor and a Doctorate in Psychology. Collapse
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