A Lament

Last Sunday, I saw Pan's Labyrinth with two retired friends. After the movie, we sauntered over to the Barnes and Noble for a warm beverage and conversation. We talked about the movie for a bit, and then the conversation turned to life--specifically their difficulty on fixed incomes to meet rising energy, property taxes and food costs. They own property together, so the real estate tax issue was huge. Remember the assessment increases that I showed? M said that she might have to sell her home because of the taxes and the heating costs.

The conversation meandered to my commitment to learn about investing over the last 20 months or so. M stated that she had 90% of her money in equities, and expressed worry about having another 2000-2001 sized downturn. Her brother, who apparently is in "the business" gave her assurances that all was right with the world. My reaction? I think it was the right one. I suggested that she seek a certified financial planner, someone other than her brother (who I don't think is a CFP), to ensure that her portfolio contained the appropriate risk profile for her age.

My Observation
I'm a reasonably intelligent person, and I have found this entire "investing" business a bit of an information labyrinth. I did what normal folks do, and invested my money in mutual funds which I thought made sense, but I lost 1/2 of my money as did most others with my mutual fund mentality. I didn't pay attention to markets, because I didn't think I had to. Most hard-working people don't see this as part of their responsibility (much less ability) to understand this stuff. Most people in my off-line life don't pay attention to this stuff--and they are smart, have the ability (but not the time/inclination) and they have resources. There is a part of me that wants to shake them and wake them from their complacency, because I know that in a protracted downturn, their hard-earned money is at-risk.

I don't want to sound like an investment evangelist, but I have come to this conclusion through my investing reading, writing, and arithmetic: If I were not doing this myself, I would hand my money over to a Gary Kaltbaum, a Bill Cara (should he begin doing it), a Roger Nusbaum or a George Dagnino--someone with their ear to the ground and their licked finger in the wind. Going to a bank money manager, or just being in indexed funds or diversified ETF's will not protect you unless your assets are actively managed to protect you in a downturn.

My conclusion about diversification is this: I want to be diversified among the sectors expected to perform well in the current economic cycle, and when risk in the market is high, I want to wallow in my cash. I do NOT want my investment so diversified that I have watered down returns when the market is performing well and STILL lose money when the market turns ugly and has a protracted contraction.

For most Americans participating in their company's 401(k), their investment choices are narrow, and their investment tools are not tools that help them understand market risks. I'm concluding, then, that most hard working Americans are getting ripped off.