I was invited to speak at an investment club inauguration. The group represented several distinct age groups. Toward the end of my presentation, I asked for a show of hands from people who would prefer to watch money grow rather grass.
Fortunately, the consensus was that, as a spectacle, grass was less attractive.
Although, I knew what to expect from my compliant audience, I was also not surprised to find out that less than half of the attendees knew whether or not CitiGroup would be considered a growth stock. Worse than that, only four people had reviewed their investment accounts within the past thirty days. Yet, these same investors were excited about the new investment club they had just organized. There were nearly fifty members present.
“Why do you want to start an investment club?” I asked.
The spokesperson reiterated what she told me during our first conversation. Most of the members did have an ambition to learn more about investing in stocks. Their premise was correct. The few that approached me at the end of the meeting confirmed that they were happy about the knowledge they received in forty minutes.
In my opinion, this story reflects the disposition of thousands of Americans who, either because of busy schedules or social distractions, domestic or otherwise, are not in touch with their investments. A quick “drive by” at any lay financial forum on the Internet confirms this view. If index funds were band-aids, Johnson & Johnson should shut down all of its non-band-aid operations and go vertical.
I use the plastic strip analogy to build an image of how thousands of people relate to index funds. You might use a better symbol. Nonetheless, facts show that billions of dollars have been transferred away from other investment vehicles, in favor of market tracking funds. This behavior has created a dilemma for investors who plan to retire soon or rich or both.
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For the benefit of those who believe index funds will repeat their 12-month trailing performance, I have planted this year-to-date chart of the Vanguard 500 Index Fund (VFINX) as a free gift, courtesy of Vanguard.
It’s obvious that this index trend was very wobbly during the 16 days between February 26 and March 14, along with the collapse of the broad markets. This benchmark of index securities continues to be the fund to watch for anyone attempting to simplify the challenge of investing with safety. Of current importance is whether or not the share price will get back to, or exceed its February high and for how long.
One final note worth digesting is the fact that this fund (and many just like it) has averaged a little over 6% over the past five years*. There dozens of bond funds that have done better. Yet, the masses swear by index funds. I predict many of them will be heading for the exits (the alert one’s will) by year end. Think what you will; but watch, by all means. Diversification, as a panacea for safety, is overblown.
Hudster
Source data and quotes courtesy of Yahoo! Finance.
* As of 4/12/07
Capital Latititudes 
