Money Magazine Ask the Mole

Your portfolio: Poised for a comeback

This isn't the first time stocks have been declared dead, and it won't be the last. But a well-diversified portfolio always makes a comeback.

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By the Mole, Money Magazine's undercover financial planner

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Have future topics for the Mole to address? E-mail him at themole@moneymail.com.
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NEW YORK (Money) -- Question: Stocks always come back, until they don't! How long will an investor who invested in the NASDAQ at 5000 wait to break even, including inflation? 50 years? Or longer? Do you really think investing in stocks is a good idea?

The Mole's Answer: After coming off the worst week in the history of the stock market, this is probably how most people feel. And I'll freely admit that I have been impacted by the "shock and awe" of this historic stock market plunge.

Even though I've experienced the pain that we all have, my answer to your question is yes, I do think stocks always come back - if you invest the right way.

But first I'll explain a couple of wrong ways to invest, including the one you alluded to.

The wrong way to invest

Suddenly getting into stocks via the NASDAQ at levels above 5,000 is one of the many wrong ways to buy stocks. Putting your money in tech-heavy stocks after skyrocketing returns is a clear formula for failure.

The strategy you mentioned represents two pitfalls: performance chasing and buying a very non-diversified portfolio.

Even a more diversified portfolio, however, is no guarantee of good performance. Over the past ten years (and including this recent plunge), the average U.S. stock has only gained 1.7% annually while the average international stock has gained 3.7% annually.

Admittedly, this is awful stock performance but declaring the death of capitalism might be a tad premature. A 1979 Business Week cover story entitled "The death of equities" gave some pretty compelling reasons why investing in the stock market was not the right thing to do.

But even with this recent historic market plunge, the stock market has earned a whopping 10.6% annual return since the 1979 eulogy for equity investing was published. I can only hope the market does as well after the recent cries of the failure of capitalism.

The right way to invest

Again, I'm definitely feeling the "shock and awe" pain of the of the stock market plunge last week. Much as my clients are, I'm seeing my nest egg shrink and experiencing the accompanying emotional impact.

How did I react? I bought more broadly diversified U.S. and international index funds. Why would I do this?

First of all, I'm not buying at market highs - like buying the NASDAQ at levels over 5000. Sticking with a disciplined investing plan offers better odds of performing well over longer periods of time. Sticking with an asset allocation target forces us to sell some stocks during good times. And we must also have the courage to buy when stocks are down. Yes, even when the "down" is of historic proportions.

I'm also not buying one hot sector or even the stock market of a single country. Buying a global portfolio that owns thousands of companies across the globe is betting on capitalism. That's a bet I'm willing to make.

My advice

I certainly can't assure anyone that individual stocks will come back, though I'd wager that stocks like Lehman Brothers and Washington Mutual won't. I also can't guarantee that a certain market sector will come back. And, of course, I know that I don't know what the market will do in the short-run.

What I do know, however, is far more important. I know that capitalism works and that investing in a broadly diversified global portfolio has the best long-term odds of beating inflation.

I don't recommend putting money you need in the next few years into the stock market. The market has always been too risky in the short-term. For money needed ten years or more into the future, I think the stock market offers the best chances of beating inflation and taxes. For that reason, I will not be attending any funerals for capitalism or the stock market.

The Mole is a certified financial planner and certified public accountant who - in the interest of fairness - thinks you should know what goes on behind the scenes in financial planning. Want to make contact? E-mail him at themole@moneymail.com. To top of page

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