Investing Well is Like Baking an Award-Winning Cake

Managing a successful investment portfolio is like baking a State Fair award-winning cake. They both require high-quality ingredients, mixed in the right amounts, and discipline when baking. Decorating is important too, although no amount of frosting will cover-up marginal ingredients or careless baking.

A Balanced Portfolio for a Balanced Life

Fear gripped the financial markets five years ago as the U.S. and the world suffered through the worst global economic downturn since the Great Depression. Millions of individual investors sold stocks and mutual funds during the crisis and continued liquidating through 2012 for fear of another downturn.

Yet on Friday, January 26, 2013, the Wilshire 5000 Index hit an all-time record high, breaking through the previous record set on October 9, 2007. This proxy of the total U.S. equity market, which includes large companies and small, was up 131.52 percent or $10.8 trillion from the low on March 9, 2009. This gain doesn’t include dividends or dividend reinvestment over the period.

Naïve Investors Taken to the Cleaners

I feel for people who are not investment savvy because they pay a dear price for their inexperience. The mutual fund industry and advisers who sell commission-based products take advantage of unsophisticated investors by marketing high-fee, high-commission funds that earn low returns. I wish there were a way to put a little voice in every inexperienced investor’s head that tells them, “Just buy low-cost index funds!” It would go a long way to solving this serious problem.

Mr. Market Doesn’t Care What You Think

The stock market doesn’t care what you think. Investor sentiment has little bearing on whether prices go up or down. Even former Fed Chairman Alan Greenspan’s 1996 quip that the stocks may have reached the “irrational exuberance” level didn’t stop the market from doubling again by 1999. Sentiment only makes a difference during extreme market periods.

ETFs Turn 20-Years Old in the U.S.

The first commercially successful U.S. exchange-trade fund ETF turns 20-years old this month. SPDR S&P 500 (Ticker: SPY) was launched on January 22, 1993 after spending several years in SEC registration. It was an evolution in the mutual fund industry. Today, SPY is the largest ETF by asset in the exchange-traded product industry that has total assets of over $1.4 trillion.