Tuesday, August 25, 2009
The LA Times is Part of the Problem
The LA Times has a story today about the death of buy and hold investing. The premise is a layup to resonate with many since the S&P 500 is down 23% over the last 10 years. That is a long time.
The problem I have with the article is encapsulated in the following example that they use in the story:
"Susan York was fed up with the dismal performance of her 401(k) retirement account. Then her husband saw a Sunday morning infomercial in January touting the benefits of trading options, which give an investor the right to buy or sell stocks and other securities at pre-determined prices.
The 50-year-old from Naples, Fla., had limited investment knowledge but attended several seminars before starting to trade in May. So far, York said, she's up an average of 40% a month and is trading full time.
"It's the best job I've ever had, not just for the enjoyment but from the compensation standpoint," said York, who previously sold telecom equipment. "I've replaced a significant six-figure income.""
Let's say she started with $100k, which is low if her actual intention was to replace a six figure income. Compounding at 40% per month over one year would result in a gain of over $5.4 million in the first year. Let it ride and her new bank roll will be over $310 million after year two.
Is that going to happen? Of course not. Might some readers try it for themselves? Of course.
I am not defending the professional investment industry here. Lots of pros got it wrong and the market has been dismal. I'm just pointing out that putting a 4 month fairy tale example into a financial article with a serious premise is irresponsible.