Stocks — Part I: There’s a Major Market Crash Coming!!!! and Dr. Lo Can’t Save You.

Annoyed Cat

I’m feeling testy today. I just finished an article in Money Magazine and reading this magazine is, in and of itself, enough to make me testy.

This particular piece is an article on page 87 of the March 2012 edition interviewing Dr. Andrew Lo*. Dr. Lo is an economist and finance professor at MIT’s Sloan School of Management. There are a couple of impressive photos of Dr. Lo looking serious and imposing.  

I’m going to tell you what he says and why he’s wrong. You can see the article here if you’d like:

Oh, and that major market crash that’s coming? Don’t worry. I’m also going to tell you why it doesn’t matter.

First, in fairness to Dr. Lo, I have no quarrel with most of his ideas. In fact, it is very possible the good folks at Money didn’t quite get it right. Perhaps they simply didn’t put the emphasis correctly. Maybe someday Dr. Lo and I will have a few laughs over a cup of coffee on this. Or not.

Basically Dr. Lo contends that the long-held theory of efficient markets is morphing into what he calls the”‘adaptive markets hypothesis.” The idea is that with new trading technologies the market has become faster moving and more volatile. That means greater risk. So far so good.

But he goes on to say this means “buy and hold investing doesn’t work anymore.” Money then points out, and good for them, that even during the “lost decade” of the 2000s buy and hold would have returned 4%.

Dr. Lo responds: “Think about how that person earned 4%. He lost 30%, saw a big bounce back, and so on, and the compound rate of return….was 4%. But most investors did not wait for the dust to settle. After the first 25% loss, they probably reduced their holdings, and only got part way back in after the market somewhat recovered. It’s human behavior.”

Hold the bloody phone! Correct premise, wrong conclusion. We’ll come back to this in a moment.

Money: So what choice do I have instead?

Dr. Lo: “We’re in an awkward period of our industry where we haven’t developed good alternatives. Your best bet is to hold a variety of mutual funds that have relatively low fees and try to manage the volatility within a reasonable range. You should be diversified not just with stocks and bonds but across the entire spectrum of investment opportunities: stocks, bonds, currencies, commodities, and domestically and internationally.”

Money: Does the government have a role in preventing these crises?

Dr. Lo: “It’s not possible to prevent financial crises.”

In the on-line comments a guy named Patrick McGuinness nails it: “So, markets are efficient except when they’re not. And buy and hold doesn’t work because most people don’t stick to it at the wrong time. OK wisdom, but is this news?” Gold star, Mr. McGuinness.

Let me add, Dr. Lo’s recommendation (since he contends “buy and hold” no longer works) is to buy and hold lots of different stuff. Huh?

Let’s accept Dr. Lo’s premise that markets have gotten more volatile and will likely stay that way. I’m not sure I buy it, but OK, he’s the credentialed economist. We can also agree that the typical investor is prone to panic and poor decision-making, especially when all the cable news gurus are lining up on window ledges. We certainly agree that it is not possible to prevent financial crises. More are headed our way.

So the question that matters is, how do we best deal with it?

Dr. Lo says:

Treat the symptoms.

He defaults to the all too common canard of Asset Allocation (Some Asset Allocation can be useful and we discuss that in this series here and here). He would have us invest in everything and hope a couple of those puppies pull through. To do this properly is going to require a ton of work understanding the asset classes, deciding on percents for each, choosing how to own them, rebalancing and  tracking. All this to guarantee sub-par performance over time while offering the hope of increased security. I am reminded of the quote: “Those who would trade liberty for security deserve neither.”

jlcollinsnh says:

Toughen up bucko and cure your bad behavior.

Take the cure. Recognize the counterproductive psychology that causes bad investment decisions and correct it in yourself.

To start you need to understand a few things about the stock market:

1. Market crashes are to be expected. What happened in 2008 was not something unheard. It has happened before and it will happen again. And again. I’ve been investing for almost 40 years. In that time we’ve had:

  • The great recession of 1974-75.
  • The massive inflation of the late 1970s & early 1980. Raise your hand if you remember WIN buttons (Whip Inflation Now). Mortgage rates were pushing 20%. You could buy 10-year Treasuries paying 15%+.
  • The now infamous 1979 Business Week cover: “The Death of Equities,” which, as it turned out, marked the coming of the greatest bull market of all time.
  • The Crash of 1987. Biggest one day drop in history. Brokers were, literally, on the window ledges and more than a couple took the leap.
  • The recession of the  early ’90s.
  • The Tech Crash of the late ’90s.
  • 9/11.
  • And that little dust-up in 2008.

2. The market always recovers. Always. And, if someday it really doesn’t, no investment will be safe and none of this financial stuff will matter anyway.

In 1974 the Dow closed at 616*. At the end of 2014 it was 17,823*. Over that 40 year period (January 1975 – January 2015) the S&P 500 (a broader and more telling index) grew at an annualized rate of 11.9%** If you had invested $1,000 then it would have grown to $89,790*** as 2015 dawned. An impressive result through all those disasters above.  

All you would have had to do is Toughen up and let it ride. Take a moment and let that sink in. This is the most important point I’ll be making today.

Everybody makes money when the market is rising. But what determines whether it will make you wealthy or leave you bleeding on the side of the road, is what you do during the times it is collapsing.

3. The market always goes up. Always. Bet no one’s told you that before. But it’s true. Understand this is not to say it is a smooth ride. It’s not. It is most often a wild and rocky road. But it always, and I mean always, goes up. Not each year. Not each month. Not each week and certainly not each day. But take a moment and look at any chart of the stock market over time. The trend is relentlessly, through disaster after disaster, up.

4. The market is the single best performing investment class over time. Bar none.

5. The next 10, 20, 30, 40 years will have just as many collapses, recessions and disasters as in the past. Like the good Dr. Lo says, it’s not possible to prevent them. No question, every time your investments will take a hit. Every time it will be scary as hell. Every time all the smart guys will be screaming: Sell!! And every time the guys with enough nerve will prosper.

6. This is why you have to toughen up and learn to ignore the noise, stay the course and ride out the storm. Oh, and Buy!

7. To do this, you need to know these bad things are coming. They will happen. They will hurt. But like blizzards in winter they should never be a surprise. And, unless you panic they won’t matter.

8. There’s a major market crash coming!! And there’ll be another after that!! What wonderful buying opportunities they’ll be.


The world isn’t going to end on our watch.

I tell my 20-year-old that during her 60-70 odd years of being an investor she can expect to see 2008 level financial meltdowns every 15-20 years or so. That’s 3-4 of these economic “end of the world” events coming her, and your, way. Smaller versions even more often.

Thing is, they are never the end of the world. They are part of the process. So is all the panic that surrounds them. So, of course, is all the hype that will surround the 3-4-5 mega bull markets she’ll see over those same years.

About those the financial media will be confidently saying “this time it’s different.” In this too they will be wrong.

In the next few posts in this series we’ll discuss why the market always goes up, and I’ll tell you exactly how to invest at each stage of your life, wind up rich and stay that way. You won’t believe how simple it is. But yer gonna have to be tough.

*Note: In the comments below Robert takes me to task for being too harsh on Dr. Lo and his ideas. If you agree, good news! You can now invest with him. In the Forbes 2015 Investment Guide (December 2014 issue) Dr. Lo is one of four academics featured in an article titled “Profits from the Profs” on page 96. To quote the article directly:

“These days Lo puts some of his theories to work as founder of AlphaSimplex Group, with its $3 billion Natixis ASG Global Alternatives Fund (GAFYX), which invests in a constantly changing menu of securities, including stock index, currency and commodities futures and forwards, dialing the risk up and down according to the volatility of the underlying markets. Returns have been a mediocre 5.1% a year since the fund was launched in September 2008, just half the S&P 500’s return. But Lo argues the fund did its job in the tumultuous final months of 2008, dropping only 3% compared with an 11% loss for hedge funds with similar strategies and a 23% dive in the S&P.”

For this the fund sports a breath-taking expense ratio of 1.33% and 5.75% sales load insuring at least Dr. Lo will be made wealthier.

Note 2: From Kendall Frederick in the the comments below:

“I just re-read this post as I was giving somebody a link to the series. I guess I was sufficiently bored enough to Google Dr. Andrew Lo, and I found this funny: his Alpha Simplex hedge fund you mention above folded last year after underperforming several years in a row. I suspect the good doctor didn’t do badly, however, with the fees and front end load.”

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  1. JTH says

    Very comforting to read. We’ve experienced exactly what you say. We’ve stayed the course, with a side-dish of panic. What is driving the market anyway? Can’t wait for the next Part. Yo to lobo!

    • jlcollinsnh says

      Hi JTH…

      Staying the course is always served with a side dish of panic (great phrase, BTW!) That’s why ya gotta be tough.

      Great question! and this is the subject of the next post in this series. We’ll look at what it is that drives the market relentlessly upwards over time and why it is such a rough ride along the way.

  2. Fuji says

    Thank you for this comforting wisdom. I try not to flinch from all the scary headlines, but it is difficult not to freeze up. I have $10,000 cash available for each of my kids (19 and 20) and have been waiting to buy Vanguard Total Stock Mkt for them, but haven’t been able to make the leap. Do you think it matters when I make the purchase – should I do it at one go, or do it in chunks?

    • jlcollinsnh says

      Hi Fuji….

      even the toughest of us flinch. That’s OK as long as we don’t let go. In Part III I’ll be sharing the story of my own nerve failing me.

      Your kids, if they are smart, will be holding that 10k for the next forty years. Take a moment at re-read point #1 above. Thru all the financial turmoil of the last 40 years, 10k would have grown to $668,920. Even if they had never added another dime.

      It is a very safe bet the next 40 years will see an equally rough ride, and yet will produce an equally spectacular return.

      So, I’d invest it tomorrow. I say that having no idea what the market will do on Monday, or next week, or next month, or next year. But with great certainty as to what it will do over 40 years.

      Your toughest problem: Convincing your kids to hold it all that time.

  3. Partners for Prosperity says

    Post WW2 industry has relied on 1)finding new markets and 2) utilizing credit to allow purchases not otherwise affordable. the emergence of an interconnected global market and near capacity credit limits witnessed by universal default are new and not repeated events.

    In response governments have become the driving force by purchasing excess capacity and using social programs to prevent desperation. They can only do this by borrowing far in excess of credit limits imposed on non-governments coupled with printing the money to make minimum interest payments.

    At some point a global reset button needs to be pressed, all electronic debt erased and start the process over again. has this happened in history? I love the study of economics but not sure we can see the pattern or future in this one.


    • jlcollinsnh says

      Hi Todd….

      ….and welcome. Just took a look at your blog. Looks interesting and I am planning to spend some time over there checking it out.

      good points.

      “Reset buttons” have been throughout history and will continue to be routinely pressed. Individual stocks come and go. Companies come and go. Countries also come and go, but on a surprisingly slow scale.

      This is all part of the sometimes painful but always healthy process of creative destruction. We’ll take more about this later in this series.

      What won’t happen is a global reset all at once. Too many conflicting interests rise as others fall. We’re going to learn how to win regardless.

      • Jian says

        Great series! I would venture to say, world wars are actually ‘resets’. WWI and WWII certainly are, and before those, plenty of large scale warfare! Recession are market’s way of resetting things.

        In fact I rather think economic resets are healthy; without them, how are younger generations ever going to have a chance in life? What we need to learn to do as a better way of governance is to mediate the human sufferings that are inevitable after the resets. Sorry off topic a bit, so back to us individuals – we just need to prepare ourselves and be ready to jump in after the resets.

  4. Shilpan says

    Jim, I enjoyed this article. I agree with your reasoning for most part, but I also agree with Dr. Lo somewhat on the fact that market is much more volatile and dynamic due to ease of trading and lower cost of trading. I’ve come up with my box theory to buy and sell top quality stocks with strong fundamental and technical measures. I’ve been generating on average 32% return for past several years. This year is off to a good start as well.

    • jlcollinsnh says

      Thanks Shilpan….

      glad you liked it. And you and I agree on that point of Dr. Lo’s. But, for the long-term case I’m making whether he is correct or not doesn’t matter. Market’s have always been volatile, and if this new technology has made them more so we’ll tough our way thru that as well.

      Thanks for linking to your post on your “box theory.” I encourage my readers to click over and give it a read. For those readers, let me make a few points first:

      1. Shilpan is one of my very favorite bloggers. He brings great insight and wisdom to his posts and I always benefit from reading them.

      2. His “box theory” is a strategy for picking individual stocks with the goal of out-performing the market as represented by Index Funds like VTSAX which I’ll be discussing next time.

      3. An average 32% return is spectacular. I have no idea if he can maintain this pace, but if he does it will put him in a league with Peter Lynch (who he mentions), Michael Price, Warren Buffet and other rarified investment names.

      4. These names are legendary precisely because out pacing the market over time is vanishingly difficult.

      5. Only a fraction of investors that start down the stock picking path outperform. I certainly could not, and that’s not to say I didn’t have some pretty impressive up years along the way.

      6. This blog in general, and this series of posts in particular, are designed to give my readers a winning strategy that over time will outperform roughly 80% of active stock pickers and professional managers.

      7. If you want to try to be in that top 20%, read and absorb first the principles I share here. Then feel free to expand into other strategies. Shilpan’s are a great place to start. But know, the odds are steeply against you and you are signing up for a far more intensive investing experience.

      • Shilpan says

        Jim, I am both humbled and honored for your kind words. I don’t know if I have your wisdom, but I am constantly reminding myself what I don’t know; Socrates was famous for being cognizant about things he didn’t know. And he was a genius of his time. I honestly try to learn what works in life, and avoid mistakes I’ve made in the past. My box theory is one of those life experiments. I will honestly share, in due course, if it works consistently or not.

        • Missy says

          I’ve tried to find later results online and I haven’t been able to (at least not easily). What happened in the intervening 10 years, if I may be so bold?

  5. Jan says

    I agree with the theory you posited about the stock market. In fact, I often advise my son, an M.D. in his early 30’s, married to an M.D., to each consider maxing out their respective 401k contributions and then investing the rest of their disposable income. That being said, every once in a while, I get this sickening feeling that the stock market is really just some some sort of publicly sanctioned Ponzi scheme!

    • jlcollinsnh says

      Hi Jan….

      ….glad you are reading this and took the time to comment.

      With their “double doc” income you son and his wife should do very well following your advice.

      the biggest risk high income earners face, especially doctors who go from poor interns to mega earners overnight, is lifestyle inflation. If their lifestyle matches or, god forbid exceeds, their income they become no more than a gilded slaves.

      Next time, I’ll be talking about why the market always goes up and why it’s always a wild ride on the way.

    • jlcollinsnh says

      Hi 101C…

      Amen to keeping some cash for buying on the pull-backs and/or crashes. The bigger challenge is to have the courage to deploy it when everybody else is in a selling panic.

      In fact the ride is endlessly, relentlessly up. Always. More on this next time.

  6. bluecollarworkman says

    This post is absolutely AWESOME! Can’t say I disagree with anything you said. Doesn’t W. Buffett have a similar thought? Buy when everyone is selling and sell when everyone is buying (i.e., when the market crashes and people freak out, that’s the time to buy buy buy [and not freak out]; and when everyone is living high on the hog and selling, you hold hold hold). This is my first time here actually– I’ll be back!

    • jlcollinsnh says

      Hey BWC….

      …great to see you over here and thanks for the very kind words! Glad the post struck a cord. Hope you subscribe and add your comments to other posts.

  7. matt76allen says

    Awesome insight here from somebody who’s actually been investing for a long period of time. I just don’t know how all the nay-sayers about the stock market can’t understand this simple logic. The proof is in the numbers. Great post. Now I gotta read the next one.

  8. matt76allen says

    Oh.. I also get extremely agitated when I read Money magazine. So much so, that I didn’t even renew my subscription. The thing with reading a printed magazine is that there is no comment section for you to yell at the author when they are blatantly wrong, ignorant, stupid, etc! Reading money blogs is way better and more real. Real advice from real people.

    • jlcollinsnh says

      glad I’m not the only one! by the end of a year’s worth I’m so irritated I tend to let my subscription expire. Then I get curious and sign up again.

      the trouble with Money Mag is that sometimes they get it right but too often they are writing things to tout their advertisers.

      So you get conflicting info that can be very tough for the typical readers to sort out. That makes it worse than useless.

      thanks for your comments!

  9. James Gos says

    “I’ll tell you exactly how to invest at each stage of your life, wind up rich and stay that way. You won’t believe how simple it is. But yer gonna have to be tough.”

    Hey mate.

    I’m 24, in my final year of law school (also have a business degree) and found your blog. At exactly the same time that I realised I need to be in charge of my own financial security long term, not my parents.

    I have a couple of K savings, working hard to put more away this year.

    No debt apart from the student loan which was deferred to tax to get through uni (not significant).

    Where can I find the post on how to invest for my stage of life? I want to have enough to start a family by the time I am 30… If I could meet the right person.

    Cool blog. Even cooler that you put this out for free.

    Cheers mate, from Australia. James

    • jlcollinsnh says

      Hey James…

      Glad you found your way here. Welcome, and thanks for the kind words.

      Congrats on thinking about this stuff at a young age. It will serve you well.

      If you haven’t already, I urge you to read the entire stock series before you take action. But in Part VI you’ll find the basic answer you’re looking for:

      As you’ll see, I really only consider two stages in one’s investing career:

      1. Wealth Building
      2. Wealth building and preservation.

      Unlike most investing advice you’ll see, these have almost no relationship to your age. More importantly, they relate to where you are in your earnings career. If you retire early, as many readers here plan to do, you’ll shift to #2 sooner. Should you again begin working, you might want to shift back to #1.

      And, you’ll want to fine tune each to your own risk tolerance.

      Hope this helps!

  10. Rich Field says

    Jim, great blog.

    I’ve only read a few posts after I found it through Mr Money Mustache, but I can tell already that there is a lot of good reading here. Hopefully I can learn a thing or two.

    On the whole, your views on index funds reflect mine; I just wish I had started investing in them a long time ago. I was ready to start investing more heavily in them until I read something that led me to doubt that the market up cycles will always counter the down cycles; also, that the market is currently in a down cycle and waiting for it’s next up cycle.

    This was in a book called Aftershockby David Wiedemer. I wonder, have you heard of it or read it? The author predicted the crash of 2008 is predicting a much bigger crash very shortly. The current rally being merely a result of considerable money printing, that is merely delaying the inevitable. This is based on his theory that there are 6 co-linked bubbles, each putting pressure on the next as they fail. The first of the bubbles, being real estate and the last two being the US Dollar and the US Government debt. It is the bursting of these last two that will be the most dramatic.

    One very interesting graph shows how the DOW rose 300% between 1928 and 1981, but 1400% since 1981. Similar graphs exist for house prices. In short the book claims this is unsustainable.

    I just wondered, if you had read this book and what your thoughts may be?

    All the best

    • jlcollinsnh says

      Thanks Rich and welcome!

      Nope, I haven’t read it.

      The bookshelves are filled with gurus like this predicting disaster, or boom times.

      There is much money to be made doing so as I explain here:

      Certainly I believe there will be future crashes, this is the title of my post after all. But it is a fool’s game to believe you can predict them or when they will occur. Unless, of course, you want to sell books and get on MSNBC.

      I see he claims to have predicted 2008. Maybe so, but usually when you really dig into such claims they prove to be a whole bunch vaguer than touted.

      Even if he did, this is no guarantee that his predictions will be accurate going forward. Elaine Garzarelli — — was lionized for precisely predicting Black Monday in 1987. Her predictions after that? Not so much.

      Alarmism sells. That’s why there is so much of it out there. With an almost endless pack of gurus predicting just about anything that could possibly happen, a few are bound to be right. Or at least close.

      I’d be very cautious in believing this means they have the power to predict the future. For the same reason I don’t believe people who win the lottery have figured out a sure-fire way to pick winning lottery numbers.

  11. Krissie says

    You are a GOD! I just finished reading your stock series and OMG, Thank You!! I have been wanting to try and understand this stuff for so long. It has been so intimidating. Im embarrassed to say it but I started my Roth with Primerica, yuck. I didn’t know any better and so many others out there don’t either. So sad. You put all this complicated stuff into simple English that anyone can understand. I found you through The mad Fientist who I had found through Million Mile Secrets. What a unique way to network. I’ve loved the few podcasts you have been on. I would love to hear and read MORE. I’m now about to go through the Mr.Mustache blog. Please keep it up and more post and podcasts coming.

    • jlcollinsnh says

      And you, krissie, know how to pay a compliement! I’m honored you would put me in the same class as MF & MMM.

      Don’t worry too much about the ameritrade misstep. You didn’t mention your age, but it should be early enough to correct.


  12. Robert says

    I’m new to your blog; tracked here from gocurrycracker. Looking forward to reading the rest of your stock investing series. So far, pretty conventional wisdom but nicely expressed.

    That said, I do think you misrepresent Andrew Lo. You and I both know–and you intimated as much in your comments–that Money magazine is a poor source of investment advice. I’d go so far as to say it is a shill for the Wall Street investment industry and best reserved for toilet paper. (Except that it’s pages are too slick–like it’s advice!). I wouldn’t trust Money to have represented Dr. Lo accurately.

    I encourage you to read some of Dr. Lo’s original scholarly publications (freely available here: ). The adapative market hypothesis recognizes what is well known in academia and the finance literature of the past couple decades. The efficient market hypothesis is not quite the sure thing it was thought to be way back when. There are numerous proven anomalies (seasonal, earnings announcements, etc.). These are the subject of numerous papers by finance students working on their PhD’s! Exploiting them becomes difficult once they are known because they are arbitraged away. Some cannot be fully arbitraged, for a variety of reasons. Additionally, there are indeed “animal spirits” lose in the market. The same fear that drives individual investors out of the market at exactly the wrong time–the reason you advocate they buy and hold (perhaps with periodic rebalancing)–is an example of that. Greed and fear motivate professional investors as well. And as we saw in the 2008 financial crisis, it can even dry up liquidity to the extent that the system is on the verge of collapse. These events can force pseudo-irrational behavior, like selling low because you simply cannot stay in longer due to margin calls or whatever. There is a whole field of behavioral finance that has sprung up to examine the irrational side of market performance.

    To me, Dr. Lo’s adaptive market hypothesis is primarily about recognizing that there is a drive to efficiency but also a dynamic irrational aspect to the market, with exploitable anomalies. The market adapts to these, and they go away. Then once everyone figures they no longer work, they will start working again. Then they can be exploited again. This may continue for a few cycles but the amplitude gets dampened over time. Eventually you’ll reach a point of efficiency where that phenomenon can no longer be arbitraged because the effect is too well known and too small to be profitable. In other words, markets adapt.

    Dr. Lo describes the Adaptive Markets Hypothesis as a synthesis between the Efficient Market Hypothesis and Behavioral hypotheses. The way I read the papers, it is a descriptive theory, not a quantifiable one yet, and while it has some ramifications for investing, it doesn’t offer specific trading schemes. It says that strategies wax and wane, there is seasonality to the markets, there are times when the equity risk premium is high and times when it is low, etc. Remember, if the market ever became so efficient that it encapsulated all information, then how would you ever find someone to take the other side of a trade? The market would collapse if it were 100% efficient.

    Dr. Lo does have a consulting business that complements “buy and hold” type strategies by making small levered bets on the market at times of high and low risk; a company I invest with recently started a couple funds that Dr. Lo does this sort of risk management for. People have been doing that for years with futures/options, and not necessarily with much success. From what I can tell, Dr. Lo’s involvement hasn’t yet led to any breakthroughs in investing performance for the funds he’s involved with. But while the motivation for that may be the AMH, it isn’t the AMH itself, nor do I think AMH should be judged by it. I find AMH simply a good way to describe the reality of the markets we face–they are indeed a blend of efficient and irrational behaviors with one or the other dominating at different times.

    The papers are actually good reading and I encourage you to look them up. A good place to start would be his 2004 paper to portfolio managers, “The Adaptive Markets Hypothesis: Market Efficiency from an Evolutionary Perspective”; it gives a nice introduction that explains the efficient market and behavior schools and how the AMH is a needed synthesis. The other paper I’d recommend is, “Adaptive Markets and the New World Order”, published in 2011. It discusses the 2008 crisis from an AMH perspective. I’m not a finance guy at all but found both these papers quite readable. I challenge you to read them and then decide if you still want to be tough on Dr. Lo. I think you owe it to him for having judged him by a Money magazine article! 😉

    • Terrance says

      “I’m not a finance guy at all”. Yea, the novel you wrote really reaffirms that statement lol. I think it’s safe to say Dr. Lo was wrong here. Pretty simple — no need to over complicate.

  13. Mingtian says

    I am so happy I have found your blog. It is slowly changing my thinking.

    Have you ever watched/read anything from Michael Maloney such as his series here:

    These are extremely well produced and (I think and would love to hear why you think not) very persuasive. I understand he is someone who could be just selling something (precious metals) but he doesn’t come across that way at all.

    So I am torn. Is what he says right or is it more unreasonable to bet against this country and its economy?

    I would love to hear your thoughts!

    Thanks so much for your blog!

    • jlcollinsnh says

      Welcome Mingtian…

      Glad you are finding value here.

      I am not familiar with Mr. Maloney and unfortunately don’t have the time, or candidly the inclination, to spend with it.

      I will say that one of the reasons I started this blog is because there is so much nonsense out there. Some is simply bad advice. Much is bad advice design to sell you crap.

      I will also say that there are no “Hidden Secrets of Money.” 😉

      As you read thru the blog here you’ll have a clear idea of how I see things. It then shouldn’t be hard then to contrast my ideas with others and decide for yourself.

      Just be careful. And you might want to read this:

  14. Richard says

    “In 1974 the Dow closed at 616. In 2011, 12,217. If you had invested $1,000 then, it would be $66,892 by this past New Year’s Eve. That is a 12% annual return thru all those disasters above.”

    I wasn’t quite sure how you got these numbers at first. Obviously if you invested at end of 1974, the increase from 616 to 12,217 would mean an increase of 19.8 times. This would equate to an average annual return of 8.41%. Which is not the same as 12%!

    Then it occurred to me that the math above didn’t include dividends. So I did some searching and was able to find the annual percentage gain/loss as well as the annual dividends percentage. I put this into a spreadsheet so I could calculate what $1,000 would grow to using the numbers I found, and sure enough it was about $12,217.

    I thought I would add this comment for 2 reasons:
    1) Perhaps it would be helpful for other readers that were also wondering about the calculations.
    2) I was really curious – what approach did you take to come up with those numbers?


    • jlcollinsnh says

      Hi Richard…

      With this post being over two years old I’m afraid I don’t recall the tool I used. My guess is that it was one of the many online calculators available.

      In later posts I’ve gotten better about posting links to those I use and your comment is a good reminder that some readers are interested.

  15. Bulls & Bears says

    This is a very bad advice!

    Once the stocks start to drop you should immediately sell and then buy at the dip!!! Even if you take a loss when selling!

    You’ll recover when they start going back up again and you will even make a profit once they reach the selling point!


    It has nothing to do with toughen up! GET SMART!

    • Jone says

      Bulls & Bears – You advocate a common mantra in investing media: buy low (bear market), sell high (bull market). The problem with that mantra is determining when the market is actually starting to fall and when the market is starting to climb. Lets look to last month (October 2014) as a case in point.

      From October 1 through October 15, 2014 global stock prices tumbled. In hard numbers, global stock markets, as measured by the Investor Shares of Vanguard Total World Index Fund (VTWSX), returned –5.50%. This loss, over the course of two weeks, erased the fund’s entire year-to-date gains for 2014. Some “experts” in the investing media suggested that a global bear market (defined as a loss of 10%) was just around the corner. Sounds like perfect conditions for a “bear market buyer” to start….doing something.

      You advise that, “Once the stocks start to drop you should immediately sell…” Well, OK. How would you have determined what day to buy/sell that fund last month? On October 2nd or the 7th? Perhaps the 8th? How about the 14th? What prompted your decision(s)? In short, how did you know (in advance) when stocks would start to drop or rise? This is the essence of speculation – guessing when stocks have started dropping.

      You then advise, “…buy at the dip!!! Even if you take a loss when selling!” Well, OK. What day last month did you identify (in advance) where the market would settle and when to start buying the fund? On October 2nd or the 7th? Perhaps the 8th? How about the 24th? What prompted your decision? In short, how did you identify the bottom of the dip and know (in advance) that stocks were about to climb? Again, this is the definition of speculation – guessing when stocks will start to climb.

      Investors are not speculators. Rather, investors would have purchased shares in the fund on whatever day they had the spare capacity to do so – generally on a predefined regular basis as new funds become available to them from external sources from, for example, a paycheck.

      On the selling side, investors would have sold shares of the fund when the sale met their individually predefined criteria. These criteria are different for each investor’s personal financial situation. Some investors might sell to harvest a tax loss. Other might sell to withdraw one’s annual required minimum distribution.

      While speculators try to capitalize on short term market gyrations, investors buy and sell in a rational, predefined method using external reference points (e.g., paydays and tax bills) with little regard to what the market might be doing (or the talking heads on television might be screaming) in the short term. Diversification, cost management, tax awareness, and long term commitment to a predefined plan are the “skills” of an investor.

      So, how did last month end? On October 1st, 2014, a $10,000 investment in VTWSX would have been worth – drum roll – exactly $10,000. On October 31st, 2014, that same $10k would have increased in value to – second drum roll – $10,118.22. How could one have predicted (in advance) which day the value of that initial investment would have been worth nearly $600 less?

      I’m curious – what is your prediction for December for VTWSX – or any other publicly traded stock, mutual fund, EFT or other security that we can track? Are you going to buy/sell on December 2nd or the 7th? Perhaps the 8th? How about the 24th? Please let us know in advance….Thanks!

  16. Amanda says

    I was wondering if you have a tutorial for people in their 20’s on where to start buying or investing or what I should be doing…I was introduced to this website and knowledge by my coworker and I am interested in learning more.

  17. Allen Sharp says

    Yes the market has ups and downs. Maybe this has already been answered but what if you are in the time frame of wanting to pull out your money cause you need it but you are in a downward market spiral at the time? And what if you don’t have 3-4 years or whatever it takes for the market to recover? What is your solution there?

  18. Andy Lomon says

    Hi Jim, as always, great post!

    I wonder if there is any further suggestion on ‘taking the leap’ to start investing. I mean, people tend to shock and paralyzed with the ‘crash next door’ news and even more if they are looking for short investment periods or trying to time the market. I guess that historical data would be reason enough but perhaps there is some advice on the psychological side…

    Thanks in advance!

  19. Enochraine says

    Hi JL I love the blog man and I have a question. I have been invested since my early twenties my aunt gave me almost $20k in saving bonds that I used to start investing. I invested that money pretty passively and essentially doubled it and used to half to buy a home after I got married. I’m thirty six now and through additional investing I have over $100k in stocks and bonds. However the truth is its just the past few years that I have recently really learned the ins and outs of investing and Im beginning to love it.

    So my questions: Of my investments almost $40k is in a Scottsdale account that through the help of a relative has had an unbelievable return but the more I learn about Vanguard I like and I have a small amount around $4k in some Vanguard etfs. Should I move my scottrade investments to VTSAX at Vanguard or stay with the scottrade?

    • jlcollinsnh says

      Thanks Enochraine…

      As you read thru this series you’ll find my reasons for recommending VTSAX presented in some depth.

      But the short answer is….

      Yes, that is what I would do.

  20. Kendall Frederick says

    I just re-read this post as I was giving somebody a link to the series. I guess I was sufficiently bored enough to Google Dr. Andrew Lo, and I found this funny: his Alpha Simplex hedge fund you mention above folded last year after underperforming several years in a row. I suspect the good doctor didn’t do badly, however, with the fees and front end load.

    • jlcollinsnh says

      Thanks Kendall…

      …I hadn’t heard that. I suspect you’re right and he made great money with it while it lasted.

      Meanwhile, those who followed the advice on this blog have profited handsomely and I’ve made not a dime.

      The irony isn’t lost on me. 🙁 🙂

  21. Gladys says

    Hi Jim,

    I’ve been interested in investment for quite some time but found it complicated. I would start to read an article or an e-book to know more about the basics and would just end up getting lost.

    I first read about the Stock Series in I finished up to the second part and completely went off track because…life. Anyway, I’m gearing towards attaining an MBA and researching on management consultancy as my next career path. And browsing through management reading recommendations, I came across your name again and again. So I’m back and happy to be back. And I am now, more than ever, interested about investment (in general, not because of the MBA or management consultancy). I think it’s because I was able to relate to “My Short Attention Span” and “Travels with ‘Esperando un Camino'” that kept me reading your posts.

    Well, I thought you might be interested in knowing a little about one of your readers: a 29 year old, third culture woman who recently moved to Europe from a third world country who is kind of back in square one with her career and is completely lost. So I commented.

    Looking forward to reading this series and your other posts. I really appreciate the way you explain things without using big words or complicated phrases. It’s an “easy read” so far. I’ll get back to you on this as I keep reading. I do have an upcoming long haul flight.

    Anyway, thank you!

    • jlcollinsnh says

      Hi Gladys…

      …and welcome. I’m pleased you found your way here and have enjoyed some of my posts.

      However, you have me confused with Jim Collins the business book author who has written “Good to Great” among others. This is why I chose to go by jlcollinsnh. 🙂

      Good luck with your MBA and your investing future!

      • Gladys says

        No no, it’s definitely you as “Stock Series” keep coming up. I’m also aware of that other Jim Collins. So…both!

      • Gladys says

        Well that is embarrassing for me. But I’d rather take it as a sign to go back and read further on investment. Silver lining! 🙂

  22. Juan says

    Great post Jlcollinsnh! I recently heard about you at Camp Mustache 2016.
    Have read a few of your articles and really enjoyed them. Will be reading some more for sure. Congrats on the book!

    • jlcollinsnh says

      Thanks Juan…

      I hear Camp Mustache was a blast again this year. I gonna have to make it out there one of these years….

      • Juan says

        It was! I’ve heard great things about the event in Ecuador as well. Hope to make it to that one soon. Hopefully, I’ll get to meet you in person one of these days

  23. Mir says

    Hello there,

    Interesting blog. I subscribe to the indexing, buy low-sell high philosophy your articles advocate and I plan to read more as you have nice way to clarifying complicated things. But I have to say I find your your confidence in the stock market slightly scary and dangerous. Several financial experts who I have come across warn against such unbridled optimism. As an example, I quote below is an excerpt from an interview given by the famous financial expert Larry Swedroe. Something to think about!

    How do you navigate that memory that so many investors have of 2000-02 & 2008-09? It would be perfectly logical for investors to think Why can’t we have another 50% dip.

    We certainly can. We’ve had three of them in the last 50 years. The Nikkei index was almost at 40,000 25 years ago and now it’s 16,000. It’s still down, at least in price only, well over 50%. And people make the mistake, that’s called the Triumph of the Optimists, when they look at the US data and think that stocks can’t do poorly for 25 years and still be down. That’s a problem that people make.

    The way you navigate is, there is an old saying among generals that “battles are won in the preparation stage, not on the battle field.” So investors need to be prepared by (a) Knowing their financial history. Knowing that stocks can underperform for very long periods. Knowing that you should not be subject to home country bias or Triumph of the Optimists.

    I always point out to people, from 1969 to 2008 — 40 years — large cap growth stocks and small cap growth stocks under-performed 20 year Treasuries for a 40 year period! And not only have stocks fallen 50% roughly top to bottom three times in the last 40 years, but they fell much more than that in the Great Depression top to bottom probably 85% or so.

    I also point out not only the Japanese example but in the early 1900s two of the ten largest stock exchanges in the world were the Egyptian and Russian stock exchanges and those investors are still waiting for return “of” capital, not return “on” capital. You should never make the mistake of treating the unlikely as impossible.

    source :

    • jlcollinsnh says

      Welcome Mir…

      Glad you find it interesting and, should you continue to read, you’ll have a better understanding of my ideas. For instance…

      I do not advocate a “buy low-sell high philosophy” and I caution repeatedly that periodic plunges in the market are part of the process and to be expected.

      If you choose to explore my writings further, you can then compare them to the writings of others and decide for yourself what resonates and what does not.

      Good luck!

  24. ZJ Thorne says

    I’m reading through this series on a Friday night and I can’t wait to buy your book for a young couple that just had their first baby. I think they’ll be able to understand your clear and concise reasoning (they’ve avoided learning about finances out of fear).

  25. Aura Finke says

    Valuable piece , I loved the specifics . Does someone know if my business would be able to access a sample Canada AR-1 form to type on ?

  26. Mark W says

    I’m one of those that don;t believe that try to time the market is a bad thing, After I transferred 100K from a CD to the VTI in July 2008 I can’t agree w/ that.
    You should at least avoid investing after a rally or at a top of a bull market…..I would have made such more money if invested months later….

    • jlcollinsnh says

      Ah, but how do you know the rally has peaked and the bull is at its top?

      How do you know when the low is reached and it is time to invest?

      That’s called market timing and nobody has been able to do it consistently. It is one thing to get it right once or even twice, but that is more akin to selecting winning lottery numbers: Luck.

      The road to ruin is littered with those who confused luck with the ability to predict the market.

  27. Sathish Gajula says

    Very well stated JLCollinsnh!!

    I have recently started investing and thank god I stumbled upon this website.

    In my view, you have given some confidence to someone who would panic at any small crisis in the stock market.

    Every though I am pretty young at investing (currently 26), I have become a huge fan of low-cost index funds (Vanguard is my personal favorite).

    One quick question: Would you recommend dollar cost averaging foa a young investor like me(setting up automatic payments from checking account)? What are the pros and cons?

    I am excited to read your book “The Simple Path to Wealth”

    Best Regards,

  28. Chris says

    Well, what about this: Current Shiller PE ration is 28.88 . Average is around 16. So while i am more or less fully on board with ‘not timing the market’, – this does look a bit dangerous. I was just wondering, – if one looked at all the historical data, would THIS not be actually a level when it is statistically much better TO WAIT?
    I know this is contradicting the main tenor of this blog, but if I look at the charts then it seems pretty clear that on this level the risk of a major downhill is much higher then continuous uphill. I think it was only in early 2000 that on a similar level it went much higher before it crashed, but that was in a small window of time. I’d appreciate your thoughts on this!

    • jlcollinsnh says

      One of the main tenets of this blog is that the market routinely and unpredictably drops periodically.

      The Shiller PE ratio has been around a long time and if it had any predictive value, by definition it would never reach levels like 28.

      In assuming it has predictive value, you are assuming it is the “P” that must adjust. So far, the market is expecting it to be the “E”

      No one really knows, or can know.

    • Zack says

      There is more to the Shiller PE ratio than just how high the number is relative to the past. I had researched using it for market timing exactly as you are thinking. However, you need to consider the alternative places to invest your money. Assuming 10-20 year investment period. A P/E10 of 29 would be an earnings yield of about 3.4%. The earnings would likely grow with inflation. The question then becomes what is a 10-20 year inflation protected bond going to yield. When that amount is higher than the earnings yield of stocks, that will be much more informative signal to wait.

  29. Drharhar says

    Hello! So I finished the book and have been recommending it to friends and family… so far everyone just looks at me sideways.

    I loved it. I couldn’t believe how you made everything so simple. Planning on re reading it by the end year. Also planning on being debt free by the end of the year! WHOOT. Two questions.

    Is there a faster way to FU money? I’d suspect that it would have to be more volatile. So you’d have to hold on. I’ve already started cutting back and experimenting with frugality (thanks to your friend Mad Fientist and Vicki Robin).

    Also, is there a way to profit from crashes? I know bonds are our deflation hedge, but that sounds more like a hedge than an actual gain from the market tanking.

    • jlcollinsnh says

      Many are called, few are chosen. 😉

      “Is there a faster way to FU money?”

      The problem is, reaching for better returns expands your risk. So, probably not realistically. Small cap stocks tend, but don’t always, to outperform slightly but with greater volatility. Read: Deeper, scarier plunges. Not my choice.

      “…is there a way to profit from crashes?”

      Only if you know when the next crash is coming, where the bottom will be and when it will start back up. 😉

      • Drharhar says

        Yeah. Makes sense. I remember you saying they are more aggressive, but have long periods of underperforming. I’ve looked, but maybe I missed it, do you have a post on small cap vs large cap index funds?

        • jlcollinsnh says

          Nope, no post.

          But i have gotten and responded to that question a number of times in the comments. That might be what you recall.

  30. NewReader says

    I’m happy to have stumbled across your blog and definitely look forward to making time for the series!! I’ve already shared it with a buddy.

    Despite Chris’s Schiller P/E question back in March, I’d like to ask a specific question:
    If you had $50k to put into VTSAX in a non-tax advantaged account, would you buy in all at once or do something else?

  31. Karen says

    ‘like blizzards in winter they should never be a surprise’ this is my favourite line and so true!

  32. James says

    Actually…US markets always go up, but not all markets have an upward bias. They depend heavily on the health and productivity of the underlying economies.

    Also, frankly under the Trump administration political risk to economic growth may be higher than most subject matter experts realize.

    • jlcollinsnh says

      You’ve been reading five years and only just now shared this site with your daughter? 🙂

      Hope she enjoys and benefits from it!

  33. Jimmy says

    Reading notes 1 and 2 in sequence gives the impression that the Global Alternatives fund from Note 1 (GAFYX) was the fund that was liquidated. However, as of today (21 Sept 2018), GAFYX seems to be still alive and kicking. The liquidated fund that was the subject of the WSJ article linked in Note 2 was actually “Diversifying Strategies” (DSFAX), a different fund from the same AlphaSimplex Group.

    This really does not make much difference to the overall point being made, but in the interest of factual accuracy I thought it important to point out.

  34. Ruturaj Yadav says

    Thank you Jim.

    I was born in a developing country where neither of my parents had sound investing knowledge but they taught me to save well. Saving was and is still a big part for me and my mom who is nearing retirement. I really wish I had read about all this at least 5 years ago, but after reading this I promised myself I will teach my daughter why this is so important.

    Thanks once again.

    • jlcollinsnh says

      Learning to save well is crucial.

      My high savings rate is what saved me from all my early investing mistakes.

      Kudos to your parents! 🙂

  35. Randy Petty says

    Looking forward to completing your series. I started with your interview on “Talks with Google” :

    I guess I’m an idealist and still think government could prevent many of our financial meltdowns if the proper guardrails were in place via regulations. My signature block on the Bogleheads forum reads: “If I was king: once a stock is purchased, you hold it for 30 days.”
    Did I mention I was an idealist? 🙂

    • jlcollinsnh says

      I’m glad you aren’t king, Randy.

      All that short-term trading mostly hurts those that do it, but it creates a wonderfully liquid market for the rest of us. 🙂

  36. Sandra says

    Dear Mr. Collins
    Hope this email finds you well and happy! I am hoping you see this and can help because my anxiety is through the roof! My husband and I are 63 (no children) and we only have $500k cash. We are also extremely frugal. We realize that amount of money won’t last another 25 yrs so it’s important to make the right decisions. I figure we will need the money to live on pretty soon. We both want to continue to work but opportunities don’t seem to come about like they used to. We just don’t know where to put the cash and make a little more interest than it is now without losing it. I have so many sleepless nights worried we’ll end up homeless if we don’t make the correct decisions.
    Right now we have it in some short 30 day CD’s in Vanguard and some scattered in some online banks paying the highest interest / fdic insured. Of course none of this will beat inflation. What would you do if you were us? Thank you kindly and just want you to know how much we appreciate all you do…love you! : )

  37. SID Win says

    much respect. like a lot of what you are saying. i get a people telling me your can’t time the market and i would agree that is true. But so many times you never hear anyone talk about instead of timing the market, study the trends and pivot when the data justifies a pivot. I rebalance my portfolio 2x a year. I look at certain funds that my employer provides are underperforming and i’ll pivot to a different one. The most money i ever made was rebalancing the weekend before Brexit. I didn’t like what is happening in europe and honestly nothing i’ve read see a light at the end of the european tunnel and i wanted to reduce my exposure there.

    I’ve tried hiring pro’s and honestly robo like wealthfront and betterment was on par with them and for a fraction of the price. I’ve been moving to 65% or more to EFT and indexes, 10% in individual stocks that i research on and 25% in bonds/cd’s.

    I’ve been talking to an adviser he brought up several key points you might want to include. Rule of 55 which allows a 55 year old access to their 401k and not be penalize. The adviser recommended me to move my IRA to my employer 401k because of this. He said also if you ever need a loan, you can access the funds. He also said going with your employer’s 401k then the funds that you can purchase will be discounted because your company pays a portion of the ETF.


  38. Asim Sheikh says

    JL – excellent article! What are your thoughts on Warren Buffett’s theory that the when buying into the market, even if it’s an index fund using dollar cost averaging, that we need to pay attention to the total stock market cap to GDP ratio? If you look at this ratio in today’s market, there is an indication that is still way overvalued, as outlined at the following site:

    Would love to hear your thoughts on the subject!

  39. Santiago says

    I had to come back here after getting stirred up about the state of the market right now in 2022. “Is a recession coming?” Articles reminded me that, yes, probably, it is; and I just have to ride it out. Thanks for this series.

  40. CaptainFI says

    After finally getting sick of ‘market crash mania’ on social media I just re read this article again for probably the 12th time, and as always its aged well. I think I am going to binge the series again haha. Cheers

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