Making Money Alert: The Buy-and-Hold Grandfather’s Warning

When Jack Bogle speaks, the market usually stops and listens. That’s because the grandfather of buy-and-hold investing, and the founder and chairman of mutual fund stalwart Vanguard Group, is thought of as a sagacious, steady and calming voice that sooths those who want to buy stocks, and then just simply forget about them for a decade or so.

On Monday, when Bogle was interviewed on CNBC, he raised more than a few eyebrows with his prediction that the next decade could indeed be extremely turbulent for investors. Bogle basically said that investors need to prepare for at least two declines of 25-30%, and maybe even 50%, in the coming decade.

What was even more interesting is that Bogle really didn’t think this situation was too much of a concern for investors.

Bogle almost cavalierly said that bear markets just come and go. “The market goes up, and the market goes down. It’s never failed to recover from one of those 50% declines.”

The Vanguard chief then went on to chronicle the bear markets that he’s lived through, including ones in 1973-1974, 2001, 2002, 2003, 2008-2009.

Here’s the money quote from Bogle on this issue of bear markets: “They’re kind of scary — often terrifying — but it’s typical. Why it doesn’t bother me is if you hang on through the cycle, that’s the only way to invest. Trying to guess when it’s going to go way up or way down is simply not a productive way to put your money to work.”

Well, I would like to see Bogle look into the eyes of someone who just lost 50% of his or her 401(k) value in the same year they were planning to retire. I doubt these folks would be comforted by his historical perspective.

Sure, Bogle might be able to weather a 50% downturn and still be well off, but most normal investors simply cannot do that. Most of us cannot afford to lose that kind of wealth, and that’s the reason why I think that buy and hold is a bad philosophy.

Hey, you don’t have to try and time the market exactly when investing for the long term. You do, however, need to be able to sidestep bear markets when they occur. If you don’t do so, then the gains you made during bull markets could be wiped clean precisely at the worst possible time in your investing life.

One big concern I have right now about the U.S. equity market is that most foreign markets aren’t participating in the domestic rally. In fact, since January, we’ve seen the emerging markets decline more than 7% and, of course, European markets continue to grossly underperform U.S. markets.

The charts here of the S&P 500 and the iShares MSCI Emerging Markets (EEM) tell a clear tale of two markets.

As you can see, the U.S. markets have been collecting investor dollars and going higher while investors in EEM have steadily run for the exits so far in 2013.

The reason this situation concerns me so much is that it appears as though the U.S. market basically is the only game in town. As you know, I’ve been in the investing business for more than three decades, and that means I’ve seen this situation before. In fact, the U.S. was effectively the only game in town in 1997, and again in 2000 and in 2008.

Well, we know that these bullish periods were followed by big market meltdowns and, dare I say it, near-market crashes that wiped out trillions of dollars in savings and investment.

One goal here in the Making Money Alert, and in my Successful Investing and High Monthly Income advisory services, and with my money management firm, Fabian Wealth Strategies, is to help you manage your money in such a fashion that you will never be defenseless against the pernicious effects of a major market correction.

This focus on safety is one of the prime directives in my investment philosophy, and it’s a core principle of mine that will never change.

We finish our series on energy sector exchange-traded funds (ETFs) with today’s look at a fund that focuses on the energy sector in China. The country has achieved remarkable industrial growth in the past several decades, and seems destined to maintain its pace in the near future. All of that growth requires increasingly large amounts of energy; indeed, China has become one of the world’s major players in the energy industry due to its voracious demand. An ETF that tracks public energy companies in China is the Global X China Energy ETF (CHIE).

This non-diversified fund seeks investment results that correspond generally to the performance of investable energy sector companies in the Chinese economy. CHIE has traded mostly flat in 2013, gaining only 2.55% so far, but it had a gain of 11.45% in 2012 and offers a yield of 1.67%. As Chinese companies continue to demand more and more of the world’s energy, expect the companies tracked by CHIE to profit.

CHIE is invested in a variety of sectors that contribute to the consumption of energy in China. The energy sector, of course, leads the way, with 39.83% of the fund’s total assets. The other sectors which CHIE has money in are utilities, 33.29%; basic materials, 19.25%; industrials, 5.14%; and technology, 2.49%.

Since CHIE is a China-focused ETF, the individual companies the fund invests in are mainly traded on foreign exchanges. Of its top ten holdings, which comprise 64.68% of its assets, only three are traded on Wall Street, and those three have very low volume on the American market. And none of these three stocks are among the top five companies held by CHIE, which are: China Petroleum & Chemical Corporation, 9.44%; PetroChina Co Ltd, 8.48%; CNOOC, Ltd., 8.23%; China Shenhua Energy Company, 7.79%; and China Resources Power Holdings Co., Ltd., 5.47%.

With no end to Chinese growth in sight, expect the country’s demand for energy, and CHIE, to keep ascending. Even if the growth does slow, China’s large population will continue to consume energy, meaning sustained profits for those who invest in Chinese energy.

If you want my advice about buying and selling specific ETFs, including appropriate stop losses, please consider subscribing to my Successful Investing newsletter. As always, I am happy to answer any of your questions about ETFs, so do not hesitate to email me by clicking here. You may see your question answered in a future ETF Talk.

I always like to make sure I am providing readers and listeners what they want. This desire holds true for the content of my newsletters, the content here in the Making Money Alert, and it’s especially true of my Monday Morning Market Outlook podcast.

Entering a new quarter is a great time for me to ask you, the listener, what you want to hear when I do my podcast each Monday. Would you like more macro-economic news, or would you prefer I get a bit more political? Or, would you like me to concentrate on specific stocks and ETFs? Or, maybe you would like me to do more personal finance segments?

Whatever suggestions you have, I would love to hear them. Just drop me a note here and let me know what’s on your mind. And if you aren’t already a listener, then please check out my Monday Morning Market Outlook podcast today!

“A wise man should have money in his head, but not in his heart.”

–Jonathan Swift

When you’re in the investment game, it’s easy to obsess over making money. That’s why it’s good to remember what the great satirist Jonathan Swift said. You see, while we need to think about money and the pursuit thereof, we also need to remember there’s more to life than just the head.

Wisdom about money, investing and life can be found anywhere. If you have a good quote you’d like me to share with your fellow Making Money Alert readers, send it to me, along with any comments, questions and suggestions you have about my audio podcast, newsletters, seminars or anything else. Click here to ask Doug.

To read my e-letter from last week’s Eagle Daily Investor, please click here. I also invite you to comment about my column in the space provided below my Eagle Daily Investor commentary.

To the best within us,

Doug Fabian

P.S. Las Vegas Money Show, May 13-16: Join former Fed official Robert McTeer, many other experts and me at this big investment conference. Tickets are complimentary for my subscribers. Call 1-800/970-4355, and mention code # 031169.