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KAI RYSSDAL: The Dow Industrials flirted with an all-time high this week. Of course the S&P is still off its record by about 13 percent. And the Nasdaq? Fuggedaboudit. Half of what it used to be. But if you can't trust the big indices what's an investor to do? Here's a hint: It starts with the letter "D." Diversify your investments, and you want to start at square one. With your portfolio. Marketplace's Steve Tripoli rexplains.
STEVE TRIPOLI: It's a late September day to die for on the Massachusetts coast. Richard and Marilyn Wittrup have their usual front-row seats. Richard's describing the seawall just below their ocean-view porch.
RICHARD WITTRUP: "So, this piece here is just an extension of a wall that goes all the way around the end of the cliff. Goes . . ."
he Wittrups are in their late 70s, comfortably retired. Richard says their comfort partly stems from an insight he had when he started dabbling in stocks half a century ago.
WITTRUP: "Somebody from the brokerage would say 'Oh buy this or buy that.' And I'm thinkin' 'Why would he tell me to do that? Why isn't he out getting rich on his own money?' So I was skeptical, very early on, that anybody really knew what the market was gonna do, next month or next year."
Wittrup's onto something. Investors and pros don't have a crystal ball.
Wittrup's solution was broad diversification. Even in retirement his mutual fund portfolio holds many different kinds of assets. The returns have been solid over decades.
A key part of being diversified is to rebalance your holdings as markets take some of them up and some down.
Wittrup says that adds a really nice bonus to diversification.
WITTRUP: "You're selling high and buying low. Which is what my mother always told me was a good commercial practice."
Wittrup says anyone can diversify on their own. He gets help from a financial planner named Jim Pinney.
Pinney uses a portfolio model developed by University of Chicago finance wizard Eugene Fama.
The model holds 14 low-cost, index mutual funds. There are growth and value funds, large and small companies, US and foreign stocks, real estate and bond funds.
Conservative investors might raise an eyebrow here. Junk bonds in the portfolio? But Pinney says that misses an important point about diversification and overall risk.
JIM PINNEY: "If you add a very, very risky asset class to your portfolio it can bring the portfolio risk down. Diversification is a free lunch. You can add it to your portfolio and you can end up having more return and less risk at the same time. Which is really quite remarkable."
Why less risk? Because a broader basket of asset types, even some risky ones, lowers the chance that a single down asset like large US stocks can put a big hit on your returns.
Personal finance writer Paul Farrell has been tracking five so-called "lazy portfolios" developed by different finance experts.
The portfolios hold all index funds -- as few as three but no more than 11. As of June 30 this year, every one of them had handily outperformed the S&P 500 over one, three and five years.
PAUL FARRELL: "They typically outperform the market and you're not doing anything, which is the striking thing about this. There's minimum rebalancing if any, your expenses are low, you're saving on commissions, and the trading costs are virtually nil."
On all those scores you make more money. Farrell says he's never uncovered a significant downside to the strategy.
Back on the Massachusetts coast Marilyn Wittrup says she and her husband have never even had a conversation questioning their strategy. It's worked that well.
So, simplicity, results, even domestic tranquility. And you can permanently stop scouring the money magazines for the next hot tip.
Richard and Marilyn Wittrup have better things to do.
WITTRUP: "I mean we're sitting here lookin' at the Atlantic Ocean and the sun is shining and the sky is blue and the little wispy clouds are goin' by, and, ah, we just might stay here all day."
Who wouldn't want to join them?
RYSSDAL: Steve, stay with us for just one second. You know, everyone in that story makes a compelling case for diversification and you do too. But in all those asset classes, there's gotta be some that just don't work out real well.
TRIPOLI: Absolutely Kai, you know, when you own lots of different assets you're almost guaranteed some losers in any given year. That's why some folks find diversification a tough sell. You know, the losers stick out and people think you shouldn't have any. But that's really the wrong way to look at it. What diversification really does is it kills he individual investor's biggest enemy, which is a big down year because your winners hold you up.
RYSSDAL: Hmm. What about the people out there who think they can, they are the ones, the chosen few who can beat the market?
TRIPOLI: They're wrong. It's been proven over decades of research. You know, one of those lazy portfolios in the story was put together by David Swenson. He's beaten the market for years running Yale University's endowment. Now Swenson thought he'd write a book, telling folks like you and me how he does it and guess what? He realized as he was doing this book, that individual investors and even mutual fund managers can't duplicate his results. His big endowment has too many advantages that most of us will never have. SO stick with diversification using low-cost index funds. You'll end up way ahead of the pack.
RYSSDAL: Alright, there you have it. Steve Tripoli, thanks Steve.
TRIPOLI: You're welcome.
RYSSDAL: If you're interested in some of those lazy portfolios you heard about in Steve's piece, you can find them on our website. It's Marketplace.org