I’m Not Apologizing

The Wall Street Journal’s Jonathan Clements told readers for years to ignore market trends and keep investing—only to see their portfolios plunge. But in a new book, he says he's sticking to his philosophy.

03.20.09 1:53 PM ET

A year ago, I quit my gig as personal-finance columnist for the Wall Street Journal—and probably saved myself from a heap of humiliation. The fact is, if I’d stayed on, I would have kept reiterating my standard investment advice, and those who listened would have been thoroughly mauled by today’s brutal bear market.

I would, of course, have felt badly about that. But I sure wouldn’t be apologizing.

How has this strategy held up? So far, it’s been sort of like tossing dollar bills onto a bonfire.

I spent more than 13 years as the Journal’s personal-finance columnist, penning 1,009 columns and often attacking fondly held financial beliefs. I belittled America’s embrace of the big house, argued that money often doesn’t buy happiness, and decried the nation’s pitiful savings rate and burgeoning household debt.

The Little Book of Main Street Money. By Jonathan Clements. 224 pages. Wiley. $19.95.

But I was probably best-known for relentlessly pushing a no-frills, no-nonsense investment philosophy. Forget trying to outguess the markets, I advised again and again. Instead, figure out how much risk you can reasonably take and use that to settle on a stock-bond mix. Within stocks, look to diversify globally. For each market sector, set target portfolio percentages and then buy low-cost index funds to build your desired portfolio. Thereafter, save diligently and rebalance regularly.

That brings us to the current market collapse. How has this strategy held up? So far, it’s been sort of like tossing dollar bills onto a bonfire:

•While bonds have held up reasonably well, stocks across the world have been hammered, so global diversification hasn’t helped much.

•Index funds, which buy many or all of the securities that make up an index in an effort to replicate the index’s performance, have—surprise, surprise—fallen just as much as the underlying markets.

•Saving diligently has been an exercise in masochism, with each monthly investment quickly devoured by the falling markets.

•Rebalancing has only added to the pain. With rebalancing, the idea is to set target percentages for different market sectors and then occasionally to tweak our portfolios, lightening up on those sectors that are faring well, and adding to those that are suffering. Over the past year, this has meant moving money into stocks, only to see stocks fall even further in value.

All this might seem like a damning indictment. Yet, if I were still an ink-stained wretch at the Journal, I would be doggedly pushing the same philosophy—and probably getting a slew of hate mail in response. How could I possibly be so stubborn in the face of the market’s repudiation? There are three reasons.

First, when we invest in stocks, we aren’t betting on pieces of paper. Rather, we are wagering on economic growth. Over the past 60 years, gross domestic product has climbed 6.8% a year—and shares prices have climbed 7%, as measured by the Standard & Poor’s 500-stock index. On top of that 7% a year, investors also collected dividends.

True, share prices didn’t climb in lockstep with the economy and, indeed, investors had to suffer through some horrendous bear markets. Still, as long as the economy continues to grow over the long haul, the stock market should remain a decent long-run investment.

Second, as shares fall, we should become more enthusiastic about stock-market investing, not less so. How come? Everything else being equal, if share prices are lower, expected future returns should be higher. Want to ensure you capture those returns? That’s a reason to favor index funds.

Trouble is, we find it hard to convince ourselves that falling markets mean higher future returns. That leads to my third point. There’s a basic mismatch between the long-term nature of stock-market investing and the intensely short-term focus of most investors. We buy stock-market investments in good times, solemnly telling ourselves that we’re long-term investors. But when bad times come along, those good intentions go out the window.

The bottom line: The problem isn’t with the markets. They’re behaving in a wild, chaotic, unpredictable manner—just like they always have.

Rather, we’re the problem. We need to find a way to live with the markets’ chaos, so we hang tough at times like this and have a shot at earning those healthy gains that can accrue to long-term investors. And that’s why we all need someone—whether it’s our financial adviser, our mother-in-law or our friendly neighborhood columnist—who will constantly remind us of the financial basics and cajole us into sticking with the program.

Remember how, in 1,009 columns, I told you to consider risk, diversify globally, keep costs low, buy index funds, rebalance regularly and save diligently? Now, let me tell you again.

Jonathan Clements is director of financial guidance for myFi, a unit of Citigroup Global Markets, and author of The Little Book of Main Street Money, which will be available in May. The views expressed here aren’t necessarily those of Citi or its other employees.