Passive investing

Many think that the USA and dollar are doomed. As a result they are afraid of investing in the US stock market. Dan Solin from the advisory company Index Funds Advisors does not share this worry. According to him this opinion or information is already well known. Therefore, it has already been incorporated into the asset prices. In the long run the return of risky assets is higher than the return of safer ones. For example, the emerging market countries, measured by the MSCI Emerging Market Index, achieved an average return of 9.98% p.a.  over the period 1989-2008. The S&P 500 which tracks the movement of large companies earned 8.42% p.a. over the same period.

Naturally, this does not mean that you should put all your money in the US or Emerging markets. Solin recommends putting your money in a broadly diversified portfolio consisting of passively managed equity and bond index funds. It is advised to cover as many stocks in as many countries as possible. The reasoning behind this is that nobody can predict what will happen in the USA or other countries over the next 20 or more years. In 1990 nobody could have seriously predicted that the Japanese stock market would not manage to eraese the losses and to climb at least to its historical maximum. However, it would be unwise to leave out Japan from your portfolio. Nobody can be sure what will happen to Japan in 20 years just as we did not know 20 years ago.