On the tenth anniversary of the publication of "Dow 36,000"

[swag]

authored by conservative wankers extraordinaire James Glassman and Kevin Hassett, we turn to Barry Ritholtz:

Call it the audacity of cluelessness: Let us congratulate James K. Glassman and Kevin Hassett, the authors of the incredibly money losing advice in their book Dow 36,000, on their 10 year anniversary. The book forecast that lofty number would be obtained in 3 to 5 years; it was published precisely 10 years ago today.

In the ensuing decade since this book (and I use the term lightly) was published, the Dow is still below where it was 10 years ago, rather than tripling in price. The Nasdaq remains more than 60% below its highs of one decade ago.

I tried to read the book as a history lesson, but it was, to be blunt, unreadable. I got through enough to learn the basic argument they made: Stocks have been undervalued for decades, and over the ensuing years, we should expect a dramatic one-time upward adjustment in stock prices. Why? People were about to figure out what only these two geniuses already knew (hubris anyone?).

More at link above: worth a read. Hassett is employed by the egregious American Enterprise Institute. Glassman's Wikipedia page tells us that he has been named head of a yet-to-be-named "policy institute" at the GWB presidential library. Heckuva job, Jimmy.

[Liberal In Texas]

1. And when 401Ks were invented, they told us we'd be millionaires by the time

we retired due to the power of the free market!

:rofl:

[exboyfil]

3. Actually a relatively simple portfolio of stocks and bonds

would have done quite well even during this stretch. The key is not to go hot into stocks and remember diversification. LT bonds were up quite a bit last year. If you reallocated at the beginning of this year, then you would have made back a good portion on the equity loss from last year during this latest run up.

I was doing this stuff until I got the bright idea of getting out at S&P 500 at 1,000. It has gone up 6% since that decision.

My 401(k)/IRA has made a tremendous difference in my financial life. I now have seven times my base salary saved in it at 46. Roughly my annual earnings are at about 8% even through this extended bear market - that is 5% over inflation.

For a simple portfolio I would recommend everyone hold their age in LT Treasury bonds. I have 40% of my portfolio in Treasury Inflation Protected Securities. Equities are used to amp earnings in the hope of retiring earlier. If TIPS ever get back to over 3% over inflation, then I would strongly recommend taking a large position.

Of course these guys are clowns, but 401(k)s are useful wealth generators for middle class individuals. They should be encouraged, and the options should be extended (to include direct purchase of government bonds and ETFs for example).

[Liberal In Texas]

4. So you're the millionaire they were talking about.

It also depends on what funds your 401K fund manager allows you to buy. In my case no matter where I would have directed the money, it would not have done any better when the bottom fell out. It was up pretty good during the bubble, but hardly the millionaire neighborhood.

[exboyfil]

6. At seven times my annual salary

no where near being a millionaire, but I project making it before I retire.

How did your plan's LT Bond fund do last year if you had one? I thought Fidelity's did pretty well (Spartan L/T FLBAX was up 24% last year). It is down 10% so far this year, but when combined with a good equity fund and portfolio rebalancing, you will do ok. Actually I did a paper recently and investing in a L/T bond fund outperformed even an all equity porfolio for a 43 year investment horizon (working life of a profession from 22 to 65). Of course my cut off was at the end of 2008. The amazing thing is the smoothness of the return with a balanced portfolio. I only showed a small dip in 2008 when holding 65% Treasuries. At the end of 2008 if my analysis was to contine a portion of the Treasury position would have been liquidated to purchase stocks.

I frankly think bond funds suck (that is why I hold Treasuries directly in my IRA). I have had the benefit of working for an employer in the past with a 401(k). I rolled that money into a brokerage IRA with Fidelity which allows a whole lot more options.

You are right that most vanilla 401(k)s overemphasis equities to the detriment of other asset classes. Every 401(k) should have access to bond funds including L/T and Inflation Indexed. My own vanilla 401(k) only contains one bond fund of note (you have to access the brokerage 401(k)) to get to funds like Spartan L/T above.

[Liberal In Texas]

7. LT Bond fund?

You write papers on investing. Most Americans can barely balance their checkbooks. How is an architect, school teacher, firefighter, photographer, etc. supposed to keep up with these arcane funds. When I try to read a prospectus my eyes roll over to the back of my head, and I'm sure they're written just so the average joe won't understand it.

I'm dealing with 2 different 401K accounts (my wife's being the other) and in both there just isn't this great variety you seem to have. About all an average person can do is look at a funds past performance and make some partially educated guess about how much to allocate to it. It isn't much better than going to the race track.

And they did promise we'd all be millionaires when they rolled out this program. It was a big lie to get more middle class $ into the market.

[exboyfil]

9. I agree with your point

about investment understanding, and I feel that it is a failing of our school system, companies which sponsor 401(k)s, and the mutual fund companies. My daughter is learning about investing in the 8th grade, and I hope it continues with her Senior High Economics course. She will also learn a from me I hope. Yale online has a really good course on Finance that is accessible to most individuals (if you look past the math). I am actually an engineer.

My one advice would be to hold four (possibly five) funds as follows:

Long Term Bond fund which invests in Treasuries (over 10 to 15 years in maturity)
Medium Term Bond fund which invests in Treasuries (from 5 to 10 years in maturity)
You should hold at least your age as a percentage of your total portfolio in these two funds (60 year old holds 60% for example)

A cash fund with about 5 to 10% of your portfolio

A Russell 2000 (or an S&P 500) stock index fund with the remaining percentage (30% for the above mentioned 60 year old)

If you want foreign ownership (good for diversification)
then possibly up to 1/4 of the stock index percentage in a broad based foreign fund

If a Treasury Inflation Protection fund is available, then put at least a 1/4 of the LT and Medium term percentage into it

You should rebalance at least once per year (bring the percentages back in line). More often in turbulent markets (quarterly depending upon fund rules).

I am not going to justify what the Dow 36,000 folks said, but I am saying that the 401(k)/IRA is an opportunity to generate wealth (the third leg of the stool). This approach is quite conservative and is accessible for some 401(k) plans (should be all plans).

If your employer does not match, then do not participate in the 401(k)!!! Go with an IRA instead (unless you have income limits etc then you make alot more money than I make). You get much better access to funds and can directly invest in Treasuries. I recommend against managed funds. Rarely can the market be beat (Dr. Schiller from Yale has good points about this in the above referenced lecture).

I know lots of folks get upset about the tax deferred accounts stealing money from the Treasury, but I am actually thinking, given the level of needs testing and proposed needs testing for Social Security and Medicare, that the Treasury is actually going to make out pretty good on this deal.

I am not in favor of directing S.S. dollars to retirement accounts. Frankly there are not enough dollars available to do it anyway. S.S. is not the problem - government spending outside of S.S. is the problem. S.S., when you discount the cash flow from the Treasury for interest on the Trust Fund, is actually going to go negative this year. This means that while once the Treasury could use S.S. to hide the overall deficit, they now will have an ever increasing amount of dollars they will have to borrow to cover the interest and cash out the principal in the S.S. fund. Interesting times ahead.

[swag]

2. Fans can congratulate McCain camp econ advisor, Obama hater Hassett on his

extraordinary prescience and superior intellect at

[e-mail]

[Captain Hilts]

5. Glassman was yet another Harvard Crimson alumni writing for the WP's op-ed page telling the 'little

people' how great things are.

[jimlup]

8. Cheers everyone!

:rofl: