Unfair Advantage I’d say there are at least four important problems with the predominant mutual fund/401(k) system that warrant an in-depth discussion with your financial advisor: First, this brand of diversification does very little, if anything, to protect an investor against a large stock-market crash, a long-term stagnant stock market, or even a rising stock market that fails to outpace inflation over long periods. When a person buys large amounts of stock in a single company (like Warren Buffett who bought millions of shares of Coca-Cola), a large concern is that the share price of the company can fall, which of course is beyond the control of the investor. By the same token, when a person is diversified across the market, it is still possible (if not likely) that the entire market will fall, which also is completely beyond the control of the investor. I think most people would agree that our world markets have become more volatile and probably more fragile than ever. From the year 2000 to 2010 we’ve observed the “decade of nothing.” Getting back to zero offers little consolation when growth—the exponential growth associated with compounding—was required to make a plan work and now retirement is staring the investor in the face. Moreover, we could easily have another decade of nothing or, even worse, a huge market slide (and there’s plenty of fundamental data to suggest the latter). If you want to add to your financial vocabulary, the next time you’re with your financial advisor, ask him to explain what “systemic risk” means. Most mutual funds and retirement plans make the dangerous assumption that the market will always go up in the long term, but there’s no guarantee that that will actually happen for this generation of investors. Second is the question of consistency. Standard & Poor’s has released data that show that if a person takes a handful of mutual funds that do perform well in a given year, they almost never are able to repeat that performance over periods of five to ten years. In other words, past performance really is not a solid indication of future results.
by Rich Dad, Robert Kiyosaki