Tuesday, February 12, 2008

Gordon Pape’s Portfolios

Well-known financial author Gordon Pape seems to agree with Morningstar that investors tend to be very conservative. (See this post for a discussion of Morningstar’s views on investor conservatism.)

For example, in his book “Sleep-Easy Investing”, Pape recommends against owning stock index ETFs. He observes that by early 2003 stocks had declined, and “many people would have bolted at that point, thus defeating the basic strategy of owning ETFs.”

He is right that it is a bad idea to sell low and miss out on a subsequent run-up in stock prices. But stock index ETFs have given good returns for people who have stuck with them calmly through declines. The good times with stocks more than make up for the declines.

Pape’s book is one of the best financial books I’ve read. It includes useful information and practical advice explained clearly, but I’m not the least bit interested in his model portfolios. They are filled with fixed income products, and the target returns are far too low. It seemed strange to agree with almost all of his points throughout the book, but then disagree with many of his conclusions.

As a side note related to Pape’s credibility, he tells a story of extending himself too far when he and his wife bought a winter home in Florida. He says that if it the Canadian dollar had not started to rise in 2003, “we probably would have had no choice but to sell.” Maybe the story is written with a modest spin, but he seems to be saying that he isn’t rich. I’m not sure I want to take financial advice from someone who has had so much career success, but isn’t wealthy.

Pape’s portfolios may well be a good match for the way most investors think, but they’re not for me. I have cash reserves and safe investments for any money I will need in the next 3 years. Everything else is in stocks. The sleep-easy portfolios would keep me up at night worrying about the higher returns I could be getting.

If Pape is right and most investors would worry terribly and sell after a big decline if they invested the way I do, then those investors may be better off with one of the sleep-easy portfolios. I’m hardly a seasoned investor, but I’ve been through enough ups and downs that I stay calm through both.

During one 3-year period when my stocks doubled, I didn’t start planning which private jet I’d use during my retirement. When my stocks lost a third of their value over a couple of years, I didn’t sell, and I didn’t start preparing for my future by taste-testing cat food.

I believe in the long-term success of the Canadian and U.S. economies and know that stock market prices will reflect this success over the long run. I prefer to go for the historically higher returns of stocks. I accept that the value of my portfolio will have ups and downs, and I sleep well.

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