Question:
On your radio show you said that Suze Orman and others have recommended ditching the S&P 500 Index.  You have said in the past that successful investors are often contrarians. Does this mean that it could be time to invest in this fund instead of selling it? What is your recommendation?
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Paul Merriman:
You are absolutely right that being a contrarian can be fruitful. But unless you are careful, this can lead you astray. To be a contrarian, you essentially rebel against something that represents mainstream thinking. Some mainstream thinking is right on target, while other mainstream thinking can be way off the mark. Knowing which is which can be very tricky.

How do you know what a contrarian would do? Sell emerging markets and invest in the S&P 500 Index? Sell small-cap and/or value funds and invest in the S&P 500 Index? Sell international equities and invest in U.S. funds? Or the other way around? Every one of these is a contrarian action that might or might not make sense.

It’s much easier if you focus on what you should be doing. In my book, that means properly allocating your asset classes, first between equities and fixed income, then carefully within each of those categories.

To state this another way, I recommend that you follow your long-term plan and discipline. (If you don’t have a long-term plan, then you should stop right here until you have a good one.) I think your long-term plan should be based on having the right asset classes, as outlined in our core article “The ultimate buy-and-hold strategy.” You can do this a number of ways, including funds from Dimensional Fund Advisors, Fidelity, Vanguard or through ETFs. This plan calls for massive diversification as the recommended pathway to the highest likelihood of long-term success.

If 10 years ago you had followed our recommendations along these lines, you could have tripled the return of the S&P 500 Index without taking additional risk. There is no assurance that the same thing will happen in the next 10 years, of course. But based on all the academic research we know, supplemented by our own research and eight decades of market history, I’m still recommending now what we recommended in 1998:

•    Follow the assets, not the gurus.
•    Keep your costs low.
•    Control your exposure to risk.
•    Use a professional advisor to keep you on track.
 

If you do those things, you can look at Suze Orman and other self-styled gurus as entertainers instead of advisors. Then you will be on the right track. If you do this in the way that I recommend, many investors will regard you as a contrarian. I will regard you as extremely smart.

Paul Merriman is a financial educator and founder of Merriman