To save for your retirement, you need to find a suitable investment vehicle.

Index funds are often touted as the best way of saving for retirement because they charge very low fees and they outperform most managed stock funds.

BUT: Even over long time spans, index investing will not necessarily turn a profit.

Here’s a chart of the Dow Jones from Yahoo Finance:

Dow Jones Industrial Average 1940 – 2007

There’s no doubt that, over long periods of time, tracking the DJI has delivered a decent return. BUT, there’s an awkward looking 20 year period between the early 1960s and early 1980s. During this period, you would have earned close to nothing in an index fund. Imagine putting away your money every month for twenty years for zero capital return. A grim prospect indeed! And there’s no guarantee that this kind of performance won’t happen again.

Don’t worry though – the obvious solution to this grim prospect is not to put all of your eggs in one basket.

My Tips for the Future

• If you’ve started putting money into index funds for your retirement, keep doing it.
• Add a little self-reliance and knowledge to the situation. Learn more about trading and investing to better understand the risks involved in saving for retirement.
• I personally don’t think it’s smart for anyone to put all of his or her retirement savings into localized index funds. Think about investing in three dimensions – time, space and asset-type.
  • Time: Use dollar cost averaging to your advantage – but be prepared to put larger amounts of money in when you think the risk-reward ratio of the investment is highly favorable.
  • Space: Diversify your assets geographically. It’s likely that for the next few years, economic growth will continue to be higher in Asia than in the West.
  • Asset Type: Consider stocks, currencies, commodities, real estate, and bonds. Whether you’re a fundamental investor or a trader, each of these asset classes will continue to offer opportunities in mispricing and in trending.