Index vs managed funds

I have a large part of our investments allocated to index funds and
have done fairly well. The indices are the S&P 500 and the total
market.

My concern is another dip like the one experienced between 2000 and the
beginning of 2003. My consideration is to move those assets into T Rowe
Price Capital Appreciation PRWCX and Oakmark Equity and Income OAKBX.
Its all IRA money, so there is no concern about having to pay immediate
taxes on huge capital gains.

The evaluation tool I used is on the MoneyCentral site with data
furnished by Morningstar. I plotted OAKBX, PRWCX, VTSAX (Vanguard Total
Market) and VFINX (Vanguard S&P 500) for growth of $1000 (with
distributions reinvested). Looking at various time scales, the managed
funds did far better when the considered range if before the big dip.
However starting in 2003, they all run pretty close.

It looks like in good times it doesn't matter, but in hard times good
management does matter. Of course there is no guarantee that the
targeted funds will have the same management aboard for the next long
bear market, but what else can be used as a gauge except for prior
performance? Both funds carry the same Morningstar ratings for
performance, risk and return, but they are somewhat differently
invested.

We were in retirement prior to the last big dip and it was not fun
watching our nest egg drop nearly every week for three years running.
Fortunately we didn't need that money at the time and were able to ride
it out.

Comments appreciated.

Bob

Re: Index vs managed funds

I own PRWCX, among a portfolio of 6 TRP funds in my Roth. I am pleased
with it, was when I bought it, and will continue to buy shares in my
Roth IRA.

I believe the fund has recently changed managers. Check that out.
When I bought the fund it was mid cap value. It is now large cap
value. This may also affect allocations on some web sites.

Re: Index vs managed funds

Those are good picks. If you're really close to retirement I would
try to limit my exposure to stocks as much as possible. More bonds,
treasuries, CD's etc...

Also consider:



Hussman has a good hedging strategy that helps him preserve market
cap during bear markets.

Consider using a reverse index fund if something like that happens.
I think the correction will start sometime in the 3rd quarter of this
ear after the S&P gets to about 1350.

Also, get a sub to someone like Dan Sullivan or Richard Russell. They
have very good track records and have called all the right market moves
in the last 25+ yrs.

There are also Nasdaq timing services (Highlight & Intelli-Timer)
that did really well during the last correction.

Lots of options for you. Good luck. Don't believe the prevailing mood
or conventional wisdom. I think you have the right approach.

Bob <> wrote:
> I have a large part of our investments allocated to index funds and
> have done fairly well. The indices are the S&P 500 and the total
> market.
>
> My concern is another dip like the one experienced between 2000 and the
> beginning of 2003. My consideration is to move those assets into T Rowe
> Price Capital Appreciation PRWCX and Oakmark Equity and Income OAKBX.
> Its all IRA money, so there is no concern about having to pay immediate
> taxes on huge capital gains.
>
> The evaluation tool I used is on the MoneyCentral site with data
> furnished by Morningstar. I plotted OAKBX, PRWCX, VTSAX (Vanguard Total
> Market) and VFINX (Vanguard S&P 500) for growth of $1000 (with
> distributions reinvested). Looking at various time scales, the managed
> funds did far better when the considered range if before the big dip.
> However starting in 2003, they all run pretty close.
>
> It looks like in good times it doesn't matter, but in hard times good
> management does matter. Of course there is no guarantee that the
> targeted funds will have the same management aboard for the next long
> bear market, but what else can be used as a gauge except for prior
> performance? Both funds carry the same Morningstar ratings for
> performance, risk and return, but they are somewhat differently
> invested.
>
> We were in retirement prior to the last big dip and it was not fun
> watching our nest egg drop nearly every week for three years running.
> Fortunately we didn't need that money at the time and were able to ride
> it out.
>
> Comments appreciated.
>
> Bob
>

Re: Index vs managed funds

1. Is your portfolio allocated (to bonds, large caps, small
caps, international, etc.) per your risk tolerance and age?

2. I think you should keep reading about index funds. Some
time ago I put together a number of sources on the subject
that might help. See
. Dale
Maley posts here from time to time, and he has a site on
this subject that I think is good. I linked it to mine.

3. Some (many?) argue that stocks are again overpriced,
though not by as much circa 1999 or so. I personally have
more of my portfolio in cash than I have ever had. I am also
holding a lot of stocks, but they're mostly large blue
chips, yada yada. Google for {Shiller stocks "irrational
exuberance"} for the recent opinions of one guru, the guy
who predicted IIRC the 2000 crash, on this.

4. Ask your question at misc.invest.financial-plan as well.
It is moderated, but the answers are "well-tempered."


"Bob" <> wrote
> I have a large part of our investments allocated to index
funds and
> have done fairly well. The indices are the S&P 500 and the
total
> market.

snip for brevity

Re: Index vs managed funds

Bob wrote: Its all IRA money, so there is no concern about having to
pay immediate
taxes on huge capital gains.


I probably got bored with HSGFX (though limited by comparison, as is
ANDEX), and with PRWCX, and sold both. I kept OAK, but am not sure if I
will with ANDEX even though it's large - $250K min. Anything else I
have to toss into the salada is closed:

Re: Index vs managed funds

What you have to guard against here is hindsight. In any period some managed
funds will do better than index funds. Over a year the average figure is
that about 25% of managed funds will beat index funds. Over longer periods
the fraction winning reduces. I am not clear why you chose the particular
managed funds you mention. They may just be the ones available to you or you
may have picked them because they have a good record over recent years.
Whatever the reason the fact that these particular ones beat index funds may
be due to chance rather than manager skill and there is no certainty that
they will continue to do well. Looking at it the other way, managed funds
usually beat about 75% of managed funds so the odds are strongly in favour
of index funds unless you can predict which managed funds will do well in
the future.

The key task is to pick the managed funds that will beat the index funds in
the next year or so, not the last. Most authorities have found that there is
no way of doing this. Relying on fund managers who were successful in the
past does not work. Buying hot funds that have done well in the last 1,2,3,5
or 10 years does no better than chance. The odds of success are better with
index funds.

According to Modern Portfolio Theory the optimum portfolio is to buy the
market as a whole. This means not just the US market but the world market as
a whole, which includes the US market as a part. In 2005 a broadly
diversified set of funds like this in the UK invested in the UK, US, Europe,
Japan and Pacific made about 26% while the UK market made about 15%.
Surprisingly, MPT does work!


"Bob" <> wrote in message
news:
>I have a large part of our investments allocated to index funds and
> have done fairly well. The indices are the S&P 500 and the total
> market.
>
> My concern is another dip like the one experienced between 2000 and the
> beginning of 2003. My consideration is to move those assets into T Rowe
> Price Capital Appreciation PRWCX and Oakmark Equity and Income OAKBX.
> Its all IRA money, so there is no concern about having to pay immediate
> taxes on huge capital gains.
>
> The evaluation tool I used is on the MoneyCentral site with data
> furnished by Morningstar. I plotted OAKBX, PRWCX, VTSAX (Vanguard Total
> Market) and VFINX (Vanguard S&P 500) for growth of $1000 (with
> distributions reinvested). Looking at various time scales, the managed
> funds did far better when the considered range if before the big dip.
> However starting in 2003, they all run pretty close.
>
> It looks like in good times it doesn't matter, but in hard times good
> management does matter. Of course there is no guarantee that the
> targeted funds will have the same management aboard for the next long
> bear market, but what else can be used as a gauge except for prior
> performance? Both funds carry the same Morningstar ratings for
> performance, risk and return, but they are somewhat differently
> invested.
>
> We were in retirement prior to the last big dip and it was not fun
> watching our nest egg drop nearly every week for three years running.
> Fortunately we didn't need that money at the time and were able to ride
> it out.
>
> Comments appreciated.
>
> Bob
>

Re: Index vs managed funds

Bob wrote: Its all IRA money, so there is no concern about having to
pay immediate
taxes on huge capital gains.


I probably got bored with HSGFX (though limited by comparison, as is
ANDEX), and with PRWCX, and sold both. I kept OAK, but am not sure if I
will with ANDEX even though it's large - $250K min. Anything else I
have to toss into the salada is closed:

Re: Index vs managed funds

"Bob" <> wrote

> My concern is another dip like the one experienced between 2000 and the
> beginning of 2003. My consideration is to move those assets into T Rowe
> Price Capital Appreciation PRWCX and Oakmark Equity and Income OAKBX.
> Its all IRA money, so there is no concern about having to pay immediate
> taxes on huge capital gains.
>
> The evaluation tool I used is on the MoneyCentral site with data
> furnished by Morningstar. I plotted OAKBX, PRWCX, VTSAX (Vanguard Total
> Market) and VFINX (Vanguard S&P 500) for growth of $1000 (with
> distributions reinvested). Looking at various time scales, the managed
> funds did far better when the considered range if before the big dip.
> However starting in 2003, they all run pretty close.
>
> It looks like in good times it doesn't matter, but in hard times good
> management does matter. Of course there is no guarantee that the
> targeted funds will have the same management aboard for the next long
> bear market, but what else can be used as a gauge except for prior
> performance? Both funds carry the same Morningstar ratings for
> performance, risk and return, but they are somewhat differently
> invested.

Bob, I own both PRWCX and OAKBX. It isn't so much that good management does
better in bad times. It's what they invest in that matters. When growth is
in, it will give better returns than more conservative funds. The problem is
that growth funds invest in growth companies all the time, whether growth is
in or out of favor. OAKBX and PRWCX are concerned with capital preservation
and invest conservatively most all of the time. When growth is in these two
funds won't look so great. You'll make money but not like you will in a good
growth fund.

Here's an example:
1999, PRWCX, +7.07%
OAKBX, +7.90%
WOGSX, +50.14%

2001, WOGSX -39.05%
OAKBX +18.01%
PRWCX +10.26%

This is why I own these two funds, it has everythimg to do with risk.

Re: Index vs managed funds

David Wilkinson wrote:

>What you have to guard against here is hindsight. In any period some managed
>funds will do better than index funds. Over a year the average figure is
>that about 25% of managed funds will beat index funds. Over longer periods
>the fraction winning reduces. I am not clear why you chose the particular
>managed funds you mention. They may just be the ones available to you or you
>may have picked them because they have a good record over recent years.
>Whatever the reason the fact that these particular ones beat index funds may
>be due to chance rather than manager skill and there is no certainty that
>they will continue to do well. Looking at it the other way, managed funds
>usually beat about 75% of managed funds so the odds are strongly in favour
>of index funds unless you can predict which managed funds will do well in
>the future.
>
>The key task is to pick the managed funds that will beat the index funds in
>the next year or so, not the last. Most authorities have found that there is
>no way of doing this. Relying on fund managers who were successful in the
>past does not work. Buying hot funds that have done well in the last 1,2,3,5
>or 10 years does no better than chance. The odds of success are better with
>index funds.
>
>According to Modern Portfolio Theory the optimum portfolio is to buy the
>market as a whole. This means not just the US market but the world market as
>a whole, which includes the US market as a part. In 2005 a broadly
>diversified set of funds like this in the UK invested in the UK, US, Europe,
>Japan and Pacific made about 26% while the UK market made about 15%.
>Surprisingly, MPT does work!
>
>
>"Bob" <> wrote in message
>news:
>
>
>>I have a large part of our investments allocated to index funds and
>>have done fairly well. The indices are the S&P 500 and the total
>>market.
>>
>>My concern is another dip like the one experienced between 2000 and the
>>beginning of 2003. My consideration is to move those assets into T Rowe
>>Price Capital Appreciation PRWCX and Oakmark Equity and Income OAKBX.
>>Its all IRA money, so there is no concern about having to pay immediate
>>taxes on huge capital gains.
>>
>>The evaluation tool I used is on the MoneyCentral site with data
>>furnished by Morningstar. I plotted OAKBX, PRWCX, VTSAX (Vanguard Total
>>Market) and VFINX (Vanguard S&P 500) for growth of $1000 (with
>>distributions reinvested). Looking at various time scales, the managed
>>funds did far better when the considered range if before the big dip.
>>However starting in 2003, they all run pretty close.
>>
>>It looks like in good times it doesn't matter, but in hard times good
>>management does matter. Of course there is no guarantee that the
>>targeted funds will have the same management aboard for the next long
>>bear market, but what else can be used as a gauge except for prior
>>performance? Both funds carry the same Morningstar ratings for
>>performance, risk and return, but they are somewhat differently
>>invested.
>>
>>We were in retirement prior to the last big dip and it was not fun
>>watching our nest egg drop nearly every week for three years running.
>>Fortunately we didn't need that money at the time and were able to ride
>>it out.
>>
>>Comments appreciated.
>>
>>Bob
>>
>>
>>
>
>
>
>
Is it really possible to have a practical MPT fund ?. Who is the states
is considered the one to beat (or buy).
L

Re: Index vs managed funds

I was listening to cnbc a couple of days ago and some well known fellow,
whose name escapes me (not a cnbc talking head, but someone respectable)
said that 50% of the time in any given year, an index fund would beat a
managed fund. He went on and finally got to long term and said that over 5
years and more, and index fund would beat a managed fund over 90% of the
time, because the index fund follows the market, and a managed fund depends
on fund choices...

Happy Guy, "Laissez les bons temps roulez"
..
..
"Ed" <> wrote in message
news:
>
> Bob, I own both PRWCX and OAKBX. It isn't so much that good management
> does better in bad times. It's what they invest in that matters. When
> growth is in, it will give better returns than more conservative funds.
> The problem is that growth funds invest in growth companies all the time,
> whether growth is in or out of favor. OAKBX and PRWCX are concerned with
> capital preservation and invest conservatively most all of the time. When
> growth is in these two funds won't look so great. You'll make money but
> not like you will in a good growth fund.
>
> Here's an example:
> 1999, PRWCX, +7.07%
> OAKBX, +7.90%
> WOGSX, +50.14%
>
> 2001, WOGSX -39.05%
> OAKBX +18.01%
> PRWCX +10.26%
>
> This is why I own these two funds, it has everythimg to do with risk.
>

Re: Index vs managed funds

Well put. Now for the numbers to backup your statements:



As for beating index funds, it must be done with the same level of risk.
Very tough.



"David Wilkinson" <> wrote in message
news:dpul3g$9g2$
> What you have to guard against here is hindsight. In any period some
> managed funds will do better than index funds. Over a year the average
> figure is that about 25% of managed funds will beat index funds. Over
> longer periods the fraction winning reduces. I am not clear why you chose
> the particular managed funds you mention. They may just be the ones
> available to you or you may have picked them because they have a good
> record over recent years. Whatever the reason the fact that these
> particular ones beat index funds may be due to chance rather than manager
> skill and there is no certainty that they will continue to do well.
> Looking at it the other way, managed funds usually beat about 75% of
> managed funds so the odds are strongly in favour of index funds unless you
> can predict which managed funds will do well in the future.
>
> The key task is to pick the managed funds that will beat the index funds
> in the next year or so, not the last. Most authorities have found that
> there is no way of doing this. Relying on fund managers who were
> successful in the past does not work. Buying hot funds that have done well
> in the last 1,2,3,5 or 10 years does no better than chance. The odds of
> success are better with index funds.
>
> According to Modern Portfolio Theory the optimum portfolio is to buy the
> market as a whole. This means not just the US market but the world market
> as a whole, which includes the US market as a part. In 2005 a broadly
> diversified set of funds like this in the UK invested in the UK, US,
> Europe, Japan and Pacific made about 26% while the UK market made about
> 15%. Surprisingly, MPT does work!
>
>
> "Bob" <> wrote in message
> news:
>>I have a large part of our investments allocated to index funds and
>> have done fairly well. The indices are the S&P 500 and the total
>> market.
>>
>> My concern is another dip like the one experienced between 2000 and the
>> beginning of 2003. My consideration is to move those assets into T Rowe
>> Price Capital Appreciation PRWCX and Oakmark Equity and Income OAKBX.
>> Its all IRA money, so there is no concern about having to pay immediate
>> taxes on huge capital gains.
>>
>> The evaluation tool I used is on the MoneyCentral site with data
>> furnished by Morningstar. I plotted OAKBX, PRWCX, VTSAX (Vanguard Total
>> Market) and VFINX (Vanguard S&P 500) for growth of $1000 (with
>> distributions reinvested). Looking at various time scales, the managed
>> funds did far better when the considered range if before the big dip.
>> However starting in 2003, they all run pretty close.
>>
>> It looks like in good times it doesn't matter, but in hard times good
>> management does matter. Of course there is no guarantee that the
>> targeted funds will have the same management aboard for the next long
>> bear market, but what else can be used as a gauge except for prior
>> performance? Both funds carry the same Morningstar ratings for
>> performance, risk and return, but they are somewhat differently
>> invested.
>>
>> We were in retirement prior to the last big dip and it was not fun
>> watching our nest egg drop nearly every week for three years running.
>> Fortunately we didn't need that money at the time and were able to ride
>> it out.
>>
>> Comments appreciated.
>>
>> Bob
>>
>
>

Re: Index vs managed funds

"NoEd" <> wrote in message
news:
> Well put. Now for the numbers to backup your statements:
>
>
>
> As for beating index funds, it must be done with the same level of risk.
> Very tough.

It's better to beat them with lower risk, should be easy.

Re: Index vs managed funds

L wrote:
>
> >
> Is it really possible to have a practical MPT fund ?. Who is the states
> is considered the one to beat (or buy).
> L

the Vanguard Total Market Fund comes about as close to a full US Market
fund as you can get (David Swensen's new book is good on this, ditto
Burton Malkiel Random Walk Down Wall Street). They also offer a global
index fund.

One issue, to my mind, is that market capitalisation weighted funds
(which all index funds are) are potentially quite distorting. For
example Japan was half the world stock exchange index throughout the
90s (ex US). And Japan was a total dog-- that market capitalisation
was the all-time bubble, slowly deflating. Efficient Markets Theory
(which is not entirely MPT) doesn't allow for 'bubbles', but in
practice they seem to occur.

There is a strong case for a US dollar investor to have 20% of her
assets in a global equity index fund, but I doubt there is a case for,
say, 50% (unless that investor spends half of their consumption and
future consumption outside the US dollar).

Re: Index vs managed funds

Howdy Hap,

Well, I'll even concede a higher percentage of index funds beating
their managed peers - say 85%. That's OK because there are 1000's of
funds and some have done better than their respective index for years
running. With a little research, these can be found.

Where managed funds really seem to have an advantage is around the
edges, if you will . . . the weird stuff that adds herbs and spices to
our allocation stew. Emerging mkts, small and micro caps, int'l wee
stuff, and some of the sector plays. In these types of categories, I'd
posit that managed funds do much better than their respective index -
annually and over time.

best,

rono

Re: Index vs managed funds

Bob wrote:

> It looks like in good times it doesn't matter, but in hard times good
> management does matter. Of course there is no guarantee that the
> targeted funds will have the same management aboard for the next long
> bear market, but what else can be used as a gauge except for prior
> performance? Both funds carry the same Morningstar ratings for
> performance, risk and return, but they are somewhat differently
> invested.
>
> We were in retirement prior to the last big dip and it was not fun
> watching our nest egg drop nearly every week for three years running.
> Fortunately we didn't need that money at the time and were able to ride
> it out.

No offense, but it looks like you're attempting some kind of market
timing here: When the next period of "good times" happens, what do you
plan to do then? Move back to index funds? Or even to more aggressive
funds?

I claim that predicting the next period of "good times" or "bad times"
is utterly impossible. We can only look at relative risk, and leave
predictions to Nostradamus.

So the issue for you, IMHO, is risk tolerance. You rightly didn't enjoy
seeing your index funds decline by 40%. You need to decide how big a
decline you can ride thru without losing sleep over it. And then invest
accordingly--and stick to it!

Let's say, for example, that you couldn't stomach a 40% decline in your
index fund but you could tolerate a 20% decline. Then you should look
for funds whose "beta coefficient" (relative risk) is only half that of
the market as a whole. But when you invest in those funds, your return
will be lower in the next period of "good times": If the market rises
by 40%, your funds may only rise by 20%.

If you're hoping to achieve *both* high returns in good times, and only
small declines in bad times, you're taking on a far bigger challenge
than you realize.


--
Steven D. Litvintchouk
Email:

Remove the NOSPAM before replying to me.

Re: Index vs managed funds

I think Steven brings up one of a few points which needs to be
considered:

If the market declines 40%, what would you do with the investment?
If the market goes up 4% and managed funds are showing a 15% return,
what would you do?
If the market goes up 50% and managed funds are going up 100%+, what
would you do
If the market goes down 30% and the managed funds go down 90%, what
would you do?

The point being will you "react" to the market by

a) moving existing assets around
b) selling the losers
c) buy more of the winners
d) buy more of the losers

when stocks I own go down, I buy more. Examples include DCN and XRX
about 6 years ago. I know several people which sold at a loss on both
of these. My cost basis has these two at a gain right now, and I'm
still holding.

Re: Index vs managed funds

jIM wrote:

> I think Steven brings up one of a few points which needs to be
> considered:
>
> If the market declines 40%, what would you do with the investment?
> If the market goes up 4% and managed funds are showing a 15% return,
> what would you do?
> If the market goes up 50% and managed funds are going up 100%+, what
> would you do
> If the market goes down 30% and the managed funds go down 90%, what
> would you do?
>
> The point being will you "react" to the market by
>
> a) moving existing assets around
> b) selling the losers
> c) buy more of the winners
> d) buy more of the losers

My recommendation on this has not changed in many years: You should
start with an investment strategy you can live with. That means you
need to know what your end-goal is, and what your risk tolerance is
along the way. And then stick to it!

If you're trying to set up a retirement nest egg, your first step is to
calculate how much money you will NEED in your retirement. Not how much
you WANT (everybody always wants to be a gazillionaire), but how much
you NEED (taking Social Security and inflation into account) to be able
to live the lifestyle you want. From that you can calculate the needed
annualized return of your assets, and you can combine that with your
risk tolerance to set up your portfolio.



--
Steven D. Litvintchouk
Email:

Remove the NOSPAM before replying to me.

Re: Index vs managed funds

All points well taken. Thank you very much to everyone. I've filled out
forms to make IRA transfers from Vanguard to T Rowe and to Oakmark, but
haven't mailed them yet (and may never do it).

If I had next year's newspapers I'd know exactly what to do. Right now
my chief goal is to preserve capital. The nestegg should outlast us
even with a 50% loss, but who knows? Perhaps the most prudent thing to
do would be to move everything into a money market fund, but thats
boring. We'd also be facing an enormous capital gains tax on
nonsheltered investments as most of them have been held for a dozen
years or more.

Yes, I keep reading about balancing one's portfolio with bonds, but I
never have and have certainly met my goals. Bonds seem to be not much
better than a good money market fund and the money market never looses
value.

Bob

Re: Index vs managed funds

"Bob" <> wrote
> Perhaps the most prudent thing to
> do would be to move everything into a money market fund,
but thats
> boring.

I think I'm going to make this into a signature for my
financial posts. Okay?

;-)

> Yes, I keep reading about balancing one's portfolio with
bonds, but I
> never have and have certainly met my goals. Bonds seem to
be not much
> better than a good money market fund and the money market
never looses
> value.

Easy to say now, with the curve inverted!

But to each his own. :-)

Re: Index vs managed funds

jIM wrote: ... The point being will you "react" to the market by ...

That you you think you will, I think is a valid point. An idea one
holds, say, most often presented conventionally as the B&H stategy on
the front pages of fund firms isn't necessarily going to be a continued
collective representation for your commitment to the investment aim of
the firm. Whether or not there's a general overlap of methodology or
averages to display, if what emerges may be perceived different. You
buy into weak positions for value, is an example, instead of using the
rationale of averages to wait out a downturn. What you may have
effectively said, then, is you are not locked into one certain
methodology, nor disagreeable to incorporating other devices into an
evolving end. How can that be differentiated to an exclusion of what
is not of you that wills, from external circumstances that operate upon
oneself, in some fasion, to modify a behavioral end? Are not such very
factors, indeed, embodied in a complexity of global capital markets,
and are you no less readily willing to equate your sum upon a trite
surmise averages and generalities concern? Risk, in itself, seems to
me to suffice for the purpose of disputation. Given a willingness to
directly experience consequence by actively engaging risk will be most
apparent and immediately formulative, whether a preparatory stance one
assumes prior to risk taking is undertaken in the light of sound
experience reasoning abides, or without forethought losses incur. As
you have said, you have experience to know when to buy when others have
not a same sense to know by worth what true values proffer. As a
stategy, perhaps you see yourself a contrarian. . . May I ask, have
you ever lost large, and how has that modified your stategy?

Re: Index vs managed funds

"darkness39" <> wrote in message
news:
>
> Efficient Markets Theory
> (which is not entirely MPT) doesn't allow for 'bubbles',
>
Are you sure? It only says all *available* information are priced in.
Future info are not available info.

Re: Index vs managed funds

"Steven L." <> wrote in message
news:f%Twf.6184$%
>
> Let's say, for example, that you couldn't stomach a 40% decline in your
> index fund but you could tolerate a 20% decline. Then you should look
> for funds whose "beta coefficient" (relative risk) is...
>
Well, the problem is that the market has a way of going down another 40%
when you thought it couldn't decline any lower than 40%. The only way to
ensure no more than 20% decline is to keep 80% in cash equivalents.

Re: Index vs managed funds

Bob wrote:

> All points well taken. Thank you very much to everyone. I've filled out
> forms to make IRA transfers from Vanguard to T Rowe and to Oakmark, but
> haven't mailed them yet (and may never do it).
>
> If I had next year's newspapers I'd know exactly what to do. Right now
> my chief goal is to preserve capital. The nestegg should outlast us
> even with a 50% loss, but who knows? Perhaps the most prudent thing to
> do would be to move everything into a money market fund, but thats
> boring. We'd also be facing an enormous capital gains tax on
> nonsheltered investments as most of them have been held for a dozen
> years or more.

One way that you can greatly reduce risk without greatly lowering
returns is diversification: Look for investments all of which may have
good long-term potential, but which are poorly correlated with each
other. That way, at any given time, one of your investments will be
doing well even when the others are not.

In the past, I have suggested that newbies consider adding a 15%
position in real-estate (REIT) funds to their portfolio. Over the
years, REIT funds like Fidelity Real Estate have done well. But their
performance isn't well correlated with the S&P 500: Fidelity Real
Estate did well in 2000-2002 while the broader stock market declined.
REIT funds also throw off a dividend for income.

If you have the extra cash, I have also suggested a 5% position in hard
asset funds like natural resources funds or maybe precious metals funds.
That makes a good insurance policy against inflationary times. Again,
notice how well those funds have been doing in the last couple of years,
and notice how well they did in the last inflationary period of the 1970's.

You have to be able to accept that at any point in time, some of your
investments won't be doing well--but others will.


--
Steven D. Litvintchouk
Email:

Remove the NOSPAM before replying to me.

Re: Index vs managed funds

The Lehman Aggregate Bond Index is an excellent diversifier on a
conditional correlation basis. It's investable via ticker symbol: AGG

It's important to look at this investment on a "total return" basis
since it pays significant dividends. To do this you can use
stockcharts.com (where charts are adjusted for dividends &
distributions) or the "investment growth" chart on microsoft investor
(which account for dividends & distributions in the equity curve
calculation).

Of course REIT's and metals are excellent diversifiers as well.

Re: Index vs managed funds

"TK Sung" <> wrote in message
news:IvYwf.5084$
>
> "Steven L." <> wrote in message
> news:f%Twf.6184$%
>>
>> Let's say, for example, that you couldn't stomach a 40% decline in your
>> index fund but you could tolerate a 20% decline. Then you should look
>> for funds whose "beta coefficient" (relative risk) is...
>>
> Well, the problem is that the market has a way of going down another 40%
> when you thought it couldn't decline any lower than 40%. The only way to
> ensure no more than 20% decline is to keep 80% in cash equivalents.
>
>
A slightly extreme view if you diversify as the market has never gone all
the way to zero, but it would be true if you only had one stock. This point
is covered in "The Random Walk Guide to Investing" by Malkiel, page 94 in my
hardback copy. He gives a table of "Ability to withstand loss and maximum
equity exposure". I won't reproduce the whole thing as you can look it up
but a couple of lines from it are:

Max Tolerable Loss (%) Max exposure to common stocks (%)

20 50

40 90

Of course, this assumes that you are going to sit there holding and doing
nothing while the market plunges. Flasho was making a good point in another
post, at least I think he was, that our investment strategies can rapidly
change with the market. In good times, like the last couple of years, I can
almost convince myself I have gone over to an MPT-style B&H but it does not
take much of a pause, let alone a correction, for timing to suddenly look
very attractive again. My current position of about 85% in equity funds and
stocks does not actually mean I would tolerate a 40% loss. No way! As soon
as any serious decline began I would sell most of it and move into cash.

Re: Index vs managed funds

"Bob" <> wrote in message
news:
>I have a large part of our investments allocated to index funds and
> have done fairly well. The indices are the S&P 500 and the total
> market.
>
> My concern is another dip like the one experienced between 2000 and the
> beginning of 2003. My consideration is to move those assets into T Rowe
> Price Capital Appreciation PRWCX and Oakmark Equity and Income OAKBX.
> Its all IRA money, so there is no concern about having to pay immediate
> taxes on huge capital gains.
>
> The evaluation tool I used is on the MoneyCentral site with data
> furnished by Morningstar. I plotted OAKBX, PRWCX, VTSAX (Vanguard Total
> Market) and VFINX (Vanguard S&P 500) for growth of $1000 (with
> distributions reinvested). Looking at various time scales, the managed
> funds did far better when the considered range if before the big dip.
> However starting in 2003, they all run pretty close.
>
> It looks like in good times it doesn't matter, but in hard times good
> management does matter. Of course there is no guarantee that the
> targeted funds will have the same management aboard for the next long
> bear market, but what else can be used as a gauge except for prior
> performance? Both funds carry the same Morningstar ratings for
> performance, risk and return, but they are somewhat differently
> invested.
>
> We were in retirement prior to the last big dip and it was not fun
> watching our nest egg drop nearly every week for three years running.
> Fortunately we didn't need that money at the time and were able to ride
> it out.
>
> Comments appreciated.
>
> Bob

My thoughts:
1. Why not have some in both an index fund and some in a managed fund?
Having one fund that is set versus one that is managed provides a level of
diversifying as well--one reacts to changes in the economy and earnings, the
other does not.
2. Perhaps look at other indices, too--the Amex index has done very well of
late, as has the Russell 2000.
3. International funds provide additional diversification...one ad blurb I
saw a few years back indicated that the best return:risk ratio was 2 parts
U.S. to 1 part International...I've been shooting for this ratio in my
401(k), IRA, and Roth IRA and have beaten the S&P 500 each year in each
category except one (my '05 IRA returns seem to have been below the
S&P...due to U.S. funds...my international fund, Fidelity Diversified
International, saved me from a negative return in my IRA's)...qualifier:
I've had some of my international money in gold funds, which have done well
since '01.

D

Re: Index vs managed funds

"Tess Millay" <> wrote in message
news:rcAwf.4447$
> 1. Is your portfolio allocated (to bonds, large caps, small
> caps, international, etc.) per your risk tolerance and age?
>
> 2. I think you should keep reading about index funds. Some
> time ago I put together a number of sources on the subject
> that might help. See
> . Dale
> Maley posts here from time to time, and he has a site on
> this subject that I think is good. I linked it to mine.
>
> 3. Some (many?) argue that stocks are again overpriced,
> though not by as much circa 1999 or so. I personally have
> more of my portfolio in cash than I have ever had. {snip}

I'm increasing my cash portions, too...several bear indicators are out
there:
1. Trade deficit--new records in 3 of the past 11 months...an analyst on
CNBC (from Citi or Chase?) indicated a 10% drop in the dollar vs. foreign
currencies in 2006, meaning foreign investors will be skiddish.
2. FOMC tightening...another analyst stated that the U.S. markets experience
a downturn after the Fed ends a tightening cycle...it appears that the FOMC
will raise interest rates only 1-2 more times this year.
3. Inverted yield curve--foretold a resession 8 of the last 9 times---the
2-year yield has been higher than the 5-year for over 2 weeks now, albeit
slightly.
4. Federal debt--the U.S. Treasury is going to issue $100 billion in
treasury securities over the next month, one of the highest totals
ever...that money has to come from somewhere...can you say "overbought U.S.
stock market?"
5. Higher oil prices.
6. Mid-term elections--uncertainty always spooks the market.
7. Baby boomers beginning to retire...first Boomers were born in 1946--they
all will have turned 59½ by the end of June...some will retire, and start
taking money out of their retirement plans (mostly stocks) instead of
putting money in...those that keep on working are likely to start shifting
some money to safer investments.

2006 has been exciting so far...almost everyday I sell on rises to lock in
profits.

D

Re: Index vs managed funds

"Dave Hannes" <> wrote
> I'm increasing my cash portions, too...several bear
indicators are out
> there:

snip for brevity

All you list are fair indicators.

I personally rely increasingly on valuation theory, as
espoused by Benjamin Graham et al., as a barometer of the
market.

> 2. FOMC tightening...another analyst stated that the U.S.
markets experience
> a downturn after the Fed ends a tightening cycle...it
appears that the FOMC
> will raise interest rates only 1-2 more times this year.

I hope Greenspan's replacement continues his policy of
raising interest rates to keep inflation in check. AFAIC,
the market is overvalued again. That it's less overvalued
than, say, 1999 is irrelevant. People (most "professional"
stock analyst whores and the typical, uninformed,
thoughtless stock investor) need to get a grip. Slow and
steady, hard work and patience, not looking for a quick
buck, etc. win the race.

Like you said (I think), I'm taking profits on some of my
stock positions, slowly but surely. I am also mentally
prepared to take a hit within the next two years on the ones
I am keeping, though hopefully the cushion I built in at
purchase eases the pain.

Re: Index vs managed funds

"As
you have said, you have experience to know when to buy when others have

not a same sense to know by worth what true values proffer. As a
stategy, perhaps you see yourself a contrarian. . . May I ask, have
you ever lost large, and how has that modified your stategy? "

I have sold three securities in my short investment lifetime (~8
years):

SDRC (company stock, sold on 2 or 3 different occasions). I broke
even. There was definitely a loss on one income tax return (measured
in hundreds of dollars) and sold the stocks for downpayment on my first
house and again sold more for wedding expenses.

About a year after moving in I sold my "Strong Blue Chip 100" fund. I
think this paid for some wedding expenses, but don't remember. Two
reasons, it changed it's investment strategy and I preferred to keep my
money in other investments. I lost money on certain purchases, but
overall I think my income tax return showed a net capital gain.

EDS (company stock, sold prior to moving into second house). I have to
calculate this gain/loss for my 2005 tax return. estimates suggest I
lost money because I started working for EDS when the stock was at $60.
It hasn't seen $25 for years, though.

I still hold:

MSFT, BAX, DCN, ORCL, XRX, PG, F, MAT and ALD.

I am still buying PG every month.

I buy thru netstock and haven't figured out how to have netstock tell
me if I have a gain/loss. Some of those stocks are in a custodial
account for my god daugther, and I have little need to sell any of the
securities anyway.

Re: Index vs managed funds

darkness39 wrote:

> There is a strong case for a US dollar investor to have 20% of her
> assets in a global equity index fund, but I doubt there is a case for,
> say, 50% (unless that investor spends half of their consumption and
> future consumption outside the US dollar).

What if the said US dollar investor purchases foreign-made goods? Or
relies on foreign commodities like oil?

Re: Index vs managed funds

I think the 20% loss tolerance to a maximum exposure of 50% equities
makes sense.

I think the 40% loss tolerance to a maximum exposure of 90% makes "less
sense" but is still accurate.

My question to this would be "what is maximum tolerable loss". I don't
like losing any money, so my maximum tolerable loss is zero. But I
assume I may lose **some** money while investing with hopes of time
erasing any loss. Should there be a third column there for time to
recover loss?

Re: Index vs managed funds

According to Malkiel's table if you want to lose no more than 5% then your
exposure to stocks should be no more than 20% of your portfolio. For 0% loss
you presumably should not be in stocks at all!

"jIM" <> wrote in message
news:
>I think the 20% loss tolerance to a maximum exposure of 50% equities
> makes sense.
>
> I think the 40% loss tolerance to a maximum exposure of 90% makes "less
> sense" but is still accurate.
>
> My question to this would be "what is maximum tolerable loss". I don't
> like losing any money, so my maximum tolerable loss is zero. But I
> assume I may lose **some** money while investing with hopes of time
> erasing any loss. Should there be a third column there for time to
> recover loss?
>

Re: Index vs managed funds

"jIM" <> wrote in message
news:


[snip]

> My question to this would be "what is maximum tolerable loss". I don't
> like losing any money, so my maximum tolerable loss is zero. But I
> assume I may lose **some** money while investing with hopes of time
> erasing any loss. Should there be a third column there for time to
> recover loss?

This is an excellent point. I think some may think it goes without saying
that you should only invest long-term money in the stock market. We can
argue about what that means but it generally means money you won't need in
the next seven or more years (IMHO).

People can, no doubt, quote freakish periods in the past where it would have
taken a lot longer than this to be made whole again, after a downdraft.
There is no certainty but chances are you can have zero loss if you can wait
long enough. If this is money you need soon, for a down-payment, marriage
or tuition eg, then you shouldn't put it at risk at all.

-herb

Re: Index vs managed funds

Evojeesus wrote:
> darkness39 wrote:
>
> > There is a strong case for a US dollar investor to have 20% of her
> > assets in a global equity index fund, but I doubt there is a case for,
> > say, 50% (unless that investor spends half of their consumption and
> > future consumption outside the US dollar).
>
> What if the said US dollar investor purchases foreign-made goods? Or
> relies on foreign commodities like oil?

most commodities are priced in US dollars. Which opens up an
interesting conundrum-- if oil is priced in US dollars, but the US is
not self sufficient in oil, do we need a currency hedge?

I am not sure there is a theoretical answer. A practical one might be
that holdings in energy companies hedge oil prices (to some extent).

As to foreign made goods, the external sector is relatively small in
the US economy (as opposed to the Canadian, where it is nearly 1/3rd,
or the British where it is 1/4). EEven the Japanese make their cars in
the US, with US sourced parts!

That said, if you can really work out what percentage of your *future*
consumption will be in non-USD items, there is a case for hedging it.

Another important factor is that, last time I checked, 40% of SP500
earnings come from outside the US, so there is a natural hedge there,
too.

Diversifying outside your home market also exposes you to risk the
other way. For example, I have a prior expectation that the Euro is
way overvalued (and this would be more obvious if the US was pursuing a
rational fiscal policy) and may eventually cease to exist in its
current form (the infrastructure is in place to dissolve it, eg the
national banks still exist). If it does so, the US investor heavily
invested in euro stocks, could take a lot of pain.

Re: Index vs managed funds

Good point and welcome to the debate about the definition of Efficient
Capital Markets.

However a rational market would price in the probability of future
bubbles, and they would not occur, because short sellers would
eliminate them. Any rapid fall in the value of an asset would simply
be the consequence of changed information about the future, not
unrealistic expectations.

Re: Index vs managed funds

jIM wrote:

> I think the 20% loss tolerance to a maximum exposure of 50% equities
> makes sense.
>
> I think the 40% loss tolerance to a maximum exposure of 90% makes "less
> sense" but is still accurate.
>
> My question to this would be "what is maximum tolerable loss". I don't
> like losing any money, so my maximum tolerable loss is zero. But I
> assume I may lose **some** money while investing with hopes of time
> erasing any loss. Should there be a third column there for time to
> recover loss?

It's impossible to predict the future, so all we can do is look at the
time to recover loss in the last 100 years. And you might well find
that data to be rather distressing:



Worst case of 20th century: In 1929, the Dow Jones Industrial Average
peaked at 380. Then it began a major decline during the Great
Depression. The DJIA didn't fully recover back to 380 until 1954--25
years later.

Second worst case: In 1966, the DJIA peaked at 1000. And that's as
high as it went thru the 1970's, declining way below that value in bear
markets, but never managing to penetrate significantly above 1000 in
bull markets. It finally broke decisively above 1000 in 1982 (and has
remained above 1000 ever since.) Since the 1970's, was a period of high
inflation, you were actually losing real value in the stock market from
1966 thru 1982--16 years of negative returns. (Only the relatively high
dividends being paid by some stocks cushioned this loss at the time.)

The time to recover loss can be well over a decade; once it took 16
years, and once it took 25 years.

So the moral of the story is: Don't invest in the stock market unless
you can tie up the money for way more than 10 years. Hopefully for 30
years.


--
Steven D. Litvintchouk
Email:

Remove the NOSPAM before replying to me.

Re: Index vs managed funds

"Steven L." <> wrote in message
news:rfgxf.8065$M%
> jIM wrote:
>
> > I think the 20% loss tolerance to a maximum exposure of 50% equities
> > makes sense.
> >
> > I think the 40% loss tolerance to a maximum exposure of 90% makes "less
> > sense" but is still accurate.
> >
> > My question to this would be "what is maximum tolerable loss". I don't
> > like losing any money, so my maximum tolerable loss is zero. But I
> > assume I may lose **some** money while investing with hopes of time
> > erasing any loss. Should there be a third column there for time to
> > recover loss?
>
> It's impossible to predict the future, so all we can do is look at the
> time to recover loss in the last 100 years. And you might well find
> that data to be rather distressing:
>
>
>
> Worst case of 20th century: In 1929, the Dow Jones Industrial Average
> peaked at 380. Then it began a major decline during the Great
> Depression. The DJIA didn't fully recover back to 380 until 1954--25
> years later.
>
> Second worst case: In 1966, the DJIA peaked at 1000. And that's as
> high as it went thru the 1970's, declining way below that value in bear
> markets, but never managing to penetrate significantly above 1000 in
> bull markets. It finally broke decisively above 1000 in 1982 (and has
> remained above 1000 ever since.) Since the 1970's, was a period of high
> inflation, you were actually losing real value in the stock market from
> 1966 thru 1982--16 years of negative returns. (Only the relatively high
> dividends being paid by some stocks cushioned this loss at the time.)
>
> The time to recover loss can be well over a decade; once it took 16
> years, and once it took 25 years.
>
> So the moral of the story is: Don't invest in the stock market unless
> you can tie up the money for way more than 10 years. Hopefully for 30
> years.

These worst case scenarios only apply to people who suddenly decided to get
into the market the very day that it peaked. I have to think that was very
few people, indeed. Most people invested earlier and rode the markets up to
the peak from a much lower base and were made whole again in much less time.

These scenarios show what COULD happen (for all I know, today was the
highest the DOW will be for many years to come) but they don't make a very
strong argument for what is likely to happen. I started investing when the
DOW was at 1877. It took less than a year for me to recover from the Crash
of '87 and less than 3 years for me to recover from the bursting of the
Internet Bubble.

Of course, I could have greatly extended these periods by selling out at the
bottom and locking in my losses. Instead, I defied my emotions and bought
more at the lower prices.

The bottom line is that, if you don't think the market will be up over the
next X years then you shouldn't invest in it. If you do think so, you
should only invest money that you won't need for another X years.

-herb

Re: Index vs managed funds

On March 10, 2000 the Nasdaq Comp hit 5132.52 and closed at 5048.62.
That was almost 6 years ago and it's at 2331.36 now. It still has to go up
another 120% to break even.




"Steven L." <> wrote in message
news:rfgxf.8065$M%
> jIM wrote:
>
>> I think the 20% loss tolerance to a maximum exposure of 50% equities
>> makes sense.
>>
>> I think the 40% loss tolerance to a maximum exposure of 90% makes "less
>> sense" but is still accurate.
>>
>> My question to this would be "what is maximum tolerable loss". I don't
>> like losing any money, so my maximum tolerable loss is zero. But I
>> assume I may lose **some** money while investing with hopes of time
>> erasing any loss. Should there be a third column there for time to
>> recover loss?
>
> It's impossible to predict the future, so all we can do is look at the
> time to recover loss in the last 100 years. And you might well find that
> data to be rather distressing:
>
>
>
> Worst case of 20th century: In 1929, the Dow Jones Industrial Average
> peaked at 380. Then it began a major decline during the Great Depression.
> The DJIA didn't fully recover back to 380 until 1954--25 years later.
>
> Second worst case: In 1966, the DJIA peaked at 1000. And that's as high
> as it went thru the 1970's, declining way below that value in bear
> markets, but never managing to penetrate significantly above 1000 in bull
> markets. It finally broke decisively above 1000 in 1982 (and has remained
> above 1000 ever since.) Since the 1970's, was a period of high inflation,
> you were actually losing real value in the stock market from 1966 thru
> 1982--16 years of negative returns. (Only the relatively high dividends
> being paid by some stocks cushioned this loss at the time.)
>
> The time to recover loss can be well over a decade; once it took 16 years,
> and once it took 25 years.
>
> So the moral of the story is: Don't invest in the stock market unless you
> can tie up the money for way more than 10 years. Hopefully for 30 years.
>
>
> --
> Steven D. Litvintchouk
> Email:
>
> Remove the NOSPAM before replying to me.

Re: Index vs managed funds

"Herb" <> wrote

> These worst case scenarios only apply to people who suddenly decided to
> get
> into the market the very day that it peaked. I have to think that was
> very
> few people, indeed. Most people invested earlier and rode the markets up
> to
> the peak from a much lower base and were made whole again in much less
> time.

On March 10, 2000 the Fidelity Select Developing Communications Fund closed
at
$89.24, it's $21.92 now. It has to go up another 307% before it's
shareholders are even again.

Herb was and is in this fund. It doesn't matter when he bought the fund or
how much he paid for it.
All of his shares were worth $89.24 and now they are worth much less, 6
years later.

I have heard Herb's argument that these gains and losses are just "paper" as
if to say they weren't real.
I look in my wallet and see "paper", it's very real.

Re: Index vs managed funds

Ed wrote:
> On March 10, 2000 the Nasdaq Comp hit 5132.52 and closed at 5048.62.
> That was almost 6 years ago and it's at 2331.36 now. It still has to go up
> another 120% to break even.

You baffle me, Ed.
Here it seems like you're actually trying to agree with me and confirm
my point about the time it may take to break even, by providing another
example.

But when I had said in previous posts that I thought we were in a
secular-bear market, meaning that the NAZ won't break even till we're
past this entire decade, you said you didn't think that was the case.

If we were in a secular-bull period, then the NAZ could break even in a
considerably shorter period of time (look how it zoomed upward in the
last secular-bull condition in the 1990's).

I'll say it again: I think we won't see the NAZ break even till way
past 2010. Because I think today's economic (and geopolitical)
conditions are closer to the 1970's than the 1990's.


--
Steven D. Litvintchouk
Email:

Remove the NOSPAM before replying to me.

Re: Index vs managed funds

The Dow index does not include dividends.Neither do the other indexes.
So your example is substantially worse than reality. You need to look
at TOTAL RETURN. It's not always easy to discern what exactly the chart
you are looking at includes. And to be fair, you need to include
trading costs.

Re: Index vs managed funds

David Wilkinson wrote:
> Of course, this assumes that you are going to sit there holding and doing
> nothing while the market plunges. Flasho was making a good point in another
> post, at least I think he was, that our investment strategies can rapidly
> change with the market.

Let's see -- remember that, except for who I would have been
plagiarizing then. . . Think it's a Harvard.edu link to a paper
dealing with managerial or corporate decision-making styles -- setting
up for an objective with consideration for factoring external operands.
Can't recall offhand without some time to reread the article an exact
shift I placed into an investment framework.

Re: Index vs managed funds

"Flasherly" <> wrote in message
news:
>
> David Wilkinson wrote:
>> Of course, this assumes that you are going to sit there holding and doing
>> nothing while the market plunges. Flasho was making a good point in
>> another
>> post, at least I think he was, that our investment strategies can rapidly
>> change with the market.
>
> Let's see -- remember that, except for who I would have been
> plagiarizing then. . . Think it's a Harvard.edu link to a paper
> dealing with managerial or corporate decision-making styles -- setting
> up for an objective with consideration for factoring external operands.
> Can't recall offhand without some time to reread the article an exact
> shift I placed into an investment framework.
>

Re: Index vs managed funds

Do you have a reference explaining how or when external and not internal
operands are considered in decision making styles? I would love to learn.

"Flasherly" <> wrote in message
news:
>
> David Wilkinson wrote:
>> Of course, this assumes that you are going to sit there holding and doing
>> nothing while the market plunges. Flasho was making a good point in
>> another
>> post, at least I think he was, that our investment strategies can rapidly
>> change with the market.
>
> Let's see -- remember that, except for who I would have been
> plagiarizing then. . . Think it's a Harvard.edu link to a paper
> dealing with managerial or corporate decision-making styles -- setting
> up for an objective with consideration for factoring external operands.
> Can't recall offhand without some time to reread the article an exact
> shift I placed into an investment framework.
>

Re: Index vs managed funds

"Steven L." <> wrote in message
news:rfgxf.8065$M%
> jIM wrote:
>
> The time to recover loss can be well over a decade; once it took 16 years,
> and once it took 25 years.
>
> So the moral of the story is: Don't invest in the stock market unless you
> can tie up the money for way more than 10 years. Hopefully for 30 years.
>
But this assumes you are going to stay invested and take no action as the
market declines. An ideal market timer would sell as the decline began.

However, a real life one would probably hang on too long and sell just
before the bottom so there would be NO recovery of money lost.

Many UK pension funds have done just this and it was not necessarily their
fault. The UK Government pensions regulator required them to adopt a less
risky asset allocation after years of losses up to 2003 and compelled a
large scale move out of equities into bonds, guaranteeing they could not
recover money lost even though the stock market recovered.

For UK Government financial stupidity, this was only matched by the
Chancellor's decision to sell off a large fraction of the UK gold reserves
several years ago when the price was about 320 and miss all the subsequent
rise.

Re: Index vs managed funds

"Steven L." <> wrote

> Ed wrote:
>> On March 10, 2000 the Nasdaq Comp hit 5132.52 and closed at 5048.62.
>> That was almost 6 years ago and it's at 2331.36 now. It still has to go
>> up another 120% to break even.
>
> You baffle me, Ed.
> Here it seems like you're actually trying to agree with me and confirm my
> point about the time it may take to break even, by providing another
> example.

I'm doing exactly that.

> But when I had said in previous posts that I thought we were in a
> secular-bear market, meaning that the NAZ won't break even till we're past
> this entire decade, you said you didn't think that was the case.

I don't recall saying that, as a matter of fact I think I said that it could
take many years on more than one occassion. I recall telling one poster that
he might not break even in his lifetime. I told him that when he said. a few
years ago, that he was going to hold on to what he had until he broke even
and then he was getting out.

> If we were in a secular-bull period, then the NAZ could break even in a
> considerably shorter period of time (look how it zoomed upward in the last
> secular-bull condition in the 1990's).
>
> I'll say it again: I think we won't see the NAZ break even till way past
> 2010. Because I think today's economic (and geopolitical) conditions are
> closer to the 1970's than the 1990's.

I never really thought much of the terms secular bull/bear and cyclical
bull/bear.
We have been in a 3 year bull market and it appears we're going for a
fourth.

Re: Index vs managed funds

Doug, I agree that total return is the way to measure but the time it takes
to get even in these examples assumes, in my view anyway, a buy and hold
position. Remember, we're talking about an index so trading costs are not an
issue.


"Doug" <> wrote in message
news:
> The Dow index does not include dividends.Neither do the other indexes.
> So your example is substantially worse than reality. You need to look
> at TOTAL RETURN. It's not always easy to discern what exactly the chart
> you are looking at includes. And to be fair, you need to include
> trading costs.
>

Re: Index vs managed funds

Another point is that taking the index value alone not only misses out
dividends but also costs and inflation, which roughly cancel out the
dividends. The return on the index is approximately the real return, which
can indeed take 15 to 25 years to recover back to break even after a really
severe bear market, like 1929-32 or even a long static period, like 1965-82.

"Ed" <> wrote in message
news:
> Doug, I agree that total return is the way to measure but the time it
> takes to get even in these examples assumes, in my view anyway, a buy and
> hold position. Remember, we're talking about an index so trading costs are
> not an issue.
>
>
> "Doug" <> wrote in message
> news:
>> The Dow index does not include dividends.Neither do the other indexes.
>> So your example is substantially worse than reality. You need to look
>> at TOTAL RETURN. It's not always easy to discern what exactly the chart
>> you are looking at includes. And to be fair, you need to include
>> trading costs.
>>
>
>

Re: Index vs managed funds

darkness39 wrote:
> Evojeesus wrote:
> > darkness39 wrote:

> > > There is a strong case for a US dollar investor to have 20% of her
> > > assets in a global equity index fund, but I doubt there is a case for,
> > > say, 50% (unless that investor spends half of their consumption and
> > > future consumption outside the US dollar).

> > What if the said US dollar investor purchases foreign-made goods? Or
> > relies on foreign commodities like oil?

> most commodities are priced in US dollars. Which opens up an
> interesting conundrum-- if oil is priced in US dollars, but the US is
> not self sufficient in oil, do we need a currency hedge?

Most commodities are hard assets. If the value of dollar slides, you'll
have to pay more in dollars.

> I am not sure there is a theoretical answer. A practical one might be
> that holdings in energy companies hedge oil prices (to some extent).

Agreed.

> As to foreign made goods, the external sector is relatively small in
> the US economy (as opposed to the Canadian, where it is nearly 1/3rd,
> or the British where it is 1/4). Even the Japanese make their cars in
> the US, with US sourced parts!

How about Chinese goods? What causes the trade deficit if not foreign
made goods bought in the US? It seems to me that at the moment the most
important things the US is exporting are carbon and debt.

> That said, if you can really work out what percentage of your *future*
> consumption will be in non-USD items, there is a case for hedging it.

Or, if you think that the dollar might depreciate.

> Diversifying outside your home market also exposes you to risk the
> other way. For example, I have a prior expectation that the Euro is
> way overvalued (and this would be more obvious if the US was pursuing a
> rational fiscal policy) and may eventually cease to exist in its
> current form (the infrastructure is in place to dissolve it, eg the
> national banks still exist). If it does so, the US investor heavily
> invested in euro stocks, could take a lot of pain.

At the moment the Euro seems to be on a way more secure footing than
the dollar, which seems to have considerable downside risk. Do you want
to keep holding dollars if the currency depreciates against other
currencies and gold?

Re: Index vs managed funds

Steven L. <> wrote:

> Second worst case: In 1966, the DJIA peaked at 1000. And that's as
> high as it went thru the 1970's, declining way below that value in bear
> markets, but never managing to penetrate significantly above 1000 in
> bull markets. It finally broke decisively above 1000 in 1982 (and has
> remained above 1000 ever since.) Since the 1970's, was a period of high
> inflation, you were actually losing real value in the stock market from
> 1966 thru 1982--16 years of negative returns. (Only the relatively high
> dividends being paid by some stocks cushioned this loss at the time.)
>
> The time to recover loss can be well over a decade; once it took 16
> years, and once it took 25 years.
>
> So the moral of the story is: Don't invest in the stock market unless
> you can tie up the money for way more than 10 years. Hopefully for 30
> years.

I think the moral of your story is index timing and understanding business
cycles.

No one can predict the future or predict tops and bottoms with 100% accuracy
but if you want to invest wisely you have to do more than "buy & hold"
or wait for 30yrs for things to get better.

-Mike

Re: Index vs managed funds

Ed <> wrote:
> On March 10, 2000 the Nasdaq Comp hit 5132.52 and closed at 5048.62.
> That was almost 6 years ago and it's at 2331.36 now. It still has to go up
> another 120% to break even.

And it probably won't until well past 2010.

Re: Index vs managed funds

jIM wrote:
> Two reasons, it changed it's investment strategy and I preferred to keep my
> money in other investments. I lost money on certain purchases, but
> overall I think my income tax return showed a net capital gain.

The issues you play at the side appear weighted to direct proficiency
for your chosen field. Yes, I can see how EDS would have been hammered
aroundabout Greenspan's debut and an overvaluation of many things
dotcom that go bust in the night. From what I gather, you are apt over
time to have adhered within convention to a B&H strategy, namely
through T.Rowe Price. I also assume TRP to be at a core and primary
momentum for 8 years of investments, and the ticker issues are perhaps
less weighted, more of recent additions that pose interesting
quandaries. Yes, you will first need to resolve that issue with
Netstock. Looking at Netstock's fee schedule, an account without a
monthly premium would not appear to offer that amenity. Would free
account services for portfolio tracking through Yahoo and other sites
be suitable as an alternative method to tracking? I find it no less
than imperative to have in an instant a grasp of any concern for
investment issues - relative to measures of acceptable standing, dates
and timeframes for trading - in order to build average structures for
comparitive worth. All the more reason with your electronics
background, I agree. Anything less than succintly enumerated
expression lacks a discrete quality for determinates at transition
points.

Re: Index vs managed funds

NoEd wrote:
>> "Flasherly" <> wrote in message

> Do you have a reference explaining how or when external and not internal
> operands are considered in decision making styles? I would love to learn.

Last November another person asked me much the same question, although
I did condescend over a rather abject state of his financial affairs,
as they were presented me. Regardless, affairs I see as internalized
when one defines oneself by an objective, thereby operating within a
set course investment strategy incorporates without deviation. Whereas
with an externalized operand, it is at a view to later account forms by
active concession, in order to attempt to bias success within a
relative survival base. Getting back to the original point, I'll
provide you an example. Apart from objectives, you've bought into one
and only one house with only 5 or 6 respective Vanguard funds. If you
do not you see yourself diverging throughout a course you feel in some
way obligated to follow, I may reasonably say you are within a
predetermined set of internal operands -- apparent and apart from
directly anticipating intervention within foreseeable (not foreseeable
would be logically, a priori, prime evidence) external operands, risk,
or sector momentum have to play over international balances.

The true measure of a career is to be able to be content, even proud,
that you succeeded through your own endeavors without leaving a trail
of casualties in your wake. -Alan Greenspan

Re: Index vs managed funds

Bob -

I would like to go back to your original e-mail, not to the many threads
that evolved since.

I agree with you to invest in two subportfolios - one in a standard index
allocation and the other in an eclectic mix of managed equity funds. I use
Modern Portfolio Theory to select the managed funds seeking low volatility
funds that are generally value style.

I select these funds by long term performance (5 to 8 years) based on their
incremental increase in Sharpe Ratio of the total portfolio (index and
managed funds), thus selecting funds that "work" best with the entire
portfolio.

Being able to do this requires monthly total return data for many funds
going back 8 or more years. How I do this is a story for another day.

Bruce King
"Bob" <> wrote in message
news:
>I have a large part of our investments allocated to index funds and
> have done fairly well. The indices are the S&P 500 and the total
> market.
>
> My concern is another dip like the one experienced between 2000 and the
> beginning of 2003. My consideration is to move those assets into T Rowe
> Price Capital Appreciation PRWCX and Oakmark Equity and Income OAKBX.
> Its all IRA money, so there is no concern about having to pay immediate
> taxes on huge capital gains.
>
> The evaluation tool I used is on the MoneyCentral site with data
> furnished by Morningstar. I plotted OAKBX, PRWCX, VTSAX (Vanguard Total
> Market) and VFINX (Vanguard S&P 500) for growth of $1000 (with
> distributions reinvested). Looking at various time scales, the managed
> funds did far better when the considered range if before the big dip.
> However starting in 2003, they all run pretty close.
>
> It looks like in good times it doesn't matter, but in hard times good
> management does matter. Of course there is no guarantee that the
> targeted funds will have the same management aboard for the next long
> bear market, but what else can be used as a gauge except for prior
> performance? Both funds carry the same Morningstar ratings for
> performance, risk and return, but they are somewhat differently
> invested.
>
> We were in retirement prior to the last big dip and it was not fun
> watching our nest egg drop nearly every week for three years running.
> Fortunately we didn't need that money at the time and were able to ride
> it out.
>
> Comments appreciated.
>
> Bob
>

Re: Index vs managed funds

No, it's nasdaq's fall from feb 2000 high. It went from 5000 to
something close to 1000. If you invested 50% in it at the peak, you
would've lost 40%, not 20%.

Re: Index vs managed funds

jIM wrote:
>
> My question to this would be "what is maximum tolerable loss".
>
The problem is, your tolerance varies depending on your pyche du jour.
And, if you have any kind of "maximum loss" in mind, you should invest
only that percentage in stocks. As far as I'm concerned, this risk
tolerance thing is utterly useless concept paddled by financial
analysts. People should plan solely based on their future needs and
likely returns instead.

Re: Index vs managed funds

darkness39 wrote:
>
Any rapid fall in the value of an asset would simply
> be the consequence of changed information about the future, not
> unrealistic expectations.
>
Or, changed interpretation of information. And the expectation is
labeled unrealistic only fater the facts. If it did before the burst,
there wouldn't have been a bubble after all.

I'm now pondering if google is a bubble. At $150b, it's a huge
valuation for a company who draws revenue from online ads. Apparently,
majority of the market thinks google will change the
advertising/computing paradigm and it'll be worth $250b soon. Is it
unrealistic? I suppose we'll know in two years.

Re: Index vs managed funds

Doug wrote:

> The Dow index does not include dividends.Neither do the other indexes.
> So your example is substantially worse than reality. You need to look
> at TOTAL RETURN.

Actually, you need to look at INFLATION-ADJUSTED TOTAL RETURN. The
1970's were an extreme example: inflation had soared to 14% annualized,
the dividend yield on the S&P 500 was 8% or so, so that you were still
losing about 6% annualized in real terms, even if the market stayed flat.

I used to post those charts here--inflation-adjusted total return--but
the website I relied on has since gone away.



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Email:

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Re: Index vs managed funds

David Wilkinson wrote:

> Another point is that taking the index value alone not only misses out
> dividends but also costs and inflation, which roughly cancel out the
> dividends. The return on the index is approximately the real return, which
> can indeed take 15 to 25 years to recover back to break even after a really
> severe bear market, like 1929-32 or even a long static period, like 1965-82.

I'm curious: Did the London market (FTSE) have those same bear markets
and static periods? Or was it less correlated to the U.S. market in
those years?



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Re: Index vs managed funds

darkness39 wrote:

> Good point and welcome to the debate about the definition of Efficient
> Capital Markets.
>
> However a rational market would price in the probability of future
> bubbles,

But that's impossible.

Because the "probability of a future bubble" depends on how people
interpret the data--and that depends on which people, and when they do
the interpretation.

One of my problems with the notion of a "rational market" is that young
investors never seem to factor in the total history of the market (what
happened before they were adults) when making investment decisions.
Today's investors are too young to remember either the Great Depression
of the 1930's or the Great Stagflation of the 1970's, so they ignore
both and the probability, however small, that such conditions can
reoccur. Thus they react very differently to a market rise than their
parents who got burned in the 1970's or their grandparents who got
burned in the 1930's. Their parents and grandparents would be
suspicious of a market rise, worrying the rally may fizzle. And they
wouldn't go overboard on purchasing stocks. But today's generation
thinks that "stocks always go up" because in their investment lifetimes,
they did--and so they bet on the market rises continuing.

The generation of the 1970's, accustomed to seemingly endless
stagflation, assumed that "hard assets will always go up"--causing a
bubble in precious metals--and they got burned too.

Humans just don't pay as much attention to things that happened before
they were born. Especially to young people, 20 years is practically
"forever."


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Re: Index vs managed funds

TK Sung wrote:
> darkness39 wrote:
>
> Any rapid fall in the value of an asset would simply
>
>>be the consequence of changed information about the future, not
>>unrealistic expectations.
>>
>
> Or, changed interpretation of information. And the expectation is
> labeled unrealistic only fater the facts. If it did before the burst,
> there wouldn't have been a bubble after all.
>
> I'm now pondering if google is a bubble. At $150b, it's a huge
> valuation for a company who draws revenue from online ads. Apparently,
> majority of the market thinks google will change the
> advertising/computing paradigm and it'll be worth $250b soon. Is it
> unrealistic?

In my past investing experience, "change the paradigm" has ALWAYS been
an unrealistic way to invest in stocks. Because if "the paradign"
really does change, it will simply invite a lot more entrants into that
new market, who may do better than those who changed the paradigm in the
first place.

The Apple II and IBM PC created the huge consumer market for personal
computers, forever changing computing from mainframe to personal. But
neither one of those companies ended up being the big beneficiary of
that market in the long run. Dell and Microsoft have.

And if Google manages to "change the paradigm" again, the biggest
beneficiaries may be smaller, more nimble companies, or maybe even new
entrepreneurs we haven't heard of it.


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Email:

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Re: Index vs managed funds

"Steven L." <> wrote in message
news:2VCxf.6717$
> David Wilkinson wrote:
>
>> Another point is that taking the index value alone not only misses out
>> dividends but also costs and inflation, which roughly cancel out the
>> dividends. The return on the index is approximately the real return,
>> which can indeed take 15 to 25 years to recover back to break even after
>> a really severe bear market, like 1929-32 or even a long static period,
>> like 1965-82.
>
> I'm curious: Did the London market (FTSE) have those same bear markets
> and static periods? Or was it less correlated to the U.S. market in those
> years?
>
>
Steven. This is not as easy to answer as one might think. As so often the UK
lags well behind the US, in this case in financial indices and statistics.
Amazingly the FTSE100 index did not start until April 1984, so it did not
cover either of the periods you mention. The FTSE All-Share and FTSE250
indices are even later, starting in 2000! The Dow-Jones index started in
1928, just in time for the crash.

Before the FTSE100 index of the 100 largest shares by market capitalisation
started, the UK used the FT30 index of 30 prominent shares, which started in
1935. This still misses out the great crash of 1929-32. This index is still
just available in the Financial Times newspaper but is not generally quoted
anywhere else and has fallen into disuse. Neither does there seem to be any
very obvious source of historical values. For once Google fails to come up
with anything that is very useful. It is more productive to start with the
Financial Times website but even they keep fairly quiet about it and it
takes a lot of digging to turn up anything much about it. I did find a brief
history of the FT30 at
and
further digging to the URL at the end might reveal historical figures but I
doubt they would be given without some sort of payment or subscription.

Unlike the Dow30 the FT30 seemed to have a downward bias due to the rules
for its composition and did not really reflect the market movements very
well. The main problem was that only way for a company to leave the index
was to go bust or be part of a merger or acquisition. This meant that a lot
of companies in the index that were initially flourishing when chosen peaked
and then went into decline but still hung on in there, dragging the index
down as they became second or third rate. The index was the responsibility
of the editor of the Financial Times who did not seem to have the wit or
energy to change the rules to make the index more representative. Unlike the
Dow30 there was no wise committee to add and delete companies to keep it
relevant. In the end the more logical FTSE100 index was introduced, with a
committee to carry out quarterly reviews to delete and add companies to it
based purely on market capitalisation. Now they all seem rather embarrassed
by the FT30 and keep quiet about it.

Re: Index vs managed funds

Dave Hannes wrote:
> My thoughts:
> 1. Why not have some in both an index fund and some in a managed fund?
> Having one fund that is set versus one that is managed provides a level of
> diversifying as well--one reacts to changes in the economy and earnings, the
> other does not.

The index concept is all right - within a group concept exhibiting less
deviation between index funds, ideally dispersed broadly over
proportionate means diversity accounts throughout a greater market
whole. Risk strategies or characteristic profiles, though viable, are
an inconsequence index by definition negates. Value has simply to be
assessed a plan, homogenously so, in order to describe a given
demographic cross-section, and over time factor risk through return by
plugging in the appropriate indexes in order for everything to be setup
to go. Forget all of the above with active management. Indexes are
not concerned whence asset values derive palatably posed fools, bigger
fools invariably buy into, in the nick of time it takes commiseratively
to interject an arbitrageur's fortune. A fortune to premise, of
course, upon some bigger fool's belief for underlying securities
fashioned inexorably after exponential growth. Which, of course,
everyone knows well to identify, since we are dealing intimately with
fools, in a certain circumlocutory manner after tottering patter. And,
so, after all is said and done, then, it's all about a matter of when,
after all, we may politely divest ourselves from the proverbial Plate
of Plenty;--In a light deftly best left by those yet remaining, albeit
somewhat bereft of bag, in time duly to retire;--Betimes morn anon
strikes, what miscreant dreams betwixt stir, to a rapid rise and fall
of fortunes these cock-cries set to motion.

"I can calculate the motion of the heavenly bodies but not the madness
of people." -Sir Isaac Newton [over a lost wager].

Re: Index vs managed funds

> Doug wrote:
>
>> The Dow index does not include dividends.Neither do the other indexes.
>> So your example is substantially worse than reality. You need to look
>> at TOTAL RETURN.
>

Doug is incorrect...the DJIA and every other index, AFAIK, incorporates
dividends by adjusting the divisor when they are paid out:


D

Re: Index vs managed funds

Groaaannnnn!!!

See what I mean about having to be careful? It depends on what chart
you are looking at folks. Is it :
1) TOTAL RETURN (including dividends)
or is it :
2) RETURN BASED ON STOCK PRICE (excluding dividends)

And it makes a HUGE difference over time because if it includes
dividends, then those dividends grow. At the end of 50 years of
investing, the difference is much larger than you might imagine.

The number as quoted in the Wall Street Journal for the current value
of the DOW does not include dividends. But don't take my word for it,
do your own research. Read this:

Re: Index vs managed funds

It IS a confusing subject as to whether the DOW and other indexes
include dividends or not. The problem is, the indexes themselves don't
(although they DO include "special" dividends and splits, groan),
but.......yahoo and many of the online brokers report "total return
indexes" that DO include the dividends!!!! No wonder everyone is
confused. But to "proove" my assertion (well just pick up a copy of the
Wall Street Journal and look on the page with the DOW stats), but I'll
provide a credible online source, Stanford University research. Go down
to page 5. It clearly states that dividends aren't included in the DOW
(or SP500 or Nasdaq or Wilshire 5000). They SHOULD be, because they
make a huge difference, especially over long periods of time.

Here is the url: (go to bottom of page 5)


Bottom line, sometimes dividends are included, sometimes they aren't.
You have to dig to find out.

Re: Index vs managed funds

Dave Hannes wrote:

>>Doug wrote:
>>
>>
>>>The Dow index does not include dividends.Neither do the other indexes.
>>>So your example is substantially worse than reality. You need to look
>>>at TOTAL RETURN.
>>
>
> Doug is incorrect...the DJIA and every other index, AFAIK, incorporates
> dividends by adjusting the divisor when they are paid out:
>

That's not what was meant.
What was meant was a chart of the TOTAL RETURN of the stock or market
index, which includes both its price and dividends paid out.

The S&P 500 has a dividend yield. That is entirely separate from the
index number. As I said, in the 1970's, the dividend yield rose as high
as 8%. But that wasn't factored into the index--the index wasn't rising
8% every year!



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Email:

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Re: Index vs managed funds

David Wilkinson wrote:
> "Steven L." <> wrote in message
> news:2VCxf.6717$
>
>>David Wilkinson wrote:
>>
>>
>>>Another point is that taking the index value alone not only misses out
>>>dividends but also costs and inflation, which roughly cancel out the
>>>dividends. The return on the index is approximately the real return,
>>>which can indeed take 15 to 25 years to recover back to break even after
>>>a really severe bear market, like 1929-32 or even a long static period,
>>>like 1965-82.
>>
>>I'm curious: Did the London market (FTSE) have those same bear markets
>>and static periods? Or was it less correlated to the U.S. market in those
>>years?
>>
>>
>
> Steven. This is not as easy to answer as one might think. As so often the UK
> lags well behind the US, in this case in financial indices and statistics.
> Amazingly the FTSE100 index did not start until April 1984, so it did not
> cover either of the periods you mention. The FTSE All-Share and FTSE250
> indices are even later, starting in 2000! The Dow-Jones index started in
> 1928, just in time for the crash.
>
> Before the FTSE100 index of the 100 largest shares by market capitalisation
> started, the UK used the FT30 index of 30 prominent shares, which started in
> 1935. This still misses out the great crash of 1929-32. This index is still
> just available in the Financial Times newspaper but is not generally quoted
> anywhere else and has fallen into disuse. Neither does there seem to be any
> very obvious source of historical values. For once Google fails to come up
> with anything that is very useful. It is more productive to start with the
> Financial Times website but even they keep fairly quiet about it and it
> takes a lot of digging to turn up anything much about it. I did find a brief
> history of the FT30 at
> and
> further digging to the URL at the end might reveal historical figures but I
> doubt they would be given without some sort of payment or subscription.
>
> Unlike the Dow30 the FT30 seemed to have a downward bias due to the rules
> for its composition and did not really reflect the market movements very
> well. The main problem was that only way for a company to leave the index
> was to go bust or be part of a merger or acquisition. This meant that a lot
> of companies in the index that were initially flourishing when chosen peaked
> and then went into decline but still hung on in there, dragging the index
> down as they became second or third rate. The index was the responsibility
> of the editor of the Financial Times who did not seem to have the wit or
> energy to change the rules to make the index more representative. Unlike the
> Dow30 there was no wise committee to add and delete companies to keep it
> relevant. In the end the more logical FTSE100 index was introduced, with a
> committee to carry out quarterly reviews to delete and add companies to it
> based purely on market capitalisation. Now they all seem rather embarrassed
> by the FT30 and keep quiet about it.



I'm sorry I asked. :-)



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Email:

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Re: Index vs managed funds

Doug wrote:

> It IS a confusing subject as to whether the DOW and other indexes
> include dividends or not. The problem is, the indexes themselves don't
> (although they DO include "special" dividends and splits, groan),
> but.......yahoo and many of the online brokers report "total return
> indexes" that DO include the dividends!!!! No wonder everyone is
> confused. But to "proove" my assertion (well just pick up a copy of the
> Wall Street Journal and look on the page with the DOW stats), but I'll
> provide a credible online source, Stanford University research. Go down
> to page 5. It clearly states that dividends aren't included in the DOW
> (or SP500 or Nasdaq or Wilshire 5000). They SHOULD be, because they
> make a huge difference, especially over long periods of time.
>
> Here is the url: (go to bottom of page 5)
>
>
> Bottom line, sometimes dividends are included, sometimes they aren't.
> You have to dig to find out.

I can't find a chart of inflation-adjusted total return of the S&P 500
for the last 100 years anymore. The website I used to rely on for such
charts has gone away. And I can't find anything else on Google either.

If anyone knows how to dig up such data, I would greatly appreciate it.
The patterns in the data were tremendously informative to me.


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Email:

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Re: Index vs managed funds

The difference over a long period of time is COLOSSUL ! If dividends
were included in the DOW since its inception in 1872, the DOW index
would be 250,000 now!!! I know that seems unbelievable. Read the
Stanford University research report at:

Re: Index vs managed funds

"Doug" <> wrote in message
news:
> The difference over a long period of time is COLOSSUL ! If dividends
> were included in the DOW since its inception in 1872, the DOW index
> would be 250,000 now!!! I know that seems unbelievable. Read the
> Stanford University research report at:
>

That's interesting. Here's a quote that you may find interesting:
"When Charles Dow created the Dow Jones Industrial Average, first published
on May 26, 1896, it consisted of a dozen stocks."


Which DOW are you talking about?

Re: Index vs managed funds

Yes, I think the 1872 figure should be 1896. 1896 being the first year
the DOW was published publically. (The DOW did exist privately for some
time before that, and those records are now available). But, OK, the
DOW was started in 1896. Why they didn't include dividends, I don't
know (and IS an interesting question).

But the point is, the DOW index does not include dividends, and if it
did include dividends, the difference, over long periods of time, is
HUGE (a DOW of 11,000 vs a DOW of 200,000+). 1872, 1896, not a big
deal. Dividends included in the index or not IS a big deal.

Re: Index vs managed funds

"Doug" <> wrote
> Yes, I think the 1872 figure should be 1896. 1896 being
the first year
> the DOW was published publically. (The DOW did exist
privately for some
> time before that, and those records are now available).
But, OK, the
> DOW was started in 1896. Why they didn't include
dividends, I don't
> know (and IS an interesting question).

I think that's a little misleading. Written reports of stock
market performance, be it the Dow or the S&P 500 (or any of
the other indices Sialm mentions in the paper you cited),
nearly always include the effect of reinvested dividends.
Graphs of the Dow and S&P 500 usually do not. So what?
Compounding is compounding. Graphs of the indices certainly
could be altered to include reinvested dividends. You'd
still get a rougly linear graph (when graphed on log paper).

> But the point is, the DOW index does not include
dividends, and if it
> did include dividends, the difference, over long periods
of time, is
> HUGE (a DOW of 11,000 vs a DOW of 200,000+). 1872, 1896,
not a big
> deal. Dividends included in the index or not IS a big
deal.

All you're saying is that reinvesting dividends has the same
marvelous effect as compounded interest.

Re: Index vs managed funds

What I am saying is when you look at the graphs of performance, you
need to know if you are looking at graphs that include dividends or
not. People frequently say if you invested in the DOW in 1929 before
the crash, you would have to wait until 1954 to break even. Not true,
the DOW numbers they use dont include dividends. Using dividends you
would have broken even in 1945.

Look at a graph of the Nasdaq vs the DOW years 1980 to 2000. Nasdaq
appears to drastically outperform DOW. True if you dont include
dividends, not true if you include dividends.

The point is, people present a graph of an index and don't tell you if
it includes dividends or not. For example, your investment advisor
compares the performance of your investments to the SP500 (or the DOW).
Your investement performance of course includes dividends and trading
costs. The SP500 or Dow perfromance he presents to you does not include
dividends. This makes your investment look better. I have seen
investment advisors who truly DON'T know if DOW graphs they are using
includes dividends or not. I have also seen ones who know, but ignore
it.

People are using DOW, SP500 and Nasdaq performance graphs to base their
investment decisions on. And since these indexes do not include
dividends (or some total return ones do and he doesnt know it), they
are getting erroneous information.

Re: Index vs managed funds

If you are into market history it's nice to know how that index or this
index did from 100 or more years ago.
All that really counts is from tomorrow forward. You weren't invested 100
years ago and you won't be invested 100 years from now. Concentrate on the
present.




"Doug" <> wrote in message
news:
> What I am saying is when you look at the graphs of performance, you
> need to know if you are looking at graphs that include dividends or
> not. People frequently say if you invested in the DOW in 1929 before
> the crash, you would have to wait until 1954 to break even. Not true,
> the DOW numbers they use dont include dividends. Using dividends you
> would have broken even in 1945.
>
> Look at a graph of the Nasdaq vs the DOW years 1980 to 2000. Nasdaq
> appears to drastically outperform DOW. True if you dont include
> dividends, not true if you include dividends.
>
> The point is, people present a graph of an index and don't tell you if
> it includes dividends or not. For example, your investment advisor
> compares the performance of your investments to the SP500 (or the DOW).
> Your investement performance of course includes dividends and trading
> costs. The SP500 or Dow perfromance he presents to you does not include
> dividends. This makes your investment look better. I have seen
> investment advisors who truly DON'T know if DOW graphs they are using
> includes dividends or not. I have also seen ones who know, but ignore
> it.
>
> People are using DOW, SP500 and Nasdaq performance graphs to base their
> investment decisions on. And since these indexes do not include
> dividends (or some total return ones do and he doesnt know it), they
> are getting erroneous information.
>

Re: Index vs managed funds

"Doug" <> wrote
> What I am saying is when you look at the graphs of
performance, you
> need to know if you are looking at graphs that include
dividends or
> not.

Sure.

> People are using DOW, SP500 and Nasdaq performance graphs
to base their
> investment decisions on.

You can't be sure of this. Most people I know either say
that (1) the market has returned about 11% a year, on
average, for many years; or (2) believe stocks will pay
better than any bonds or a money market account, without
knowing why.

(1) of course assumes dividend reinvestment.

Shialm argues that the way the DJIA etc. is calculated today
(without dividends) derives from inadequacy of computing way
back when. Fair point. But I don't think it's a big deal.
YMMV

Re: Index vs managed funds

Steven L. wrote:
> darkness39 wrote:
>
> > Good point and welcome to the debate about the definition of Efficient
> > Capital Markets.
> >
> > However a rational market would price in the probability of future
> > bubbles,
>
> But that's impossible.
>
> Because the "probability of a future bubble" depends on how people
> interpret the data--and that depends on which people, and when they do
> the interpretation.

Welcome to the weird and wonderful world of Rational Expectation
economics. Which was the intellectual centrepiece of the conservative
revolution of the 1980s (the REH boys dreamt up the theories in the
1970s, and in the 1980s these were applied in policy). And is now
looking a bit tired, 20 years later.

>
> One of my problems with the notion of a "rational market" is that young
> investors never seem to factor in the total history of the market (what
> happened before they were adults) when making investment decisions.

Richard Thaler, Daniel Kahneman, Amos Tversky have all been working
intensively in this area-- Thaler has now joined the economics faculty
at Chicago (the homeland of the REH boys). And Kahneman won the Nobel
Prize. Already we are beginning to see policy prescriptions which are
very different from what the ultra-rationalists of the 70s and 80s
concluded.

> Today's investors are too young to remember either the Great Depression
> of the 1930's or the Great Stagflation of the 1970's, so they ignore
> both and the probability, however small, that such conditions can
> reoccur. Thus they react very differently to a market rise than their
> parents who got burned in the 1970's or their grandparents who got
> burned in the 1930's. Their parents and grandparents would be
> suspicious of a market rise, worrying the rally may fizzle. And they
> wouldn't go overboard on purchasing stocks. But today's generation
> thinks that "stocks always go up" because in their investment lifetimes,
> they did--and so they bet on the market rises continuing.

My gut is that most stocks are held by less than 10% of the population,
and the vast majority of those are held by *older* people with liquid
assets (widows in particular). So the behaviour of a bunch of young
etraders may have some impact (the tech bubble) but the vast majority
of stocks are held by people over 45, if not 55. Young people just
don't have the assets, mostly (Paris Hilton notwithstanding ;-).

>
> The generation of the 1970's, accustomed to seemingly endless
> stagflation, assumed that "hard assets will always go up"--causing a
> bubble in precious metals--and they got burned too.
>
> Humans just don't pay as much attention to things that happened before
> they were born. Especially to young people, 20 years is practically
> "forever."

There is a wealth of evidence that people discount the short and long
term at different rates-- hence the (logical) movement towards, for
example, mandating 'opt in' for pension plans (so you have to
consciously choose to opt out-- the evidence shows that that increases
pension plan membership from c. 40% to c. 80%, just that simple change
of the question when you sign the paperwork for a new job. Google
'Davie Laibson hyperbolic discounting' for some examples.

I agree that 20 years seems to be about the human memory span for a
stock market, and that we take recent experience as our best forecast
of future behaviour even when that is inappropriate-- hence the well
known tendency of small investors to invest in the latest 'hot sector'
and the current interest in, eg, emerging market funds.

Re: Index vs managed funds

Evojeesus wrote:
> darkness39 wrote:
> > Evojeesus wrote:
> > > darkness39 wrote:
>
> > > > There is a strong case for a US dollar investor to have 20% of her
> > > > assets in a global equity index fund, but I doubt there is a case for,
> > > > say, 50% (unless that investor spends half of their consumption and
> > > > future consumption outside the US dollar).
>
> > > What if the said US dollar investor purchases foreign-made goods? Or
> > > relies on foreign commodities like oil?
>
> > most commodities are priced in US dollars. Which opens up an
> > interesting conundrum-- if oil is priced in US dollars, but the US is
> > not self sufficient in oil, do we need a currency hedge?
>
> Most commodities are hard assets. If the value of dollar slides, you'll
> have to pay more in dollars.

I don't know if that is always the case (really not sure). I have
heard the argument that the rise in oil prices mostly simply offset the
weakness in the dollar.


The theoretical matching is your long term future consumption against
the currency in which it will take place. Since your two biggest
future costs are likely to be health care and housing, and those will
be priced in US dollars.

>
> > I am not sure there is a theoretical answer. A practical one might be
> > that holdings in energy companies hedge oil prices (to some extent).
>
> Agreed.
>
> > As to foreign made goods, the external sector is relatively small in
> > the US economy (as opposed to the Canadian, where it is nearly 1/3rd,
> > or the British where it is 1/4). Even the Japanese make their cars in
> > the US, with US sourced parts!
>
> How about Chinese goods? What causes the trade deficit if not foreign
> made goods bought in the US?

But exports and imports are not a huge part of the US economy. And if
you strip out Canada and Mexico, which arguably are simply parts of the
US economy governed by someone else (since the differences between
Vermont and Quebec are probably smaller than the differences between
Texas and Vermont, that is a quite sustainable assertion) the
international sector is an even smaller part of the US economy. The US
runs a huge trade deficit with Canada, but a current account surplus
(Canadians travelling in the US and buying services provided by US
companies).

>From memory China exports something over $100bn of manufactured goods a
year to the US or less than 1% of US GDP of $11 trillion. China also
buys a lot from the US, be it forest products, steel, aircraft,
computer software etc. It's a very visible trade but not, actually a
very important one. Take an example, Chinese textile imports are now
flooding in. But what these are doing is displacing Indian,
Bangladeshi, Morrocan textile exports to the US, far more than they are
actually destroying US producers. The big loser in the last 10 years
to China has been Mexico.

What you have is one or two states (the Carolinas) who are losing a lot
of textile jobs and some key midwestern states that are losing
manufacturing jobs. This attracts union attention, and also industry
lobbyists in Washington and influential politicians. But in the
context of a US economy with 130 million or so people working and a GDP
of 11 trillion, it's not very important.

It seems to me that at the moment the most
> important things the US is exporting are carbon and debt.

Mathematically, the US current account deficit is simply the excess of
investment over savings (S-I = current account deficit). What is
really happening is American consumers and American government are not
saving anything, and US business can't pick up all the slack from its
own savings. If the US Federal government were not running its huge
deficit, the current account balance would be much smaller. Similarly
if the Fed had not allowed the housing bubble to run rampant, Americans
would save more.

You saw the record export numbers last month? US industry can compete
(Boeing completed a large aircraft order) but the dollar is undoubtedly
too strong, because of the policy of far Eastern governments to keep
their currencies too weak. Eventually that will unwind-- what is
important is that the US set its own house in order (simply reversing
the Bush tax cuts would be a good place to start), which would increase
the pressure on other economies to sort out their affairs (Europe
especially).

One of Newt Gingrich's proudest claims was to roll back agricultural
protection to the benefit of American consumers, taxpayers and the
economy as a whole. Unfortunately that legacy is now being reversed.
US cotton subsidies average $850k per producer, and are larger in total
than US aid to cotton producing countries. Of course a side effect is
it makes the situation of US textile manufacturers worse.

Carbon? Do you mean auto exhausts, or coal? ;-). On the former, it's
crazy to have a strategically vital material, for which your own
production is declining, that you do not discourage consumption. The
European policy of high energy prices is informed by the fact that
Europe imports c. 90% of its petroleum, and about 70% of its total
energy needs-- as we found out when the Russians tweaked the gas
supplies to punish Ukraine this winter. So whether it is more
efficient air conditioners and appliances, more insulated houses,
better public transport or higher gasoline taxes, it all makes sense in
a strategic context. The US would do well to follow.

Coal is like our agricultural policy. We subsidise the production of
coal, as we do agricultural goods, to enormous waste of resources and
enormous damage to emerging market countries that could do the job far
better. The US is actually a world low cost producer of coal, albeit
the coal isn't mostly in the right place to export (Powder River basin,
Wyoming).

However a gas tax is a political impossibility, which makes me tilt
towards renewed fuel economy standards. However Ford and GM could not
cope with these, and Michigan and Ohio are swing states electorally:
neither party can afford to alienate the old line auto producers and
their unions. Maybe after Ford and GM seek Chapter 11.... cars will
still be built in America, they will be built by Honda and Toyota and
Nissan and BMW...

>
> > That said, if you can really work out what percentage of your *future*
> > consumption will be in non-USD items, there is a case for hedging it.
>
> Or, if you think that the dollar might depreciate.

Yes, although the record of forecasters on the dollar (or any currency)
is just about zero. The best forecast has always been that tomorrow's
exchange rate is unchanged from today. Remember the consensus at the
beginning of this year was that the dollar would go down.

>
> > Diversifying outside your home market also exposes you to risk the
> > other way. For example, I have a prior expectation that the Euro is
> > way overvalued (and this would be more obvious if the US was pursuing a
> > rational fiscal policy) and may eventually cease to exist in its
> > current form (the infrastructure is in place to dissolve it, eg the
> > national banks still exist). If it does so, the US investor heavily
> > invested in euro stocks, could take a lot of pain.
>
> At the moment the Euro seems to be on a way more secure footing than
> the dollar, which seems to have considerable downside risk.

The political pressures in Europe are building up to explosive levels.
The voters have rejected the European constitution, when asked by
referendum. Nativist right wing political parties (think Europe's Pat
Buchanan) are growing apace in Denmark, Holland, France, Belgium,
Itally amongst others. Italy is almost in outright depression and its
logical route out is devaluation (ie leaving the Euro). France is in a
politically explosive situation due to unemployment.

The main European countries are all breaking the requirements for
maximum deficits: France, Germany, Italy; which were imposed on
creation of the Euro.

How long can this go on? My bet is not as long as people think. I
think Italy will exit the Euro. It's a myth to believe that this is
impossible-- all of the infrastructure is still in place to have
national currencies.


Do you want
> to keep holding dollars if the currency depreciates against other
> currencies and gold?

I'll tend to agree with you (and Warren Buffett) that the US dollar
looks like a supremely bad bet. But we live in an increasingly
dangerous world (Iran) and there may well be a flight to safety.
Beware consensus.

Re: Index vs managed funds

Steven L. wrote:
> TK Sung wrote:
> > darkness39 wrote:
> >
> > Any rapid fall in the value of an asset would simply
> >
> >>be the consequence of changed information about the future, not
> >>unrealistic expectations.
> >>
> >
> > Or, changed interpretation of information. And the expectation is
> > labeled unrealistic only fater the facts. If it did before the burst,
> > there wouldn't have been a bubble after all.
> >
> > I'm now pondering if google is a bubble. At $150b, it's a huge
> > valuation for a company who draws revenue from online ads. Apparently,
> > majority of the market thinks google will change the
> > advertising/computing paradigm and it'll be worth $250b soon. Is it
> > unrealistic?
>
> In my past investing experience, "change the paradigm" has ALWAYS been
> an unrealistic way to invest in stocks. Because if "the paradign"
> really does change, it will simply invite a lot more entrants into that
> new market, who may do better than those who changed the paradigm in the
> first place.

The best returns empirically have been from value investing, ie
investing in the stocks which are the opposite of 'change the
paradigm'.

In addition, franchise value is hugely important-- Warren Buffet's key
insight. Think tobacco companies, or (at least until the last few
years) newspapers. The latter, along with TV stations and radio, have
been huge moneyspinners for investors. So too has big tobacco-- de
facto a regulated industry now, where the virtuous circle of high
corporate profits goes hand in hand with high taxes (counting the
litigation settlement as a 'tax') and revenues for government.

Slow growth, slow moving industries tend to have higher rates of return
on capital for far longer than fast moving industries like technology
which attract new entrants.

>
> The Apple II and IBM PC created the huge consumer market for personal
> computers, forever changing computing from mainframe to personal. But
> neither one of those companies ended up being the big beneficiary of
> that market in the long run. Dell and Microsoft have.

Very good examples.

>
> And if Google manages to "change the paradigm" again, the biggest
> beneficiaries may be smaller, more nimble companies, or maybe even new
> entrepreneurs we haven't heard of it.

Every generation of computing technology you get a dominant player: IBM
in mainframes, DEC in minis, now Microsoft in the era of the PC (and
Oracle). That dominant player reaps far higher returns and generates
far more cash flow than the number 2,3,4 in the market and is not
usually the first entrant (Oracle was an also ran database when it
started). *however* it usually gets killed by the next technology
cycle: it is not Microsoft that is making (much) money from mobile
phones. I can't think of a major company, dominant in one technology
platform that has successfully extended that domination to the next
one.

Dell, which is a fantastic company, is strugglling to find the market
to dominate beyond PCs: they've had to pull back (somewhat) in consumer
devices. Sony, which dominated consumer electronic devices for so
long, is still looking for the next Walkman, Trinitron etc.

Even Intel, the other half of the dominant Wintel paradigm, is
struggling to stay ahead. Returns on capital are under pressure, even
with 90%+ market share.

Re: Index vs managed funds

Stephen

Just to add. People have back constructed the stock market indices
for the UK: google Elroy Dimson and Paul Marsh, Barclays Equity Gilt
study.

The UK has had greater swings than the US and averages over the long
run about 1% lower returns pa. In 18 months 1972-1974 the UK had the
greatest crash on record for any continuous stock market (a time of 22%
inflation and an appeal to the IMF for funds), falling 90% in about 18
months. It then produced triple digit returns in the subsequent year--
if you panicked out at the wrong moment, you were wiped out (it was
about 1979 before it regained its 1972 level).

In the 80s the UK outperformed the US market: a function of the
(Margaret) Thatcher revolution.

Re: Index vs managed funds

Doug wrote:

> The difference over a long period of time is COLOSSUL ! If dividends
> were included in the DOW since its inception in 1872, the DOW index
> would be 250,000 now!!!

You still don't seem to care about inflation, do you?

According to the Bureau of Labor Statistics, a dollar in 1913 (the
earliest year they have inflation numbers) had the same purchasing power
as $19.73 today.

And beyond that, you also don't seem to have noticed that the dividend
yield has been declining steadily for decades. I very much doubt the
dividend yield on the S&P 500 is going to rise to 8% any time in the
immediate future.

So counting on huge dividends for a substantial return anymore is a pipe
dream.


--
Steven D. Litvintchouk
Email:

Remove the NOSPAM before replying to me.

Re: Index vs managed funds

Doug wrote:

> Look at a graph of the Nasdaq vs the DOW years 1980 to 2000. Nasdaq
> appears to drastically outperform DOW. True if you dont include
> dividends, not true if you include dividends.
>
> The point is, people present a graph of an index and don't tell you if
> it includes dividends or not. For example, your investment advisor
> compares the performance of your investments to the SP500 (or the DOW).
> Your investement performance of course includes dividends and trading
> costs. The SP500 or Dow perfromance he presents to you does not include
> dividends.

What are you talking about???

The dividend yield on the S&P 500 has been under 2% now for a decade.
That 2% is eaten up by inflation.

You keep looking back to a time when the dividend yield was much higher.
Unless you can come up with an argument that the dividend yield will
be high once again in the immediate future, counting on the dividend
yield for big returns is a pipe dream.


--
Steven D. Litvintchouk
Email:

Remove the NOSPAM before replying to me.

Re: Index vs managed funds

"TK Sung" <> wrote
> The problem is, your tolerance varies depending on your
pyche du jour.
> And, if you have any kind of "maximum loss" in mind, you
should invest
> only that percentage in stocks. As far as I'm concerned,
this risk
> tolerance thing is utterly useless concept paddled by
financial
> analysts.

The problem is your poor English, TK Sung. Risk tolerance is
exactly what you are "peddling" in your second sentence
above as well as your sentence below.

> People should plan solely based on their future needs and
> likely returns instead.

You would be unlikely to recommend to anyone who needed
money for a house downpayment within one year to put the
money into the stock market. Why? Because you know it's
highly unlikely many people would have such a high tolerance
for the risk a one-year or less investment in stocks
represents.

Jeezus Christ, take a course in English.

Re: Index vs managed funds

darkness39 wrote:

> Steven L. wrote:
>
>>TK Sung wrote:
>>
>>>darkness39 wrote:
>>>
>>>Any rapid fall in the value of an asset would simply
>>>
>>>
>>>>be the consequence of changed information about the future, not
>>>>unrealistic expectations.
>>>>
>>>
>>>Or, changed interpretation of information. And the expectation is
>>>labeled unrealistic only fater the facts. If it did before the burst,
>>>there wouldn't have been a bubble after all.
>>>
>>>I'm now pondering if google is a bubble. At $150b, it's a huge
>>>valuation for a company who draws revenue from online ads. Apparently,
>>>majority of the market thinks google will change the
>>>advertising/computing paradigm and it'll be worth $250b soon. Is it
>>>unrealistic?
>>
>>In my past investing experience, "change the paradigm" has ALWAYS been
>>an unrealistic way to invest in stocks. Because if "the paradign"
>>really does change, it will simply invite a lot more entrants into that
>>new market, who may do better than those who changed the paradigm in the
>>first place.
>
>
> The best returns empirically have been from value investing, ie
> investing in the stocks which are the opposite of 'change the
> paradigm'.
>
> In addition, franchise value is hugely important-- Warren Buffet's key
> insight. Think tobacco companies, or (at least until the last few
> years) newspapers. The latter, along with TV stations and radio, have
> been huge moneyspinners for investors. So too has big tobacco-- de
> facto a regulated industry now, where the virtuous circle of high
> corporate profits goes hand in hand with high taxes (counting the
> litigation settlement as a 'tax') and revenues for government.
>
> Slow growth, slow moving industries tend to have higher rates of return
> on capital for far longer than fast moving industries like technology
> which attract new entrants.

Yes, and I believe that their stocks also hold up better in market
downturns, because they pay higher dividends generally, and because
their stocks are less dependent on momentum players who twitch every
time there is a downturn.

Certainly in 2000-2002, you were better off with DJIA "DIAMONDS" than
with the NASDAQ QQQ.


--
Steven D. Litvintchouk
Email:

Remove the NOSPAM before replying to me.

Re: Index vs managed funds

darkness39 wrote:
> Evojeesus wrote:
> > darkness39 wrote:

> The theoretical matching is your long term future consumption against
> the currency in which it will take place. Since your two biggest
> future costs are likely to be health care and housing, and those will
> be priced in US dollars.

I live within the EU, but that's quite irrelevant. If I thought it was
wise to keep some of my savings in dollars or US stocks, I'd do it.

> > How about Chinese goods? What causes the trade deficit if not foreign
> > made goods bought in the US?

> But exports and imports are not a huge part of the US economy.

So what causes your colossal trade deficit then? It's around 3 trillion
now, isn't it?

> From memory China exports something over $100bn of manufactured goods a
> year to the US or less than 1% of US GDP of $11 trillion.

Well, it seems the imports are expected to be $500 billion this year:



> The big loser in the last 10 years
> to China has been Mexico.

Sure, but do you think you can pile up debt endlessly and therefore
always consume yourselves out of an impending recession? Where's the
money going to come from once the housing market cools off, or slumps?

> Coal is like our agricultural policy. We subsidise the production of
> coal, as we do agricultural goods, to enormous waste of resources and
> enormous damage to emerging market countries that could do the job far
> better. The US is actually a world low cost producer of coal, albeit
> the coal isn't mostly in the right place to export (Powder River basin,
> Wyoming).

That's good for you, as my take on the peak hydrocarbons issue is that
if/when it becomes impossible to increase the supply of liquid
hydrocarbons, coal and coal liquifaction become very important. Unless
this is going to be "clean coal", the atmosphere CO2 is going to
skyrocket and we may have a real climate crisis at some point in the
future.

> > At the moment the Euro seems to be on a way more secure footing than
> > the dollar, which seems to have considerable downside risk.

> The political pressures in Europe are building up to explosive levels.
> The voters have rejected the European constitution, when asked by
> referendum. Nativist right wing political parties (think Europe's Pat
> Buchanan) are growing apace in Denmark, Holland, France, Belgium,
> Itally amongst others. Italy is almost in outright depression and its
> logical route out is devaluation (ie leaving the Euro). France is in a
> politically explosive situation due to unemployment.

> The main European countries are all breaking the requirements for
> maximum deficits: France, Germany, Italy; which were imposed on
> creation of the Euro.

> How long can this go on? My bet is not as long as people think. I
> think Italy will exit the Euro. It's a myth to believe that this is
> impossible-- all of the infrastructure is still in place to have
> national currencies.

I don't see anyone seriously contemplating leaving the Euro, not even
the Italians. The EU or the Euro is nowhere near collapse at the
moment. It might be more likely than the "Blue states" in the US
leaving USA, but not much. Things need to get a lot lot worse for
breakup of the Euro or the EU is a possibility. Don't you think
reckless printing of dollars is a risk? Why is gold so strong lately,
is it just speculation or is there something fundamental happening?

Re: Index vs managed funds

t wrote:

>
> Jeezus Christ, take a course in English.
>
Is this Mr. Steven L. parading as Ms Elle Navor.?

Re: Index vs managed funds

"TK Sung" <> wrote
> t wrote:
> > Jeezus Christ, take a course in English.
> >
> Is this Mr. Steven L. parading as Ms Elle Navor.?

No. Steven L. speaks the Vulgar language. I do not.

Parading? Take the course.

Re: Index vs managed funds

Your english is a lot better than t's.
Some people just beg to be ignored.



"TK Sung" <> wrote in message
news:
>t wrote:
>
>>
>> Jeezus Christ, take a course in English.
>>
> Is this Mr. Steven L. parading as Ms Elle Navor.?
>

Re: Index vs managed funds

On the trade deficit (X-M) exports minus imports of goods





Current Account = (X-M) + balance on services + investment income &
dividends + net transfers

Now

net savings (S - I) = net exports (X - M)

derivation:
Y = GDP, C = consumption by consumers, I = fixed capital formation
(investment), G = government spending on goods and services (but not on
fixed assets which is in I), X-M = exports minus imports

Y = C + I + G + (X-M)
X-M + I + G = Y - C

note that Y = C + T + S (the total income in the economy equals
consumption plus taxes plus savings)
T+S = Y- C

so TI+G+X-M = T+S

X-M = T-G + S - I now T-G is the government deficit (surplus), S-I is
the surplus (deficit) of savings in the economy over investment

Turning to the Euro

- I live outside the euro area. My general take is that the Euro is
causing enormous deflationary pain in Italy (and to some extent Germany
and France). None of those countries now obeys the Schengen limit (on
central government deficits) that was imposed as a condition of entry
into the Euro.

Italy strikes me as the likeliest candidate for exit because it has a
very weak central government and no consensus political elite behind
the Euro (vs. France and Germany where the political elites have staked
their credibility on it).

On the US consumption bubble, I think it is a bubble, and bubbles end.
The effect could be much more pronounced here (in the UK) where we have
a long and distinguished tradition of housing boom and bust, and on
most measures houses are the most expensive they have ever been (to the
point where the impact on housing prices in parts of Spain, France and
Italy favoured by British second home buyers, has been tangible). The
US the housing bubble is more localised (basically the coastal areas)
but the deflation will still be painful. House prices fell by 40% in
Boston 1990-94 if I recall correctly, it was a tough time.

Generally for the US consumer I think spending growth will become more
anemic. I don't expect to see savings rates of 10% anytime soon, but
4%, the long run historic average, is quite possible. Depending how
fast the US moves to that, I could see a quite painful recession.

I am agnostic on ''Peak Oil'. There is clearly a physical limit to oil
production, but after a 10 year period of falling oil prices, in a
business where the time lag between exploration and production can be
more than 10 years, it is hard to argue *yet* that we have seen the end
of our ability to raise oil production. But it might be much sooner
than we think. I don't know if Matt Simmons is right re Saudi Arabia:
if he is, then you can see the logic in the Bush Administration
invading Iraq.

My gut is the political risk to oil is what is going to preoccupy us
over the next 10 years, rather than the geologic risk. But I'm not
selling my Canadian natural gas and oil sands stocks ;-).

Over to coal. There is no economic case for producing coal in most of
the EU, and security of supply is not a huge issue (because there are
so many producing countries, notably the US, Columbia, South Africa,
Ukraine). But the Germans still pay their kohlpfennig on their
electricity bills I believe.

On energy generally the way out of the box is greater efficiency of
consumption, the cheapest 'source' of new energy there is. I have seen
endless studies that show that efficiency gains of 40% are possible at
limited extra cost (on homes, heating, air conditioning, even
potentially transport (harder). Energy efficiency gains of 80% are
possible-- a friend rebuilt her house with R40 insulation and heat
pump, they also have a wood stove (airtight). This is in the Canadian
snowbelt (Ottawa). She achieved an over 60% drop in energy bills.
Air con we are horrifically inefficient: glass walls, dark roofs etc.
I read that simply painting the rooftops of Phoenix white would save
10% of their air conditioning bills.

The problem of global warming is very real and appears to be
accelerating. In one of those ironies of civilisations under threat
(see 'Collapse' by Jared Diamond) we are likely to make it worse trying
to fight it: eg more airconditioning breeds more CO2 brings a hotter
climate.

Gold. It's never an asset class I understand. A financial asset,
fundamentally I would guess.

Re: Index vs managed funds

Note there are two reasons to hold a foreign currency:

- to hedge future consumption in that currency ('hedging')

- a forecast that that currency will appreciate (in real terms) against
you own currency *and* a credible belief you have a better forecasting
power than the market as a whole. ('speculation')

Diversification I see as a sub case of hedging (I don't know what the
future is, but I have a more efficient portfolio in a mean-variance
sense if it is more diversified). I was trying to sketch a theoretical
limit of diversification (which is long run consumption)

Re: Index vs managed funds

FWIW I am paid in sterling and my largest assets (house and company
pension) are in sterling. So I tend to make personal investments in
dollars and euros, to hedge.

Re: Index vs managed funds

darkness39 wrote:

> Turning to the Euro

> - I live outside the euro area. My general take is that the Euro is
> causing enormous deflationary pain in Italy (and to some extent Germany
> and France).

Do you mean inflationary pain? People complain that the Euro made many
things more expensive.

> None of those countries now obeys the Schengen limit (on
> central government deficits) that was imposed as a condition of entry
> into the Euro.

That is freeloading and ought to stop.

> Italy strikes me as the likeliest candidate for exit because it has a
> very weak central government and no consensus political elite behind
> the Euro (vs. France and Germany where the political elites have staked
> their credibility on it).

Well, I live in Italy and that is not seriously debated at all. It's
not that easy to leave the Euro or the EU.

> Generally for the US consumer I think spending growth will become more
> anemic. I don't expect to see savings rates of 10% anytime soon, but
> 4%, the long run historic average, is quite possible. Depending how
> fast the US moves to that, I could see a quite painful recession.

Isn't that slowing down happening already as home equity borrowing is
tanking?



> My gut is the political risk to oil is what is going to preoccupy us
> over the next 10 years, rather than the geologic risk. But I'm not
> selling my Canadian natural gas and oil sands stocks ;-).

I'd like to know whether it makes sense to hand onto the energy stocks
if the stock market starts a decline, or to exit and to buy them back
cheaper later. Hmm.

> The problem of global warming is very real and appears to be
> accelerating.

Yes, Greenland has been acting up lately. The global sea level might
rise faster than anticipated so far.

Re: Index vs managed funds

> Turning to the Euro
> - I live outside the euro area. My general take is that the Euro is
> causing enormous deflationary pain in Italy (and to some extent Germany
> and France).


Do you mean inflationary pain? People complain that the Euro made many
things more expensive.

>>> no. Deflation. The indices don't show raging Italian inflation, what they show is near zero growth, high unemployment. Classic signs of deflationary pressure. France went through the same thing 1930-35, when it stayed in the Gold Bloc whilst every other country devalued. It was a major reason they were in no shape to fight WWII 5 years later.

>From the point of view of someone on an income that hasn't risen, an
increase in prices is a loss of purchasing power.

On Shengen, forcing the European countries into brutal deflationary
policies, cutting spending in the face of high unemployment, is likely
to make economic conditions worse not better. If governments cut
spending then consumers will cut back (fearing for their jobs) and
businesses will not invest. And so government revenues will be lower
and deficits will be worse, thus necessitating further spending cuts.
This is a very familiar cycle from the days of the Gold Standard in the
early 1930s. >>>
>>>

> Italy strikes me as the likeliest candidate for exit because it has a
> very weak central government and no consensus political elite behind
> the Euro (vs. France and Germany where the political elites have staked
> their credibility on it).


Well, I live in Italy and that is not seriously debated at all. It's
not that easy to leave the Euro or the EU.

>>> my sense of Italian politics is that the impossible is always possible. You have a near dictatorship, with a ruler who seems to make almost random decisions. There is no political consensus other than a bunch of politicians trying to save their jobs. No one would take tough medicine like restricting public sector pensions. If any country besides Germany needs its Thatcher, it is Italy.

Historically whenever Italy has been in this mess before (uncompetitive
with major trading partners) it has devalued. Now it cannot.

No one will talk about leaving the Euro, until it is almost a done
deal.

Leaving the Euro is not tantamount to leaving the EU. The UK and
Denmark, Sweden are not members of the Euro, and it is not at all clear
that Poland, Romania, Bulgaria will join any time soon. >>>>

Trying to sell stocks and then buy them back is like catching a falling
knife. Good on you if you can manage it!

The question on global warming is increasingly not 'if' but 'how much'.
It could be 6 degrees centigrade by 2050, a level for which the world
is manifestly not ready.

Jared Diamond's 'Collapse' is out in paperback (Penguin -- you can pick
it up at an airport if nowhere else). He makes a series of case
studies of societies that collapsed because the ruling elites could not
adjust to changed environmental conditions and/ or environmental
degradation. His case studies include Easter Island, the Mayas, the
Vikings in Greenland. It's well worth a read. His point, made
explicitly, is that if we fail to make adaptations now, our society
will not make it.

Re: Index vs managed funds

darkness39 wrote:
> > Turning to the Euro
> > - I live outside the euro area. My general take is that the Euro is
> > causing enormous deflationary pain in Italy (and to some extent Germany
> > and France).

> Do you mean inflationary pain? People complain that the Euro made many
> things more expensive.

> >>> no. Deflation. The indices don't show raging Italian inflation, what they show is near zero growth, high unemployment. Classic signs of deflationary pressure.

In the area were I live house prices have almost tripled since 2000.
That does not sound very deflationary to me. The inflation is around 4%
I assume.

> > Italy strikes me as the likeliest candidate for exit because it has a
> > very weak central government and no consensus political elite behind
> > the Euro (vs. France and Germany where the political elites have staked
> > their credibility on it).

> Well, I live in Italy and that is not seriously debated at all. It's
> not that easy to leave the Euro or the EU.

> >>> my sense of Italian politics is that the impossible is always possible. You have a near dictatorship, with a ruler who seems to make almost random decisions. There is no political consensus other than a bunch of politicians trying to save their jobs. No one would take tough medicine like restricting public sector pensions. If any country besides Germany needs its Thatcher, it is Italy.

I agree that some really tough decisions need to be taken here. I don't
see how that could happen though, maybe there needs to be some kind of
a collapse first.

> Historically whenever Italy has been in this mess before (uncompetitive
> with major trading partners) it has devalued. Now it cannot.

Italy has a lot of small manufacturing companies that used to be the
basis of the economy. Devaluation won't help them much because no
amount of devaluing will make them competitive against China or India.
It does not look very good here.

> Trying to sell stocks and then buy them back is like catching a falling
> knife. Good on you if you can manage it!

Would you want to be holding the falling knife all the time instead?
I'd just like to know how the energy-sector will do in an economic
slowdown, I think that the oil supply cannot grow much anymore so the
energy-situation will be "interesting" in the future.

> The question on global warming is increasingly not 'if' but 'how much'.
> It could be 6 degrees centigrade by 2050, a level for which the world
> is manifestly not ready.

Yes, and according to recent estimates Greenland is rising the global
mean sea level by 0.65mm in 2005, or twice as much as ten years
earlier! The trend is worrying, to say the least.

> Jared Diamond's 'Collapse' is out in paperback (Penguin -- you can pick
> it up at an airport if nowhere else). He makes a series of case
> studies of societies that collapsed because the ruling elites could not
> adjust to changed environmental conditions and/ or environmental
> degradation. His case studies include Easter Island, the Mayas, the
> Vikings in Greenland. It's well worth a read. His point, made
> explicitly, is that if we fail to make adaptations now, our society
> will not make it.

The energy-situation looks dangerous to me. Well, I think we'll know
more what's in store for us within 10 years :-/