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posted by Helen at 2:17 PM
Thursday, January 15, 2009
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7 Comments:
Suze should stick with her bread-and-butter, like "You should try to reduce the balance on your 29.99% interest-rate credit card" [said as if speaking to a slow child].
When her ego gets pumped up and she talks about more important things, it becomes evident that she's kind of a bird brain.
Second note: She is probably the most irritating woman I have ever seen. I literally can't bear to watch her.
Well, what was kind of bizarre was the way a shorter term investment yields more than a longer term investment. That is backwards. But, I think Miller is the one that is far more bizarrely off the mark here. Look, take your money and buy an index fund. It follows the index of your choice. You will make the return of that index (give or take some fees). There is a reason indexes are constantly in flux -- it is because they are supposed to be representative of the market. Of course, that isn't a straightforward process, but regardless, like I say, buy an index fund and that way the composition of *your* mutual fund will exactly follow the index regardless of how comparable past index values are to present values. (Of course, the whole point of such an index is that they *are* comparable.) For that matter, everyone's mutual fund is constantly in flux and hardly invested in every security in existence or some such thing.
Anyway, I just don't get it. It sounds like Miller is just waiting for all markets to crash and everyone to close their doors or something. Yeah it is *theoretically* possible that we go into a bear market for a century or whatever. Law of Large Numbers -- there are all sorts of things that are possible that just aren't going to happen. (But, you do have to be able to ride out the lean times like these -- or better yet start pouring money into the market right now.)
> Second note: She is probably the most irritating woman I have
> ever seen. I literally can't bear to watch her.
She's giving Nancy Grace some serious competition, isn't she.
I would consider a room with TV channels stuck on Suze Orman and Nancy Grace torture.
"I would consider a room with TV channels stuck on Suze Orman and Nancy Grace torture."
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I read somewhere that was tried at Guantanemo, but it was too far over the line so they stuck with waterboarding.
"Look, take your money and buy an index fund. It follows the index of your choice. You will make the return of that index. . ."
No, Miller is right. The fund does not "make the return of that index" because, unlike the index, the fund can't simply substitute the new, high performing stock, for the old, low performing stock. The fund must sell the bad old stock (which actually sinks a little lower on being delisted, because such funds must sell it, and because the delisting itself is a sign of weakness) and buy the new good stock (which costs a little more than it otherwise would, because such funds must buy it, and because listing itself is a sign of strength).
Say you have an index fund for the DJIA. When it added Wal Mart and dropped KMart, your fund had to dump its KMart stock and buy Wal Mart stock. Your fund took a loss on the K Mart stock, which was performing badly (which is why it was delisted) even though the index "went up" after the switch. And the Wal Mart stock was relatively expensive to buy at that moment as the stock was doing well (which is why it was added to the list).
"There is a reason indexes are constantly in flux -- it is because they are supposed to be representative of the market."
That may be the PR spin, but the reality is that only bad stocks are delisted and only good stocks are added to the lists. The bad stocks may actually be more representative of the market as a whole than the good stocks, but that doesn't stop it from being delisted.
". . .buy an index fund and that way the composition of *your* mutual fund will exactly follow the index regardless of how comparable past index values are to present values. . ."
Yes, the "composition" will be the same, but not the return. Again, that is because the index can painlessly substitute the one stock for the other, but neither an individual investor, nor an index fund, can.
As for comparison over time, this case is similar to the phenomenon of the "survivor bias" in mutual funds. When companies market mutual funds, they say that all of their currently existing funds have out-performed the market for the last x number of year. What they don't say is that there are funds that they once offered but no longer do (funds that have either been liquadated or rolled into other funds) which underperformed the market. The "surviving" funds are all doing great; the defunct ones are forgotten. Of course, when one invests today one can't know if the fund one invests in will continue to do great and thus "count" towards the company's "perfect record," or will do badly, be scuttled and thus, not "count."
In the case of indices, the companies which do well stay in the index (GE, the oldest member of the DJIA, has, I believe, been in it for close to a hundred years), in other words, the "survivors," count; the companies which fell by the wayside, the non survivors, don't "count." So, the index tends to go up over time.
But, again, investors, and mutual funds, can't simply exchange the bad for the good; they must sell the bad for a loss and buy the good when they are a (maybe the) peak price. And the losses such transactions incur are very real, and effect returns greatly, even though they are never reflected in the performance (short or long term) of the index.
Eh... the index funds are good enough for that purpose. They don't track the indexes perfectly, but they're good enough at it that we're just talking about relatively small tracking errors. (Gus Sauter at Vanguard was pretty good at smoothing over those tracking errors using futures contracts within the fund).
That 'delisting' works both ways. Stocks get a bump upon making the bottom of the 500 as well. And midcap index funds have stocks leaving the list upwards as well as downwards. (this makes for a slight downward bias in midcaps.) To eliminate this factor as much as possible, you can use a total market fund.
Here's a stupid investing trick, which is ridiculously easy: You can theoretically boost returns over time by putting half your risky money in an S&P value index and the other half in the S&P growth index. Then rebalance every couple of years to bring them back even.
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