Katrina's Effect on S&P

[ChromePony]

OK, so I just put some poker money into the basic Vanguard S&P index and I'm quite content to enjoy the lowish risk/lowish rewards it typically offers in exchange for not having to worry about things.

Now, there has been a lot of talk lately about how the fallout and loss of jobs from Katrina will hurt our economy in the near future, I'm no expert (in fact I know very little), but these are the rumors I hear on these boards and on cable news and that sort of thing.

So my question is this...Would this be a good time to take this money out of S&P and put it in a foreign fund or something. I of course understand the point of riding out the ups and downs of the market and how over the long term things will tend to right themselves. But it seems that if we can predict that there will be even a small downturn it would be stupid to sit and watch my money depreciate, or at least not grow at the rate it could be.

Vanguard has lots of no load funds so its not much of a hassle to transfer to a new one. Thoughts and suggestions?

[Peter666]

Put it in a mutual fund with good managers who have above average results.

The be all and end all of index funds is to get guaranteed average performance....if you do not touch the fund for a long time. But obviously this has not worked in your case,and doesn't for anyone I know as most are smart enough to realize that current events effect the markets in a positive or negative way, and it is possible to make more money by having it at the right place at the right time.

A good fund manager has more experience in this field and you should either give them your money or invest it yourself.

I do not like index funds precisely because of their failure to satisfy an investor's psychological needs, and the fact that their performance is merely average.

[Uglyowl]

Theoretically the market already should have priced in what it thinks is the slowdown as a result of Katrina.

[1C5]

Yeah but most mutual funds have not even beat the market and it can be tough to pick one that will.

[kagame]

just buy motley fool and load up on all their stock picks

no way they dont beat the market

[snappo]

as op says there are and will be obvious economical ramifications from katrina. yet after katrina hit and did all that damage the market did not go down. in fact it has been going up since the hurricane hit. shouldn't this be interpreted as a sign of major underlying strength in the market? or is this interpration flawed?

[Peter666]

My studies suggest that most mutual funds don't beat the market because people want less fluctuation and fund managers respond in kind. Most people cannot psychologically handle the fluctuations a higher return usually entails (they want bond like performance with the tax advantages of stocks).

However, if you do some research on morningstar, you can find some funds that are both less volatile and perform a little better than the market average after expenses.

[Peter666]

Different sectors get hit in different ways. Knowing what the average effect of all sectors combined is on the market does not do the investor much good. We want more specific information that can tell us this is a good place to pull out of now, and this is a place we should be in now. That is how to get above average returns. The major indexes cannot tell us this.

I also heard that all the immediate effects of 9/11 on the stock market vanished by October.

[Sniper]

[ QUOTE ]
My studies suggest that most mutual funds don't beat the market because people want less fluctuation and fund managers respond in kind.

[/ QUOTE ]

These are some of the reasons mutual funds have mediocre performance. Also, these are many rules that constrain the actions of mutual funds.

The biggest problem that funds have is that they simply have too much money and that money must be almost fully invested at all times.

An individual investor that does their homework, can easily beat the possible % returns of a mutual fund manager.

Think of poker... a player can start the year with $250, play .50/1 limit and end the year with over $25,000 including rakeback and bonus... a 1000% return. However, there is no way that a player starting with a $1 million bankroll is going to achieve a 1000% return even playing 4K/8K.

[Elaboration]

[ QUOTE ]
shouldn't this be interpreted as a sign of major underlying strength in the market? or is this interpration flawed?

[/ QUOTE ]

The bump was probably due to the expected impact of recovery spending. The gov approved 50 bill last week and they say it'll probably top 200 bill. Thats just the government, without including the private sector.

Think about it from a business perspective. If you were a big builder, retailer, restaurant owner and you saw that one of the countries flagship cities needed to be rebuilt, wouldn't you be salivating at the opportunity?

Where it could be flawed is the potential expectation that the hurricane will curb the fed in raising interest rates. While they might give a free pass at the next meeting I think their long term goal probably stands from what I have read.

[ChromePony]

[ QUOTE ]
Think of poker... a player can start the year with $250, play .50/1 limit and end the year with over $25,000 including rakeback and bonus... a 1000% return. However, there is no way that a player starting with a $1 million bankroll is going to achieve a 1000% return even playing 4K/8K.

[/ QUOTE ]

I'm not sure I totally follow this anaolgy. In poker, small stakes players can achieve a greter rate of return because bonues account for such a large percentage of profits, and players are so much worse that bb/100 win rate is greater.

But in the stock market there are no bonuses and there are no worse players, managers of big funds have access to the same opportunities as everyone else and supposedly a lot more experience and information. How is it that funds with tons of money to invest cant beat the performance of individual small timers like you and me?

[ttw22]

[ QUOTE ]
But in the stock market there are no bonuses and there are no worse players, managers of big funds have access to the same opportunities as everyone else and supposedly a lot more experience and information. How is it that funds with tons of money to invest cant beat the performance of individual small timers like you and me?

[/ QUOTE ]

From what I understand, there is no stock market equivalent of bonuses, but having a large "bankroll" does make it harder to do so well, since when you buy many shares of a stock (say, as a mutual fund manager), you actually have influence over the price, whereas as most individual investors will not be trading enough stock to substantially change prices, therefore being able to complete their entire orders at the market price. Somebody please correct me if I'm wrong.

[ChromePony]

that sounds resonable...anyone else?

[Sniper]

[ QUOTE ]
I'm not sure I totally follow this anaolgy.

[/ QUOTE ]

The analogy has to do with the velocity of money, or as Barry G put it, the amount of action a player can get. A small stakes player can easily get action on his small stakes any time of the day or night, on a large number of sites, on multiples of tables at the same time. The million dollar bankrolled poker player just can't get his entire bankroll on the table in the same way. Is there even 1 place that you can 4 table a 4K/8K game?

The same is the case for a large mutual fund. There are just so few relative places that you can put a million shares to work.

This is simply the Law of Diminishing Returns in action. The more money you have (after a certain point) the harder it is to find ways to multiply it (in % terms).

[ QUOTE ]
But in the stock market there are no bonuses

[/ QUOTE ]

There are bonuses (given by brokers) in the stock market, here is one example... http://www.cybertrader.com/marketing/jump/xview.aspx

Active individual traders also receive the best commission rates. While the large mutual funds pay the highest transaction costs.

[ QUOTE ]
and there are no worse players

[/ QUOTE ]

It should be fairly obvious that, of course there are strong and weak players in the market.

[ QUOTE ]
managers of big funds have access to the same opportunities as everyone else and supposedly a lot more experience and information.

[/ QUOTE ]

Actually, managers of mutual funds do not have the same opportunities, as there are many stocks which they simply cannot trade because a typical investment size for them would buy the whole company /images/graemlins/wink.gif

Also individuals have access to the same information as the mutual funds.

[ QUOTE ]
How is it that funds with tons of money to invest cant beat the performance of individual small timers like you and me?

[/ QUOTE ]

In addition to those issues mentioned already, there are many limits placed on what mutual funds can do.

Most mutual funds must remain almost fully invested at all times, while an individual investor can strategically time the market.

Most mutual funds cannot short shares, while individual investors can take advantage of the market going either way.

I've already discussed the relative ease of trading in and out of 1,000 share lots compared to 100,000-million share lots.

If you truly examine what mutual funds own, you will see that they generally own the same stocks.

The individual trader is not constrained in any way. A speedboat can run circles around an aircraft carrier. Educate yourself in the ways of the market, and you too can easily run circles around the mutual fund managers.

BTW, if you want to see potentially possible returns on $1 million portfolios, check the ranking page of Marketocracy (http://www.marketocracy.com/cgi-bin/WebObjects/Portfolio.woa/ps/RankingOverviewPage/bfix=1). I will also note that those performances are accomplished with the same "compliance" rules that mutual funds operate. An individual trader not contrained by those rules can significantly outperform even the significantly outperforming numbers there.

There is no doubt in my mind that a mega-multitabler killing the 5/10 or higher limit poker game, could train themselves to turn a 50-100K market port into $1 million in 1 year (before taxes).

[ChromePony]

Thanks for the explaination, now excuse me while I pull my money out of the index and go get rich.

[Sniper]

[ QUOTE ]
Thanks for the explaination, now excuse me while I pull my money out of the index and go get rich.

[/ QUOTE ]

Just make sure you take the time to educate yourself first... you don't want to be the fish! /images/graemlins/wink.gif

[ChromePony]

[ QUOTE ]
[ QUOTE ]
Thanks for the explaination, now excuse me while I pull my money out of the index and go get rich.

[/ QUOTE ]

Just make sure you take the time to educate yourself first... you don't want to be the fish! /images/graemlins/wink.gif

[/ QUOTE ]

Yes, well in all seriousness I'll probably hang onto my index for a while, at least until I graduate this year and then maybe have some free time to get into this stuff. Im sure there are tons of good books to read and Ive seen plenty of posts listing them, so I guess thats a good place to start.

[Sniper]

Enjoy your Senior year, and Read as much as you can!