blog23mar2008

Hot Off the Web
Jon Clements drives home how counterintuitive investing really is in WSJ’s “Falling down the market rabbit hole”.  Some of the 10 reasons that he gives include: if everybody “knows” that something will happen then it probably won’t, trying to preserve capital can actually wreck it (by reaching too far for yield and/or not keeping up with inflation after tax), we don’t get what we pay for (as in high fees for investment management lead to lower returns), and the things we want will disappoint (the thrill is gone shortly after achieving our latest dream and before you know it we are off chasing the next dream).
Jon Chevreau reviews Keith Matthews’ “The empowered investor” . The principles advocated would also help tolerate the current market turmoil, in tune with what is suggested at this website, start with an Investment Policy Statement, evolving to the corresponding asset allocation, and then implementation with ETFs. He also list eight investment pitfalls, among them: trying to time the market, not having an investment plan, and improper diversification.
Jon Chevreau in another article, “Panic all depends on time horizon” , reminds the reader that volatility of the stock market is a function of your horizon. So while an imminent retiree with a large stock market exposure and a need to start tapping those assets may have to delay his retirement, for young people saving for a retirement more than ten years in the future, low stock prices is an opportunity.
In WSJ’s “Opportunity in credit crisis” Brett Arends list 10 things to consider when investing during this crisis. Among them are: do invest during panic, invest in stages (not all at once), take a long perspective (5+ years), consider what inflation will do to your savings if you choose to sit on cash.
Then in “Packaged funds a trend best avoided”  Rob Carrick of the Globe and Mail dissects new mutual fund offerings called wrap programs, and he calls them “mostly a waste and can be safely avoided”. These are mostly a blend of index funds which are rebalanced to maintain a specific mix. Rob points out that you could implement these much cheaper yourself. Not only are these funds expensive for what they offer, but they also lock you into the fund company’s own family of funds.
To tap into the economic growth in Africa, Sophia Green in Financial Times’ “Timely index gives access to Africa’s rising wealth” reports on the creation of Duet Victoire Africa Index http://www.duetgroup.net/content.asp?PageID=245 launched to allow access to all companies with capitalization in excess of $250M. Due to liquidity limitations it is not in ETF form. For now, it may be an interesting source of diversification for institutions (minimum investment is $100,000).
Thomas Homer-Dixon recapitulates how we got to the current financial crisis in Globe and Mail’s “We’ve moved from a world of risk to a world of uncertainty” . Then in the spirit of The Black Swan he proceeds to make a clear distinction between risk and uncertainty as follows: “So the rules of the game have now changed. Our global financial system has become so complex and opaque that we’ve moved from a world of risk to a world of uncertainty. In a world of risk, we can judge dangers and opportunities by using the best evidence at hand to estimate the probability of a particular outcome. But in a world of uncertainty, we can’t estimate probabilities, because we don’t have any clear basis for making such a judgment. In fact, we might not even know what the possible outcomes are. Surprises keep coming out of the blue, because we’re fundamentally ignorant of our own ignorance. We’re surrounded by unknown unknowns.”
Martin Wolf in Financial Times’ explains “Why today’s hedge fund industry may not survive” given investors difficulties of separating skill from luck in a manager, the disconnect between the reward system of the managers and the good of the investors, and the resulting attractiveness of this business for the unscrupulous.
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