Transcript of Notes on the News, March 26, 2010.
The following is a transcript of Notes on the News, "Paying Down Rich Nations' Debt," first videocast on March 26, 2010.
Though it doesn't always feel like it, at least not in the rich nations like the U.S. and Europe, recovery from the Great Recession is well underway. The world economy as a whole will grow 4% this year, faster next. As the 2008/2009 crisis recedes, governments everywhere have to drain off the stimulus support that got them through it.
This poses three particular challenges. Get them wrong and we're back in trouble. First, get the timing for stimulus exit right. It will be different for different countries. Governments shouldn't move until they are sure recovery is firmly entrenched. China has made a start. The U.S., as Fed Chairman Ben Bernanke has recently indicated, will have to wait a while.
The second is a global rebalancing of savings to help make recovery sustainable over the long run.
The third--a particular challenge in rich nations--is to cut public debt ratios back to prudent levels. The Great Recession created a great decline in government revenues. Stimulus spending widened the resulting deficits further. The IMF reckons that in the rich countries government debt will have risen from 75% of GDP pre-crisis to 110% of GDP by 2014. Even if stimulus spending is cut back, it only accounts for 10% of the forecast increase in debt--far outweighed by the growing demographic pressure that will raise health and pension spending.
Many of those obligations are in the public sector and thus politically difficult to cut back. Over the medium term, large public debts could lead to high real interest rates and slower growth. Without containment of health and pension spending--perhaps though better targeting of social benefits--the recovery in the rich countries from the Great Recession is going to be a long slow haul.
David Serchuk, 03.29.10, 06:00 AM EDT
Monday 29 March 2010
In Praise Of Investing Inertia
It turns out that doing nothing with your retirement portfolio was a pretty good way to ride out the financial crisis.
To channel Mark Twain, it appears that rumors of the death of buy-and-hold investing have been greatly exaggerated. Had you simply stayed put in a low-stress, completely pedestrian collection of equity and bond funds, including index funds, over the past few years and continued to contribute to them you would have actually outperformed the market. In other words, a little inertia can be a very good thing.
The obvious argument for buying and holding is that if you try to time the markets it's well nigh impossible that you will sell at the very top or buy back into the market at the very bottom. Blowing this timing can deliver more than a small, smarting tweak to your portfolio in our bubble-prone economy where highs can be dizzying and the lows crushing. A good chunk of the recovery will happen in its very first few days, and the crashes can be swift, too. Good luck trying to call these moves perfectly. You’ll need it.
Javier Estrada, professor at the IESE Business School in Barcelona, has proved just how much damage can be wrought by pulling out of the markets at the wrong time. Estrada analyzed the Dow Jones industrial average from 1900 through the end of 2007. He found that $100 invested in 1900 would have returned $25,746 by the end of his study. Yet if you missed just the 10 best days of that entire ride your total pot at the end would be $9,008, almost two-thirds less than maintaining constant market exposure. Had you missed the best 100 days you would have earned just $87 in that century-plus stretch.
The flip side, of course, is that if you avoid the worst days you also outperform. Had you missed the worst 10 days of Dow losses you would have seen your total rise to $78,781. The worst 100 would have earned you $11,198,734.
What this shows is that while timing the markets right can earn you a lot of money, you can also lose a lot. If you are investing for your retirement this is an awfully dangerous gamble. For many investors it may be a better idea to invest in a range of index funds, set it up so you dollar-cost average on a monthly basis, and basically forget about trying to micro-manage it.
Morningstar recently tabulated a decade's worth of data and compared how the average investor did vs. the average fund. The answer was that over the past 10 years investors did considerably worse, seeing returns of 1.68%, against 3.2% for all funds, meaning investors were generally off with how they timed their purchases and sales.
In addition Vanguard recently documented the benefits of standing pat in its study "Resilience in volatile markets: 401(k) participation behavior September 2007-December 2009." What the study found was that during a time of exceptional volatility the average defined contribution investor at Vanguard barely altered their saving and investment behavior. On the face of it this sounds like heresy: We are being told more than ever to keep a close eye on our money, and to, in essence, become our own investment managers. But this consistency yielded surprisingly good returns for Vanguard's retirement-centered investors, mitigating the downside of 2008 considerably.
In 2008 during the height of the credit crisis and the stock market meltdown, Vanguard found that traders shifted just 4% of their assets from equities to fixed income. In 2009 that number was 1%. Between September 2007 and December 2009 only 3% of participants abandoned equities.
This might sound like a recipe for financial suicide, but it was the opposite. Since most 401(k) investors at Vanguard kept up their contributions, the median participant account balance actually grew by 10%, vs. a 25% decline for the markets during the time above. The beauty of all this was during the worst financial crisis in several decades those who stayed put, whether by design or simple inertia, ended up buying a lot of securities at the bottom and making money.
What this means is that despite a hyperventilating financial media and daily reports of doom and gloom, most people who stuck with a plan of investing in a balanced portfolio of diversified equity, balanced and bond funds, including indexes, experienced far less volatility. They were able to build on their portfolios during a crisis and buy at the bottom. This paid off in 2009 when median account balances grew by 33% at Vanguard against a 26.5% rise for the S&P 500.
Vanguard is the leading name in indexing, a passive way of owning securities that mirror the investment performance of the world's financial markets. Many, including Vanguard founder John Bogle, argue that indexing remains the easiest, most cost-efficient way for the average investor to invest.
Of course there are arguments to be made against buying and holding indexes. The leading argument is that there are skilled investors that have consistently beaten the markets. This may well be true, but there are caveats to putting your money with a great money manager. The biggest caveat, again, is timing.
Fund managers Ken Heebner, manager of the CGM Fund; and Bill Miller, of Legg Mason's ( LM - news - people ) Value Trust both have earned well-deserved praise for their abilities to beat the Standard & Poor's 500 during their respective tenures as the heads of their respective funds. No one can, or would try, to take this away from them. Yet both of these guys lagged the markets for years, even decades. Rare is the investor with the fortitude to stick through almost 20 years of losses, compared with the market, to reap later gains.
Let's start with Heebner: He became manager of his fund on the first day of 1981. From that day until March 22, 2010 he beat the S&P 500, but it was closer than you might think, according to data supplied by Morningstar. In that time Heebner earned annualized returns of 10.93% against the market's 10.67%. Again, all credit to Heebner. It should also be noted that Heebner badly lagged the markets through the end of 1999, returning 15% against the market's 17.2%.
This means that $10,000 invested with Heebner, if you stayed for the whole ride, would now be worth $207,420, against $193,389 for the S&P 500. Yet what if you stuck with him through the end of 1999 and, entering a new decade, simply got fed up? You would have had returns of $143,228 from Heebner against $202,586 for the S&P.
It's possible you would have bailed at that point. CGM couldn't provide data as to how many, if any, investors fled the fund, but assets certainly dwindled after 1999. By the end of the year Heebner's fund had $909 million under management, which shrank to $654 million by the end of 2000, and bottomed at $376 million by the end of 2002. For those who hung tight, the story had a happy ending, though, as Heebner ended up beating the markets over the past decade, by a nice margin. As of the end of 2009 the fund had $549 million in assets under management. Yet the ride was not smooth.
Bill Miller has managed the Value Trust since April 17, 1982. If you had stayed with him for the whole ride you would have, again, beaten the markets. The value of $10,000 invested at the start of his tenure would be worth $245,579 as of March 22, against $219,441 for the markets. Impressive. The actual annualized percentage points were closer, with Miller's fund earning 12.1% against 11.7% for the markets. Miller's fund has seen a reversal of fortune over the past decade, though, earning annualized total returns of -2.7% against the market's -0.7%.
(One irony: Despite making more money during his time managing the Value Trust, Miller's fund currently has one star from Morningstar against five for Heebner's.)
Miller saw his assets shrivel during a tough period, in his case 2006 through 2008, only to have the fund roar back to life in 2009. Once again nervous investors missed the ride. As Miller himself noted in a 2008 letter to shareholders, "We (and everyone else) get the most inflows and the most interest AFTER we've done well, and the most redemptions and client terminations AFTER we've done poorly. It will always be so, because that is the way people behave."
Some people, that is.
So while it may be better to lucky than good, sometimes it's better to be lazy than smart.
David Serchuk, 03.29.10, 06:00 AM EDT
The obvious argument for buying and holding is that if you try to time the markets it's well nigh impossible that you will sell at the very top or buy back into the market at the very bottom. Blowing this timing can deliver more than a small, smarting tweak to your portfolio in our bubble-prone economy where highs can be dizzying and the lows crushing. A good chunk of the recovery will happen in its very first few days, and the crashes can be swift, too. Good luck trying to call these moves perfectly. You’ll need it.
Javier Estrada, professor at the IESE Business School in Barcelona, has proved just how much damage can be wrought by pulling out of the markets at the wrong time. Estrada analyzed the Dow Jones industrial average from 1900 through the end of 2007. He found that $100 invested in 1900 would have returned $25,746 by the end of his study. Yet if you missed just the 10 best days of that entire ride your total pot at the end would be $9,008, almost two-thirds less than maintaining constant market exposure. Had you missed the best 100 days you would have earned just $87 in that century-plus stretch.
The flip side, of course, is that if you avoid the worst days you also outperform. Had you missed the worst 10 days of Dow losses you would have seen your total rise to $78,781. The worst 100 would have earned you $11,198,734.
What this shows is that while timing the markets right can earn you a lot of money, you can also lose a lot. If you are investing for your retirement this is an awfully dangerous gamble. For many investors it may be a better idea to invest in a range of index funds, set it up so you dollar-cost average on a monthly basis, and basically forget about trying to micro-manage it.
Morningstar recently tabulated a decade's worth of data and compared how the average investor did vs. the average fund. The answer was that over the past 10 years investors did considerably worse, seeing returns of 1.68%, against 3.2% for all funds, meaning investors were generally off with how they timed their purchases and sales.
In addition Vanguard recently documented the benefits of standing pat in its study "Resilience in volatile markets: 401(k) participation behavior September 2007-December 2009." What the study found was that during a time of exceptional volatility the average defined contribution investor at Vanguard barely altered their saving and investment behavior. On the face of it this sounds like heresy: We are being told more than ever to keep a close eye on our money, and to, in essence, become our own investment managers. But this consistency yielded surprisingly good returns for Vanguard's retirement-centered investors, mitigating the downside of 2008 considerably.
In 2008 during the height of the credit crisis and the stock market meltdown, Vanguard found that traders shifted just 4% of their assets from equities to fixed income. In 2009 that number was 1%. Between September 2007 and December 2009 only 3% of participants abandoned equities.
This might sound like a recipe for financial suicide, but it was the opposite. Since most 401(k) investors at Vanguard kept up their contributions, the median participant account balance actually grew by 10%, vs. a 25% decline for the markets during the time above. The beauty of all this was during the worst financial crisis in several decades those who stayed put, whether by design or simple inertia, ended up buying a lot of securities at the bottom and making money.
What this means is that despite a hyperventilating financial media and daily reports of doom and gloom, most people who stuck with a plan of investing in a balanced portfolio of diversified equity, balanced and bond funds, including indexes, experienced far less volatility. They were able to build on their portfolios during a crisis and buy at the bottom. This paid off in 2009 when median account balances grew by 33% at Vanguard against a 26.5% rise for the S&P 500.
Vanguard is the leading name in indexing, a passive way of owning securities that mirror the investment performance of the world's financial markets. Many, including Vanguard founder John Bogle, argue that indexing remains the easiest, most cost-efficient way for the average investor to invest.
Of course there are arguments to be made against buying and holding indexes. The leading argument is that there are skilled investors that have consistently beaten the markets. This may well be true, but there are caveats to putting your money with a great money manager. The biggest caveat, again, is timing.
Fund managers Ken Heebner, manager of the CGM Fund; and Bill Miller, of Legg Mason's ( LM - news - people ) Value Trust both have earned well-deserved praise for their abilities to beat the Standard & Poor's 500 during their respective tenures as the heads of their respective funds. No one can, or would try, to take this away from them. Yet both of these guys lagged the markets for years, even decades. Rare is the investor with the fortitude to stick through almost 20 years of losses, compared with the market, to reap later gains.
Let's start with Heebner: He became manager of his fund on the first day of 1981. From that day until March 22, 2010 he beat the S&P 500, but it was closer than you might think, according to data supplied by Morningstar. In that time Heebner earned annualized returns of 10.93% against the market's 10.67%. Again, all credit to Heebner. It should also be noted that Heebner badly lagged the markets through the end of 1999, returning 15% against the market's 17.2%.
This means that $10,000 invested with Heebner, if you stayed for the whole ride, would now be worth $207,420, against $193,389 for the S&P 500. Yet what if you stuck with him through the end of 1999 and, entering a new decade, simply got fed up? You would have had returns of $143,228 from Heebner against $202,586 for the S&P.
It's possible you would have bailed at that point. CGM couldn't provide data as to how many, if any, investors fled the fund, but assets certainly dwindled after 1999. By the end of the year Heebner's fund had $909 million under management, which shrank to $654 million by the end of 2000, and bottomed at $376 million by the end of 2002. For those who hung tight, the story had a happy ending, though, as Heebner ended up beating the markets over the past decade, by a nice margin. As of the end of 2009 the fund had $549 million in assets under management. Yet the ride was not smooth.
Bill Miller has managed the Value Trust since April 17, 1982. If you had stayed with him for the whole ride you would have, again, beaten the markets. The value of $10,000 invested at the start of his tenure would be worth $245,579 as of March 22, against $219,441 for the markets. Impressive. The actual annualized percentage points were closer, with Miller's fund earning 12.1% against 11.7% for the markets. Miller's fund has seen a reversal of fortune over the past decade, though, earning annualized total returns of -2.7% against the market's -0.7%.
(One irony: Despite making more money during his time managing the Value Trust, Miller's fund currently has one star from Morningstar against five for Heebner's.)
Miller saw his assets shrivel during a tough period, in his case 2006 through 2008, only to have the fund roar back to life in 2009. Once again nervous investors missed the ride. As Miller himself noted in a 2008 letter to shareholders, "We (and everyone else) get the most inflows and the most interest AFTER we've done well, and the most redemptions and client terminations AFTER we've done poorly. It will always be so, because that is the way people behave."
Some people, that is.
So while it may be better to lucky than good, sometimes it's better to be lazy than smart.
David Serchuk, 03.29.10, 06:00 AM EDT
Rio Tinto sacks four executives jailed in China for bribery
(Reuters / Aly Song)
Australian Consulate General, Tom Connor speaks outside the People's Intermediate Court in Shanghai after the trial of a Chinese-Australian executive of Rio Tinto
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