{"id":23215,"date":"2013-11-15T09:30:17","date_gmt":"2013-11-15T14:30:17","guid":{"rendered":"http:\/\/www.technologyinvestor.com\/?p=23215"},"modified":"2013-11-15T11:10:37","modified_gmt":"2013-11-15T16:10:37","slug":"23215","status":"publish","type":"post","link":"https:\/\/www.technologyinvestor.com\/?p=23215","title":{"rendered":"Diversification and a nutty family"},"content":{"rendered":"

The family is nuts. Because the new baby (Eleanor) is so precious Daddy has to get TDAPped. TDAP is a “3-in-1”\u00a0vaccine that\u00a0protects against diphtheria, tetanus (lockjaw), and pertussis (whooping cough). Great all that protection in one shot. What could be simpler. Nothing, except that my wrist swelled up and enjoyed excruciating pain for three days. A one a million reaction to the tetanus part.. After I’d run around getting x-rays for busted bones (none) and visiting a zillion perplexed doctors, I found the solution on the Internet – Benadryl Allergy antihistamine. Three days later, I can finally type a little with my right hand. Our granddaughter\u00a0 will never catch anything from Gramps (my new name). One week of labor for me. I did<\/strong> want the kid. So I should suffer. And the baby’s not even Jewish.<\/p>\n

While Gramps is suffering with his busted wrist, the market explodes. Who knows why? I’ll take it.<\/p>\n

This chart — called The Importance of Diversification<\/em> — shows results to end September. To me it shows my “brilliance” in staying away from\u00a0 commodities and bonds. It also shows I should be in more small growth stocks. Sadly, it’s t always easy to find the right ones.<\/p>\n

This chart is used by many on Wall Street to peddle the idea of annual portfolio rebalancing. What the chart tells me is that you have to be on top of this stuff every day.<\/p>\n

\"DiversificationImportance\"<\/a><\/p>\n

If you can’t read the chart, click here<\/strong><\/a> for the bigger original.<\/p>\n

I\u00a0 can do better than all the mutual funds and all the index funds. <\/strong>I really can’t. My “solution” is to own stocks and funds. And move monies around as things change. This piece is from the business section of the New York Times is fascinating and pertinent:<\/span><\/span><\/p>\n

One Answer to the Index Fund: Build a Better Index<\/strong>
\nPAUL A. SAMUELSON made a startling and significant case for index funds in 1974. In a deliberately provocative essay, Mr. Samuelson, who had already won the Nobel in economic science and written the most influential economics textbook in history, said most professional investment managers should \u201cdrop dead.\u201d<\/p>\n

At the very least, he said, they should \u201cgo out of business.\u201d<\/p>\n

When fees were included, nearly all stock and bond pickers could not reliably beat the overall market, he said, and the world would be better off if they just stopped trying. \u201cTake up plumbing,\u201d he advised. \u201cTeach Greek,\u201d or, maybe, work for a corporation \u2014 one that produced something useful. And he issued a challenge: Someone should set up a low-cost portfolio that tracks the Standard & Poor\u2019s 500-stock index, allowing investors to match the returns of the overall stock market.<\/p>\n

The essay did not win him many friends on Wall Street. But it struck a sympathetic chord in John C. Bogle, then in the early stages of founding Vanguard. \u201cI took up the challenge,\u201d he said in an interview last month.<\/p>\n

On Aug. 31, 1976, with little fanfare, Mr. Bogle started the world\u2019s first index mutual fund. Derided as \u201cBogle\u2019s Folly,\u201d the fund mirrored the performance of the S.& P. 500 \u2014 ensuring that, fees aside, investors would not do much worse than the index. They would not do better than the index, either. Merely matching the market \u2014 being \u201caverage\u201d \u2014 seemed un-American to many mutual fund managers at the time. Yet the new index fund survived a rocky start and has become the immensely popular Vanguard 500 Index fund.<\/p>\n

Today, while thousands of stock pickers and individual bond buyers still proudly ply their trades, index funds have swept the world. Including exchange-traded funds \u2014 nearly all of which are a form of index fund \u2014 more than $3 trillion in assets are now invested in index funds, according to the Investment Company Institute, the industry\u2019s trade group. The question now is not whether low-cost, diversified, broad-market index funds have any value, it is how much they can be improved.<\/p>\n

Mr. Bogle and current executives at Vanguard say the funds have gotten better through techniques that make them hew more closely to their underlying indexes and through economies of scale that enable them to cut costs.<\/p>\n

Beyond that, Mr. Bogle said, innovation should not go. \u201cPeople say they want to build a better mousetrap,\u201d Mr. Bogle said. \u201cForgive me if I doubt it.\u201d<\/p>\n

But several companies say they already have created a better mousetrap \u2014 broad index funds that can beat the overall market, rather than merely matching it, even including fees.<\/p>\n

\u201cWe don\u2019t think you need to settle for average returns,\u201d said Chris Brightman, the head of investment management for Research Affiliates, which says it has constructed so-called fundamental indexes that will deliver superior returns.<\/p>\n

IN terms of performance, the verdict is not yet in. The performance of the newer indexes \u2014 and of the funds based on them \u2014 is close to that of the older ones. Sometimes the newer funds are better, sometimes they are worse. It may take decades to come up with a statistically valid test that will show whether tweaked index funds can regularly outperform the overall market \u2014 to say nothing of doing it consistently after the cost of the effort has been factored in.<\/p>\n

Because the newer indexes are not tracking the overall stock or bond markets \u2014 and because they often have higher fees than the funds of Vanguard and some other traditional indexers \u2014 Alex Bryan, a Morningstar<\/span><\/span> analyst, said, \u201cI tend to think most people will be better off with very low-cost diversified funds of the kind sold by Vanguard.\u201d<\/p>\n

Still, funds based on indexes from two companies \u2014 Research Affiliates, based in Newport Beach, Calif., and WisdomTree, based in New York \u2014 have operated for more than five years, with generally good track records. These firms use criteria like dividend yield and corporate profit to create indexes \u2014 and index funds based on them \u2014 that are in some ways filtered versions of the broad indexes.<\/p>\n

What is the argument for the new approaches? Jeremy J. Siegel, a professor of finance at the Wharton School of the University of Pennsylvania, and the author of \u201cStocks for the Long Run,\u201d is senior investment strategy adviser at WisdomTree. He said that his research, and that of many other economists, showed that value stocks \u2014 those priced cheaply compared with the overall market \u2014 tended to outperform so-called growth stocks over long periods.<\/p>\n

\u201cFundamental indexing captures this value effect very effectively,\u201d he said.<\/p>\n

Stocks with a smaller market capitalization have also tended to outperform larger-capitalization stocks, he said, pointing to research by Eugene F. Fama, the University of Chicago economist who is one of this year\u2019s Nobel laureates.<\/p>\n

Similarly, Research Affiliates uses several factors \u2014 including sales, cash flow, dividends and book value \u2014 to create fundamental indexes that are the basis of E.T.F.\u2019s sold by PowerShares and Charles Schwab, Mr. Brightman said.<\/p>\n

Traditional market indexes like those used at Vanguard are \u201cdefinitely valid benchmarks for performance, but they have a basic drawback,\u201d he said. Because these indexes are constructed on the basis of market capitalization \u2014 that is, a company like Apple with a huge market cap will have a much larger weight in the index than a company with a smaller market cap like AutoZone \u2014 an investor will inevitably end up holding a large dollop of companies whose share prices have already risen in value. \u201cBuying low and selling high is the way to make money,\u201d he said. But the rebalancing effect of market-cap-weighted indexes is to buy high and sell low.<\/p>\n

\u201cFundamental indexes do the reverse,\u201d Mr. Brightman said, \u201cand that will produce better returns.\u201d<\/p>\n

In response, Fran Kinniry, a principal of Vanguard\u2019s investment strategy group, said that Mr. Brightman and those who practice similar strategies were not really indexers at all. They are active managers \u2014 similar to stock pickers or strategists who try to time moves in the markets by altering their asset allocation.<\/p>\n

\u201cI don\u2019t mean to be too cynical about this, but by every single definition an index is meant to measure the risk and returns of a particular asset class and it has to be market cap-weighted because that\u2019s what the market is,\u201d he said. \u201cThat\u2019s our biggest concern. We\u2019re not against actively managed funds at Vanguard. We\u2019ve got many excellent funds that do that. But they\u2019re not index funds.\u201d<\/p>\n

A third company, Dimensional Fund Advisors, based in Austin, Tex., takes a different approach. It does not operate index funds, in part, because \u201cVanguard already does that so well,\u201d said David G. Booth, its chairman. Instead, he said in an interview, his firm uses research by Professor Fama, Kenneth R. French of Dartmouth and Robert C. Merton of M.I.T. to construct funds that are close cousins of index funds, but are intended to outperform them.<\/p>\n

\u201cWe don\u2019t try to outguess the market,\u201d he said. \u201cBut we don\u2019t try to get zero tracking error, either,\u201d meaning that he is not troubled if D.F.A. funds veer from the day-to-day performance of the overall market. Instead, he said, his firm\u2019s funds try to beat traditional indexes \u201cby trading less than the index funds, or by trading at better times.\u201d In addition, he said, the funds often have a greater small-cap value weighting than index funds.<\/p>\n

\u201cWe\u2019re not setting ourselves up as alternatives to index funds,\u201d he added. \u201cThere\u2019s nothing wrong with basic index funds.\u201d<\/p>\n

Many companies are trying other approaches aimed at using quantitative measures to beat the market.<\/p>\n

For his part, Mr. Bogle said Dimensional Fund Advisors and the fundamental index managers all practiced a form of \u201cactive management.\u201d<\/p>\n

\u201cOver the long run, I doubt very much that they can really beat the market,\u201d he said, especially if their costs are higher than Vanguard\u2019s, as they generally are.<\/p>\n

\u201cThe problem is that you don\u2019t know what will perform well in the future,\u201d he said. And he pointed out that small-cap value stocks tended to be more volatile than the overall market, so investors were taking on more risk.<\/p>\n

Professor Samuelson never ruled out the possibility that some active managers had enough \u201cflair\u201d to beat the market consistently. He just could not find this particular \u201csubset\u201d of people.<\/p>\n

\u201cWhat is interesting is the empirical fact that it is virtually impossible for academic researchers with access to the published records to identify any member of the subset with flair,\u201d he wrote. \u201cThis fact, though not an inevitable law, is a brute fact.\u201d<\/p>\n

Finally a useful money saving tip.<\/strong> My soap dish has 72 slivers of soap. My family begs me to throw them out. I’m too cheap. Finally a solution. Boil them and make new soap. For this invaluable, money-saving tip, click<\/span> here<\/strong><\/a><\/span><\/p>\n

Apple iPad Mini with retina display is now on sale.<\/strong> It has everything the bigger\u00a0 one does, including the same\u00a0 number of pixels. But it’s smaller and pocketable. Check it out at your local Apple store. It’ s the Christmas present of choice. I may get one today, if just for reading.
\n<\/span><\/span><\/p>\n

Two greatest inventions since sliced bread:<\/strong><\/span><\/p>\n

\"SlicedBread\"<\/a><\/p>\n

Left is a 12 foot extension cord for headphones\/earbuds. Watching TV is better (for me) with headphones. I usually use wireless Sennheiser headphones, but sometimes they get interference from another TV. Easy solution: use Apple ear buds and an extension cord. Only $8.99 at Amazon. Click here.<\/strong><\/a><\/p>\n

On the right is a hair catcher. I just spend an hour cleaning out the drain in my shower. Solution: a hair catcher from Bed, Bath and Beyond. Only $3.99.<\/p>\n

I\u00a0 upgraded to the Canon G16.<\/strong> The big “sell” for me: Almost no shutter lag. Much faster. Better processor. Some small design improvements.\u00a0 I love my old trusty, wonderful G15. I now love my new G16.<\/span><\/span> I don’t “need” it. But indulgence is so sweet — especially since the market has been so strong lately.<\/p>\n

\"CanonG16\"<\/span><\/a><\/span><\/p>\n

This will not work.<\/strong><\/span><\/p>\n

David is telling a new joke to Yossi. “Yitzhak and Hymie were talking one day…”<\/p>\n

Right away, Yossi interrupts him. “Always with the Jewish jokes! Give it a rest! Change the names to another ethnic group for once will you David!”<\/p>\n

So David starts again, “Hashimoto and Suzuki were talking one day at their nephew’s Bar Mitzvah…”<\/p>\n

\"HarryNewton\"<\/a>
\nHarry Newton. If you ‘re getting column by email on your Gmail account, hit the button that says “Always display images from Harry_Newton@TechnologyInvestor.com.”<\/em><\/p>\n

 <\/p>\n

 <\/p>\n","protected":false},"excerpt":{"rendered":"

The family is nuts. Because the new baby (Eleanor) is so precious Daddy has to get TDAPped. TDAP is a “3-in-1”\u00a0vaccine that\u00a0protects against diphtheria, tetanus (lockjaw), and pertussis (whooping cough). Great all that protection in one shot. What could be simpler. Nothing, except that my wrist swelled up and enjoyed excruciating pain for three days. […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[1],"tags":[],"class_list":["post-23215","post","type-post","status-publish","format-standard","hentry","category-uncategorized"],"_links":{"self":[{"href":"https:\/\/www.technologyinvestor.com\/index.php?rest_route=\/wp\/v2\/posts\/23215","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.technologyinvestor.com\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.technologyinvestor.com\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.technologyinvestor.com\/index.php?rest_route=\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.technologyinvestor.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=23215"}],"version-history":[{"count":0,"href":"https:\/\/www.technologyinvestor.com\/index.php?rest_route=\/wp\/v2\/posts\/23215\/revisions"}],"wp:attachment":[{"href":"https:\/\/www.technologyinvestor.com\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=23215"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.technologyinvestor.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=23215"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.technologyinvestor.com\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=23215"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}