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July 08, 2003 MUTUAL FUND MADNESS....The Economist writes about the dismal performance of actively managed mutual funds this week:
Now then, what was that you were saying about privatizing Social Security....? Posted by Kevin Drum at July 8, 2003 02:26 PM | TrackBackComments
Of course, to Wall Street, that's just confirming what they already knew. There's a lot of potential Social Security skimming being wasted on somebody else but them. Posted by: Barry at July 8, 2003 02:28 PM | PERMALINKPut the money in a bloody index fund! By definition they match the market, and Vanguard's, for example, are very low cost. (Something like 0.25 basis points per year.) The idea of social security privatization isn't to get rich quick, it is to get rich gradually. Oh, and don't forget the bond index fund for 1/3 or so of it. Diversify, diversify, diversify. Posted by: rvman at July 8, 2003 02:37 PM | PERMALINKYep. Unless you have no choice or have some very special reason, you should never invest in anything other than an index fund. And you should just keep it there. That's my humble opinion, anyway. Posted by: Kevin Drum at July 8, 2003 02:40 PM | PERMALINKActualy, hedge funds provide a service (honest ones at least). Umm... for people in my age group, the expected "return" on social security is in the NEGATIVES. I'll take 2.7% over NEGATIVE growth, thankyouverymuch. Posted by: Alex Knapp at July 8, 2003 03:07 PM | PERMALINKYup, leveraging 20-1 "reduces the volatility of your portfolio." Uh-huh. In the real world hedge funds have nothing to do with reducing volatility. Oh, and what's the volatility of SS payment? Hey, maybe Social Security provides a service too! Posted by: Lemuel Pitkin at July 8, 2003 03:09 PM | PERMALINKAlex, seems to me you're a libertarian of sorts. doesn't it frighten you a bit that the government would have its finger on the trigger of a multi-trillion dollar investment in index funds? that's some pretty big gubmint. i'm ambivalent about privatization, only because i agree with you on the fact that our generation gets screwed. but i hesitate to allow politics to play THAT much of a role in the stability of the market. doesn't seem, er, prudent. Posted by: Marc at July 8, 2003 03:13 PM | PERMALINKYep your return could end up being negative, because you could die tomorrow. Of course you're dead, so I'm not sure the lost social security is your biggest problem. Posted by: Rob at July 8, 2003 03:24 PM | PERMALINKYup, leveraging 20-1 "reduces the volatility of your portfolio." Uh-huh. I don't know what you mean by this but in the real world hedge funds do have a lot to do with reducing volatility. First of all, by being short some stocks in exactly the same amount you are up others, you can maintain a market neutral position (ie. if the entire market goes up or down your portfolios value doesn't change much). Also, by measuring the correlation of the stocks presently in your portfolio with each other and with other stocks in your trading universe, you can go long or short individual stocks to reduce the noise of individual stocks moving up and down relative to each other (ie. basis risk). Finally, if one finds oneself exposed to certain sectors (eg. technology) one can long or short the appropriate index futures (eg. qqq) in order to minimize ones risk. All of this does work minimize volatility and it's only the tip of the iceberg of what can be done. Responsible hedge funds are substantialy more viable than mutual funds. Unfortunately, their high fees mean they are inaccessible to most consumers. Posted by: WillieStyle at July 8, 2003 03:26 PM | PERMALINKBefore concluding our generation gets screwed, let's consider some facts: (1) SS is not an investment vehicle, it's an insurance program. It pays out as long as you remain alive, and begins early if you are disabled or your breadwinner dies -- a substantial portion of its payments are for death or disability, not old age. Fire, auto, life insurance all have negative payouts, on average. Does that mean anyone who purchases them is getting screwed? (2) If your expectation of a negative payout is based on the assumption that benefits won't be paid out in full, you should say so. The changes needed to make the system solvent over 75 years are minor under the absurdly pessimistic assumptions used by the Trustees, and completely unnecessary under more realistic assumptions. (3) Privatization doesn't address the intergenerational transfer problem at all unless you also cut the benefits of current retirees. Otherwise, since the SS contributions are now going into private accounts, some other tax needs to be raised to pay for current benefits, and that tax is paid by our generation too. So as far as privatization goes, "our generation is getting screwed" is a complete red herring. And anyway, the country's going to be much, much richer when we retire. I think we can afford some sacrifices for folks who have the bad luck to be getting old now. (4) SS is effectively invested in government bonds. If investors are rational -- kind of a premise of most privatization arguments -- they are choosing their optimal portfolio including those bonds. Since many investors nonetheless make additional investments in bond funds, as suggested above, we can assume they're already at their preferred point on the risk-return frontier. Transfer SS funds to a higher-risk, higher return instrument and they'll simply transfer some of their own savings in the other direction to compensate. Assuming they're optimizing their portfolio rationally ... and if they're not, that might create its own problems. Posted by: jw mason at July 8, 2003 03:37 PM | PERMALINK"If you try to use hedge fund strategies to reduce volatility, you can make remarkable progress. Right, but that's not what high-profile hedge funds do, just the opposite. 20-1 leverage refers specifically to LTCM, but they weren't that atypical. Posted by: Lemuel Pitkin at July 8, 2003 03:43 PM | PERMALINKI don't see anything wrong with partial privitization -- say, allowing taxpayers to invest up to 20% of their Social Security contributions -- so long as the approved investments are carefully scrutinized and heavily regulated. Obviously, we don't want the stockbrokers to get a hold of financially ignorant people -- that would be a crime -- but if we allowed taxpayers to choose from a list of very safe investments, such as blue chips and/or municipal bonds, what would be wrong with that? Posted by: Joe Schmoe at July 8, 2003 03:46 PM | PERMALINKIt seems to me that the major arguments against privatization of Social Security are: 1) It exposes Social Security to significant risk and the whole point of Social Security is to reduce the risk of retirement. 2) The added overhead of fees absorbed by WallStreet types would fatten fat cats without doing much to aid future retirees. Solution, have some portion of the Social Security trust fund
invested in diversified "well run" funds. Create a Fanny Mae or Freddy
Mac type structure to allocate out social security funds to the best
performing funds (with adequate oversight). The point is to 2) Pool payroll tax funds so that people who wouldn't otherwise benefit from sophisticated hedge funds could do so. 3) Pool payroll tax funds so that the consumers (ie. future retirees) can negotiate lower costs on there investments than they could get from mutual funds as individual investors. 4) Have a large pool of fund managers negotiate for payroll tax funds, not only keeping costs low, but ensuring that a few unscrupulous managers don't wreck the entire system. 5) Allow Social Security to better build up value during periods with a large working population or stock market rally, in order to pay for rainier days. 6) By keeping social security funds wrapped up in such funds, prevent politicians from raiding the Social Security trust fund. If the strategy of large payroll tax funded retirement funds backed
up with inflation adjusted treasuries and/or federaly insured for a
minimum return is at all possible I think it can be a very beneficial
progressive policy. JW Mason, SS isn't an insurance program, and it isn't effectively invested in government bonds. It is a welfare program for people with the status of being old. That is highly unfortunate from an actuarial point of view because nearly everyone gets old nowadays. It makes payments to the rich and middle class, which is a bit odd for a welfare program. It isn't invested in anything because the same entity which is assuring the money is also borrowing it. When you borrow money on your credit card, is it an investment? Actually yes, but not for you. It is an investment for your bank, an entity other than you who is loaning the money. The entity that is you has incurred a liability. Posted by: Sebastian Holsclaw at July 8, 2003 03:50 PM | PERMALINKBTW the average Social Security return rate right now is between 1 and 2 percent depending on how you calculate it. That means that even the stupid investors who only got a 2.7% rate of return in the market were doing better than Social Security. Posted by: Sebastian Holsclaw at July 8, 2003 03:52 PM | PERMALINKRight, but that's not what high-profile hedge funds do, just the opposite. 20-1 leverage refers specifically to LTCM, but they weren't that atypical. If by "high profile" you mean notorious then sure. It isn't invested in anything because the same entity which is assuring the money is also borrowing it. Sebastian, I believe this is the case only because the Social Security trust fund is constantly being raided with applumb. In my humble opinion, my proposal above (or something along those lines) would deal with that problem. Posted by: WillieStyle at July 8, 2003 04:02 PM | PERMALINKSebastian: It is a welfare program for people with the status of being old. No, it's not. A third of beneficiaries, and nearly a third of benefit payments, are under the survivor and disability programs, not the old age program. If you compare your total contributions to only the old-age portion of the payments, of course the return looks bad. It isn't invested in anything because the same entity which is assuring the money is also borrowing it. Muy point was that from the point of beneficiaires SS is roughly equivalent to an investment in government bonds. The returns are comparable, and both are backed by the full faith and credit of the United States. Yet despite this, many investors choose to make additional investments in bond funds, and even in US bonds. So the higher-risk, higher-return portfolio privatization is supposed to create is already available to them, and they are choosing against it in the marketplace. Re the return, see above. But the key point is, today's taxpayers are going to have to pay for today's beneficiaires unless you cut benefits. Unless you cut benefits for current retirees, privatization is at best putting money in one pocket and taking it from the other, because if today's contributions are going into private funds, some other tax will have to be raised to replace them. Sebastian Holclaw probably does want to cut SS benefits, at least for middle-class (by whose definition?) retirees. Most privatization advocates aren't so honest. But anyone who claims you can have one without the other is either lying or confused. Posted by: jw mason at July 8, 2003 04:14 PM | PERMALINKWillieStyle, Your two points against privatization are well taken. Should have included them on my lsit. But re your proposal, do you really believe that we can collectively enrich ourselves by having the government collect taxes and then invest them in financial markets? And if you do, why stop with Social Security? Posted by: jw mason at July 8, 2003 04:18 PM | PERMALINKBut re your proposal, do you really believe that we can collectively enrich ourselves by having the government collect taxes and then invest them in financial markets? Up to a point, yes. But I am willing to be convinced otherwise. And if you do, why stop with Social Security? Because you reach a point of diminishing returns. However, I think that there is a sufficiently small part of Social Security funds that can be invested while avoiding mutual mastrubation. Posted by: WillieStyle at July 8, 2003 04:33 PM | PERMALINKOh, and on the investment vs. insurance question, the old-age component of SS also has an insurance aspect, namely, insuring against living longer than you expected. If you look at the price of annuities, you'll find the market places a very high value on this type of insurance. So again, the "return" on Social Security contributions isn't a meaningful number. Posted by: jw mason at July 8, 2003 04:39 PM | PERMALINKI absolutely want the government to phase out Social Security on the middle and upper classes (affectionately known around here as the 'rich'.) I think it is silly for the government to be making subsistence payments to people who are well off. The investments 'backed by the full faith and credit of the United States' thing is just a dodge. A loan to yourself is a liability not an investment, no matter how large an entity you are. Your credit card is backed by the 'full faith and credit' of you. Your credit isn't worth as much as the United States so you have a lower credit limit and a higher interest rate. That doesn't mean that what is a liability for you is magically an investment for the United States. It just means that your net worth and expected income potential is somewhat less than that of the United States. I don't like Williestyle's vision of government managed hedge funds because they will inevitabely become subject to highly politicized investment strategies. I'm a conservative. I don't believe in doubling the government's already massive influence in the financial markets. As for the disabled, we can certainly fund a disabled benefit structure that doesn't involve paying rich people for being old. Why in the world do we have a structure that links the two? Why can't we support keeping the disabled cothed and housed without giving lots of extra cash to rich people? I just don't get it. Actually we should give money to rich disabled people either. Do you get disability from Social Security if you are Christopher Reeves? Actually if the answer is yes, you probably shouldn't tell me. It will just make me flip out. Posted by: Sebastian Holsclaw at July 8, 2003 04:47 PM | PERMALINKWillie - There are two key questions: one, are there profitable real investments that firms aren't making because they can't finance them because not enough money is going into the securiteis markets? Note that a complicated process is inviolved here, since investments in the secondary market don't directly finance anything. Two, will privatization raise the national savings rate, or will it simply displace other investments in the same markets? Again, this is not a simple question. If your answers are yes to both, then it's possible -- not necessarily the case, but possible -- that privatization could result in a net increase in incomes. But this argument is totally independent of SS per se -- it's an argument for governments in general collecting taxes for the specific purpose of purchasing private securities -- something which no government on earth except tiny oil-rich nations ever does, which would sort of seem to be an argument against it. But if either of those answers are no, then privatization is at best a transfer from one group -- current beneficiaries and/or taxpayers -- to another -- the securities industry and possibly current taxpayers. Personally, I'd say the evidence of the 1990s is against a dearth of investment due to insufficient funds flowing into the securities market, but hey, that's just me. Posted by: jw mason at July 8, 2003 04:48 PM | PERMALINKI don't like Williestyle's vision of government managed hedge funds because they will inevitabely become subject to highly politicized investment strategies. I'm a conservative. I don't believe in doubling the government's already massive influence in the financial markets. Well Sebastian is against it, so I'm encouraged :) Posted by: WillieStyle at July 8, 2003 04:57 PM | PERMALINKJW Mason, One important factor that I think you overlook is foreign investment. As it stands, China has way too much leverage over our bond markets. Besides, we're liberals dude. Well, as part of my endless, quixotic quest to get someone, anyone, in the blogoshphere to share my fascination with Pierre Rinfret's site, I will provide the following URLs. He means to show that mutual funds are a ripoff, and I think he succeeds. Check them out. http://www.parida.com/tocfunds.html http://www.parida.com/mutupdate503.html Posted by: David at July 8, 2003 05:01 PM | PERMALINK"blogoshphere" Sorry, obviously I've had one too many. Posted by: David at July 8, 2003 05:04 PM | PERMALINKI read Bogle's op ed in the WSJ today that had those statistics on mutual fund returns. My first thought was where is this guy getting his stats? His company runs the largest mutual fund in the world, which just so happens to be an S&P 500 index fund. His stats may be good, but I'd like to get them from an unbiased source before I really believed them. Posted by: pj at July 8, 2003 07:04 PM | PERMALINKpj: If you go to The Motley Fool, they've been pushing the "Indexed Funds Good, Managed Funds Bad" thing for years, with similar statistics. Ironically, during the recent post-bubble crash, managed funds did a bit better than the indexes as they bailed completely on obvious losers while the indexes kept them in since they were part of the index. Still, over time, I believe the point is valid - index funds beat managed funds most of the time. rvman's suggestion to keep some money allocated to bonds is another good idea, though bonds are due for bad times ahead as interest rates get off the bottom. First of all, by being short some stocks in exactly the same amount you are up others, you can maintain a market neutral position (ie. if the entire market goes up or down your portfolios value doesn't change much). Or you could keep the money in a sock, with much the same effect. Posted by: jimBOB at July 8, 2003 08:06 PM | PERMALINKOr you could keep the money in a sock, with much the same effect. Wit and ignorance make for an embarassing combination. Posted by: WillieStyle at July 8, 2003 08:39 PM | PERMALINKHey jw_mason, Fine, WillieStyle, I'm ignorant. So explain it to me. Your hedged position allows you to not lose money if the whole market moves, but also not make money if it moves. (Am I missing something here?) I guess you could be ahead if the stuff you shorted goes down and the stuff you didn't goes up. OTOH you'd be in the hole if the shorted stuff goes up and the rest goes down. Why this is inherently superior to a more straightforward approach? I'm not seeing it. Posted by: jimBOB at July 8, 2003 10:04 PM | PERMALINKOn hedge funds: They do indeed have much less volatility - meaning standard deviation of actual historical price date - than stocks or even equity indices (SP500, FTSE, ...), under almost all circumstances. The problem with hedge funds is that there are exceptional circumstances where you can lose everything. The manager could be a crook, or his strategy could come uncorked, especially when liquidity in the market dries up. It's the hundred year flood which causes hedge funds problems - but these happen every five years or so. Posted by: Andrew Boucher at July 8, 2003 11:48 PM | PERMALINK>>BTW the average Social Security return rate right now is between 1 and 2 percent depending on how you calculate it. That means that even the stupid investors who only got a 2.7% rate of return in the market were doing better than Social Security. Apples and oranges. When these stupid investors buy an annuity with their savings (to make it comparable to SS), they lose a fair amount more. Posted by: dsquared at July 9, 2003 02:58 AM | PERMALINKd, are you saying that if I bought an annuity at 20, I would have a negative NPV? I don't think so. People who buy annuities at 65 take a hit, because the company hasn't time to offset the risk, but if you started paying premiums on an annuity that paid off at 65 when you were 20, I believe you'd get one with a positive return, however slight. Also, as far as I know the expected real returns on an insurance policy are only negative when discounted fairly aggressively; otherwise, they're just flat. Expected social security returns on our "investment", on the other hand, are actually negative; my generation could have done better by sticking the money in a savings account. Posted by: Jane Galt at July 9, 2003 04:19 AM | PERMALINKFine, WillieStyle, I'm ignorant. So explain it to me. Your hedged position allows you to not lose money if the whole market moves, but also not make money if it moves. (Am I missing something here?) I guess you could be ahead if the stuff you shorted goes down and the stuff you didn't goes up. OTOH you'd be in the hole if the shorted stuff goes up and the rest goes down. Why this is inherently superior to a more straightforward approach? I'm not seeing it. Gladly jimBob. Say you have bought the stocks that you like and they are indeed good stocks, but then something happens (a terrorist attack, acounting scandal, or just day to day skittishness) that causes the entire market to go down. The stocks you picked are better than average so they don't go down as much, but they're still dragged down by the general momentum of the market. You'd lose a lot of money. This happens all the time. If on the other hand, you're in a market neutral position, then you'd actualy make money in such a scenario because your good stocks will tend to go down less than the entire market. Now you don't have to be market neutral. If you think the entire
market is about to go up, then you can be long the whole market. And if
you think that the bottom is about to go out then you can be short the
whole market. But generaly, the market tends to bounce around from day
to day while good stocks trend upwards over time and bad stocks trend
downwards. Williestyle: the whole point of the original article is that the idea of the "skill at picking good stocks vs. bad stocks" is a mirage. If you aren't that good, and frankly, as Bogle and the Motley Fool point out, most fund managers aren't, then jimBOB's comment is appropriate and accurate. Hedge funds protect you from some market movements, leaving the fund the profit from the difference between the market's movement and the individual firm's movement. It starts looking a lot more like picking horses - speculating - and a lot less like taking advantage of economic growth - investing. The fund MANAGER of course benefits - he can charge an arm and a leg for the complicated investment strategy. The broker benefits because this hedging allows - in fact requires - huge turnover in the investment portfolio to remain viable. The poor investor in the fund, though, is SOL unless by some miracle he invests with that one fund manager in about 4 or 5 who can actually beat the market by enough to make up for the added expenses, consistently. Posted by: rvman at July 9, 2003 08:07 AM | PERMALINKrvman, Right exactly. Robert Shiller's Irrational Exuberance, which is kind of essential on this stuff, points out the irony that tho most investors acknowledge they have no special skill at picking out the best stocks, they still tend to believe they have the skill to pick out the best fund managers. Posted by: jw mason at July 9, 2003 08:29 AM | PERMALINKThere are a lot of mutual fund managers who do a piss poor job. In any human endevour, there'll be a lot of folks who do a piss poor job. It does not then follow that it is impossible to make money by investing in funds. Finding the right fund has nothing to do with luck. People seem to think that stocks are these magical entities whose value goes up and down irrespective of any real world factors. At Goldman and Sachs they've got armies of analysts (many of 'em trained Mathmaticians, Engineers and Physicists) who succeed consistently at making money by differentiating good stocks from bad stocks. Now, unfortunately the average investor doesn't have the money or
clout to get to into the very top funds, but that doesn't mean one has
to settle for the typical underperforming mutual fund. Robert Shiller's Irrational Exuberance, which is kind of essential on this stuff, points out the irony that tho most investors acknowledge they have no special skill at picking out the best stocks, they still tend to believe they have the skill to pick out the best fund managers. What's ironic about that? And once again, the point is that you don't have to be particularly skilled to get a better rate of return than the 1-2% that people get in Social Security now, or the negative return that young people will get on it. None of this deals with the problem of giving money to rich people. How can liberals complain and complain about 'corporate welfare' when one of their very favorite programs involves taking the money out of the working man's pocket and giving it to rich retired people? Why is that a good policy? Posted by: Sebastian Holsclaw at July 9, 2003 09:41 AM | PERMALINKProblem is, five year returns is a noisy measure of whether someone is any good at this stuff. Pretty much anyone investing in a counter-cyclical strategy will have a five-year return that beats an index right now. Three years ago, anyone betting tech was "outperforming" the market over five years. I will grant this - hedge funds will outperform in a down market. Problem - in an up market they will underperform. Since there are more up markets than down markets, ON AVERAGE, the TYPICAL hedge fund will underperform the market over the long term. The problem is, I don't believe that there are very many people out there who actually have some sort of magical "touch" with picking stocks. Warren Buffett. Richard Rainwater. I believe that virtually all of the people who outperform the market over 5, even 10 or 20 years, do it because of luck, and sweat. They make you pay for the sweat in fees. Posted by: rvman at July 9, 2003 10:20 AM | PERMALINKSebastian's point holds - we don't have to beat the stock market to beat Soc. Sec. If beating SS is all we need to do, we can probably do that with money markets, or at worst with investment grade bonds or federal bonds. At least as safe as Social Security retirement, and a better return. Disability really has no business being part of the same program - that's a kind of AD&D coverage which the market is quite happy to provide. As insurance, it shouldn't, and doesn't, provide a great ROI. (About the only insurance that provides an ROI is whole life, which really only does so because it is, in effect, a kind of primative mutual fund, combined with a life insurance policy.) Posted by: rvman at July 9, 2003 10:28 AM | PERMALINKProblem is, five year returns is a noisy measure of whether someone is any good at this stuff. Pretty much anyone investing in a counter-cyclical strategy will have a five-year return that beats an index right now. Three years ago, anyone betting tech was "outperforming" the market over five years. I meant outperforming the market each year for 5 years. Problem - in an up market they will underperform. Since
there are more up markets than down markets, ON AVERAGE, the TYPICAL
hedge fund will underperform the market over the long term. This claim is based on what exactly, or are you just pulling stuff out of orifices? "Privatization doesn't address the intergenerational transfer problem at all unless you also cut the benefits of current retirees." Or cut SS collections to the level needed to pay the benefits of current retirees. Then, reduce promised future benefits. Of course, you'll then need to cut other federal spending that's dependent on the extra SS collection. "I don't see anything wrong with partial privitization -- say, allowing taxpayers to invest up to 20% of their Social Security contributions -- so long as the approved investments are carefully scrutinized and heavily regulated." That's an extremely bad idea. Giving the Feds the power to dictate to millions of people whether they are allowed to invest that money in a particular stock or fund is just asking for trouble. A better idea would be to just stop collecting that money and let people have it, in cash, to invest as they see fit. Or, to spend it, and then keep working longer. Posted by: Ken at July 9, 2003 10:42 AM | PERMALINKWillieStyele Yes, there are hundreds of funds which have consistently outperformed the market. There are thousands, or tens of thousands, of funds. If funds are randomly distributed around the market, 1/32 of all funds will outperform the market in each of five years. 1 in 1000 will even beat market each of 10, and 1 in 100 9 of 10 years. There are not enough "great" funds to claim that they aren't the product of chance. Even if you assume that funds will on average underperform, then you can expect 1 in 100 or so to outperform each of 5 years, and 1 in 9000 or so to outperform in each of 10. Long-Term Capital Management had beaten any benchmark you might pick, its first four years in existence. It lost all gains, and 90% of principal, in the fifth. If anyone had the brainpower, the market smarts, we are talking about, it is them. Posted by: rvman at July 9, 2003 11:40 AM | PERMALINKBut Willie, except in Lake Woebegon only a minority of funds can outperform the market. So suggesting a strategy for investors in general that is premised on above-average stock picking is logically incoherent. It's like getting to a movie early to get better seats. It's a good strategy for you or me as an individual, but it obviously doesn't make sense to suggest that we all can impove our movie-going experience by all arriving a half-hour early. Posted by: jw mason at July 9, 2003 11:50 AM | PERMALINKKen: Or cut SS collections to the level needed to pay the benefits of current retirees. That's not much of a cut -- over 85% of Social Security contributions pay current benefits, and that proportion is going up, not down. So not much money for those private accounts. And as you say, even that would have to be paid for by raising other taxes or cutting non-SS spending. Posted by: jw mason at July 9, 2003 12:02 PM | PERMALINKI've seen lots of folks on this thread claim that the expected return of young taxpayers on SS contributions is negative. I've seen others claim expected returns in the range of 1-2%. I haven't seen anyone provide a cite that would explain where those numbers come from, or what they're supposed to be measuring. Posted by: jw mason at July 9, 2003 12:05 PM | PERMALINKrvman: Disability really has no business being part of the same program - Maybe disability and survivorship insurance should be part of SS, maybe they shouldn't. But the point is, they are, so you can't caluculate the "return" on social security contributions by looking only at the retirement income component. Posted by: jw mason at July 9, 2003 12:08 PM | PERMALINKI will say this - in the long term, no single strategy will outperform the market, compensated for risk. If it did, then large numbers of people would switch to it, and the market would now perform with that strategy, only cheaper. Not true. Yes, there are hundreds of funds which have consistently outperformed the market. There are thousands, or tens of thousands, of funds. If funds are randomly distributed around the market, 1/32 of all funds will outperform the market in each of five years. 1 in 1000 will even beat market each of 10, and 1 in 100 9 of 10 years. There are not enough "great" funds to claim that they aren't the product of chance. Even if you assume that funds will on average underperform, then you can expect 1 in 100 or so to outperform each of 5 years, and 1 in 9000 or so to outperform in each of 10. I'm sorry but that is faulty mathematical reasoning. However, the smart way to do this is to approximate funds by a normal
distribution. Then pick funds that are one standard deviation or more
better than the market. The odds of a fund being in such a category is
about 16% if left simply up to chance. Long-Term Capital Management had beaten any benchmark you might pick, its first four years in existence. It lost all gains, and 90% of principal, in the fifth. If anyone had the brainpower, the market smarts, we are talking about, it is them. LTCM went down in a blaze of infamy not because those guys were stupid but because they were incredibly greedy bastards. I'm not sure if your cited chart shows that 85% of contributions pay current benefits. I think it shows that trust fund income for this year is comprised of 85% contributions from this year. It doesn't seem to address the outgoing money in those terms. But I'll admit that the language isn't clear, so I could be misinterpreting. Posted by: Sebastian Holsclaw at July 9, 2003 12:12 PM | PERMALINKSebastian: The chart shows that 2002 expenses -- overwhelmingly benefits; the extremely low administrative overhead costs of SS are an important part of this discussion -- were about equal to 85% of 2002 contributions. So if the system were moved back to a pay as you go basis, as Ken suggested (and as it was until the early 1980s), you could reduce contributions by 15%. Willie: Every one and his dog knows that leveraging 20-1 on qqq futures is a really fucking stupid thing to do. Everybody sure didn't know it then. At least, the LTCM people who were doing it didn't know it was stupid, and they were as smart as they come. Look: by definition most funds cannot outperform the market. I
don't know how to put it any more simply.And if you add in additional
costs associated with active trading, the level of outperforming has to
be higher to cover them, so the propoprtion of funds that can make money
this way is even smaller. The approaches you're talking about may be a
good strategy for you/i>, if you have good reason to believe you
are smarter than most people. But it is logically impossible for them to
be a good strategy for investors in general. And then don't forget, active trading is rent-seeking in the pure sense, i.e. social waste. Any increase in the amount of labor devoted to stock-picking needs to be counted as a cost. Posted by: jw mason at July 9, 2003 12:36 PM | PERMALINKWillie: Every one and his dog knows that leveraging 20-1 on qqq futures is a really fucking stupid thing to do. jwMason:Everybody sure didn't know it then. At least, the LTCM people who were doing it didn't know it was stupid, and they were as smart as they come. Yes they did, but they did it anyway out of greed. Just like the folks at Enron knew that their shady deeds could lead to disaster but were tempted by greed. Look: by definition most funds cannot outperform the market. If you define "funds" as everyone in the market then sure. JW I think you are wrong about your conclusion. At the moment SS takes in far more money than it pays out in benefits. The 85% number of the total income. The total income is far above the total expenditures at this point. Posted by: Sebastian Holsclaw at July 9, 2003 12:55 PM | PERMALINKLook jw mason, However, until that day comes, it is very much worth it to research competent hedge funds and invest in them. And that day won't come any time soon because: 2) Apparently many people are convinced it's futile and so won't even try. 3) Not everyone has the luxury to pick and choose where to invest his or her money. For instance, VERY large shareholders in companies (like Bill Gates or the Ford family) can't just divest themselves of themselves of all their stock without dissaster striking. Also many companies insist that employees invest significant portions of their 401Ks in the company's stock. Posted by: WillieStyle at July 9, 2003 01:05 PM | PERMALINKSebastian: I think you are wrong about your conclusion. At the moment SS takes in far more money than it pays out in benefits. Total contributions, 2002: $532.5 bn 453.8/532.5 = 86.7%. This isn't my "conclusion," it's the numbers straight from the Social Security Administration. Posted by: jw mason at July 9, 2003 01:13 PM | PERMALINKWillie, I think we're talking at cross-purposes. You're saying some people really do benefit from active trading strategies. Fine -- altho I would add that many more people think they can, than actually do. I'm saying that it's impossible for the population as a whole to benefcit from active trading, so it's irrelevant in the context of Social Security. Posted by: jw mason at July 9, 2003 01:17 PM | PERMALINKI'm saying that it's impossible for the population as a whole to benefcit from active trading, so it's irrelevant in the context of Social Security. That is not true. Besides, SS funds wouldn't even have to outperform the market to be beneficial. They'd just have to outperform treasury bonds (which is the theoretical maximum return SS can presently provide). We're on the same side here jw. We both believe in Social Security. If the portion of Social Security funds invested in the market is actively traded and a substantial portion of the rest of the market isn't, then all SS beneficiaries can benefit. All right, let's say this is true. If the Social Security Administration invests a relatively small portion of contributions in the market, and hires some whiz kids to manage it, they can get return higher than what the trust fund is effectively getting now. Maybe even sufficiently higher to pay for the vastly inflated administrative costs involved. So what's this mean? Well, the total volume of corporate profits stocks represent a claim on hasn't chagned. So now, instead of representing a transfer from general taxpayers to beneficiaries, Social Security rerpresents a transfer from ill-informed or constrained investors to beneficiaries -- with a nice cut for the whiz kids. Remind me why this is an improvement? Posted by: jw mason at July 9, 2003 01:45 PM | PERMALINKTotal contributions is less than total income according to the chart. Furthermore you are missing Ken's point. You reduce the funding to cover current payments (the number you cite as 85%) while informing current workers that their benefits will be reduced (probably based on a 15 or 20 year window and informed by how close they are to retirement.) This is a huge savings over the 20 year period, because you are reducing payments each year over that time. So it is a small savings now, and a huge one later. I would suggest not cutting SS tax levels immediately, but announcing the declining benefits over a 20 year window. Phase in personal retirement investment over that time. Of course I would also suggest means-testing for benefits (i.e. rich people don't get Social Security) but that doesn't go over well with liberals for some reason. Posted by: Sebastian Holsclaw at July 9, 2003 01:52 PM | PERMALINKWell, the total volume of corporate profits stocks represent a claim on hasn't chagned. So now, instead of representing a transfer from general taxpayers to beneficiaries, Social Security rerpresents a transfer from ill-informed or constrained investors to beneficiaries -- with a nice cut for the whiz kids. Remind me why this is an improvement? 1) Because you get much higher return at much lower cost. 2) It allows to better use periods with high working populations and/or booming markets to help finance rainier days. What's not to love? Posted by: WillieStyle at July 9, 2003 02:10 PM | PERMALINKBecause you get much higher return at much lower cost. Who's you? If the Social Security's returns are higher, somebody's returns are lower. The problem is, you insist on looking at things from the point of view of an individual participant in the market. But the perspective of society as a whole is idfferent -- that was what I was trying to illustrate earlier with the anlogy of arriving earlier at the movies, which works great for an individual who wants a better seat but doesn't do anything to improve the seats of the audience as a whole. Society as a whole is going to use some fraction of current output to provide incomes to people who are retired. The claims of the retirees can take the form of SS eligibility, stock ownership, or whatever. They're all just different ways of requiring workers to pay a certain amount to retirees. The only way to increase benefits to retirees is to take more from workers. Within that constraint, we look for the way of organizing the transfer that has the lowest overhead costs and best fits our standards of fairness. My point -- which you really haven't addressed -- is that transferring money to retirees through security ownership is worse on both of these standards than the current system. What I wish you would acknowledge is that higher benefits to retirees are a cost to someone else. Sebastian, despite being on the wrong side politically, at least seems to understand this key point. Posted by: jw mason at July 9, 2003 02:23 PM | PERMALINKI would also suggest means-testing for benefits (i.e. rich people don't get Social Security) but that doesn't go over well with liberals for some reason. Why don't liberals like means-testing? (1) Political reason. Programs for the poor have much narrower support and are much easier targets than broader entitlements. (2) Principled reason. We think of programs like Social Security as part of a universal "social wage", something people are entitled to simply as members of society like police protection and access to parks & libraries, rather than as charity for the poor. Posted by: jw mason at July 9, 2003 02:28 PM | PERMALINKSociety as a whole is going to use some fraction of current output to provide incomes to people who are retired. The claims of the retirees can take the form of SS eligibility, stock ownership, or whatever. They're all just different ways of requiring workers to pay a certain amount to retirees. That is absolutely not true! "Society as a whole is going to use some fraction of current output to provide incomes to people First of all, current output is dependent on what those seniors have been up to during their working lives. Any profitable investments they make will result in extra output; that's where the profits ultimately come from. Second the number of retirees, and the number of current workers, is affected by the incentives that are currently in place for people approaching 65, as well as the incentives that have been in place over their working lives. If they can look forward to the government sending them checks after they turn 65, they won't have the same incentive to keep working, or even to have more children, than they would if their retirement was not taken care of by the government. Posted by: Ken at July 9, 2003 04:31 PM | PERMALINK"Society as a whole is going to use some fraction of current output to provide incomes to people First of all, current output is dependent on what those seniors have been up to during their working lives. Any profitable investments they make will result in extra output; that's where the profits ultimately come from. Second the number of retirees, and the number of current workers, is affected by the incentives that are currently in place for people approaching 65, as well as the incentives that have been in place over their working lives. If they can look forward to the government sending them checks after they turn 65, they won't have the same incentive to keep working, or even to have more children, than they would if their retirement was not taken care of by the government. Posted by: Ken at July 9, 2003 04:32 PM | PERMALINKLatina Kiss - Big N Plump - Blowing Loads - Dirty Cheerleaders - Fantasy Toons - Fort Booty Posted by: Free porn thumbs at June 21, 2004 05:49 PM | PERMALINK
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