Is indexing good?

[greg]

Very Charmin.

I think you've wiped up the entire mess that SG started.

 

[greg]

This is "doo" all right, and "persistant"? What the hell is that?

JG

I don't even know anymore.

 

[brewer12345]

Thank you, brewer, for helping to keep my index funds efficiently priced.   

Actually, I can probably thank all the indexers for leaving attractive equities out of the indexes and therefore available at a bargain price. Most of the time when something I own gets added to a major index, it gets ridiculously bid up and I sell.

Bonds, in particular, appear to be badly mispriced by the market on a regular basis. Indexes of bonds are even messier because the biggest (lousiest) debtors take up the largest portion of the indexes (think Ford, GM, etc.). Stuff that is already beaten down and out of the index is often worth par plus accrued (minimum) but is priced like it is going to be a goose egg.

 

[Gone4Good]

Yup, many people feel that things are not right in these times.  I wonder what is causing this feeling?  All the government numbers seem to tell us everything is fine, hunky-dory.   

Isn' this how the scientist basically starts out?  Scientist:  That theory we've been using for years to explain things just doesn't feel right.  Plus there are anomalous events that can't be explained with it.  Something isn't right.  But the other people who have a stake in that theory just keep arguing  that I'm irrational in my quest.  I need a deeper, better theory that encompasses not just what those other scientists say but, also, explains those events that they deny exist.  I'll get right on it.    

I have to admit, I don't have a clue as to what you are trying to say.

Government conspiracies?

The X-Files??

Extraterrestrials 

It does explain a lot though. 


TRUST NO ONE!!!!

 

[Gone4Good]

Actually, I can probably thank all the indexers for leaving attractive equities out of the indexes and therefore available at a bargain price.  Most of the time when something I own gets added to a major index, it gets ridiculously bid up and I sell.

Bonds, in particular, appear to be badly mispriced by the market on a regular basis.  Indexes of bonds are even messier because the biggest (lousiest) debtors take up the largest portion of the indexes (think Ford, GM, etc.).  Stuff that is already beaten down and out of the index is often worth par plus accrued (minimum) but is priced like it is going to be a goose egg.

Plenty of indexes (mid-cap, small-cap, micro-cap), don't know why everyone thinks the S&P 500 is the only game in town.

For bonds, par plus accrued is all you ever get (unless on the very rare occasion you get misallocated equity coming out of bankruptcy).

 

[sgeeeee]

I think you've wiped up the entire mess that SG started.

Don't blame me. It's all those Minnesotans with the runs.

 

[Mr._johngalt]

I don't even know anymore.  

I'm a little confused myself.

JG

 

[Mr._johngalt]

Don't blame me.  It's all those Minnesotans with the runs.   

Ding Ding! The traveling "Most Tasteless Post" trophy
"moves" again.

JG

 

[Gone4Good]

Maybe it's because a lot of people aren't sharing in the growth, and don't think that things are so good after all as far as they are personally concerned.   My entire division of megacorp got zero, zip, zilch for a raise this year, despite record earnings, just as one example.  So for me, the economy really stinks, especially given the inflation rate.  In other words, despite all of the economic "growth," I lost about 4%, and so did a lot of other people I personally know.

I can certainly see how this is true. It's like the old saw "a recession is when your neighbor is out of work and a depression is when you are."

But what you describe also sounds a lot like the "jobless recovery" of the early 90's, which later gave way to the "Goldilocks economy". Just like in the early 90's productivity has grown at a very fast pace, meaning that companies can get more done with the same, or fewer, number of people. That can be disruptive in the short-term. But in the longer-term, productivity growth translates into higher standards of living. In fact, increased productivity is the only way to improve standards of living in aggregate. I know that is cold comfort to the person who loses his job to a machine, but it should give the dispassionate observer reason for optimism.

 

[Cut-Throat]

I know that is cold comfort to the person who loses his job to a machine, but it should give the dispassionate observer reason for optimism.

Don't you think eventually that All Americans will lose their jobs to a Chinese laborer making $5 a day? - I can't see how the American Middle Class standard of living won't be going down in the next 20 years!

 

[ladelfina]

Yes, Whodathunkit has an excellent point:

Maybe it's because a lot of people aren't sharing in the growth, and don't think that things are so good after all as far as they are personally concerned.   My entire division of megacorp got zero, zip, zilch for a raise this year, despite record earnings, just as one example.  So for me, the economy really stinks, especially given the inflation rate.  In other words, despite all of the economic "growth," I lost about 4%, and so did a lot of other people I personally know.

A lot of people on this board (and off) like to think Deep Thoughts about The Economy. But there isn't just one "Economy", even if the US is / has been arguably "The Economy" for some time. There are as many "economies" as there are people/families/businesses/states/countries. Also touched on by Apocalypse WRT state tax incentives and so on.

It's hideously complex.

This board is great when people start to get into their own personal reasons for investing/allocating the way they do. Some people have big salaries (a lot of them, to judge by the recent poll), others don't bring home all that much. Some people have pensions (whee!), others will get a handshake when they walk out the door. Kids (obligations) complicate it further. Future capital allocation differs wildly; some will retire to a little cabin in Maine while others want to travel the world, buy a sailboat, build their dream house... So their hopes/fears are all different, too.

Your mileage may vary: If you live in CA, you won't experience inflation in the same way (housing), as someone in the backwoods of NE (fuel).

Seems like you need to get a handle on the broad panorama of risk/reward factors that will influence your personal economy, then hope for the best. I don't see the value in worrying about what China will or won't do. It's too stressful.

 

[brewer12345]

Plenty of indexes (mid-cap, small-cap, micro-cap), don't know why everyone thinks the S&P 500 is the only game in town.

For bonds, par plus accrued is all you ever get (unless on the very rare occasion you get misallocated equity coming out of bankruptcy). 

Actually, I find that the worst of the overpricing happens when small caps are added to an idex. Liquidity isn't that deep and the stocks often get ridiculously bid up as everyone tries to get through the door at once. Naturally, the following year or so usually shows lousy performance as the air comes out of the index additions.

Par plus accrued is great if you bought the bond at a significant discount to par. If I can get coupons of 7% or better and generate another 3 to 5% of capital gains on some bonds, I am a happy camper. Remember, I really only need CPI plus 4.5% to make it to my target.

 

[Gone4Good]

Don't you think eventually that All Americans will lose their jobs to a Chinese laborer making $5 a day? - I can't see how the American Middle Class standard of living won't be going down in the next 20 years!

Perhaps.  But that also assumes Chinese laborer's will be forever willing to accept $5 / day.  Living standards are rising rapidly in places like China and India.  I've already heard stories of companies that looked into outsourcing some services to India but didn't because it was too expensive.

I don't profess to know how this all balances out, but I can't get myself too worked up over it either.  The US economy doubled the labor pool when women entered the work force on mass.  I think there was a lot of concern at the time that women were taking away jobs from men  : - but the economy made room for them easily.  Probably because the dual earning family had more money to spend, which helped to push the economy forward and increased demand for labor.  As China and India become more affluent, they too will be buying more things helping to push the global economy forward in the same way.  That's not to say the transition will be smooth and painless for everyone, but I think the world will continue to be better off as "developing" economies develop. 

 

[Nords]

Don't you think eventually that All Americans will lose their jobs to a Chinese laborer making $5 a day?

Not quite-- I'm going to tell my kid to move to Minnesota and learn to be a plumber. How many toilets are there in that state anyway?

 

[Eagle43]

Not quite-- I'm going to tell my kid to move to Minnesota and learn to be a plumber.  How many toilets are there in that state anyway?

Tell him to bring hip boots, so he can wade through all that liberal ca ca! 

 

[greg]

Don't you think eventually that All Americans will lose their jobs to a Chinese laborer making $5 a day? - I can't see how the American Middle Class standard of living won't be going down in the next 20 years!

Reversion to the mean. Happens all the time. Cheer up, a billion Chinese will be better off.

 

[greg]

Don't blame me. It's all those Minnesotans with the runs.

SG, you're right. Instead I'll blame Uncle Mick for asking about various activities to keep him busy in the winter. It got DW thinking and has caused me untold misery lately.

 

[unclemick]

heh heh heh heh heh heh

I do notice that most of my 'new' DRIP stock picks occur during winter month's - AND that was in 'warm' LA.

No telling what a winter in MO will bring. May 'become a legend in my own mind stock picking wise'. - to cover anticipated high heating bills to come.

De Gaul and the Norwegian widow might be in for rough winter. Still intend to stay basically balanced index.

?

 

[greg]

CT:

“Don't you think eventually that All Americans will lose their jobs to a Chinese laborer making $5 a day? - I can't see how the American Middle Class standard of living won't be going down in the next 20 years!”

I see the same thing, but don’t necessarily see it as all bad—rather, it’s just a force of nature in operation. In a sense, this expansion of the middle-class has been a reversion against the mean over the past 50-100-200 years. For the most part thru history, there have primarily been two economic classes: working class and a small group of richer leader types. And even here, for the most part, the disparity between the two classes hasn’t been that great, except during times of extreme excess such as later Roman empire, later Spanish empire, you get the idea.

This disparity also existed cross the world, for the most part Asians didn’t live much differently than Europeans, or Africans, or most others at most periods of civilization. The industrial revolution has created much of this current middle class reversion, because it allowed the formation of excess wealth which could be used for creation of more wealth or just consumed.

So today, we have this middle-class expansion that is probably reaching its peak or is just past it. Plus, we have this enormous disparity between “have” western nations and “have not” other nations. When things get out of whack, nature, I believe, brings things back in balance. They revert to the mean. In a sense, I think our generation and few previous ones experienced a sort of bubble of wealth creation (formation of a middle class) inside a larger bubble formation (the western industrial revolution).

As humans, as an aggregate whole, the economic ideal should be to attempt raising the overall mean. This is what foreign aid used to be about, fix things so that larger numbers of poor were better off, what FDR tried to do by providing a security net, what LBJ was trying to do with “the war on poverty.” All were trying to mildly change the rules of the game to raise the lower end of the economic spectrum, to soften the disparities between rich and poor.

This is how civilization should work to my mind, but not how it actually works lately and during other wild and crude times--as I see it.

A part of modern portfolio theory says (I THINK) that rebalancing funds out of high priced assets and into lower priced assets is an efficient thing to do for the portfolio as a whole. It improves overall returns to the holder of that portfolio. The risky thing to do would be to allow excessive reversion from the mean because volatility is almost certain to result. If equities make up 80% of the portfolio and they go down, ouch.

So what do we do about the future deterioration of the American living standard? I have the same ideas others have and they are all pretty well known. But in general we need to consume less and turn that saved money back toward productive regeneration of wealth.

Currently I see us wasting huge amounts of money in empire building—which is its own deviation from the mean.

 

[justin]

So... the moral of the story is hedge your US bets with a substantial allocation to a globally diversified portfolio? (Don't tell anybody but a lot of passive investors do this already )

 

[sgeeeee]

So...  the moral of the story is hedge your US bets with a substantial allocation to a globally diversified portfolio?  (Don't tell anybody but a lot of passive investors do this already )

Yes. This is the easy problem for Greg to solve. Buy a low fee international index fund. But what is he going to do about that toilet?

 

[justin]

Yes. This is the easy problem for Greg to solve. Buy a low fee international index fund. But what is he going to do about that toilet?

He won't have any time to worry about the toilet what with all the time he's spending trying to figure out how to beat the market.

 

[Gone4Good]

Reversion to the mean.  Happens all the time.  Cheer up, a billion Chinese will be better off.

I guess this makes sense if you view the world economy as a zero sum game - its not. The rise of Japan and Germany after WWII didn't take away from US prosperity, it enhanced it. Same with Hong Kong and South Korea. Similarly the rise of the US economy has been an engine of world growth, and rising living standards, over the past century. It's hard for me to believe that a billion people can improve their standard of living without making the world economy bigger - but I guess it is always easier to succumb to the natural fear of change.

 

[WhodaThunkit]

- but I guess it is always easier to succumb to the natural fear of change. 

Ah, yes -- macroeconomic theory. If it only worked . . .

One reason that people fear change is that the effects of change are often visited so cruelly on a few people selected seemingly at random, while others, selected equally at random, prosper from it. Depends where you are when the music stops or changes, I guess.