| How many of you remember the immortal words | | | | But let's not dwell upon the three or more levels |
| of P. T. Barnum? Of Yogi Berra? On Wall Street, | | | | of speculation that are the very foundation of all |
| the incubation period for new product scams may | | | | index funds. Let's move on to the two basic ideas |
| be measured in years instead of minutes, but the | | | | that led to the development of plain vanilla Mutual |
| end result is always a lopsided, greed-driven, gold | | | | Funds in the first place: diversification and |
| rush toward financial disaster. The melt down | | | | professional management. Mutual Funds were a |
| spawned the index mutual funds, and their dismal | | | | monumental breakthrough that changed the |
| failure gave life to "enhanced" index funds, a wide | | | | Investment World. Hands on investing (without |
| variety of speculative hedge funds, and finally, a | | | | the self-centered assistance of the banks and |
| rapidly growing number of Index ETFs. Deja Vu all | | | | insurance companies) became possible for |
| over again, with the popular ishare variety of ETF | | | | absolutely everyone. Self directed retirement |
| leading the lemmings to the cliffs. How far will we | | | | programs and cheap to administer employee |
| allow Wall Street to move us away from the | | | | benefit programs became doable. The investment |
| basic building blocks of investing? What ever | | | | markets, once the domain of an elite group of |
| happened to stocks and bonds? The Investment | | | | wealthy entrepreneurs, became the savings |
| Gods are not happy. | | | | accounts of choice for the employed masses. But |
| A market or sector index is a statistical | | | | only because the Funds were relatively safe with |
| measuring device that tracks the movement of | | | | their guarantees of diversification and professional |
| price changes in a portfolio of securities that are | | | | management! ETFs are just not the answer to |
| selected to represent a portion of the overall | | | | the problems we've experienced lately with |
| market. Index ETF creators: a) select a sampling | | | | traditional Mutual Funds. (Those problems are a |
| of the market that they expect to be | | | | function of Fund Manager Compensation, conflicts |
| representative of the whole, b) purchase the | | | | of interest within Fund Sponsor Organizations, the |
| securities, and then c) issue the ishares, SPDRS, | | | | delivery and pricing system for the funds, and |
| CUBEs, etc. that you can trade on the normal | | | | believe it or don't, the self directed retirement |
| exchanges just like ordinary stocks. Unlike | | | | programs themselves.) |
| ordinary index funds, ETF shares are not handled | | | | Here's a thumbnail sketch of how well the major |
| directly by the fund, and as a result, they can | | | | Passively Managed Indices have done since the |
| move either up or down from the value of the | | | | turn of the century: For those six years, the DJIA |
| securities in the fund, which, in turn, may or may | | | | growth rate averaged Zero % per year, the S & |
| not mirror the movements of the index they | | | | P 500 averaged Minus 2% per year, and the |
| were selected to track. Confused? There's more... | | | | NASDAQ Composite averaged Minus 8% per |
| these things are designed for manipulation! | | | | year! How many positive sectors, technologies, |
| Unlike managed Closed-End Funds (CEFs), ETF | | | | commodities, or capitalization categories could |
| shares can be created or redeemed by market | | | | there have been? Go ahead, add in 1999 just to |
| specialists, and Institutional Investors can redeem | | | | make yourself feel better and you'll come up with |
| 50,000 share lots (in kind) if there is a gap | | | | +2% per year for the DJIA, Zero % annually for |
| between the net-asset-value and the market | | | | the S & P, and a stellar -1.5% per year for the |
| price of the fund. These activities create demand | | | | NASDAQ. Now subtract the fees... hmmmm. |
| in order to minimize the gap between the fund | | | | Again, how would those ishares have fared? Hey, |
| net-asset-value and the fund price. Clearly, these | | | | when you buy cheap and easy, it's usually worth |
| arbitrage activities provide profit-making | | | | it. Now if you want performance, I suggest you |
| opportunities to the fund sponsors that are not | | | | try management. Any management is better than |
| available to the shareholders. Perhaps that is why | | | | no management, so long as you are receptive to |
| the fund expenses are so low... and why there | | | | the strategies or disciplines employed by the |
| are now hundreds of the things to choose from. | | | | manager. If you can't understand or accept the |
| Two other ishare/ETF idiosyncrasies need to be | | | | strategy, don't hire the manager. During the past |
| appreciated: a) performance return statistics for | | | | six years, there have been more advancing issues |
| index funds typically do not include fund | | | | than declining ones on the NYSE, more stocks |
| expenses... it should be fairly obvious that an index | | | | achieving new highs than new lows. Why did you |
| fund will always under-perform its market, and b) | | | | lose money? |
| some index funds, ishares in particular, publish P/E | | | | Sure, you might find some smiles in an ishare or |
| numbers that only include the profitable companies | | | | two, particularly if you have the courage to take |
| in the portfolio. How do you feel about that? | | | | your profits, and there may be times when it |
| So, in addition to the normal risks associated with | | | | makes good business sense to use these |
| investing in general, we add: speculating in | | | | products as a hedge against a specific risk. But |
| narrowly focused sectors, guessing on the | | | | please, stop kidding yourself every time Wall |
| prospects of unproven small cap companies, | | | | Street comes up with a new short cut to |
| experimenting with securities in single countries, | | | | investment success. Don't underestimate the |
| rolling the dice on commodities, and hoping for the | | | | value of experienced management, even if you |
| eventual success of new technologies. We then | | | | have to pay a little extra for it. Actually, there is |
| call this hodge-podge of speculations a diversified, | | | | no reason why you (and I mean every one of |
| passively managed, inexpensive approach to 21st | | | | you) can't learn either to run your own |
| Century Asset Management! How this differs | | | | investment portfolio, or to instruct someone how |
| from how the mess started is a mystery to me. | | | | you want it done. Every guess, every estimate, |
| Once upon a time, there were high yield junk | | | | every hedge, and every shortcut increases risk, |
| bond funds that the financial community insisted | | | | because none of the crystal balls used by those |
| were appropriate investments because of their | | | | creative product hucksters works very well over |
| excellent diversification. Does diversified junk | | | | the long haul. Products and gimmicks are never |
| become un-junk? Isn't "Passive Management" as | | | | the answer. ETFs, a combination of the two, don't |
| much of an oxymoron as "Variable Annuity"? | | | | even address the question properly. What's in |
| What ever happened to the KISS Principle? | | | | your portfolio? |