Re: [MLUG - DISCUSSION] Money Markets?

[Dave Lloyd <EMAIL:PROTECTED>]

On Mon, 22 May 2006, Stephen Montgomery-Smith wrote:

> Many many years ago I computed five year moving averages for how mutual funds 
> did.  The yearly gain is too crude a measure for long term investments, 
> because each fund philosophy will work better in different environments.  But 
> volatile stock funds really do seem to do better in the long run.  There may 
> be a particular year or even a period of several years when they do very 
> badly, even to the point of losing money, but in the long run they do 
> extremely well, even when including years like 1923 which have stock market 
> crashes.

That's true.  I also like to use Vanguard funds as an example since they
were one of the pioneers in that space.  Here's the page for the S&P500
index fund:
http://flagship3.vanguard.com/VGApp/hnw/FundsSnapshot?FundId=0040&FundIntExt=INT

That's averaged 12.16% since 1976, and there have lots of down years
since then.  As an example, say you invested $1,000 in 1976.  At 12.16%
compounded year over year you'd now have $9,925.67.  The Windsor fund
has returend 12.55% since 1958, plenty of down years and investment fads
have come and gone over the last 40 odd years.  The Windsor II fund has
average 12.92% since 1985.

Now, some funds look really good over the last 10 years, but they don't
offer a balanced approach which I think i truly important for the long
haul.  Take the REIT (real estate investment trust) funds.  They look
absolutely great over the last 10 years:
http://flagship3.vanguard.com/VGApp/hnw/FundsSnapshot?FundId=0123&FundIntExt=INT

But, this depends on the real-estate market continuing to grow the way
it has.  Can it really keep up this performance?  I think it doubtful.
Look at the gains that have come in the last five years of low interest
rates.  Artifically low interest rates have bloated the amount of easily
avilable credit and bouyed housing prices way beyond what they really
should be right now.  In other words, the time to get into this fund was
10 years ago, not now for the next 10 years, unless you use that fund as
part of an overall balanced investment strategy.  That said, I don't
think that the housing market is headed for a downward correction (I'm
sure Mr. Odle will weigh in here), but I do not think that this level of
growth is sustainable.  Energy and mining funds have similar performance
over the last five years for slightly similar reasons.

The point here is that fads and trends may come and go (anyone remember
the "Nifty Fifty?"
http://www.fool.co.uk/qualiport/2005/qualiport050517.htm ), but betting
on the overall market is a solid long term strategy.  Of course, this
depends on a good chunk of sheep driving individual stock prices up, but
I'll let other people do that, not me.

> But the trick with volatile stock mutual funds is not too look at it too 
> often.  It can be very depressing when you actually lose money for several 
> years, and this might tempt one to pull out.  But this is the worst thing to 
> do, in part because you are pulling out when it is at its lowest.

That's very true.  In fact, it's probably the best time to stock up on
stocks (hah!) when you're most depressed about their earnings, espically
for the long term.  Check out the trough in the market in 2003:
http://finance.yahoo.com/q/bc?s=%5EGSPC&t=5y&l=on&z=m&q=l&c=

Ouch! Espically if you bought in 1999. However, almost all the losses
have been recouped at this point.  If you bought at the trough in 2003
(probably about the time when you were most depressed), you'd have
almost doubled the money you invested in at that point.  That's why, for
long term investments, it makes sense to invest by using dollar cost
averaging, which is just a fancy way of saying that you should invest an
identical dollar amount over time, rather than an identical share
amount.  E.g., put away $200 every month instead of buying 10 shares
every month.

> In fact, one of the questions you are asked when you are advised which kind 
> of fund to invest in is - what is your tolerance for risk?  If you have a low 
> tolerance, volatile funds are not the way to go.
>
> But I do feel that the high risk in volatile funds is illusionary, at least 
> if you are willing to invest for the very long term,  If you really do lose 
> everything, chances are the whole economy has gone through the floor, and 
> money has lost its meaning.

The risk is also a sliding scale based on how long you want to hold your
investments.  Long term investments can tolerate more risk because the
bumps smooth out over the long haul:
http://finance.yahoo.com/q/bc?s=%5EGSPC&t=my&l=off&z=m&q=l&c=

But shorter term investments can tolerate less risk.

> And as David said elsewhere, if you are willing to let them be, volatile 
> stock mutual funds are very easy to manage.

It's like the Ron Popeil style of investing:  Just set it and forget it!

--dlloyd

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