RE: Questions for Sam Beard:"Investor's License"

[Michael Jones <powderfinger99@yahoo.com>]

<<<
Such managers often fail to do better than the stock market as a
whole. And the market as a whole has great risks. For just two
examples, last year's stock market slump cost CEO Philip Purcell
of Morgan Stanley Dean Witter and Co. $193.7 million, a loss of
58.7%. And it cost Merrill Lynch CEO David Komansky $164.7 million,
a loss of 58.1%. (Chicago Sun-Times, October 3, 1998, Page 28).
>>>

The ineffectiveness and cost of managed funds is a valid concern
in privatization. However, the plan does not need to be implemented
with managed funds. It is preferable to invest in what are called
index funds which return the rate of the market. The largest
index fund company is Vanguard. The cost of these funds is about
0.19% of assets (much lower than the cost of Social Security, about
1%).

Index funds are entirely mechanical. There is NO decision making
at all about what investments are made by the fund manager.

<<<
Even if a manager tries to balance stock investments with 
investments in bonds, this may only reduce rather than 
eliminate risk. Bonds sometimes decline in value at the same
time stocks do.
>>>

Remember that treasury bonds have the same characteristics
as corporate bonds.

<<<
How many professional money managers would have predicted 
in 1966 that the real rate of return for
the stock market from then to 1981 would be 0.4%? Even 
the returns of the last sixteen years have
"barely compensated investors for the dreadful 
stock returns realized in the previous fifteen years." 
>>>

I'll take it! 0.4% is better than the return I will be
getting from Social Security. Fifteen years is too small 
of a window to base an investment which lasts 40+ years.

<<<
Instead on trusting Social Security to individual accounts 
inferior in risk and return to the current system,
let's keep the current guarantees. 
>>>

It's important to understand what risk there is in the stock
market. Understanding that there is risk doesn't mean that
private investments are inferior to government bonds and should
be avoided.

Then there is the risk of "no risk". Taking "no risk" means you
will probably lose out to inflation. I find that risk to be
higher than the risk of investing.

But, how risky is investing? Well, if you mean risk to imply
short term volatility, then yes stocks are risky. But short term
volatility is really not the same animal as risk. You can go
back as far as you want, 1998, 1997, 1987, etc. and find a period
of time when the market was "risky" due to a downturn. And
yet the market is at a peak right now. The true assessment of
risk is the long term prospects of investing. And this risk
is low.

What happens over time, is that short term risk is smoothed over
by the compounding of gains. Last October, investors "lost" about
30+% of market value in their investments. But, if you have held
your investments, for say 10 years, even a 30% drop is not
meaningful. 

Here's an example. If you invested $10,000 in the market 5 years
ago, the investment would now be worth about $25,000. Now if
the market dropped tomorrow 30%, what would you be left with?
$17,500. Even with a 30% drop, you investment is still up 75%
from 5 years ago. As time goes on, the risk of actual loss
of principal goes down because of the long term appreciation of
the investment.

When it comes to investing I have nothing to lose and everything
to gain. The money I have "invested" in Social Security will 
yield a return that's negative, adjusted for inflation. 
I can invest in a bank account and get a better return.

<<<
Even then, the transition costs of moving into 
individual accounts woud be so great that "every cohort
now alive faces subtantial losses from partial 
or full privatization." 
>>>

The costs of the current system are huge. There really
isn't any silver bullet solution.

The battle over privatization has already been won. The 
Democratic and Republican plans include individual accounts
as a means to improve retirement security.

The only battle left to wage is to determine the how, what money
and who (government/private sector) will be used to implement
the plan. In my mind the "Who" is the real battle for reform.
I don't think that Democrats or the President really care about
privatization one way or the other, as long as they can keep
the money and the power in Washington. It shows in that the
Presidents plan makes the government the plan manager for the
investment accounts.

Michael