Subject: RE: Questions for Sam Beard:"Investor's License"
>From: Michael Jones
>>>>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.
I have concerns about this. Although I myself have money in a Vanguard Index Fund, the massive amounts of money from 'private' accounts going into the market as 'dumb' money could cause problems. The 'irrational exuberance' that Greenspan spoke of would only be accelerated. The point of the 'free market' is to reward those businesses who effectively 'serve' their markets and those investors who are 'smart' enough to figure out who those businesses will be. This program appears to reward 'all businesses' equally? Where will be the financial 'incentive' usually associated with individual stock prices?
And 'who' will decide when the P/E ratios get to the point where the stock market will be a 'bad' investment. Will people keep on investing in the market cause it keeps going up? No matter how much money people put into tulip bulbs, eventually it all came crashing down. The market must use the 'investment' efficiently for this all to work. Index funds, while convenient for the individual investor, would seem to have, when used in massive quantities, troubling implications for the free market concepts of risk and reward i.e 'If you invest, you will prosper'.
Indeed, I seem to be the only one who sees this problem with Clinton's proposal to invest in the market. All the regulations necessary to keep the gov't from 'unduly influencing' these private companies (which influence can easily be prevented IMHO) will result in the 'risk' being isolated from the 'owner' of the capital, and that is contrary to the functioning of free market capitalism.
>>>>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.
But of course, your example benefits from hindsight, which none of us have 'for the future'. If that money had been invested in 1966, where would you have been 5 years later. Indeed, if a person had wanted to retire in 1975, that market would have had a significant impact on the amount of 'monthly annuity' he could afford from his 'private account', compared to somebody retiring in 1990
>>>>The battle over privatization has already been won. The Democratic and Republican plans include individual accounts as a means to improve retirement security.
I think your declaration of victory might be a bit premature.
>>>>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.
That is a clear mis-statement of the Clinton plan. The plan calls for private sector money managers for the stock market component. The 'gov't bond component' depends on interest payments, not capital gains, so no active 'mamangement' is necessary. Whether Clinton's plan is good or bad, it does not 'keep the money' in Washington as you allege. Indeed, most of the criticism has been directed toward that part of the plan that sends part of the 'money and power' elsewhere.
