Ask an Economist (Post #1005 and counting)

[Mise]

In the UK at least, you can get funds that track the FTSE at most banks. It might be the same in Norway, I don't know. But FTSE tracking investments are quite popular over here.

There are also such things as index-linked bonds, which give you a return equal to the rise in some stock index. Some even offer index + a percent. E.g. if the FTSE rose by 10% this year, you'd get 11% back. But they don't give you any dividends.

 

[Homie]

You can setup accounts with online brokerages such as TD Ameritrade and E*Trade, or with the fund company itself like Vanguard.

Be careful for load funds. They will cut well into your returns. I myself just buy ETF's since they can be traded during the day and they have minimal fees.

I have made myself a list that you might be interested in:

SPY - S&P 500
QQQQ - NASDAQ 100
VWO - Vanguard Emerging Markets
VGK - European Markets
EFA - World ex. North America

I am confused as to the terminology of things. I thought buying an index fund just meant buying a portion of a stock exchange, which in turn means investing in a country´s economy, since most countries only have one stock exchange. Except for big ones, like the US, which has two. Also, they are unmanaged.
The examples you gave seem to be managed mutual funds, except for the Nasdaq one, which is a stock exchange.

 

[innonimatu]

I am confused as to the terminology of things. I thought buying an index fund just meant buying a portion of a stock exchange, which in turn means investing in a country´s economy

Neither countries' economies are truly reflected in the stock exchanges, nor are stock markers reflected on indexes, as there are always made up of certain stocks only.

As far as I can see most investing done through stock exchanges is little different from casino bets. Most of the investment is speculative, without enough information; and the house (insiders and traders) always gets better odds (or even a guaranteed fee). From a small investor's POV that's not encouraging.

 

[Whomp]

Homie--as big as Chicago is it's still a city of villages. There's not many cities like it.

Anyhow, regardless of whether mutual funds underperform indexes, stock mutual fund investors performed even worse due to their irrational behavior during declines. If they simply held the fund or index they would've been wildly successful but instead they try to time the markets and the studies done show they underperform by another ~6%.

Fear and greed. Be disciplined and allow for time and you'll win big even if you don't match an index.

 

[lovett]

What function does Corporation tax have which would not be better served via sales or income taxes?

 

[Homie]

I opened a seperate thread for this, but I might as well ask it here as well.

Is grad school really all that much harder than college? Is it worth the 2 extra years + 2 years of expenditures to get the masters degree?
I know we have at least one graduate in economics here (JH), and maybe more who can answer these questions based on personal experience.

 

[Whomp]

Yes, for any further degree or accreditation.

 

[holiday_hawk]

Care to explain what this report means to someone who doesn't understand the economical world all to well?

http://online.wsj.com/article/SB122108828944121241.html?mod=rss_opinion_main

Spoiler :

Senators Robert Byrd and Sherrod Brown, please take a bow. The West Virginia and Ohio Democrats have succeeded in getting Japan to slap another year of punitive duties on some U.S. products because of their attempts to rig trade rules for their business buddies.
[Robert Byrd]

Specifically, Japan's cabinet decided late last month to slap a 10% tariff on ball bearings and tapered roller bearings that could knock U.S. producers out of competition in Japan. The decision cited what Japan's Ministry of Finance accurately calls "illegal disbursement under the 'Byrd Amendment.'" That follows a European Union decision in May to extend punitive duties on a range of other American products. The tariffs hit just as U.S. exports have become the main source of American growth amid the housing slump and credit crunch.

Europe and Japan are hurting their own consumers here, but they are in the legal right. The Byrd Amendment is a toxic 2000 law that distributed tariff money not to the U.S. government but directly to U.S. companies that complained about "unfair" foreign competition. The World Trade Organization ruled in 2002 that the Byrd Amendment violated global trade rules, and Congress finally repealed it in early 2006. But the disbursements continue to complaining U.S. companies for as many years as it takes to collect duty due for alleged dumping of foreign products before October 1 of 2007; last year alone the payout was more than $264 million.

Worse, as we recently reported, Senators Byrd and Brown are trying to resurrect the law, probably by attaching it to a "must-pass" piece of legislation in some Senate backroom. That's how it passed the first time. We're glad to say our editorial at least smoked out the Senators, who recently defended their protectionism in a letter to the editor.

We trust the pair will also stand up and take credit for the new tariffs against U.S. exporters. Perhaps the Senators will tell workers who lose their jobs as a result that they need to take one for the Byrd-Brown team.

 

[Cutlass]

Mainly it means that even in countries that claim they want free trade, they can never quite manage to follow through on it.

 

[JerichoHill]

Neither countries' economies are truly reflected in the stock exchanges, nor are stock markers reflected on indexes, as there are always made up of certain stocks only.

As far as I can see most investing done through stock exchanges is little different from casino bets. Most of the investment is speculative, without enough information; and the house (insiders and traders) always gets better odds (or even a guaranteed fee). From a small investor's POV that's not encouraging.

Wrong.

A casino, the house always wins. Over the long haul, pick any 10 year period, and the investor in an index fund would have made money.

And insider trading...kinda illegal.

 

[JerichoHill]

I opened a seperate thread for this, but I might as well ask it here as well.

Is grad school really all that much harder than college? Is it worth the 2 extra years + 2 years of expenditures to get the masters degree?
I know we have at least one graduate in economics here (JH), and maybe more who can answer these questions based on personal experience.

It is worth it, but it's another level of analysis.

In undergraduate economies, you learn how economists describe how firms and individuals interact. But there's alot of prose in the books.

In graduate school economics, you learn how economists use mathematical tools, peel back the prose a bit and peek inside the inner workings of market logic.

In post-graduate school (Phd), the whole shebang is laid up. Hope you know calculus like the back of your hand.

 

[GenMarshall]

I always wonder, why do newly capitalist countries seem to struggle to sucseed after leaving behind/abandoning Communism and/or Socialism. The only sucsess story, that I know of, in the Pre-Russian invasion is Georgia.

 

[Cutlass]

Most of what was the Warsaw Pact is doing fairly well, as well as most of what used to be Yugoslavia.

 

[Red Door]

I always wonder, why do newly capitalist countries seem to struggle to sucseed after leaving behind/abandoning Communism and/or Socialism. The only sucsess story, that I know of, in the Pre-Russian invasion is Georgia.

China is doing pretty good for abandoning some parts of a state-controlled economy. Most Eastern European nations are doing a lot better. Czech Republic is even considered a full democracy today. But people would say that, in general, newly capitalist countries (or newly plugged in systems if you listen to Tom Friedman) have trouble adjusting because of the temporary set-backs they receive. Once the system fails once (think 1997 Asians Financial Crisis and Malaysia), countries want to go back to a more controlled economy in order to minimize their losses.

This isn't really an economics question, this is really a question of comparative politics. And I'm not claiming to be an expert either, someone feel free to correct me on anything in my post that could be wrong.

 

[innonimatu]

Wrong.

A casino, the house always wins. Over the long haul, pick any 10 year period, and the investor in an index fund would have made money.

And insider trading...kinda illegal.

Fine, show me how someone investing on a Nikkei indexed found has made money, since... December 1989! That's 18 years and that index shows no sign of rising...

CAC-40, topped in August 2000... FTSE, December 1999... I'm sure they're only going down, for the next few years. As for the Nasdaq, it's so bad over the past 8 years that it usually gets plotted on a logarithmic scale...

Alternatively, show me how someone investing on an hypothetical DJIA indexed fund would consistently beat inflation. It took 25 years just to recover from the crash of 1929, in nominal terms. It rose after WW2 and then from 1965 to 1982 gained nothing - 17 years. And now... I bet that by January 2009 it'll be lower that its nominal value in 1999.

 

[Princeps]

I always wonder, why do newly capitalist countries seem to struggle to sucseed after leaving behind/abandoning Communism and/or Socialism. The only sucsess story, that I know of, in the Pre-Russian invasion is Georgia.

Eastern European countries like Poland were much more careful and gradualist in the transition than countries like Russia. For example, they took the time to establish a system of supervision and criminal justice that is more appopriate for a market economy. In Russia the neoliberals pushed their programs through recklessly and with little regard for the interests of the population and for problems such as corruption.

 

[JerichoHill]

I always wonder, why do newly capitalist countries seem to struggle to sucseed after leaving behind/abandoning Communism and/or Socialism. The only sucsess story, that I know of, in the Pre-Russian invasion is Georgia.

Well, a simple analogy is that one often struggles at a new activity when you don't have any idea how it works. It takes a few falls to learn how to ride a bike.

When you're used to operating in a managed economy where you get 2 loaves of bread and rotten meat and live in a run down apartment and you make no decisions over what to eat or what to drive, it's kinda laughable to think that you can have a instanteous wonderful change to private markets the next moment. In economics, we refer to our skills and behavior as "human capital"

 

[JerichoHill]

Alternatively, show me how someone investing on an hypothetical DJIA indexed fund would consistently beat inflation. It took 25 years just to recover from the crash of 1929, in nominal terms. It rose after WW2 and then from 1965 to 1982 gained nothing - 17 years. And now... I bet that by January 2009 it'll be lower that its nominal value in 1999.

Done. I don't help run a successful personal finance blog for nothing, you know? And FWIW, my analysis is confined to the US Market.

From our blog, GetRichSlowly.org, here we a graph if one investing in year 1 and took their money out in year 10. As you can see, return is always positive for a 10 year time window.

The article, with graphs of 1,3, and 5 year windows, is linked below. Further, Inno asks for something to beat inflation. Sadly, inflation erodes wealth in all investments, including commodities, real estate, and mattresses. The individual investor should optimize on net return, because they must take inflation as a given.

Don't even begin to talk about gold being an inflation hedge. It's a crisis hedge. Period.


http://www.getrichslowly.org/blog/2007/04/23/saving-and-investing-the-impact-of-time/

 

[Mise]

You can buy inflation indexed bonds if you want to beat inflation. There was a good one in the UK recently, which offered RPI + 2.7% (it was tax free as well). But IMO RPI will tumble next year.

 

[innonimatu]

From our blog, GetRichSlowly.org, here we a graph if one investing in year 1 and took their money out in year 10. As you can see, return is always positive for a 10 year time window.

I asked about half a dozen of the most important indexes in the world, including the Dow Jones, and you answered with a different one. You won't be surprised if I don't concede the argument.

Even the S&P, which can be seen here, should have produced negative returns for 1964-1974, depending on the month of 1974 used for the comparison. And while this index does indeed conform to your proposed 10-year rule, none of those I mentioned does. Some of the europeans might, but give them two more years of credit implosion and they won't. The Nikkei and the DJIA certainly disprove your point (or just the last, if you want an american one).

Sadly, inflation erodes wealth in all investments, including commodities, real estate, and mattresses. The individual investor should optimize on net return, because they must take inflation as a given.

Don't even begin to talk about gold being an inflation hedge. It's a crisis hedge. Period.

That may be true, but strictly speaking your statement (and I quite it again):

Over the long haul, pick any 10 year period, and the investor in an index fund would have made money.

must account for inflation, else an investor wouldn't be "making money", but just "losing less money".

For all these reasons I must still consider it false.