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Some people have compared what happened to the U.S. stock market in 1998 to 2000 as the financial equivalent of the movie "The Perfect Storm". In one of the rarest meteorological events of the century, in 1991 three separate major weather systems aligned themselves "perfectly" for convergence. cnn.com The convergent storm created 100 mph winds and 100 foot seas. It battered ships, and caused coastal flooding along the eastern U.S. seaboard. This storm inspired the popular movie about the tragic loss of all lives aboard the Andrea Gail. In the U.S. stock market, three storms converged: 1) The Fed lowered interest rates in response to the Asian crises of 1998 (even though the U.S. did not particularly need lower rates). The rule of thumb is that it takes 18 months for interest rate changes to filter through to the economy. 2) The Fed greatly increased liquidity in U.S. banks in fears of a run on the banking system as we entered the new millennium in 2000, and 3) We had a coincident speculative bubble with eerie parallels to the1920s. Over 400 companies had the word "Motors" in their names in the 1920s. This time around it the corporate names contained ".com" What now? Thanks to my wife and some folks on the SI CSCO thread, (see post #50918 for details) I sold all my stocks in October of 2000 and turned it over to a professional financial planner who recommended particular money managers. I didn't catch the top, but I certainly missed the bottom. In 2001, after fees, my professionally-managed account, containing almost all my wealth lost 2.5%, even though we were 75% in equities. Meanwhile the S&P 500 lost 11% and the NASDAQ lost 21%. The S&P 500 and the NASDAQ are both flawed market indexes. They are capitalization-weighted. The top 50 stocks in the S&P 500 comprise 57% of its value. The Value Line Arithmetic Index might be a better proxy for the stock market. It consists of a diverse group of 1600 stocks. The index is not cap-weighted. The Value Line index is 52% small cap, 31% mid cap and 17% large cap. In May 2001, (14 months after the S&P and NASDAQ peaked) Mutual Fund magazine wrote an article about the Stealth Bull Market in the U.S. For the 10 years ending in April 2001, the VLAI was 29% less volatile than the S&P while outperforming the S&P (14.4% per year for the VLAI versus 13% for the S&P 500). The point is that the large cap tech stocks have been extremely volatile over the last few years and they have skewed the indexes. The average P/E of the S&P 500 is 24. Take away the 50 largest stocks and it is 15. Are the markets overvalued? Some sectors are, most aren't. The large cap tech stocks were responsible for market index funds outperforming most other mutual funds in the last few years. They will be probably be responsible for managed money outperforming index funds in the next few years, as more and more money leaves these stocks, in search of growth at reasonable prices. If small and mid cap stocks are the place to be for the couple years, it becomes difficult for an individual investor to pick stocks. Delegating stock selection to mutual funds and money managers may be the best way to achieve investment objectives. Financial planners, working with money managers offer the advantages of strategic allocation of assets, tax planning, and access to more investment tools (funds). For example, there are funds like Cambiar Investors Inc. that are not available to individual public investors. They are only available through professional financial planners. Cambiar has never had a year in which they lost money, since their inception 26 years ago, while averaging returns slightly over 20% per year. In 2001 they returned 6.17%. Their benchmark, the Russell 1000 Value Index lost 5.59% in 2001. Thanks to a professional investment advisor, I had 40% of my wealth invested in Cambiar, and I still do. What level of interest is there in discussing financial planners and institutional money managers? The few people with whom I have discussed financial planners seem generally satisfied with their planners/advisors. But sometimes I question their basis and my basis for evaluating them. These folks usually supply benchmark indexes to which their particular money managers should be compared. Thats one way to assess performance. Another way would be for people who engage these types of services to compare notes. To the best of my knowledge, there has never been a public forum for people to discuss financial planners and institutional money managers. Tom D | ||||||||||||
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