"There is always a philosophy for lack of courage."—Albert Camus

Monday, January 03, 2005

Only Journalists Know How to Invest?

Wall Street Journal news director Tom Lauricella wrote a couple of pieces last month suggesting young people must never be allowed any alternative to Social Security because investors in other retirement savings plans have proven far too foolish and stupid to be trusted with their own money. Alan Sloan in Newsweek and David Rosenbaum and Daniel Altman in The New York Times, among others, have made similarly arrogant paternalistic arguments. But we expect better from a top guy at The Journal.

As I noted before (http://www.cato.org/dailys/12-29-04.html) Mr. Lauricella opined on December 1 that people with 401k plans “have made obvious mistakes in investing,” such as not investing the legal maximum (which is often easier said than done) or taking more risks (which is a matter of taste). His only real evidence of mistaken investing was a study claiming amateur investors earned “only” 6.4 percent a year over the 10 years ending in 2002 (a period ending with 32 ghastly months), while the pros earned 6.8 percent. That proved nothing, however, because the figures were not adjusted for risk. The pros may simply have held more small cap stocks and fewer bonds, for example. I invest in exotic little companies all over the world, including short sales and options, often on margin. I’ve done a lot better than 6.4 percent, so far, but that doesn’t prove more-cautious investors made “obvious mistakes.”

On December 22, Mr. Lauricella followed up with another piece arguing that even federal employees can’t handle their own retirement plans (thus defying beltway beliefs that government officials are inherently smarter and also selflessly engaged in “public service”). For one thing, he complained, the choice of only five investment options “doesn’t protect participants from losses in the stock or bond markets.” No plan that offers stocks and bonds can protect participants from losses. But he’s right that allowing federal employees only one stock market choice -- the S&P500 stock index – was a classic example of why limiting investment choices forces small investors to take avoidable risks. The S&P500 index is weighted by capitalization, any fund that matched the index became increasingly overinvested in high-tech stocks while their prices were soaring.

Viewed over the past 15 years, the S&P500 index returned 10.9 percent a year, but several managed funds did much better (the Legg Mason Value Trust rose 14.6 percent a year and Fidelity Contrafund was close). But Lauricella focused only on “mistakes” made during the bear market of 2000-2002.

After noting that the S&P500 fund “lost an average of 14.4 percent annually for three years,” Lauricella had the audacious hindsight to complain that between June and October 2002, some 8 percent of the assets in the S&P500 stock index fund were moved into bond funds with “returns ranging from 5 percent to 10 percent in 2001 and 2002.” Why did Mr. Lauricella find it so foolish for federal pension investors to have made a modest shift out of stocks (that were falling by 14 percent) into bonds (that were rising by 10 percent) by the end of 2002? Only because we now know (as we could not in late 2002) that stocks finally bounced back a year later--during the second half of 2003. But that does not make it unwise to have shifted some funds from stocks to bonds in late 2002. In fact, the S&P500 stock index did not even get back to its December 2002 level until May 2003. Federal employees may well have shifted back into stocks by then, after Iraq War anxieties dissipated.

When journalists such as Tom Lauricella or Mike Kinsley lecture us that foolish investors would be better-off leaving their money in the hands of wise politicians, you have to wonder how brilliant these writers’ own investment strategies have been. I have not added a dime to my largest retirement account since 1990 (much to the dismay of those who fret about the “savings rate”), yet that fund is now worth six times what it was then. Even the expert manager of that retirement account, however, made timing mistakes similar to those Mr. Lauricella criticizes when small investors made them. Perhaps he should exhibit more respect for the mistakes of others and more humility about his own.

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