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After the gridlock, counting the cost

Bermuda Investment Primer Chapter 2 Part 3

Low cost stock index mutuals, the Nobel Prize winner in economics, Eugene Fama (the father of the efficient market hypothesis), and investors held hostage to the US budget impasse.

Investors, the world over, must have retreated to advisory words of caution with little comfort after the stressful financial experience of watching United States capital market volatility last week. In one month, the S&P 500 Index SPX:IND dropped more than 75 points, only to recover that plus a bit, once the US government settled the political budget impasse. The VIX:IND reacted in reverse, climbing, then dropping abruptly in concert with the same message.

The spectacle of the Washington elite (as they are often referred to) holding world investment markets and economies to volumes of uncertainty, just so that they could bump heads and thump chests was not to be believed. “We won, ah, no, You won.”

Guess what, there aren't any winners in this game of ultimatums! Just millions of investors, large and small shaking their heads at the stupidity (and mountainous waste) of it all.

Small retailers, restaurateurs, federal employees, and thousands of other related people coping with their personal budgets were financially torpedoed by this complete fiasco.

Not only should there not be any winner in this political posturing game, I strongly suggest that the entire US Congress owes an apology — to all those individuals and businesses affected (and unable to control) these elected officials and their reprehensible, irresponsible actions. It is particularly appalling to note that these same elected officials suffered NO personal disadvantages during this week of oneupsmanship.

And we are going to face the same scenario again, in less than 90 Days? I, personally, don't know if I can tolerate more of the same actors, because that is what it is — staged theatre — it is not the least bit entertaining.

Investment media often talk of understanding investor behaviour during various capital market conditions. But how is a small investor supposed to respond, react, and strategise in managing the family investment portfolio given these ridiculous unpredictable abnormal circumstances.

You can — whenever there is increased volatility in capital markets and you become concerned about your investments — review the following questions:

1. Have my needs and time horizon for this portfolio changed since this latest market incident?

2. Do I need the cash right now?

3. Has anything else changed in my life that would cause the need to liquidate right now?

4. Did I shop around, spend some time researching investment purchases before I bought?

5. Do I still feel that I (and my advisor — if you used one) picked good mutual funds, or stocks or bonds with a good long history of returning steady returns?

If the answers to questions 1, 2 and 3 are NO, and the answers 4 and 5 are YES, why would you feel the need to change anything? The only change necessary short-term is a change in mind set — and not to sell in a panic, or an emotional depression, as you may incur unrecoverable losses.

And now for some good news. Rather than taking on the pressure of managing a group of individual stocks, for many years, investors have sought (and bought) the low fee passive stock market index tracking mutual funds instead.

Beating market returns via active investment management versus the predictability of holding stocks long-term has been a debatable issue amongst the learned and the laggards of interested investors. It is still an ongoing topic, but recently, the investing guru advocate of the long-term index fund investing strategy won one for the masses and the magisterials.

The Nobel Prize in Economics was awarded to Eugene Fama, Robert J Schiller and Lars Peter Hansen. Their work, known for many years among experienced commercial investors, reached the pinnacle of global validation.

Eugene Fama, in his Efficient Market Hypothesis or the Random Walk Theory, evolved in the 1960s from his PhD Dissertation, persuasively made the argument that in an active market that includes many well-informed and intelligent investors, securities will be appropriately priced and reflect all available information.

If a market is efficient, no information or analysis can be expected to result in outperformance of an appropriate benchmark.*

In layman's terms (and plain English), Professor Fama's incredible research illuminated the fact that investors could not beat the market in short-term investing. Investors would be better off buying/investing in passive long-term stock index funds, rather than trying to time the market and pick individual stocks.

The S&P 500 Index SPX:IND track record for almost five years is as follows. Purchased January 05, 2009 at 929 per share and holding until Thursday, October 17, 2013 at 1,733 per share. Not bad for benign neglect, meaning no trading during that entire time frame. Worth a consideration.

**http://www.investorhome.com/emh.htm

Martha Harris Myron JP CPA PFS CFP is a Bermudian journalist and a cross border financial planning specialist focused on offshore financial perspectives for international citizens living, working, crossing borders, and straddling ponds in the North Atlantic Quadrangle: United States, Canada, United Kingdom, Europe, and the island of Bermuda, the premier international finance centre. President of Pondstraddler★ Life™ Consultancy. Publications & Presentations: International consultant on cross border financial planning. www.pondstraddler.com. Inquiries to info@pondstraddler.com

The opinions expressed in this article are those of the author alone, and not The Royal Gazette. This article is intended for general educational purposes only and cannot be used for specific individual tax, investment, or retirement advice, nor can this article be relied upon for any personal financial planning purposes. The Editor of The Royal Gazette has final right of approval over headlines, content, and length/brevity of article.

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Published October 19, 2013 at 1:00 pm (Updated October 19, 2013 at 1:51 pm)

After the gridlock, counting the cost

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