FOREIGN MARKETS SHOW THAT WHAT GOES UP IS SURE TO COME DOWN

Stock bubbles bursting are old news in the United States as most U.S. investors experienced the painful technology bubble burst several years ago. Now, some foreign markets that had experienced gains of up to 500% in two years have started to burst, as well, yet many investors in those countries were unprepared for the severe downturn.

From The New York Times:

A year ago, investors like Guan Ling were ebullient. Chinese share prices had climbed over 500 percent in the span of two years, setting off a nationwide stock buying frenzy.

That was last year. The Shanghai composite index has plunged 45 percent from its high, reached last October. The first quarter of this year, which ended Monday with a huge sell-off, was the worst ever for the market.

Other parts of Asia are as bad, or worse. In India, stock prices have plunged 31 percent in Mumbai; they are off 31 percent in Japan and a whopping 53 percent in Vietnam, another booming economy. Angry investors have burned a securities regulator in effigy in Mumbai, and some are in tears in Ho Chi Minh City, Vietnam.

“I’m getting out of the game,” said Yuan Yuan, 23, a researcher at a fund company in Shenzhen who also invests on his own. “The game is over. Big institutions pulled out first, only leaving the small investors.”

In China, the government fears that angry investors can be a social problem. And so while the state-run media report on the ups and downs of the market, and even warn investors of the risks and pitfalls of investing, the press does not usually report on investors’ anger.

“Actually there are a lot of complaints, but the Chinese media can’t report this,” says Mr. Guan, the former real estate company owner.

Now, in the brokerage house corridors — corridors of pain — one can hear complaints about all the market flaws: the government doesn’t regulate the stock market and it participates in it by allowing mostly big state-owned companies to go public.

There are also complaints about insider trading, stock manipulation, and big investors with government connections, pumping and dumping stocks on small investors.

INDEX FUND INVESTING: NOT EXCITING, BUT VERY EFFECTIVE

I get many questions from students regarding investing. I do not consider myself to be an expert in the sense that I am a guru who can pick the hot stock or outperform the market.

What I can do is give what I believe to be good advice for investing for retirement. Put your money in index mutual funds and let compound interest take care of setting you up for a fantastic retirement.

Many investment professionals push investors to buy actively managed funds instead of index funds? Why? Well, the fees associated with index funds are very low (typically about 80-90% less than actively managed funds) and many investment professionals steer clients to the investments that pay them the most (trust me, that isn't index funds).

Check out the article below for more information about index fund investing.

And, if you are interested in taking a class that should help you to make smart moves with your money and plan for a wonderful retirement, consider signing up for FIN205.920, Personal Finance and Investing, in the spring semester.

From The New York Times:

IS it worth the risk to try to outperform the market?

“I have yet to meet a retiree that couldn’t have met his or her retirement goals just with market returns — and this is over a 40-year career,” said Paul Merriman, the editor of FundAdvice.com and an investment adviser at Merriman Berkman Next in Seattle.

In his experience, most retired people regard an 8-to-12-percent compounded annual return as satisfactory for their needs. Any investor who simply bought and held a no-load mutual fund that replicated the Standard & Poor’s 500 stock index would have had an 11.2 percent compounded return from 1970 to 2006. So why keep trying to pick stocks and time a volatile market when you can own the market through low-cost index funds?

Index funds are not just for the little guy who can’t take the heat, either. Theodore R. Aronson, an institutional money manager at Aronson Johnson Ortiz in Philadelphia, is paid by his clients to beat various benchmarks like the S.& P. 500 or the Russell 1000 — not to match them. His family’s money, by contrast, goes into 11 Vanguard index funds allocated 80 percent to equities and 20 percent to bonds. “Statistically it is so hard to prove that active managers can outperform, and that any outperformance is due to skill and not luck,” Mr. Aronson said.

His one-year return from indexing as of Oct. 2 was 23.5 percent; his three-year annualized return is 18.8 percent.

CRAMER'S MAD MONEY = CRAMER'S BAD ADVICE?

CNBC crazy man Jim Cramer who made millions in the 1980s and 1990s with his hedge fund rolls up his sleaves, beats his chest, and makes seemingly thousands of stock picks per show on Mad Money, but Barron's reports that Cramer's picks overall do not beat the S&P 500.

From Barron's August 20th edition:

"Over the past two years, viewers holding Cramer's stocks would be up 12% while the Dow rose 22% and the S&P 500 16%, according to a record of 1,300 of the CNBC star's Buy recommendations compiled by YourMoneyWatch.com, a Website run by a retired stock analyst and loyal Cramer-watcher."

"We also looked at a database of Cramer's Mad Money picks maintained by his Website, TheStreet.com. It covers only the past six months, but includes an astounding 3,458 stocks - Buys mainly, punctuated by some Sells. These picks were flat to down in relation to the market. Count commissions and you would have been much better off in an index fund that simply tracks the market."

After an initial day-after 2% pop for Cramer's picks, the stocks "usually moved sideways or down for the following 30 trading days. This offered an opportunity to make money - 5% to 30% a year - by selling Cramer's selections short." Short selling is betting that a stock price will drop and profiting from that drop.