| Beat
the market, or beat by the market?
By Inchul Suh
 These
days, many investors are wondering why it's so difficult to do well in the market.
Even professional money managers seem to be at the mercy of the market. So much
research goes into investing, yet so many individual portfolios are losing money.
Some blame the "soft" economy. Others blame the war against Iraq. Actually,
culprits are everywhere: rising oil and natural gas prices, declining consumer
confidence, anemic business spending, high unemployment rate, corporate scandals,
accounting frauds, threat of deflation (or is it stagflation?), strong dollar,
weak dollar. While we're at it, we could also blame global warming, solar winds
and sunspots, too.
What
now?
Many investors feel weary and have decided that they have had enough. In fact,
they pulled out $27 billion (net) from stock
mutual funds in 2002, and there is no sign of reversing the trend in 2003, as
shown in an additional net outflow of $466 million in January 2003 (according
to the recent data from Investment Company Institute). I think it is a reasonable
reaction considering the fact that we have lost about $8 trillion since March
2000.
Many who still own stocks either directly or indirectly through 401k's and other
investment funds might ask, "What do we do now?"
If the history of the stock market is any indication, this is a good time to actually
buy some stocks; stock market bottoms are generally associated with large capital
outflows by individual investors. But for many of us who do not have a large cash
position at this time, the more relevant question would be "Should I rebalance
my portfolio?" Also, many investors have grown wary of money managers' ability
to "beat" the market and might wonder whether it is good idea to take
matters into their own hands.
According to many researchers, professional money managers, on average, outperform
their benchmark indices. However, most of the gains tend to disappear once you
include management fees and transaction costs. Therefore, you might be better
off by investing your money in various index funds (e.g. Vangard 500, Diamonds
or Spiders) if you simply want to follow the stock market.
Do-it-yourself
On the other hand, you might want to try building your own portfolio yourself.
By doing so, you will feel empowered by a sense of having control over your own
financial matters. After all, who knows your financial situation better than you?
However, this may be a daunting task for the average investor. First of all, many
average investors simply do not have enough time and expertise to research all
the stocks. And even after you figure out several stocks that you would like to
invest your money in, you still have to follow general economic trends, geopolitical
risks and industry developments, to say the least. Plus, you may not have enough
funds to achieve a desired level of diversification.
If so, you might feel nauseous after watching the stock prices take big swings.
Individual investors are known for their lack of patience, causing them to underperform
the market due to frequent trading and higher transaction costs.
Those are the reasons why many investors still leave their money in the hands
of professional money managers. Even after three years of futility, net asset
value of stock mutual funds stood at $2.67 trillion at the end of 2002. Nevertheless,
it is a very good idea to check your fund's performance regularly to make sure
that it is not consistently missing the target compared to similar funds. If it
is, then you should find out whether your fund has some troublesome spots so you
can move your money to other places and avoid further deterioration.
Also, managing your money involves more than investing in the stock markets, and
you may not recognize additional choices that might be available to you. So a
call to your broker or financial planner could be time well spent and may even
provide them a chance to reassess your needs, make necessary adjustments and build
a solid foundation toward your financial goals.
At least, then, you can take comfort in know-ing someone else is counting sunspots
for you.
| Inchul Suh
is an assistant professor of finance in the College of Business and Public Administration. |
 |
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