Friday Reads: Global funds are not global … and other great reads

The debt compromise, George Soros’s departure and a window into Google

Surprise, surprise

Here’s another good case for looking under the hood of your mutual funds and ETFs: Brett Arends’s excellent piece in Smart Money Magazine about how many global funds are heavily invested in the U.S. stock market. For instance, he wrote of Vanguard’s Total World Stock Index that 42% of the money is invested in the stock market of just one country—you guessed it, the U.S.

This Seeking Alpha blog compared the costs of Vanguard ETFs and mutual funds, finding ETFs are less expensive. The blog doesn’t take tracking error into account, as we suggested that investors should do in this post.

When less is more in investing.

In this interesting Kiplinger’s piece, columnist Bob Frick reminds investors that an environment of too many choices may be detrimental. He writes about the famous supermarket experiment in which two tasting displays, one with six jams and one with 24, were set up in a store. More people stopped at the 24-jam table, but far more people who stopped at the six-jam table actually bought jam. The point is supported by research into investor behavior, as well, as we wrote about in this post, The Nine Stupid Things Investors Do, According to the Library of Congress.

1990, redux: There will be a compromise

Washington, D.C., continues to stumble painfully toward a budget compromise this week, in a season of party infighting that’s likely to make and break political careers. Old-timers are drawing comparisons to 1990, when George Bush broke his “no new taxes” pledge, and the conservative The Wall Street Journal editorial page is telling the Tea Partiers to take their rescue fantasies back to Middle Earth.

Debt downgrade less likely than you think

Meanwhile, a debt downgrade seems less and less likely. The ratings agencies said that they would downgrade the United States’ sterling credit rating if the parties couldn’t reach a budget compromise, or if the budget compromise wasn’t fiscally responsible enough.  Since the compromise will happen, the only real question was how thoroughly the agencies were going to examine it. S&P’s president said midweek that even plans that reduced the deficit less than the previously mentioned $4 trillion could still preserve the rating.

Earlier this week The Economist made the point that the worst possible scenario for the ratings agencies would be for them to downgrade the debt – and find that nobody cared. The agencies will act cautiously.

Silver lining

The debt negotiations may spur investors to diversify their assets, as the Aleph Blog suggests in this posting, Where to Hide. Here’s our take on what a diversified portfolio should look like.

Soros leaves the party

The news that iconic investor George Soros’s advisory firm would no longer manage money that’s not his own drew readers’ interest this week, rising to the tops of most-read lists on web sites. Soros made billions as an investor and then became a philanthropist and advocate (lately supporting legalized marijuana in California). Soros Fund Management aims to avoid new disclosure regulations placed on hedge fund managers who invest outsiders’ money, according to a statement from his company. So the firm is returning the outside money and transitioning to a family office.

A Bloomberg BusinessWeek article offered one other possible explanation – that Mr. Soros wanted to leave the party while he was still having a good time. Referring to Soros’s flagship Quantum Endowment Fund, the story reported:

“While Quantum has returned about 20 percent a year, on average, since 1969, when its predecessor was started, according to a person familiar with the firm, the fund’s performance has suffered in the last 18 months. In the first half of this year, Quantum lost about 6 percent, the person said, following a gain of 2.5 percent in 2010. Other macro funds have returned 5.6 percent in the last year-and-a-half, according to Chicago-based Hedge Fund Research Inc.”

A new window into Google

Google, whose business practices are under anti-trust review by the U.S. Federal Trade Commission, this week said it would stop using rivals’ reviews in its own Google Places service, which this Financial Times story said marked the first time the Internet giant had reversed course under growing criticism about unfair business practices.

Not exactly directly investment-related, but related, because Google controls so much of the information flow you use to make decisions. People used to say that The New York Times set the agenda in the United States. These days, Google search does.

What not to believe

This week, the idea pervading the web is that a government default is possible. This is one of those cases where any journalist worth her salt knows the possibility of a default is extremely, extremely low … but in this age where the “extreme story” sells, people are writing as if default were a high probability.

Predictably, after weeks of reading media reports explaining the various ways in which a default might happen, investors started to get a little skittish that one will happen. Funny how that works: the media drives up ratings by being alarmist, and individual investors are alarmed, as a New York Times story reports about how few havens there are for investors.

The opinions expressed by guest bloggers and/or blog interviewees are strictly their own and do not necessarily represent those of Wealthfront Inc. Information in this or other blogs should be used at your own risk. Past performance does not guarantee future results. Securities investments involve risk; returns in such investments vary and may involve gain or loss.