Wednesday, June 16, 2004


An "invisible hand" stock portfolio

As I've explained it's very hard to even equal the S&P 500 average
when buying a mutual fund. First of all 1/2 are always going to be
worse and second they all have fees of .5 - 2% for "management".

I suggest a fund based upon the philosophy of the wisdom of the
"invisible hand" of the market which is supposed to guide things to
the optimal price.

Let's create a fund which buys basically the S&P 500 as do all the others,
but with a difference as to how trades are determined. After creating
a fund with a representative balance of stocks in it the participants
vote each month on how to rebalance the fund.

I'm assuming that the fund would be used by long-term inverstors that are
putting it into an IRA or similar so that the amount flowing in would be
greater than the amount flowing out, but not by much. So the major function
of trades would be to invest the new funds deposited.

Each participant would get a vote (or perhaps proportional to the size
of their holdings) for a stock to reduce in the portfolio. This would be
optional, there is no reason to reduce a stock if everything is currently
OK. In any case the amount of reduction could not exceed a small percentage
of the total amount held, say 10% in any month.

In addition the participant would get a vote on which stock to increase
investment in with the new funds as well as any from the sale. If the
theory is of the "invisible hand" is correct the fund should do better
than the average because of the collective wisdom of the participants.

At least the transaction costs would be minimal and the need for high-priced
financial "advisors" would be eliminated.

Anyone interested in creating a virtual fund online to see how it fares?

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