TOM HUDSON: Clearly, there is no doubt the damage left from Sandy will take years to repair. The memories of the storm certainly will last a lifetime for those in her path. But she's just the latest natural disaster long-term investors have been faced with. I recently spoke with Mark Hebner, the founder and president of Index Funds Advisors, asking him how long-term investors should look at hurricane Sandy.
MARK HEBNER, FOUNDER & PRES., INDEX FUNDS ADVISORS: If they're holding a full equity portfolio, they really should be looking at time horizons of like 15 or maybe even 20 years to hang on to that investment, to be in a position to have a reasonably good chance of capturing the expected return of that portfolio.
HUDSON: What is the risk, though and the impact of the storm on closing stock trading? Doesn't that impact investor confidence in the market's ability to price these kinds of things right away when they are closed for two days?
HEBNER: Well, it might have some short-term impact. It might alter some investors' confidence. But you have your eye on the long-term horizon, then a couple of days really is immaterial and really should have little or no impact. Over the long haul, we rely on the fact that capitalism works and corporations in a broadly diversified portfolio of 13,000 stocks from all over the world, which is what an appropriate portfolio of index funds would look like, ... [make profits and therefore increase in value.]
HUDSON: Mark, how do you stay passive? You are essentially telling investors calm down, sit on your hands, keep the long term in mind. But how do you stay passive with so much uncertainty out there even beyond Sandy with the economic and the political uncertainty?
HEBNER: Well, Tom, this is why prices change in a free market. The job of a free market is really to set prices so that investors are properly rewarded for the risk they take. And if you think of my head as the expected return of an investment, on one side we have market uncertainty and the other side we have price. So if you have high uncertainty, the price goes down so that the expected return can stay essentially the same. And when there's low uncertainty the price goes up and once again, the expected return is held essentially constant over time. And it's the understanding of why prices change that help passive investors [be long term investors and] rely on markets to do a good job at setting prices. You know we like to say that the only people who think that markets don't work are the North Koreans, the Cubans and the active managers. We think that markets actually do a good job at pricing risk and over time, and we have found that to be the case.