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A look behind the scenes at an index fund with Vanguard's Gerry O'Reilly

203 points by cookscar 10y ago

jflowers45 10y ago
I'm probably being persnickety, but I think the title here on HN is mildly misleading, as he is actually named and the actual title of the Bloomberg article calls him "Basically Anonymous" ... not actually anonymous
- ISL 10y ago
  I'd probably change Anonymous to 'Little-known'. Anonymous would suggest that nobody has any idea who is managing the money...
- duncanawoods 10y ago
  meh - made sense to me - "not distinctive" is a very common secondary meaning equivalent to "faceless". I think I'd need a stronger term like secret, covert, unknown etc. to suggest something different.
- sctb 10y ago
  I agree, we updated the title from “Anonymous Vanguard Fund Manager Oversees $800B” to the less click-baity subtitle.
- mathattack 10y ago
  Yes. And overseeing ETFs is a little different than trying to pick $800 billion in stocks.
ape4 10y ago
There isn't much to manage since they are index funds. (Edit: Ok, I'll accept the downvotes. I mean not as much work as other fund managers. eg don't have to select companies to invest in.)
- antr 10y ago
  Minimising tracking error is no small feat. Don't underestimate active management (e.g. employees working on systems and algorithms) in index funds.
- Spoom 10y ago
  This was covered in the article: Vanguard has invested heavily in technology. Algorithms help managers figure out where to buy and sell while minimizing market impact. Risk software makes sure the portfolio stays close to the index. Because of these technologies, Brennan says, “we probably have the most assets per head of any asset manager in the world.” (The key determinant of staffing, he says, is the number of portfolios, not the assets in them.) But you can automate only so much, and the tough decisions still fall to the portfolio managers. When is the best time to buy an illiquid stock that trades only once or twice a day? How do you handle a corporate deal structured in an unusual way or the issuing of a new class of stock? “People think a computer could run index funds—and they’re so wrong,” says Brian Bruce, a former index fund manager who’s now chief executive officer of Hillcrest Asset Management in Plano, Texas, and editor-in-chief of the Journal of Index Investing.
matt_wulfeck 10y ago
> "450 billion Vanguard Total Stock Market Index Fund matches the performance of its 3,600-stock benchmark. That means owning stocks whether they’re plunging, surging, or unchanged." They mention some reasons that human decision-makers are needed, but I'm actually not convinced. Why not just two algo indexes? One tries to get the best price, the other simply doesn't trade the difficult illiquid stocks? I'm surprised an enterprising company hasn't come along that allows you to pick all your own stocks, and allow them to be rolled up in an index. That kind of service shouldn't be too hard to create from a technical point of view, so I'm assuming the issue is with regulation.
- erdevs 10y ago
  It's not that simple. First of all, the goal is to track the index as closely as possible, not to get the best price and certainly not to avoid illiquid stocks. Moreover, how would you balance these two algorithms' holdings? Regardless, there are a great many nuances, complications, and technicalities involved in trying to keep an index fund on-target. Not just the pricing and liquidity issues mentioned in this article. This is especially true for very large funds with hundreds of billions under management. Index funds are as close as one can get to full automation today, but taking the last step to full automation won't happen without fundamental changes in underlying systems like the exchanges. It's not clear if it would even be advantageous to automate human decisions away completely here. Proposed automations often run in parallel simulations to a manager's work and are plugged in when they seem empirically to do better than a human manager can. Obviously that hasn't been the case across the board just yet.
- ramchip 10y ago
  > I'm surprised an enterprising company hasn't come along that allows you to pick all of our stocks, and allow them to be rolled up in an index. Do you mean basket trading? https://www.interactivebrokers.co.jp/jp/?f=/en/trading/orders/basket.php https://www.interactivebrokers.co.jp/jp/?f=/en/trading/order...
  - ryandrake 10y ago
    It's not entirely clear from that site, but it looks like they just let you batch up a bunch of separate orders in a single spreadsheet, and execute each one of them. The grandparent post seems to be calling for a service that lets me say, "I'd like to start my own custom-ETF, consisting of A% Facebook, B% AT&T, C% Walmart, D% McDonalds, etc." and then let me invest money that "fund" every so often. I agree this would be a neat service. Currently, if you want a portfolio of specific diversified stocks, you have to either 1. Find a fund that is similar enough to the basket of stocks that you would like or 2. Purchase each stock individually (getting eaten up in commission fees). Both are less than ideal.
spitfire 10y ago
The risk with ETF index funds is when the market truly deteriorates ETF's can simply fall apart. Particularly in illiquid or quickly falling markets. There was a paper about this a year or two ago which I'm unable to find now. I'd caution risk for anyone planning on using ETF's to ride out a storm. EDIT: I'll have to see if I can find the paper again. The basic summary was that in situations like 2008 ETF's failed in ways that were materially worse than holding the same basket of assets. But this is not investment advice. Make up your own mind and plan according to your risk tolerances.
- lintiness 10y ago
  are you talking about gapping to a discount? market makers can exchange baskets of securities for shares and vice versa, so over any significant period of time, that shouldn't be a risk.
- FreedomToCreate 10y ago
  Almost every investment deteriorates when the market does. In terms of stability and long term gains, ETFs are the best bet. You have to be willing to take high risk if you want to invest in things that are not affected by market deterioration, and many people don't have the ability to take that risk. Overall, anyone reading these comments, please take all investing advice as a grain of salt.
- cpursley 10y ago
  Google disagrees: https://goo.gl/Ib4Jty https://goo.gl/Ib4Jty I'd caution anyone from parking their money anywhere else but Vanguard index ETFs.
- matwood 10y ago
  Very much depends on the ETF. Some can have issues with contango [1] for example. This is a big problem with the oil ETFs. [1] https://en.wikipedia.org/wiki/Contango https://en.wikipedia.org/wiki/Contango EDIT To add relative context from the link: A crude oil contango occurred again in January 2009, with arbitrageurs storing millions of barrels in tankers to profit from the contango (see oil-storage trade). But by the summer, that price curve had flattened considerably. The contango exhibited in Crude Oil in 2009 explains the discrepancy between the headline spot price increase (bottoming at $35 and topping $80 in the year) and the various tradeable instruments for Crude Oil (such as rolled contracts or longer-dated futures contracts) showing a much lower price increase.[10] The USO ETF also failed to replicate Crude Oil's spot price performance.
lintiness 10y ago
a single company managing that big a share of the available float worries me -- not from some paranoid, political angle, but from an error and risk standpoint.
- kevindkeogh 10y ago
  there is a lot of market infrastructure and jurisprudence that exists specifically for this problem. Trades can and are canceled as the situation demands[0]. [0] https://www.theice.com/publicdocs/endex/ICE_Endex_Trade_Cancellations_Price_Adjustment.pdf https://www.theice.com/publicdocs/endex/ICE_Endex_Trade_Canc...
  - lintiness 10y ago
    tell that to knight ...
perryh2 10y ago
After some research in personal finance last week, I moved my balance from Wealthfront to Vanguard mutual funds/ETFs. I was already using them for my 401k. Their expense ratios are the lowest in the industry and they also have managed retirement funds you can use to replace Wealthfront if you are lazy. Here is a quick way to learn about the Bogleheads investment philosophy. [0] https://www.bogleheads.org/wiki/Bogleheads%C2%AE_investment_philosophy https://www.bogleheads.org/wiki/Bogleheads%C2%AE_investment_...
- toomuchtodo 10y ago
  I too moved from a roboadvisor (Betterment) to Vanguard. The knowledge you need to make effective decisions on your own in Vanguard only takes 2-3 hours to acquire (at the Bogleheads link you provided). Highly recommend people take the time to learn instead of having your assets charging quarter after quarter by a roboadvisor. EDIT: I'd still love for Vanguard to create Betterment's version of RetireGuide, which takes into account your income and various other financial parameters, and tells you how much to save in which accounts (tax deferred, 401k, etc). I'm a sucker for sexy UX. https://www.betterment.com/retirement/ https://www.betterment.com/retirement/ https://youtu.be/W6zk2Ki83Ug?t=23 https://youtu.be/W6zk2Ki83Ug?t=23
  - dmix 10y ago
    So the general goal with Bogleheads is a way to retire wealthy as a middle-income earner? Via long term saving? I've always liked that idea as an alternative to doubling down with entrepreneurship. There's always the constant internal debate between both paths. It's nice to have a good guide to map out how to accomplish it, as the investment path comes with much more certainty if you have the right amount of self-control.
    - deleted 10y ago
      [deleted]
    - bradleyjg 10y ago
      >> So the genral goal with Bogleheads is a way to retire wealthy as a middle-income earner? Via long term saving? More focused on the hows of the saving than the goal of it. Although there's some overlap it isn't the same type of community as something like Mr. Mustache Man that emphasizes a specific life-plan (in that case very early retirement). It's a helpful community. Sometimes a bit doctrinaire about "rules of thumb" that are very useful for many people, but aren't exactly laws of the universe, but that's hardly the worst thing in the world.
breck 10y ago
A dumb question I've always had: for their S&P 500 Fund, is Vanguard just free-riding off the work of S&P, leading to their low management fees? Or is the work that goes into selecting the 500 companies in the index pretty minimal?
- readams 10y ago
  The S&P 500 is just a list of the largest 500 companies by market cap. Managing the S&P 500 fund is actually pretty tricky since everyone knows when the index changes and they know what trades you have to make so they try to take money from you. You have to employ a lot of tricks to avoid being victimized as an index fund. Edit: I should point out that the index isn't really _just_ the largest 500 companies; they try to keep it properly weighted by sector and some other considerations as well.
  - pbang 10y ago
    Do you mind elaborating on that point? I'm interested in hearing more
    - deleted 10y ago
      [deleted]
    - bluGill 10y ago
      When S&P announces results of the S&P 500 it is for fictional stocks: they don't have a fund of their own. They just say that if had bought these 500 stocks in 1957, and traced only on the dates that the dates/prices the index did you would have so much. This is impossible to do though (expect for the smallest investors), the very act of trading a stock changes the price. Most mutual funds have enough stock that they have to consider the effect of their trade on the price of the stock: if they want to invest in a company it is done over weeks and months to ensure the price doesn't change just as a result of their actions. A simple example: lets say company X and Y are both on the index and they decide to merge one company X on such an such a date. In order to keep 500 stocks in the index S&P has to choose something to replacement. You don't have to be very smart to see that X and Y are in talks about merging months in advance. It isn't hard to figure that the stock S&P chooses will be one of a few: Buy a bunch of them each at today's prices. When the merge happens all those index funds now buy the replacement stock which drives the price up, you have shares at an inflated price to sell to those funds. (You have figure out when to sell the stocks that were not added - but S&P is unlikely to add a bad stock so as an investment these are likely to do okay). This is easy if the index funds try to hold exactly what the S&P 500 has in it. Because of the above index funds promise to mirror the S&P500 results, but not the actual stocks. It is easy to say mirror results, it is much harder to pull that off, even if we ignore those above who are trying to cheat you, index funds tend to be the largest funds (because they do so well they are popular!) which means most of your trades will affect the price of the stock. There is a lot more involved (much of it that I don't know), but the above is a simple example that will get you on the right track of thinking.
baccredited 10y ago
Fun fact: Save 70% of your income and use it to buy ticker VOO (Vanguard's S&P 500 fund) and you can retire in under 10 years http://www.mrmoneymustache.com/2012/01/13/the-shockingly-simple-math-behind-early-retirement/ http://www.mrmoneymustache.com/2012/01/13/the-shockingly-sim...
- schwap 10y ago
  > Save 70% of your income Oh, is that all?! ;)
- shshhdhs 10y ago
  How close to FI are you?
  - baccredited 10y ago
    5 yrs 11 months. You?
- fibbery 10y ago
  And if the S&P drops like it did in 1987, 2000, 2008, then what...?
  - RestlessMind 10y ago
    Then just wait for a few years and it will recover again. https://www.google.com/finance?q=INDEXSP:.INX https://www.google.com/finance?q=INDEXSP:.INX
    - apr 10y ago
      Who will pay the bills in the meantime?
  - kyteland 10y ago
    Just run your projections through http://www.firecalc.com/index.php http://www.firecalc.com/index.php and project what your historical odds of going bust are.
oli5679 10y ago
Several of the comments seem confused about why the process isn't entirely straightforward. Here's an example: Say I have $100 mn under management at an index fund. When the markets close on Thursday, I have a 5 mn weighting in Apple and its market capitalisation is equal to 5% of the S & P 500 index. On Friday morning, Tim Cooke makes an inspiring speech about the iCar and Apple's market cap rises to 8% of of the S & P index. I want to sell some of my other positions and buy Apple so that I still have a balanced weighting of S & P 500 shares. However, I face a tradeoff. If I do this in small bursts over the course of the day, I have a higher administrative burden. I also risk running up bigger transaction fees if Elon Musk makes another speech in the afternoon unveiling the Tesla-phone, forcing me to sell again after Apple falls back down to 5%. If I wait until 3.59 to place a massive sell order for all my other stocks and buy order for Apple, (a) market participants might think I know something about Apple, causing the price to rise yet further as I struggle to complete my order (b) sneaky traders could buy up Apple Stock at 3.55 and then sell to me at 3.59 for a higher price. This is the balancing act a passive fund manager faces. Edit: As comments point out, this example is incorrect. First example should say something like Apple splitting into Apple and iPhone and then the relative prices changing after the split. The second half still makes sense.
- Hermel 10y ago
  This example does not work. If Apple raises from 5% to 8% of the SP500, it also raises from 5% to 8% of your portfolio. No rebalancing is needed when weighting stocks by market cap.
  - deleted 10y ago
    [deleted]
  - anonu 10y ago
    That's correct. A passive index manager is passive - they don't have to worry about some balancing act. It differs from active management because the manager isn't making decisions about which stocks are in the fund. Where the passive fund manager has to do work is on index rebalances and on any constituent corporate action.
- deleted 10y ago
notadoc 10y ago
And what happens when nearly everyone indexes? And when indexing with a bond fund, do you really want to be buying negative yield bonds?
- Hermel 10y ago
  If the less informed shareholder move to passive allocations, the market actually gets more efficient: http://www.philosophicaleconomics.com/2016/05/passiveactive/ http://www.philosophicaleconomics.com/2016/05/passiveactive/
  - infinite8s 10y ago
    Until no one is left doing price discovery. The end state of the indexing craze isn't 100% passive investing, but some equilibrium between active and passive management.
- cloudjacker 10y ago
  I think at this point we can just ignore the yields on bonds. The majority of the "income" from government bonds has come from capital gains, not the coupon. Then the yield decreases it is because the bond itself has become more expensive. Sell the bond at the higher price. Negative yield is an annual rate. Taking a short position is more expensive. Holding a CDS is more expensive. If you expect negative yields to continue or go deeper, then bonds are a good investment. Now, if you are in more illiquid corporate bonds, then you may be forced to hold them till maturity.
- anonu 10y ago
  This is the beauty of the markets. If everyone indexes then this will create arbitrage opportunities for the active manager. People will chase the opportunities - and the cycle continues.
- Spooky23 10y ago
  With interest rates on the floor, why would you want any bond index fund? You're better off putting your bond allocation in high yield savings accounts. That's the thing about index/robo people that I don't get. The magic formula can do dumb things.
nstj 10y ago
I really look forward to the day when it's easy (and safe) to have API's at places like Vanguard so developers skilled in areas such as UX can layer technology solutions on top of the fantastic investment products provided by outfits like Vanguard.
- hardikp 10y ago
  Couldn't agree more. This also applies to other financial technologies as well. In general, I feel there is just too much opaqueness in the finance. On a slightly related note, I am working on the trading part mentioned in the article - i.e. APIs for advanced methods of getting the trades done. Basically, these trading methods are use machine learning to predict near future movement and use that to optimize the orders. (Some more details here - https://www.qleap.co/ https://www.qleap.co/ - in case, someone is interested.)
  - harmegido 10y ago
    I don't see why youd need to have any sort of website/outward facing material for this. If you can really do what it says on your about page, then just trade!
- hsitz 10y ago
  I don't see much benefit. The investment philosophy that goes along with Vanguard is buy-and-hold for the long term, there's little trading that goes on these accounts. And that's a good thing. It's not like it's difficult to trade stocks as it is, no real need to make it easier.
  - nstj 10y ago
    I'm thinking more about harnessing insight into the returns on the products themselves (and of course not using an API to trade, that wouldn't make much sense with an index fund).
peterwwillis 10y ago
O’Reilly [..] came to the U.S. in 1983 to attend Villanova University on a track scholarship. As a junior, he ran the mile in less than four minutes —a feat he repeated six times. He led Villanova to a conference championship and represented Ireland at the 1988 Summer Olympics in Seoul. A few years later, O’Reilly joined Vanguard. That's the story I would have rather read.
deleted 10y ago
[deleted]
d310n9 10y ago
when the corner shoe boy gives you stock advice, its time to get the hell outta there!
ms207 10y ago
This is what happens when some companies project investing as a quick and slick process. Answer these 5 questions and here you go: this is your risk tolerance and you are saving away in taxes and doing rebalancing. The truth is that investing is just another application to data science and machine learning and a lot of hard work. Little things matter and even simple rebalancing is not as simple given that periodic rebalancing can have huge market timing effects. We recently did a webinar on how to approach investing as a data science problem instead of a 'finance' problem: https://www.qplum.co/webinars/past/07072016/skill-vs-luck https://www.qplum.co/webinars/past/07072016/skill-vs-luck
- gauravchak 10y ago
  A friend of mine invested in two roboadvisors (wealthfront and betterment) at end of April and since then they have done nothing, not a single trade. Not a single trade. In the mean while, markets have scaled new heights. Ten year rate dropped to 1.37%!. Brexit happened. The FED unlike happened. There were huge gyrations in the unemployment rate. Vanguard systematic fund VMNVX did much better. I have worked in trading all my work life and I know how hard it is, how humbling it is, and how meaningful it is. I hate it when people sell crap as smart. As Dean Kansky in Serendipity said "They should make pills for this."

203 points by cookscar 10y ago

I'm probably being persnickety, but I think the title here on HN is mildly misleading, as he is actually named and the actual title of the Bloomberg article calls him "Basically Anonymous" ... not actually anonymous

ISL 10y ago
I'd probably change Anonymous to 'Little-known'. Anonymous would suggest that nobody has any idea who is managing the money...
duncanawoods 10y ago
meh - made sense to me - "not distinctive" is a very common secondary meaning equivalent to "faceless". I think I'd need a stronger term like secret, covert, unknown etc. to suggest something different.
sctb 10y ago
I agree, we updated the title from “Anonymous Vanguard Fund Manager Oversees $800B” to the less click-baity subtitle.
mathattack 10y ago
Yes. And overseeing ETFs is a little different than trying to pick $800 billion in stocks.

ape4 10y ago

There isn't much to manage since they are index funds. (Edit: Ok, I'll accept the downvotes. I mean not as much work as other fund managers. eg don't have to select companies to invest in.)

antr 10y ago
Minimising tracking error is no small feat. Don't underestimate active management (e.g. employees working on systems and algorithms) in index funds.
Spoom 10y ago
This was covered in the article: Vanguard has invested heavily in technology. Algorithms help managers figure out where to buy and sell while minimizing market impact. Risk software makes sure the portfolio stays close to the index. Because of these technologies, Brennan says, “we probably have the most assets per head of any asset manager in the world.” (The key determinant of staffing, he says, is the number of portfolios, not the assets in them.) But you can automate only so much, and the tough decisions still fall to the portfolio managers. When is the best time to buy an illiquid stock that trades only once or twice a day? How do you handle a corporate deal structured in an unusual way or the issuing of a new class of stock? “People think a computer could run index funds—and they’re so wrong,” says Brian Bruce, a former index fund manager who’s now chief executive officer of Hillcrest Asset Management in Plano, Texas, and editor-in-chief of the Journal of Index Investing.

matt_wulfeck 10y ago

> "450 billion Vanguard Total Stock Market Index Fund matches the performance of its 3,600-stock benchmark. That means owning stocks whether they’re plunging, surging, or unchanged." They mention some reasons that human decision-makers are needed, but I'm actually not convinced. Why not just two algo indexes? One tries to get the best price, the other simply doesn't trade the difficult illiquid stocks? I'm surprised an enterprising company hasn't come along that allows you to pick all your own stocks, and allow them to be rolled up in an index. That kind of service shouldn't be too hard to create from a technical point of view, so I'm assuming the issue is with regulation.

erdevs 10y ago
It's not that simple. First of all, the goal is to track the index as closely as possible, not to get the best price and certainly not to avoid illiquid stocks. Moreover, how would you balance these two algorithms' holdings? Regardless, there are a great many nuances, complications, and technicalities involved in trying to keep an index fund on-target. Not just the pricing and liquidity issues mentioned in this article. This is especially true for very large funds with hundreds of billions under management. Index funds are as close as one can get to full automation today, but taking the last step to full automation won't happen without fundamental changes in underlying systems like the exchanges. It's not clear if it would even be advantageous to automate human decisions away completely here. Proposed automations often run in parallel simulations to a manager's work and are plugged in when they seem empirically to do better than a human manager can. Obviously that hasn't been the case across the board just yet.
ramchip 10y ago
> I'm surprised an enterprising company hasn't come along that allows you to pick all of our stocks, and allow them to be rolled up in an index. Do you mean basket trading? https://www.interactivebrokers.co.jp/jp/?f=/en/trading/orders/basket.php https://www.interactivebrokers.co.jp/jp/?f=/en/trading/order...
- ryandrake 10y ago
  It's not entirely clear from that site, but it looks like they just let you batch up a bunch of separate orders in a single spreadsheet, and execute each one of them. The grandparent post seems to be calling for a service that lets me say, "I'd like to start my own custom-ETF, consisting of A% Facebook, B% AT&T, C% Walmart, D% McDonalds, etc." and then let me invest money that "fund" every so often. I agree this would be a neat service. Currently, if you want a portfolio of specific diversified stocks, you have to either 1. Find a fund that is similar enough to the basket of stocks that you would like or 2. Purchase each stock individually (getting eaten up in commission fees). Both are less than ideal.

spitfire 10y ago

The risk with ETF index funds is when the market truly deteriorates ETF's can simply fall apart. Particularly in illiquid or quickly falling markets. There was a paper about this a year or two ago which I'm unable to find now. I'd caution risk for anyone planning on using ETF's to ride out a storm. EDIT: I'll have to see if I can find the paper again. The basic summary was that in situations like 2008 ETF's failed in ways that were materially worse than holding the same basket of assets. But this is not investment advice. Make up your own mind and plan according to your risk tolerances.

lintiness 10y ago
are you talking about gapping to a discount? market makers can exchange baskets of securities for shares and vice versa, so over any significant period of time, that shouldn't be a risk.
FreedomToCreate 10y ago
Almost every investment deteriorates when the market does. In terms of stability and long term gains, ETFs are the best bet. You have to be willing to take high risk if you want to invest in things that are not affected by market deterioration, and many people don't have the ability to take that risk. Overall, anyone reading these comments, please take all investing advice as a grain of salt.
cpursley 10y ago
Google disagrees: https://goo.gl/Ib4Jty https://goo.gl/Ib4Jty I'd caution anyone from parking their money anywhere else but Vanguard index ETFs.
matwood 10y ago
Very much depends on the ETF. Some can have issues with contango [1] for example. This is a big problem with the oil ETFs. [1] https://en.wikipedia.org/wiki/Contango https://en.wikipedia.org/wiki/Contango EDIT To add relative context from the link: A crude oil contango occurred again in January 2009, with arbitrageurs storing millions of barrels in tankers to profit from the contango (see oil-storage trade). But by the summer, that price curve had flattened considerably. The contango exhibited in Crude Oil in 2009 explains the discrepancy between the headline spot price increase (bottoming at $35 and topping $80 in the year) and the various tradeable instruments for Crude Oil (such as rolled contracts or longer-dated futures contracts) showing a much lower price increase.[10] The USO ETF also failed to replicate Crude Oil's spot price performance.

lintiness 10y ago

a single company managing that big a share of the available float worries me -- not from some paranoid, political angle, but from an error and risk standpoint.

kevindkeogh 10y ago
there is a lot of market infrastructure and jurisprudence that exists specifically for this problem. Trades can and are canceled as the situation demands[0]. [0] https://www.theice.com/publicdocs/endex/ICE_Endex_Trade_Cancellations_Price_Adjustment.pdf https://www.theice.com/publicdocs/endex/ICE_Endex_Trade_Canc...
- lintiness 10y ago
  tell that to knight ...

perryh2 10y ago

After some research in personal finance last week, I moved my balance from Wealthfront to Vanguard mutual funds/ETFs. I was already using them for my 401k. Their expense ratios are the lowest in the industry and they also have managed retirement funds you can use to replace Wealthfront if you are lazy. Here is a quick way to learn about the Bogleheads investment philosophy. [0] https://www.bogleheads.org/wiki/Bogleheads%C2%AE_investment_philosophy https://www.bogleheads.org/wiki/Bogleheads%C2%AE_investment_...

toomuchtodo 10y ago
I too moved from a roboadvisor (Betterment) to Vanguard. The knowledge you need to make effective decisions on your own in Vanguard only takes 2-3 hours to acquire (at the Bogleheads link you provided). Highly recommend people take the time to learn instead of having your assets charging quarter after quarter by a roboadvisor. EDIT: I'd still love for Vanguard to create Betterment's version of RetireGuide, which takes into account your income and various other financial parameters, and tells you how much to save in which accounts (tax deferred, 401k, etc). I'm a sucker for sexy UX. https://www.betterment.com/retirement/ https://www.betterment.com/retirement/ https://youtu.be/W6zk2Ki83Ug?t=23 https://youtu.be/W6zk2Ki83Ug?t=23
- dmix 10y ago
  So the general goal with Bogleheads is a way to retire wealthy as a middle-income earner? Via long term saving? I've always liked that idea as an alternative to doubling down with entrepreneurship. There's always the constant internal debate between both paths. It's nice to have a good guide to map out how to accomplish it, as the investment path comes with much more certainty if you have the right amount of self-control.
  - deleted 10y ago
    [deleted]
  - bradleyjg 10y ago
    >> So the genral goal with Bogleheads is a way to retire wealthy as a middle-income earner? Via long term saving? More focused on the hows of the saving than the goal of it. Although there's some overlap it isn't the same type of community as something like Mr. Mustache Man that emphasizes a specific life-plan (in that case very early retirement). It's a helpful community. Sometimes a bit doctrinaire about "rules of thumb" that are very useful for many people, but aren't exactly laws of the universe, but that's hardly the worst thing in the world.

breck 10y ago

A dumb question I've always had: for their S&P 500 Fund, is Vanguard just free-riding off the work of S&P, leading to their low management fees? Or is the work that goes into selecting the 500 companies in the index pretty minimal?

readams 10y ago
The S&P 500 is just a list of the largest 500 companies by market cap. Managing the S&P 500 fund is actually pretty tricky since everyone knows when the index changes and they know what trades you have to make so they try to take money from you. You have to employ a lot of tricks to avoid being victimized as an index fund. Edit: I should point out that the index isn't really _just_ the largest 500 companies; they try to keep it properly weighted by sector and some other considerations as well.
- pbang 10y ago
  Do you mind elaborating on that point? I'm interested in hearing more
  - deleted 10y ago
    [deleted]
  - bluGill 10y ago
    When S&P announces results of the S&P 500 it is for fictional stocks: they don't have a fund of their own. They just say that if had bought these 500 stocks in 1957, and traced only on the dates that the dates/prices the index did you would have so much. This is impossible to do though (expect for the smallest investors), the very act of trading a stock changes the price. Most mutual funds have enough stock that they have to consider the effect of their trade on the price of the stock: if they want to invest in a company it is done over weeks and months to ensure the price doesn't change just as a result of their actions. A simple example: lets say company X and Y are both on the index and they decide to merge one company X on such an such a date. In order to keep 500 stocks in the index S&P has to choose something to replacement. You don't have to be very smart to see that X and Y are in talks about merging months in advance. It isn't hard to figure that the stock S&P chooses will be one of a few: Buy a bunch of them each at today's prices. When the merge happens all those index funds now buy the replacement stock which drives the price up, you have shares at an inflated price to sell to those funds. (You have figure out when to sell the stocks that were not added - but S&P is unlikely to add a bad stock so as an investment these are likely to do okay). This is easy if the index funds try to hold exactly what the S&P 500 has in it. Because of the above index funds promise to mirror the S&P500 results, but not the actual stocks. It is easy to say mirror results, it is much harder to pull that off, even if we ignore those above who are trying to cheat you, index funds tend to be the largest funds (because they do so well they are popular!) which means most of your trades will affect the price of the stock. There is a lot more involved (much of it that I don't know), but the above is a simple example that will get you on the right track of thinking.

baccredited 10y ago

Fun fact: Save 70% of your income and use it to buy ticker VOO (Vanguard's S&P 500 fund) and you can retire in under 10 years http://www.mrmoneymustache.com/2012/01/13/the-shockingly-simple-math-behind-early-retirement/ http://www.mrmoneymustache.com/2012/01/13/the-shockingly-sim...

schwap 10y ago
> Save 70% of your income Oh, is that all?! ;)
shshhdhs 10y ago
How close to FI are you?
- baccredited 10y ago
  5 yrs 11 months. You?
fibbery 10y ago
And if the S&P drops like it did in 1987, 2000, 2008, then what...?
- RestlessMind 10y ago
  Then just wait for a few years and it will recover again. https://www.google.com/finance?q=INDEXSP:.INX https://www.google.com/finance?q=INDEXSP:.INX
  - apr 10y ago
    Who will pay the bills in the meantime?
- kyteland 10y ago
  Just run your projections through http://www.firecalc.com/index.php http://www.firecalc.com/index.php and project what your historical odds of going bust are.

oli5679 10y ago

Several of the comments seem confused about why the process isn't entirely straightforward. Here's an example: Say I have $100 mn under management at an index fund. When the markets close on Thursday, I have a 5 mn weighting in Apple and its market capitalisation is equal to 5% of the S & P 500 index. On Friday morning, Tim Cooke makes an inspiring speech about the iCar and Apple's market cap rises to 8% of of the S & P index. I want to sell some of my other positions and buy Apple so that I still have a balanced weighting of S & P 500 shares. However, I face a tradeoff. If I do this in small bursts over the course of the day, I have a higher administrative burden. I also risk running up bigger transaction fees if Elon Musk makes another speech in the afternoon unveiling the Tesla-phone, forcing me to sell again after Apple falls back down to 5%. If I wait until 3.59 to place a massive sell order for all my other stocks and buy order for Apple, (a) market participants might think I know something about Apple, causing the price to rise yet further as I struggle to complete my order (b) sneaky traders could buy up Apple Stock at 3.55 and then sell to me at 3.59 for a higher price. This is the balancing act a passive fund manager faces. Edit: As comments point out, this example is incorrect. First example should say something like Apple splitting into Apple and iPhone and then the relative prices changing after the split. The second half still makes sense.

Hermel 10y ago
This example does not work. If Apple raises from 5% to 8% of the SP500, it also raises from 5% to 8% of your portfolio. No rebalancing is needed when weighting stocks by market cap.
- deleted 10y ago
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- anonu 10y ago
  That's correct. A passive index manager is passive - they don't have to worry about some balancing act. It differs from active management because the manager isn't making decisions about which stocks are in the fund. Where the passive fund manager has to do work is on index rebalances and on any constituent corporate action.
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notadoc 10y ago

And what happens when nearly everyone indexes? And when indexing with a bond fund, do you really want to be buying negative yield bonds?

Hermel 10y ago
If the less informed shareholder move to passive allocations, the market actually gets more efficient: http://www.philosophicaleconomics.com/2016/05/passiveactive/ http://www.philosophicaleconomics.com/2016/05/passiveactive/
- infinite8s 10y ago
  Until no one is left doing price discovery. The end state of the indexing craze isn't 100% passive investing, but some equilibrium between active and passive management.
cloudjacker 10y ago
I think at this point we can just ignore the yields on bonds. The majority of the "income" from government bonds has come from capital gains, not the coupon. Then the yield decreases it is because the bond itself has become more expensive. Sell the bond at the higher price. Negative yield is an annual rate. Taking a short position is more expensive. Holding a CDS is more expensive. If you expect negative yields to continue or go deeper, then bonds are a good investment. Now, if you are in more illiquid corporate bonds, then you may be forced to hold them till maturity.
anonu 10y ago
This is the beauty of the markets. If everyone indexes then this will create arbitrage opportunities for the active manager. People will chase the opportunities - and the cycle continues.
Spooky23 10y ago
With interest rates on the floor, why would you want any bond index fund? You're better off putting your bond allocation in high yield savings accounts. That's the thing about index/robo people that I don't get. The magic formula can do dumb things.

nstj 10y ago

I really look forward to the day when it's easy (and safe) to have API's at places like Vanguard so developers skilled in areas such as UX can layer technology solutions on top of the fantastic investment products provided by outfits like Vanguard.

hardikp 10y ago
Couldn't agree more. This also applies to other financial technologies as well. In general, I feel there is just too much opaqueness in the finance. On a slightly related note, I am working on the trading part mentioned in the article - i.e. APIs for advanced methods of getting the trades done. Basically, these trading methods are use machine learning to predict near future movement and use that to optimize the orders. (Some more details here - https://www.qleap.co/ https://www.qleap.co/ - in case, someone is interested.)
- harmegido 10y ago
  I don't see why youd need to have any sort of website/outward facing material for this. If you can really do what it says on your about page, then just trade!
hsitz 10y ago
I don't see much benefit. The investment philosophy that goes along with Vanguard is buy-and-hold for the long term, there's little trading that goes on these accounts. And that's a good thing. It's not like it's difficult to trade stocks as it is, no real need to make it easier.
- nstj 10y ago
  I'm thinking more about harnessing insight into the returns on the products themselves (and of course not using an API to trade, that wouldn't make much sense with an index fund).

peterwwillis 10y ago

O’Reilly [..] came to the U.S. in 1983 to attend Villanova University on a track scholarship. As a junior, he ran the mile in less than four minutes —a feat he repeated six times. He led Villanova to a conference championship and represented Ireland at the 1988 Summer Olympics in Seoul. A few years later, O’Reilly joined Vanguard. That's the story I would have rather read.

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d310n9 10y ago

when the corner shoe boy gives you stock advice, its time to get the hell outta there!

ms207 10y ago

This is what happens when some companies project investing as a quick and slick process. Answer these 5 questions and here you go: this is your risk tolerance and you are saving away in taxes and doing rebalancing. The truth is that investing is just another application to data science and machine learning and a lot of hard work. Little things matter and even simple rebalancing is not as simple given that periodic rebalancing can have huge market timing effects. We recently did a webinar on how to approach investing as a data science problem instead of a 'finance' problem: https://www.qplum.co/webinars/past/07072016/skill-vs-luck https://www.qplum.co/webinars/past/07072016/skill-vs-luck

gauravchak 10y ago
A friend of mine invested in two roboadvisors (wealthfront and betterment) at end of April and since then they have done nothing, not a single trade. Not a single trade. In the mean while, markets have scaled new heights. Ten year rate dropped to 1.37%!. Brexit happened. The FED unlike happened. There were huge gyrations in the unemployment rate. Vanguard systematic fund VMNVX did much better. I have worked in trading all my work life and I know how hard it is, how humbling it is, and how meaningful it is. I hate it when people sell crap as smart. As Dean Kansky in Serendipity said "They should make pills for this."