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Ned Johnson had it right way back when. Why would anybody want average returns when they could pay him big money for below-average returns and the occasional bl
by OliverJones 10y ago
Ned Johnson had it right way back when. Why would anybody want average returns when they could pay him big money for below-average returns and the occasional black-monday disaster?
Seriously, index fund investing assumes an optimistic outlook. It assumes the managers of companies will do an OK job in the long term and the companies will grow. Index funds allow investors to participate in that growth without having a big chunk of it going into Mr. Johnson's pocket. A low fee burden turns OK company performance into acceptable retirement savings growth.
It's not a zero sum game. It's a slightly-positive-sum game. That means a lot of people can play and slightly win.
As for pricing the equities, the fundamental qualities of the businesses behind them are, even in the stock market casino of the 21st century, still important. Warren Buffet understands fundamentals. There's no reason a market dominated by index funds must ignore them.
There are two other aspects of successful index investing.
1. Diversification. Don't put all your money in one index. What if you have all your money in the NASDAQ index when the cultural narrowmindedness of Silicon Valley (the rule of young white brogrammers) catches up with them?
2. Disciplined rebalancing. Set a goal for diversification percentages: 60% growth equities, 20% growth-and-income, 10% nonUSA, 10% bonds for example. When your investment values move away from those percentages, sell the excess in one category and reinvest it in the other categories. This amounts to buy-low sell-high. It will serve as a ratchet to capture the upside and limit the downside.
Panic buying and selling is for the other guy. I'm grateful to that other guy; he's helped me set up a nice 401k balance.
- shostack 10y agoAny good reading on how to determine your allocation strategy? I read up on Bogleheads but there isn't always much on the "why" that is backed by data.
- beart 10y agoI found this link useful when deciding how to invest my 401k https://www.reddit.com/r/personalfinance/wiki/401k_funds https://www.reddit.com/r/personalfinance/wiki/401k_funds
- OliverJones 10y agoThere's plenty of good material on the top page of results on your favorite search engine. It's more important to choose an allocation strategy and stick to it than it is to select the perfect allocation strategy. Here's the hard part: determine your household's tolerance for risk. Are you willing to sit tight and not panic-sell if one or two of your funds decline by 40% in value? 20%? It's hard to know for sure how you will react until it happens. But, a decline like that means you should buy, not sell. I mention "your household" because your spouse or other relatives might influence your risk tolerance. It doesn't matter if your anatomy is solid brass if your spouse insists on panic-selling. Part of the deal with risk tolerance is having conversations with family stakeholders about risk, to prepare for the inevitable downturn. As the time grows nearer when you need to use the funds in your portfolio (retirement? college tuition?): reduce your stated risk tolerance once a year or so, and rebalance accordingly. This will help you lock in your gains even if something bad happens. In the old, pre-junk-bond, days, "bonds" were considered lowest risk, "growth-and-income stocks" medium risk, and "growth stocks" highest risk. You can probably find index funds like those. Certainly you can find funds that invest in an index basket of low-risk bonds, or an index basket of dividend-paying (growth and income stocks). "Unmanaged" is the key word to identify index funds. Vanguard, DFA, and others are the companies offering them. One last thing: If you don't understand a fund's strategy, DO NOT INVEST IN THAT FUND. If the promises seem too good to be true, well....