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I told the financial adviser that administers my 401K at my current job that "it's clear that putting money in a 401K makes Wall Street rich, it's not clear th

by terra_t 16y ago

I told the financial adviser that administers my 401K at my current job that "it's clear that putting money in a 401K makes Wall Street rich, it's not clear that it's making me rich." There's a serious breakdown of trust between Main Street and Wall Street, and it's got (at least) three angles: (i) I'm not confident that money I invest in retirement plans is going to grow, or even keep it's value, (ii) I'm not sure that the "system" currently knows how to distribute capital to places where it will promote prosperous business (if it did, investment funds would be making money...) and (iii) I'm worried that giving money to Wall Street is like giving it to an enemy that's going to actively make my life worse: it's going to go into lobbying to keep Washington D.C. corrupt an ineffective and it's going to be used as a club to force businesses to eliminate jobs in the U.S. and ship them out elsewhere. Given that business, government and such doesn't have a vision that makes sense five years down the road, never mind 25 or so when I retire, it's hard to avoid a "carpe diem" attitude and to simply try to minimize your use of financial services: spend what you make, don't borrow or save. I've noticed some people here are enthusiastic about index funds; now, "seldom is heard a disparaging word" about index funds, but personally I think they're a lot more harmful than hedge funds could ever be. I mean, index funds just spray money indiscriminantly at companies that are lucky enough to be on some list. It gives the big shareholders a great opportunity to collect rents, but it means that investors aren't doing there job -- why does an investor deserve to get a return on capital? Because they do some thinking about where they can put their capital to get a good return. If you don't do that thinking, you don't deserve any return... Just as if if you've got some job and you don't do your job... You don't deserve a paycheck. "Bubblenomics" made index funds look brilliant from 1980-1999, but in the long term, I think mass investement in index funds is one of the major reasons why Wall Street doesn't work...

nostrademons 16y ago
The interesting thing about index funds is that the better they work, the worse they work. If everybody put their money into an index fund, then nobody would be actively researching stocks, and the valuations reflected in the index would be wildly out of whack with respect to the true values of the stock. But if nobody puts money into an index fund, then we have a lot of people chasing high returns, a very efficient price-discovery system, and index funds that should return the exact mean of all your actively-managed funds. As a very broad heuristic, I take the size of the financial industry to be a pretty good indicator of the efficiency of index funds. When the financial industry is large, you have many eyes actively looking over stocks, an efficient market, and index funds that should track the performance of the underlying assets well. When the financial industry is small, you have fewer eyes keeping an active watch on stocks, and so you're often better off becoming one of them than sticking everything into a dumb index fund. Right now, the financial industry is still pretty large. As another interesting heuristic, I've found that oftentimes the best asset class to invest in is the one that everybody is certain is a bad investment. In the early 2000s, that was probably precious metals; in 2007, it was cash. Both asset classes have zoomed up since then. You don't want to invest in asset classes that people are actively looking at and decide are bad investments, though (eg. penny stocks). You want asset classes that people just take on faith to be bad investments.
- terra_t 16y ago
  I find your arguments somewhat convincing, but I've got the feeling that the "size of the financial industry" is one of the major reasons why it's not working. The housing bubble, for instance, shows that it can make very bad decisions -- I wonder if there is more money seeking a place to invest than there are places where the money can be profitably invested.
  - nostrademons 16y ago
    There was some prominent economist (Greenspan? Krugman?) who agreed with you, and blamed the recent string of bubbles on a "global savings glut", caused mainly by Asian development and the high savings rates of the newly-wealthy Asian middle class. Anyway, I think there's a lot of truth to that, but you've got to work with the zeitgeist you're given. When the financial industry is large, index funds perform well relative to actively managing your own money. They may still perform poorly on an absolute scale. When capital is abundant, rates of return for everything go down. You could also broaden things a bit to look at the economy as a whole. One of the reasons I'm interested in entrepreneurship is that capital is abundant, labor is abundant, and so logically the scarce resource would be their complement: innovation. You'd expect rates of return for entrepreneurship to skyrocket in a low-capital-cost, low-labor-cost environment like today. Which seems to be the case. Innovation has a high barrier to entry though: you need to have the skills and foresight to make something happen that wouldn't otherwise happen. It seems, perhaps, that the best rates of return come from investing in education in a narrow field of specialty that's broadly applicable to many emerging technologies.

by terra_t 16y ago

nostrademons 16y ago

The interesting thing about index funds is that the better they work, the worse they work. If everybody put their money into an index fund, then nobody would be actively researching stocks, and the valuations reflected in the index would be wildly out of whack with respect to the true values of the stock. But if nobody puts money into an index fund, then we have a lot of people chasing high returns, a very efficient price-discovery system, and index funds that should return the exact mean of all your actively-managed funds. As a very broad heuristic, I take the size of the financial industry to be a pretty good indicator of the efficiency of index funds. When the financial industry is large, you have many eyes actively looking over stocks, an efficient market, and index funds that should track the performance of the underlying assets well. When the financial industry is small, you have fewer eyes keeping an active watch on stocks, and so you're often better off becoming one of them than sticking everything into a dumb index fund. Right now, the financial industry is still pretty large. As another interesting heuristic, I've found that oftentimes the best asset class to invest in is the one that everybody is certain is a bad investment. In the early 2000s, that was probably precious metals; in 2007, it was cash. Both asset classes have zoomed up since then. You don't want to invest in asset classes that people are actively looking at and decide are bad investments, though (eg. penny stocks). You want asset classes that people just take on faith to be bad investments.

terra_t 16y ago
I find your arguments somewhat convincing, but I've got the feeling that the "size of the financial industry" is one of the major reasons why it's not working. The housing bubble, for instance, shows that it can make very bad decisions -- I wonder if there is more money seeking a place to invest than there are places where the money can be profitably invested.
- nostrademons 16y ago
  There was some prominent economist (Greenspan? Krugman?) who agreed with you, and blamed the recent string of bubbles on a "global savings glut", caused mainly by Asian development and the high savings rates of the newly-wealthy Asian middle class. Anyway, I think there's a lot of truth to that, but you've got to work with the zeitgeist you're given. When the financial industry is large, index funds perform well relative to actively managing your own money. They may still perform poorly on an absolute scale. When capital is abundant, rates of return for everything go down. You could also broaden things a bit to look at the economy as a whole. One of the reasons I'm interested in entrepreneurship is that capital is abundant, labor is abundant, and so logically the scarce resource would be their complement: innovation. You'd expect rates of return for entrepreneurship to skyrocket in a low-capital-cost, low-labor-cost environment like today. Which seems to be the case. Innovation has a high barrier to entry though: you need to have the skills and foresight to make something happen that wouldn't otherwise happen. It seems, perhaps, that the best rates of return come from investing in education in a narrow field of specialty that's broadly applicable to many emerging technologies.