9 ms·

A well-written article, but really? Investing in a low-cost broad index fund is the /only/ investment advice I get nowadays.

JSig 16y ago
I suppose index funds are fine if you can time buys/sells with the booms and busts. These days I sure don't feel like holding them. It's sad but the best bet is just picking the hot algo stocks.
- flyt 16y ago
  it's impossible to time the market, so instead you use dollar cost averaging to invest at a constant rate, regardless of how things are in the market. put money in both when it's expensive and cheap to do so.
  - JSig 16y ago
    I certainly disagree with you that it is impossible to time the market. There are many forms of technical, statistical and fundamental analysis that help to time the market. A key element to trading is removing emotional bias. I am aware of many people that are successful traders. I will note that the market is much different today than it was in 2004. Today HFT accounts for 70% of volume. That is huge. I think having an investing strategy that does not assume an asset will always go up is important.
    - rdtsc 16y ago
      > I certainly disagree with you that it is impossible to time the market. ... > I am aware of many people that are successful traders. You have to ask then if they own personal airplanes, yachts and private islands? If the answer is 'no', then you have to wonder why not? I think the problem is that individual successful traders are just traders who are randomly successful. You hear about them because they are the ones that get lucky and brag about it. Those who are unsuccessful will probably remain forever anonymous to the public and even their friends. The only ones that can "beat" the market are the ones that do it via technical means (minimum latency to the exchange, fastest computers, insider info, etc.) I think these are just the large investment banks.
      - JSig 16y ago
        >> I am aware of many people that are successful traders. > You have to ask then if they own personal airplanes, yachts and private islands? If the answer is 'no', then you have to wonder why not? I am a software developer. Am I not successful because I dont own personal airplanes and a private island? I don't think these things define my success. Regardless, you have provided a straw man argument. The people I know who are successful traders all have different MOs. What defines there success is that they stay in the black. Hence, they are able to time the market. You don't need minimum latency to the exchange, fastest computers, insider info. As an example check out the performance of Fund My Mutual Fund. This is a virtual mutual fund that is soon to launch for real. http://www.fundmymutualfund.com/2007/07/portfolio.html http://www.fundmymutualfund.com/2007/07/portfolio.html
        rdtsc 16y ago
        As a developer you are bounded by how much you can develop in a fixed amount of time, how much someone will pay you for it, and how many customers you have. If you could, would you not get payed more for your work? If you are working for someone, as I am, then you essentially have only one customer and they are paying you a fixed amount (+ some bonuses and raises). Or you could be like the author of minecraft, so you could be racking in hundreds of thousands a month. Now if you say you have found a way to beat the market through research, technical or fundamental analysis, your limit would be unbounded (theoretically). Your charts looks good and are very impressive, but it is only 2 years and you would not be showing them if they didn't do well. So for all I know you are just one of the random lucky ones that beat the market. Now if you had a way to consistenlty get 10% (and maybe you did!), in a decade or so you could be another Donald Trump. You need to convince others that you can do it and then soon you will start getting large investments. > What defines there success is that they stay in the black. Hence, they are able to time the market. If they can time the market, are they fully invested in it. Would they sell their house and get everyone they know to do the same so they can pour that into the market, then re-invest and eventually rule the world? Another way to ask the question is why haven't the big investment banks figured out the strategy, and as a result, diluted the strategy by now? Also what about the ones that don't stay in the black. Will they tell you, would you know how many have tried and failed? That is the true criteria. You would have to have a large group of traders commited to making money in the market. Then they all try for a fixed amount of time and in the end you see how they perform as a group. Now, essentially, you are just pickding the ones that performed in the black and using that as an argument that invididual trading can be a 100% profitable business.
  - lotharbot 16y ago
    > "it's impossible to time the market" That depends very much on exactly what you mean by "time the market". It is impossible to reliably predict whether the market will go up or down on any given day. It is also impossible to reliably predict exactly when a market will hit a peak or trough. Dollar-cost averaging is a great strategy to reduce the risk associated with the inability to "time" markets in this sense. But it is completely possible to recognize that a particular asset (or class) is over- or under-valued, as long as you have good enough information. You can't necessarily predict how long it will take for its value to be more accurately reflected in the price (another sense in which you "can't time the market"), but you can recognize that certain assets are on sale or commanding a premium price, and therefore get a good price on/for certain assets. Portfolio rebalancing is, in part, meant to help capture this. Investing more in assets that have fallen behind, and less in those that have gotten ahead, is a (very rough) mechanism for selling high and buying low. Value investing is even more about this -- explicitly putting money into assets when it is cheap to do so, and selling assets that people are putting money into when it's expensive to do so. The idea is not to "time the market" in the sense of knowing exactly what day the market will turn, but simply to take advantage of really good deals (in the long-term sense) when they present themselves.
    - tomsaffell 16y ago
      Agreed - I believe there are some ways to time the market. For example, if you want to make a 5-10 year investment, then doing so in the S&P500 when it is significantly down will yield better returns (on average) than doing it at a random time: http://saffell.wordpress.com/2008/10/26/does-timing-the-market-work/ http://saffell.wordpress.com/2008/10/26/does-timing-the-mark...
      - lotharbot 16y ago
        It should be noted that your 10, 20, and 30 year charts actually show an advantage to investing in off years; your conclusion that "there is no significant advantage" is mistaken. On the 30 year chart, the peaks on the 20-50% line are a couple percent above the peaks on the all line. Boosting returns from 7% to 9% over 30 years, or from 12% to 14% over 30 years, results in over 70% more total wealth after compounding. The visual difference is not as striking on the 30 year chart as on the 5 year chart, but that's because you're presenting annualized rather than total returns.
a5seo 16y ago
true, you get this advice everywhere. but actually implementing it for realz isn't for the faint of heart. it's not impossible either, especially if you don't mind horseshoes-and-hand-grenades approximation. If you want optimal as in mathematically optimal fund selection, then Bill Sharpe's startup, Financial Engines, does that (if you have at least $100k at Vanguard, you get it for free, also through many employers). https://personal.vanguard.com/us/insights/retirement/financial-engines https://personal.vanguard.com/us/insights/retirement/financi...
- weber88 16y ago
  I've come to be suspicious of anything in finance claiming to be "mathematically optimal". You can only optimise according to some simplified model, and simplified models of complex systems have a tendency to unpredictably break down.
  - Nick_C 16y ago
    Don't throw out the baby with the bathwater. Just because you have a large industry of sharks doesn't mean the good work being done by reputable investment houses is invalidated. In general, index funds work. Some are better than others because of fees or their stock selection process. But they do work. The reason is that stocks in a sector have high covariance, and the outliers that might pop up occasionally with low covariance are only a small part of the index anyway. It is trivially easy to optimise on variance with some goal such as a limit on the number of holdings.
- Natsu 16y ago
  > (if you have at least $100k at Vanguard, you get it for free, also through many employers) Actually, the people my employer go through just dumped Vanguard and a few other funds and would've automatically enrolled us all in a fund that changes every single year to be "optimum" for your age. I opted out and I informed my coworkers that there were good reasons to be incredibly suspicious of this move, but I wonder who actually took my advice. All I could think was that they were going to churn everyone's funds every single year so that they could get huge fees under the guise of "optimizing" our portfolios.
michaelkeenan 16y ago
You probably have a breadth of knowledge that comes from reading sites like HN, but the problem of course is that most people get their investment advice from banks and other investment professionals.
- a5seo 16y ago
  Like Ameriprise. Ugh.
jerf 16y ago
Having also read this a lot, it makes me wonder how the clever financial world will find a way to take a lot of people owning index funds and somehow fleece them. I also find myself pondering the macroeconomic effects of a lot of the market simply being in index funds, though I'm sure we're a long ways from that. My personal rule-of-thumb "By the time you've heard of it, it's too late to get in on it" is also triggering, though I have to admit for the life of me I really can't imagine how to exploit this tendency. But I am anything but a financial wizard.
- WildUtah 16y ago
  take a lot of people owning index funds and somehow fleece them There are strategies to do this now, but they're hard to execute. One example is to target stocks that are likely to enter or drop off indicies. Index funds will be looking to buy or sell them soon. Mostly these strategies depend on your ability to set up a very high speed link to the computers that clear trades and interpret the algorithms that index funds use to establish their samples of the market. If you can get in just ahead of the index funds and their monster volume, you can shave a few tenths of pennies from the investors. You can make millions with those strategies but it's a drop in the index fund bucket. Quite a lot of "quant" trading activity is about ripping off ordinary people by unnoticed fractions by getting in ahead of them. Much more innocuous than the large scale bribery and fraud that makes up so much of the financial industry.
  - nradov 16y ago
    This was covered in a WSJ article yesterday. http://online.wsj.com/article/SB10001424052748704008704575638583030174768.html?KEYWORDS=index+fund http://online.wsj.com/article/SB1000142405274870400870457563... "Over the long run, sharp traders getting out in front of these forced portfolio changes have poached at least 0.38 percentage point of annual return away from Russell 2000 index funds, estimates a new study in the Journal of Empirical Finance."
    - amh 16y ago
      Not all index methodologies are created equal, the way that Russell handles periodic reconstitution is particularly susceptible to front running. Other indexing methods are not as bad.
patio11 16y ago
Just because a question is interesting doesn't mean it has multiple right answers. (I need to stop talking like this or they'll take my ArtSci degree away...)

JSig 16y ago

I suppose index funds are fine if you can time buys/sells with the booms and busts. These days I sure don't feel like holding them. It's sad but the best bet is just picking the hot algo stocks.

flyt 16y ago
it's impossible to time the market, so instead you use dollar cost averaging to invest at a constant rate, regardless of how things are in the market. put money in both when it's expensive and cheap to do so.
- JSig 16y ago
  I certainly disagree with you that it is impossible to time the market. There are many forms of technical, statistical and fundamental analysis that help to time the market. A key element to trading is removing emotional bias. I am aware of many people that are successful traders. I will note that the market is much different today than it was in 2004. Today HFT accounts for 70% of volume. That is huge. I think having an investing strategy that does not assume an asset will always go up is important.
  - rdtsc 16y ago
    > I certainly disagree with you that it is impossible to time the market. ... > I am aware of many people that are successful traders. You have to ask then if they own personal airplanes, yachts and private islands? If the answer is 'no', then you have to wonder why not? I think the problem is that individual successful traders are just traders who are randomly successful. You hear about them because they are the ones that get lucky and brag about it. Those who are unsuccessful will probably remain forever anonymous to the public and even their friends. The only ones that can "beat" the market are the ones that do it via technical means (minimum latency to the exchange, fastest computers, insider info, etc.) I think these are just the large investment banks.
    - JSig 16y ago
      >> I am aware of many people that are successful traders. > You have to ask then if they own personal airplanes, yachts and private islands? If the answer is 'no', then you have to wonder why not? I am a software developer. Am I not successful because I dont own personal airplanes and a private island? I don't think these things define my success. Regardless, you have provided a straw man argument. The people I know who are successful traders all have different MOs. What defines there success is that they stay in the black. Hence, they are able to time the market. You don't need minimum latency to the exchange, fastest computers, insider info. As an example check out the performance of Fund My Mutual Fund. This is a virtual mutual fund that is soon to launch for real. http://www.fundmymutualfund.com/2007/07/portfolio.html http://www.fundmymutualfund.com/2007/07/portfolio.html
      - rdtsc 16y ago
        As a developer you are bounded by how much you can develop in a fixed amount of time, how much someone will pay you for it, and how many customers you have. If you could, would you not get payed more for your work? If you are working for someone, as I am, then you essentially have only one customer and they are paying you a fixed amount (+ some bonuses and raises). Or you could be like the author of minecraft, so you could be racking in hundreds of thousands a month. Now if you say you have found a way to beat the market through research, technical or fundamental analysis, your limit would be unbounded (theoretically). Your charts looks good and are very impressive, but it is only 2 years and you would not be showing them if they didn't do well. So for all I know you are just one of the random lucky ones that beat the market. Now if you had a way to consistenlty get 10% (and maybe you did!), in a decade or so you could be another Donald Trump. You need to convince others that you can do it and then soon you will start getting large investments. > What defines there success is that they stay in the black. Hence, they are able to time the market. If they can time the market, are they fully invested in it. Would they sell their house and get everyone they know to do the same so they can pour that into the market, then re-invest and eventually rule the world? Another way to ask the question is why haven't the big investment banks figured out the strategy, and as a result, diluted the strategy by now? Also what about the ones that don't stay in the black. Will they tell you, would you know how many have tried and failed? That is the true criteria. You would have to have a large group of traders commited to making money in the market. Then they all try for a fixed amount of time and in the end you see how they perform as a group. Now, essentially, you are just pickding the ones that performed in the black and using that as an argument that invididual trading can be a 100% profitable business.
- lotharbot 16y ago
  > "it's impossible to time the market" That depends very much on exactly what you mean by "time the market". It is impossible to reliably predict whether the market will go up or down on any given day. It is also impossible to reliably predict exactly when a market will hit a peak or trough. Dollar-cost averaging is a great strategy to reduce the risk associated with the inability to "time" markets in this sense. But it is completely possible to recognize that a particular asset (or class) is over- or under-valued, as long as you have good enough information. You can't necessarily predict how long it will take for its value to be more accurately reflected in the price (another sense in which you "can't time the market"), but you can recognize that certain assets are on sale or commanding a premium price, and therefore get a good price on/for certain assets. Portfolio rebalancing is, in part, meant to help capture this. Investing more in assets that have fallen behind, and less in those that have gotten ahead, is a (very rough) mechanism for selling high and buying low. Value investing is even more about this -- explicitly putting money into assets when it is cheap to do so, and selling assets that people are putting money into when it's expensive to do so. The idea is not to "time the market" in the sense of knowing exactly what day the market will turn, but simply to take advantage of really good deals (in the long-term sense) when they present themselves.
  - tomsaffell 16y ago
    Agreed - I believe there are some ways to time the market. For example, if you want to make a 5-10 year investment, then doing so in the S&P500 when it is significantly down will yield better returns (on average) than doing it at a random time: http://saffell.wordpress.com/2008/10/26/does-timing-the-market-work/ http://saffell.wordpress.com/2008/10/26/does-timing-the-mark...
    - lotharbot 16y ago
      It should be noted that your 10, 20, and 30 year charts actually show an advantage to investing in off years; your conclusion that "there is no significant advantage" is mistaken. On the 30 year chart, the peaks on the 20-50% line are a couple percent above the peaks on the all line. Boosting returns from 7% to 9% over 30 years, or from 12% to 14% over 30 years, results in over 70% more total wealth after compounding. The visual difference is not as striking on the 30 year chart as on the 5 year chart, but that's because you're presenting annualized rather than total returns.

a5seo 16y ago

true, you get this advice everywhere. but actually implementing it for realz isn't for the faint of heart. it's not impossible either, especially if you don't mind horseshoes-and-hand-grenades approximation. If you want optimal as in mathematically optimal fund selection, then Bill Sharpe's startup, Financial Engines, does that (if you have at least $100k at Vanguard, you get it for free, also through many employers). https://personal.vanguard.com/us/insights/retirement/financial-engines https://personal.vanguard.com/us/insights/retirement/financi...

weber88 16y ago
I've come to be suspicious of anything in finance claiming to be "mathematically optimal". You can only optimise according to some simplified model, and simplified models of complex systems have a tendency to unpredictably break down.
- Nick_C 16y ago
  Don't throw out the baby with the bathwater. Just because you have a large industry of sharks doesn't mean the good work being done by reputable investment houses is invalidated. In general, index funds work. Some are better than others because of fees or their stock selection process. But they do work. The reason is that stocks in a sector have high covariance, and the outliers that might pop up occasionally with low covariance are only a small part of the index anyway. It is trivially easy to optimise on variance with some goal such as a limit on the number of holdings.
Natsu 16y ago
> (if you have at least $100k at Vanguard, you get it for free, also through many employers) Actually, the people my employer go through just dumped Vanguard and a few other funds and would've automatically enrolled us all in a fund that changes every single year to be "optimum" for your age. I opted out and I informed my coworkers that there were good reasons to be incredibly suspicious of this move, but I wonder who actually took my advice. All I could think was that they were going to churn everyone's funds every single year so that they could get huge fees under the guise of "optimizing" our portfolios.

michaelkeenan 16y ago

You probably have a breadth of knowledge that comes from reading sites like HN, but the problem of course is that most people get their investment advice from banks and other investment professionals.

a5seo 16y ago
Like Ameriprise. Ugh.

jerf 16y ago

Having also read this a lot, it makes me wonder how the clever financial world will find a way to take a lot of people owning index funds and somehow fleece them. I also find myself pondering the macroeconomic effects of a lot of the market simply being in index funds, though I'm sure we're a long ways from that. My personal rule-of-thumb "By the time you've heard of it, it's too late to get in on it" is also triggering, though I have to admit for the life of me I really can't imagine how to exploit this tendency. But I am anything but a financial wizard.

WildUtah 16y ago
take a lot of people owning index funds and somehow fleece them There are strategies to do this now, but they're hard to execute. One example is to target stocks that are likely to enter or drop off indicies. Index funds will be looking to buy or sell them soon. Mostly these strategies depend on your ability to set up a very high speed link to the computers that clear trades and interpret the algorithms that index funds use to establish their samples of the market. If you can get in just ahead of the index funds and their monster volume, you can shave a few tenths of pennies from the investors. You can make millions with those strategies but it's a drop in the index fund bucket. Quite a lot of "quant" trading activity is about ripping off ordinary people by unnoticed fractions by getting in ahead of them. Much more innocuous than the large scale bribery and fraud that makes up so much of the financial industry.
- nradov 16y ago
  This was covered in a WSJ article yesterday. http://online.wsj.com/article/SB10001424052748704008704575638583030174768.html?KEYWORDS=index+fund http://online.wsj.com/article/SB1000142405274870400870457563... "Over the long run, sharp traders getting out in front of these forced portfolio changes have poached at least 0.38 percentage point of annual return away from Russell 2000 index funds, estimates a new study in the Journal of Empirical Finance."
  - amh 16y ago
    Not all index methodologies are created equal, the way that Russell handles periodic reconstitution is particularly susceptible to front running. Other indexing methods are not as bad.

patio11 16y ago

Just because a question is interesting doesn't mean it has multiple right answers. (I need to stop talking like this or they'll take my ArtSci degree away...)