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He says he's (reluctantly) doing active stock picking. He's a professional investor; I'm just some software engineer with a nest egg, which is 100% in index fun

He says he's (reluctantly) doing active stock picking. He's a professional investor; I'm just some software engineer with a nest egg, which is 100% in index funds today. What should I be doing, as a schmoe who wants to save money?

godzillabrennus 7y ago
Take a look at opportunity zone funds today. You can pull your money out and pay zero capital gain taxes for seven years. Then get a 15% discount on your capital gains at that time. All returns you realize from the fund are capital gains tax free. The benefits end this year.
- the_watcher 7y ago
  I know a bit about Opportunity Zones (roommate bought property that was subsequently designated one, to his delight), but not about the funds. Do you have any particular recs on where I can read up on them?
  - bklyn11201 7y ago
    This is likely the best first stop for OZ info from a reputable source: https://www.novoco.com/resource-centers/opportunity-zones-resource-center https://www.novoco.com/resource-centers/opportunity-zones-re... The timing restrictions around OZ investments (180 days after cap gains event) make it a bit difficult and will result in lots of bad investments with non-experienced, first-time fund owners. But maybe you have a connection to an OZ that you are familiar with and can rehab a property there. You should get help from a CPA and lawyer, but the basic process would be: 1) Sell stock and now you have cap gains 2) Setup OZ Fund XXX LLC 3) Fund the LLC with your cap gains within 180 days 4) Setup OZ Property YYY LLC 5) Purchase property inside the YYY LLC and fund purchase with XXX LLC 6) Rehab property within 31 months 7) Hold for 10 years a) Pay original cap gains tax bill (minus 15%) in 2026 tax year (negative interest loan from gov) b) Pay zero cap gains on the increase in property value over the 10 years
  - aoeusnth1 7y ago
    Here's an example fund, https://fundrise.com/offerings/opportunity-fund/view https://fundrise.com/offerings/opportunity-fund/view, but it has steep fees: Annual investment management fee 0.75% Annual tax and accounting fee 0.45% Annual carried interest / promote 15% over 8% return Maybe it's not as high when you consider that they purchase the property directly, but it still seems a bit too risky to lock myself into those high fees for 10 years. I think the main benefit is the 7 year deferment of your capital gains, which given that your money will be compounding from that point onward, is a pretty significant break if you have a lot of gains you haven't triggered yet.
    - bklyn11201 7y ago
      Main benefit has to be the zero capital gains you pay (on the new gain) if you are patient and hold for the full 10 years. Second benefit would be the cap gains deferral (negative interest loan).
  - godzillabrennus 7y ago
    https://www.activatedcapital.com/resources.html https://www.activatedcapital.com/resources.html Good resources on that page.
notyourday 7y ago
Most importantly what you should not do is freak out and sell everything.
deleted 7y ago
[deleted]
chad_strategic 7y ago
First and only piece of advice. This probably isn't the forum to get investment advice. :)
dcolkitt 7y ago
The thing is even if Burry is right (and that's a big if), it doesn't mean that you as an individual investor with a long time-horizon should do anything different. Burry's argument is that many of the underlying stocks inside the index have a lot less liquidity than the index funds and securities themselves. E.g. if a lot of capital quickly exits the index funds, then some of the single-name stocks may be overwhelmed by the liquidity. That would result in their prices becoming severely dislocated relative to their true value. But if you're just buying-and-holding that doesn't matter. If the stocks in your portfolio become temporarily dislocated, who cares? Dislocations by definition correct themselves over time. If some stock falls 50% because of panic selling, without anything having to do with the underlying company, it will eventually return to the correct price. And much sooner than the decades long timeline that you're saving for. That doesn't mean that Burry's thesis is irrelevant to everyone. In particular if you're an institution that offers liquidity to your clients it may be very relevant. Or if you're a bank, hedge fund, or insurance company that's subject to mark-to-market capital ratios or margin calls. If stocks become very dislocated, your investors may panic and redeem their money. Or your regulator may say you have insufficient capital and have to liquidate. That's very bad, because you'll be forced to sell at fire-sale prices. However, that's not relevant to individual investors, because nobody can force you to sell out just because your portfolio goes down.
- fragsworth 7y ago
  > If some stock falls 50% because of panic selling, without anything having to do with the underlying company, it will eventually return to the correct price. And much sooner than the decades long timeline that you're saving for. But that's not true, because suppose if 99.9% of investors are buying ETFs and only 0.1% are actively managing, there won't be enough funds to bring all these panic dislocated stocks back up for many, many years.
  - cbanek 7y ago
    > But that's not true, because suppose if 99.9% of investors are buying ETFs and only 0.1% are actively managing, there won't be enough funds to bring all these panic dislocated stocks back up for many, many years. The price change of a stock doesn't always depend on how often a stock is bought. For example, when earnings hit, a stock can easily move 10%. That's not because there was a certain amount of people buying at every price between what it was and +10%. This can happen because earnings are better, and many people base price of an earnings multiple. When new knowledge is put into the system, there's a new price. If everyone who is trading a stock agrees on a price, that is the price. If people don't agree, it is generally the highest price someone is willing to sell it for (and find a buyer), or the lowest someone is willing to buy it for (and find a seller). If that disconnects a lot, you get a high bid/ask spread, and possibly no shares trade (lack of liquidity). It might only take a few shares or be a very short time to move a stock a lot.
FabHK 7y ago
In my view there are two take-aways from this: 1. Diversify, but 2. not too much. 1. Even among index funds, maintain some diversification. Don't put all in US large caps (S&P 500), but also some international and some small caps (Russel 2000). He is saying that given how much money is invested via index funds now, there are opportunities in assets that are not (or insufficiently) represented in index funds. (This is hard, though, and the standard advice to refrain from trying and placing your bets on index funds instead remains valid, I think, particularly for mature markets in which you don't have an edge.) The second take-away is at a tension with the first: 2. Avoid ETFs that handle illiquid assets (real estate, bonds, etc.) or create synthetic exposure using swaps and derivatives. For big, liquid assets, the ETF or index fund can just take the investor money and go buy the assets. Then the value of the fund is approximately the value of its constituent assets, sort of by definition, and that value is relatively easy to realise (that is, if you want your money back, you get it - they'll have to sell some of the assets, but they're liquid, and that won't influence price too much). For smaller or more exotic assets, a fund might not buy them outright, but contract with a third party (an investment bank, typically), and give the bank the money, with the bank promising that it will return the value of the asset. So, it's "like" holding the asset, except that you get the credit risk of the bank - there's a risk the bank might not be able to uphold its promise. And this is most likely to happen when everyone runs for the exit. > The theater keeps getting more crowded, but the exit door is the same as it always was. All this gets worse as you get into even less liquid equity and bond markets globally. > ... the impossibility of unwinding the derivatives and naked buy/sell strategies used to help so many of these funds pseudo-match flows and prices each and every day. So, an ETF promising to deliver the value of an index can generally do it, and there was no big failure so far, but scenarios are conceivable where it cannot deliver.
Ididntdothis 7y ago
I think the key is to have some level of luck. Then you can lecture others who didn’t have luck that they didn’t do it right but you did.
adventured 7y ago
The best passive way to approach your situation, is probably what you already know: gradually keep investing passively with the savings from your income. Over the long haul that has a reasonably high probability of turning out well with very little intervention on your part as a non-professional. There is also nothing wrong with adjusting the ratio of cash vs equities that you're accumulating (eg the share of your income going into the market vs going into cash in a span of time). It's the exact same safety vs risk lever that is commonly utilized in adjusting equities vs bonds as you get older. Some will call it market timing, it is not, as you are not attempting to time a top or bottom. With recession alarms going off in most global economic data, increasing your conservative posture is nothing more than being modestly prudent (and it doesn't have to be an extreme adjustment; if 100% of your net savings is going into the market now, changing that to 75/25 or 50/50 with cash, is entirely reasonable). Even Warren Buffett has turned hardcore conservative with this market, he's buying nothing and sitting on a $122b record pile of cash that is very much annoying him (by his own admission). The reason for his behavior, beyond the obvious blaring economic data, is that the valuations are terrible vs the growth we're seeing (both macro economy and corporate earnings); right now investors are paying a steep premium in most cases for the value they're getting. Buffett doesn't like the price he's paying for the value he's getting, so he has gone into bunker mode, as he has done prominently several times in the past. The simple, non-professional approach to that move, is to just make a reasonable adjustment to how much cash you're accumulating (which can obviously later be deployed if an opportunity presents; in the meantime you're likely to see a very modest inflation debasement to the fiat).

godzillabrennus 7y ago

Take a look at opportunity zone funds today. You can pull your money out and pay zero capital gain taxes for seven years. Then get a 15% discount on your capital gains at that time. All returns you realize from the fund are capital gains tax free. The benefits end this year.

the_watcher 7y ago
I know a bit about Opportunity Zones (roommate bought property that was subsequently designated one, to his delight), but not about the funds. Do you have any particular recs on where I can read up on them?
- bklyn11201 7y ago
  This is likely the best first stop for OZ info from a reputable source: https://www.novoco.com/resource-centers/opportunity-zones-resource-center https://www.novoco.com/resource-centers/opportunity-zones-re... The timing restrictions around OZ investments (180 days after cap gains event) make it a bit difficult and will result in lots of bad investments with non-experienced, first-time fund owners. But maybe you have a connection to an OZ that you are familiar with and can rehab a property there. You should get help from a CPA and lawyer, but the basic process would be: 1) Sell stock and now you have cap gains 2) Setup OZ Fund XXX LLC 3) Fund the LLC with your cap gains within 180 days 4) Setup OZ Property YYY LLC 5) Purchase property inside the YYY LLC and fund purchase with XXX LLC 6) Rehab property within 31 months 7) Hold for 10 years a) Pay original cap gains tax bill (minus 15%) in 2026 tax year (negative interest loan from gov) b) Pay zero cap gains on the increase in property value over the 10 years
- aoeusnth1 7y ago
  Here's an example fund, https://fundrise.com/offerings/opportunity-fund/view https://fundrise.com/offerings/opportunity-fund/view, but it has steep fees: Annual investment management fee 0.75% Annual tax and accounting fee 0.45% Annual carried interest / promote 15% over 8% return Maybe it's not as high when you consider that they purchase the property directly, but it still seems a bit too risky to lock myself into those high fees for 10 years. I think the main benefit is the 7 year deferment of your capital gains, which given that your money will be compounding from that point onward, is a pretty significant break if you have a lot of gains you haven't triggered yet.
  - bklyn11201 7y ago
    Main benefit has to be the zero capital gains you pay (on the new gain) if you are patient and hold for the full 10 years. Second benefit would be the cap gains deferral (negative interest loan).
- godzillabrennus 7y ago
  https://www.activatedcapital.com/resources.html https://www.activatedcapital.com/resources.html Good resources on that page.

notyourday 7y ago

Most importantly what you should not do is freak out and sell everything.

deleted 7y ago

[deleted]

chad_strategic 7y ago

First and only piece of advice. This probably isn't the forum to get investment advice. :)

dcolkitt 7y ago

The thing is even if Burry is right (and that's a big if), it doesn't mean that you as an individual investor with a long time-horizon should do anything different. Burry's argument is that many of the underlying stocks inside the index have a lot less liquidity than the index funds and securities themselves. E.g. if a lot of capital quickly exits the index funds, then some of the single-name stocks may be overwhelmed by the liquidity. That would result in their prices becoming severely dislocated relative to their true value. But if you're just buying-and-holding that doesn't matter. If the stocks in your portfolio become temporarily dislocated, who cares? Dislocations by definition correct themselves over time. If some stock falls 50% because of panic selling, without anything having to do with the underlying company, it will eventually return to the correct price. And much sooner than the decades long timeline that you're saving for. That doesn't mean that Burry's thesis is irrelevant to everyone. In particular if you're an institution that offers liquidity to your clients it may be very relevant. Or if you're a bank, hedge fund, or insurance company that's subject to mark-to-market capital ratios or margin calls. If stocks become very dislocated, your investors may panic and redeem their money. Or your regulator may say you have insufficient capital and have to liquidate. That's very bad, because you'll be forced to sell at fire-sale prices. However, that's not relevant to individual investors, because nobody can force you to sell out just because your portfolio goes down.

fragsworth 7y ago
> If some stock falls 50% because of panic selling, without anything having to do with the underlying company, it will eventually return to the correct price. And much sooner than the decades long timeline that you're saving for. But that's not true, because suppose if 99.9% of investors are buying ETFs and only 0.1% are actively managing, there won't be enough funds to bring all these panic dislocated stocks back up for many, many years.
- cbanek 7y ago
  > But that's not true, because suppose if 99.9% of investors are buying ETFs and only 0.1% are actively managing, there won't be enough funds to bring all these panic dislocated stocks back up for many, many years. The price change of a stock doesn't always depend on how often a stock is bought. For example, when earnings hit, a stock can easily move 10%. That's not because there was a certain amount of people buying at every price between what it was and +10%. This can happen because earnings are better, and many people base price of an earnings multiple. When new knowledge is put into the system, there's a new price. If everyone who is trading a stock agrees on a price, that is the price. If people don't agree, it is generally the highest price someone is willing to sell it for (and find a buyer), or the lowest someone is willing to buy it for (and find a seller). If that disconnects a lot, you get a high bid/ask spread, and possibly no shares trade (lack of liquidity). It might only take a few shares or be a very short time to move a stock a lot.

FabHK 7y ago

In my view there are two take-aways from this: 1. Diversify, but 2. not too much. 1. Even among index funds, maintain some diversification. Don't put all in US large caps (S&P 500), but also some international and some small caps (Russel 2000). He is saying that given how much money is invested via index funds now, there are opportunities in assets that are not (or insufficiently) represented in index funds. (This is hard, though, and the standard advice to refrain from trying and placing your bets on index funds instead remains valid, I think, particularly for mature markets in which you don't have an edge.) The second take-away is at a tension with the first: 2. Avoid ETFs that handle illiquid assets (real estate, bonds, etc.) or create synthetic exposure using swaps and derivatives. For big, liquid assets, the ETF or index fund can just take the investor money and go buy the assets. Then the value of the fund is approximately the value of its constituent assets, sort of by definition, and that value is relatively easy to realise (that is, if you want your money back, you get it - they'll have to sell some of the assets, but they're liquid, and that won't influence price too much). For smaller or more exotic assets, a fund might not buy them outright, but contract with a third party (an investment bank, typically), and give the bank the money, with the bank promising that it will return the value of the asset. So, it's "like" holding the asset, except that you get the credit risk of the bank - there's a risk the bank might not be able to uphold its promise. And this is most likely to happen when everyone runs for the exit. > The theater keeps getting more crowded, but the exit door is the same as it always was. All this gets worse as you get into even less liquid equity and bond markets globally. > ... the impossibility of unwinding the derivatives and naked buy/sell strategies used to help so many of these funds pseudo-match flows and prices each and every day. So, an ETF promising to deliver the value of an index can generally do it, and there was no big failure so far, but scenarios are conceivable where it cannot deliver.

Ididntdothis 7y ago

I think the key is to have some level of luck. Then you can lecture others who didn’t have luck that they didn’t do it right but you did.

adventured 7y ago

The best passive way to approach your situation, is probably what you already know: gradually keep investing passively with the savings from your income. Over the long haul that has a reasonably high probability of turning out well with very little intervention on your part as a non-professional. There is also nothing wrong with adjusting the ratio of cash vs equities that you're accumulating (eg the share of your income going into the market vs going into cash in a span of time). It's the exact same safety vs risk lever that is commonly utilized in adjusting equities vs bonds as you get older. Some will call it market timing, it is not, as you are not attempting to time a top or bottom. With recession alarms going off in most global economic data, increasing your conservative posture is nothing more than being modestly prudent (and it doesn't have to be an extreme adjustment; if 100% of your net savings is going into the market now, changing that to 75/25 or 50/50 with cash, is entirely reasonable). Even Warren Buffett has turned hardcore conservative with this market, he's buying nothing and sitting on a $122b record pile of cash that is very much annoying him (by his own admission). The reason for his behavior, beyond the obvious blaring economic data, is that the valuations are terrible vs the growth we're seeing (both macro economy and corporate earnings); right now investors are paying a steep premium in most cases for the value they're getting. Buffett doesn't like the price he's paying for the value he's getting, so he has gone into bunker mode, as he has done prominently several times in the past. The simple, non-professional approach to that move, is to just make a reasonable adjustment to how much cash you're accumulating (which can obviously later be deployed if an opportunity presents; in the meantime you're likely to see a very modest inflation debasement to the fiat).