5 ms·

A lot of the stuff on the wiki and site is massively simplified and not strictly true. If you don't know much about finance, stuff like "return is always associ

by smabie 6y ago

A lot of the stuff on the wiki and site is massively simplified and not strictly true. If you don't know much about finance, stuff like "return is always associated with risk, there is no free-lunch" is a good place to start, but more knowledgeable and quantitative investors know that this isn't true (according to CAPM, only systematic risk generates return, not specific risk). If you haven't thought much about what kind of volatility you are okay with and aren't really interested in managing your money, a boglehead kind of portfolio is good place to start. It's something, for example, that I might recommend my mom, if I wasn't willing to put in the work to manage her investments for her. But for a technical crowd, like HN, the stuff on the site misrepresents modern financial theory and perpetuates people saying stuff that doesn't even make any sense, like, "you can't beat the market", "don't hold a leveraged index fund", "active management is a scam", etc. Like all things people say, these have a kernel of truth, but the specifics and context are so far removed that these statements become meaningless, or even flat out wrong. Even by just holding simple, automated ETFs (I don't call this passive investing, because passive investing doesn't exist), there's tons of room for really interesting optimizations that increase return and decrease risk. Things like risk parity portfolios, minimum variance optimizations, persistent factor portfolios, etc. And best of all, with zero commissions, super tight bid-ask spreads, and easy to access APIs, "quant-lite" investing is more accessible than every before. In conclusion, every portfolio is an active portfolio, from deciding a equity/bond ratio, to investing in real estate, to deciding to buy some TSLA. It's all the same, so stay away from any dogmatic approaches to investing (I would say the bogleheads are pretty dogmatic). By becoming familiar with the biggest and most important advances in quantitative finance, along with understanding your own risk tolerance, you can construct a portfolio that is perfect for you, and that will give you so much more than a one-size-fits-all boglehead portfolio could ever hope to.

300bps 6y ago
I don’t know your background. But I’ve worked at an investment bank the past 15 years and have traded every kind of stock, bond and derivative there is. With respect, you sound a little bit like every new programmer that I’ve worked with. They get a taste of learning about finance and suddenly become day traders. They make some money and then suddenly they give it all back and more because they really weren’t understanding what they were doing. In general, anyone with a full time job that thinks they can out-compete full time traders that specialize in the exact instrument that you are trying to trade will have a very expensive lesson some day. If you really want to pursue it at least take the level 1 CFA exam. If you can’t pass that you don’t have much of a chance and if you can pass that you’ll probably realize you don’t want to do it.
- smabie 6y ago
  If you're interested, check out my blog: https://cryptm.org/category/Posts.html https://cryptm.org/category/Posts.html I used to work in finance doing portfolio analytics. I'm not really advocating day trading, but rather using quantitative methods for optimal portfolio construction.
  - arkis22 6y ago
    >For example, if we purchased a 2x bull leveraged S&P 500 ETF such as SSO, we would choose an appropriate weight to cancel out the leverage, 0.5 in this case. If we kept the rest of the money in cash, the return of the portfolio would only be slightly worse than that of the S&P 500, due to the 0.90% expense ratio we pay. A 2x bull leveraged etf replicates daily moves. your long term return to expense expectations are completely off.
    - 300bps 6y ago
      You are exactly correct. So many people are buying these synthetic instruments without even reading the prospectus that clearly states in plain language what you said but they still buy them expecting > daily tracking. I’ve seen so many strategies that technology people come up with (including myself) that look great on paper but don’t take into account the prospectus or things like market conditions, counterparty risk, backwardation, contango, etc.
      - atombender 6y ago
        Out of interest, what's your take on Hedgefundie's now-infamous UPRO/TMF risk parity portfolio [1], which is currently 55% UPRO, 45% TMF? [1] https://www.bogleheads.org/forum/viewtopic.php?f=10&t=288192 https://www.bogleheads.org/forum/viewtopic.php?f=10&t=288192
    - smabie 6y ago
      You're right that 0.9% is a lot, but the expenses get absorbed by the bond yield. The total difference of return between 0.5*SSO and SPY over the ten year period (2010-01-01 and 2020-01-01) is 28%. Maybe you're right that that's more than "slightly" worse, I'll change the wording. Moreover, when doing at the historical returns, I do use UPRO, not just 3xSPY, so the expense ratio is included. It's not included in the chart that goes back to 2004, but I do mention that that one is synthetic and inaccurate.
sigstoat 6y ago
> But for a technical crowd, like HN... there's obviously a lot of folks here who aren't "technical", see endless stream of "how to find a technical cofounder"-esque posts. (and that's ok!) and even the engineering school and math grads floating around on here can't be expected to have significant financial expertise. > If you haven't thought much about what kind of volatility you are okay with and aren't really interested in managing your money, a boglehead kind of portfolio is good place to start. that's most people! even on HN! > By becoming familiar with the biggest and most important advances in quantitative finance i'd love to see a summary or jumping off point for this.
xapata 6y ago
> return is always associated with risk ... this isn't true ... only systematic risk generates return On the contrary, your criticism that "only systematic risk generates return" does not invalidate the assertion that "return is always associated with risk". Perhaps you misinterpreted the direction of causality implied by that assertion, thinking that it meant risk is always associated with return?
- smabie 6y ago
  You can take on more risk and not get any more return. Conversely, you can get more return and not take on anymore risk. That's like the foundation of Modern Portfolio Theory.
  - xapata 6y ago
    Theory tells us that you can't get more return without taking on more risk, if the market is efficient. Of course, the market can't be perfectly efficient, but it's possible that the market is weakly efficient: the cost of information is so high that it, on average, makes it impossible to beat the market.
    - smabie 6y ago
      No, only if the portfolio is on the efficient frontier. There are many sub-optimal portfolios that do not have the best return/risk trade-off, like portfolios with a lot of specific risk. Check out the Markowitz Bullet. Specific risk does not get compensated because it is easy to eliminate it with diversification.
      - xapata 6y ago
        I should have been more specific (no pun intended). You should take a closer read of my comment. You've made the same misinterpretation a second time. Suppose a non-diversified investor, A, owns an asset which has both systemic risk and specific risk, and a diversified investor, B, has the same knowledge as A. In this case, B would be willing to pay a higher price for the asset than A would. A then sells the asset to B and the market becomes efficient. No assets would exist not on the efficient frontier.
mmmrk 6y ago
> "you can't beat the market" You can, but not consistently according to the Efficient Market Hypothesis. If you are referring to e.g. factor investing, that's not "beating the market" in the traditional fund manager way, just holding it differently and taking more systemic risk for a higher potential upside (if the factor is indeed based on risk and not irrationality of market participants). > And best of all, with zero commissions, super tight bid-ask spreads, and easy to access APIs, "quant-lite" investing is more accessible than every before. I'm conservative here and would wait 10 years before jumping on some fancy new technique to make more money. Why? Because fin history is littered with fancy new ways of making money that primarily made the manager money. Any real advantages are going to be quickly taken up by competing money makers anyway. > In conclusion, every portfolio is an active portfolio, from deciding a equity/bond ratio, to investing in real estate, to deciding to buy some TSLA. It's all the same, so stay away from any dogmatic approaches to investing This is dangerously wrong advice. "Passive investing" in the Bogleheads sense and choosing e.g. a equity/bond ratio is based on science and 120+ years of available data (Efficient Market Hypothesis, Modern Portfolio Theory), buying TSLA is not. Real estate is a very mixed bag (for US research, see e.g. Beracha et al. 2012 "Lessons from over 30 years of buy versus rent decisions" in Real Estate Economics Vol 40 No 2, and https://www.prnewswire.com/news-releases/house-of-cards-morningstars-hellowallet-unit-examines-how-buying-a-home-vs-renting-and-investing-affects-wealth-creation-282253721.html https://www.prnewswire.com/news-releases/house-of-cards-morn...). Conclusion: the "dogmatic" approach is absolutely the right thing for 99% of retail investors to follow.
- anon9001 6y ago
  On March 1 2009, the S&P500 was $773. On January 1 1997, the S&P500 was $773. During the same time, bonds sold off too. Everything did. If you were dollar cost averaging into the market for 12 years, you could find yourself below where you started. That's a pretty demoralizing situation. I think being aware of market conditions and reallocating as you see fit is just part of being a responsible adult. Maybe sometimes you do want to hold VTI, but also it's not unreasonable to bet on Elon. I'm not saying everyone has to be highly leveraged and aggressive, but I think you're putting a tremendous amount of faith in the markets and intentionally looking the other way.
atombender 6y ago
> "you can't beat the market" But the "you" here isn't you, it's people who aren't hobbyist investors (let alone professionals). People who don't know, and don't really want to know, what "risk parity" or "minimum variance" is. I don't think any boglehead truly believes nobody can beat the market.

by smabie 6y ago

300bps 6y ago

I don’t know your background. But I’ve worked at an investment bank the past 15 years and have traded every kind of stock, bond and derivative there is. With respect, you sound a little bit like every new programmer that I’ve worked with. They get a taste of learning about finance and suddenly become day traders. They make some money and then suddenly they give it all back and more because they really weren’t understanding what they were doing. In general, anyone with a full time job that thinks they can out-compete full time traders that specialize in the exact instrument that you are trying to trade will have a very expensive lesson some day. If you really want to pursue it at least take the level 1 CFA exam. If you can’t pass that you don’t have much of a chance and if you can pass that you’ll probably realize you don’t want to do it.

smabie 6y ago
If you're interested, check out my blog: https://cryptm.org/category/Posts.html https://cryptm.org/category/Posts.html I used to work in finance doing portfolio analytics. I'm not really advocating day trading, but rather using quantitative methods for optimal portfolio construction.
- arkis22 6y ago
  >For example, if we purchased a 2x bull leveraged S&P 500 ETF such as SSO, we would choose an appropriate weight to cancel out the leverage, 0.5 in this case. If we kept the rest of the money in cash, the return of the portfolio would only be slightly worse than that of the S&P 500, due to the 0.90% expense ratio we pay. A 2x bull leveraged etf replicates daily moves. your long term return to expense expectations are completely off.
  - 300bps 6y ago
    You are exactly correct. So many people are buying these synthetic instruments without even reading the prospectus that clearly states in plain language what you said but they still buy them expecting > daily tracking. I’ve seen so many strategies that technology people come up with (including myself) that look great on paper but don’t take into account the prospectus or things like market conditions, counterparty risk, backwardation, contango, etc.
    - atombender 6y ago
      Out of interest, what's your take on Hedgefundie's now-infamous UPRO/TMF risk parity portfolio [1], which is currently 55% UPRO, 45% TMF? [1] https://www.bogleheads.org/forum/viewtopic.php?f=10&t=288192 https://www.bogleheads.org/forum/viewtopic.php?f=10&t=288192
  - smabie 6y ago
    You're right that 0.9% is a lot, but the expenses get absorbed by the bond yield. The total difference of return between 0.5*SSO and SPY over the ten year period (2010-01-01 and 2020-01-01) is 28%. Maybe you're right that that's more than "slightly" worse, I'll change the wording. Moreover, when doing at the historical returns, I do use UPRO, not just 3xSPY, so the expense ratio is included. It's not included in the chart that goes back to 2004, but I do mention that that one is synthetic and inaccurate.

sigstoat 6y ago

> But for a technical crowd, like HN... there's obviously a lot of folks here who aren't "technical", see endless stream of "how to find a technical cofounder"-esque posts. (and that's ok!) and even the engineering school and math grads floating around on here can't be expected to have significant financial expertise. > If you haven't thought much about what kind of volatility you are okay with and aren't really interested in managing your money, a boglehead kind of portfolio is good place to start. that's most people! even on HN! > By becoming familiar with the biggest and most important advances in quantitative finance i'd love to see a summary or jumping off point for this.

xapata 6y ago

> return is always associated with risk ... this isn't true ... only systematic risk generates return On the contrary, your criticism that "only systematic risk generates return" does not invalidate the assertion that "return is always associated with risk". Perhaps you misinterpreted the direction of causality implied by that assertion, thinking that it meant risk is always associated with return?

smabie 6y ago
You can take on more risk and not get any more return. Conversely, you can get more return and not take on anymore risk. That's like the foundation of Modern Portfolio Theory.
- xapata 6y ago
  Theory tells us that you can't get more return without taking on more risk, if the market is efficient. Of course, the market can't be perfectly efficient, but it's possible that the market is weakly efficient: the cost of information is so high that it, on average, makes it impossible to beat the market.
  - smabie 6y ago
    No, only if the portfolio is on the efficient frontier. There are many sub-optimal portfolios that do not have the best return/risk trade-off, like portfolios with a lot of specific risk. Check out the Markowitz Bullet. Specific risk does not get compensated because it is easy to eliminate it with diversification.
    - xapata 6y ago
      I should have been more specific (no pun intended). You should take a closer read of my comment. You've made the same misinterpretation a second time. Suppose a non-diversified investor, A, owns an asset which has both systemic risk and specific risk, and a diversified investor, B, has the same knowledge as A. In this case, B would be willing to pay a higher price for the asset than A would. A then sells the asset to B and the market becomes efficient. No assets would exist not on the efficient frontier.

mmmrk 6y ago

> "you can't beat the market" You can, but not consistently according to the Efficient Market Hypothesis. If you are referring to e.g. factor investing, that's not "beating the market" in the traditional fund manager way, just holding it differently and taking more systemic risk for a higher potential upside (if the factor is indeed based on risk and not irrationality of market participants). > And best of all, with zero commissions, super tight bid-ask spreads, and easy to access APIs, "quant-lite" investing is more accessible than every before. I'm conservative here and would wait 10 years before jumping on some fancy new technique to make more money. Why? Because fin history is littered with fancy new ways of making money that primarily made the manager money. Any real advantages are going to be quickly taken up by competing money makers anyway. > In conclusion, every portfolio is an active portfolio, from deciding a equity/bond ratio, to investing in real estate, to deciding to buy some TSLA. It's all the same, so stay away from any dogmatic approaches to investing This is dangerously wrong advice. "Passive investing" in the Bogleheads sense and choosing e.g. a equity/bond ratio is based on science and 120+ years of available data (Efficient Market Hypothesis, Modern Portfolio Theory), buying TSLA is not. Real estate is a very mixed bag (for US research, see e.g. Beracha et al. 2012 "Lessons from over 30 years of buy versus rent decisions" in Real Estate Economics Vol 40 No 2, and https://www.prnewswire.com/news-releases/house-of-cards-morningstars-hellowallet-unit-examines-how-buying-a-home-vs-renting-and-investing-affects-wealth-creation-282253721.html https://www.prnewswire.com/news-releases/house-of-cards-morn...). Conclusion: the "dogmatic" approach is absolutely the right thing for 99% of retail investors to follow.

anon9001 6y ago
On March 1 2009, the S&P500 was $773. On January 1 1997, the S&P500 was $773. During the same time, bonds sold off too. Everything did. If you were dollar cost averaging into the market for 12 years, you could find yourself below where you started. That's a pretty demoralizing situation. I think being aware of market conditions and reallocating as you see fit is just part of being a responsible adult. Maybe sometimes you do want to hold VTI, but also it's not unreasonable to bet on Elon. I'm not saying everyone has to be highly leveraged and aggressive, but I think you're putting a tremendous amount of faith in the markets and intentionally looking the other way.

atombender 6y ago

> "you can't beat the market" But the "you" here isn't you, it's people who aren't hobbyist investors (let alone professionals). People who don't know, and don't really want to know, what "risk parity" or "minimum variance" is. I don't think any boglehead truly believes nobody can beat the market.