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There are some important ideas in here. The truth is that a number aspects of finance are simply broken, and being heavily gamed for very short term gains (the

There are some important ideas in here. The truth is that a number aspects of finance are simply broken, and being heavily gamed for very short term gains (the Facebook IPO is an excellent example of some of this). The reality right now, is that for the vast majority of people (anyone sub $500k in investable assets) getting the kind of quality advice needed to navigate the complexities of investing is virtually impossible. This type of high-touch service is almost exclusively reserved for the high net-worth marketplace. In a bear market like this one the likelihood that the returns of most mid-level advisor's and fund managers will outperform the management fees is not exceptionally high. This is why Vanguard's funds have received so much attention recently, they are a relatively safe, and very, very low cost, which addresses a big problem in this market. That being said, they don't perform exceptionally well either, at least not by themselves as a strategy. Investing in the value of the stock market is a volatile strategy in the best of times, and completely fruitless in the worst. Value investing has to be balanced by an income generation strategy, usually one focused on equities that pay solid dividends and other income-generating investments. http://www.theglobeandmail.com/globe-investor/investment-ideas/five-reasons-to-love-dividend-growth-investing/article535865/ http://www.theglobeandmail.com/globe-investor/investment-ide... Even armed with that information, the truth is that people should ideally not be put in a position of managing their own finances. They regularly work against themselves, have emotional attachments to their losses and gains and often make out no better than a gambler. This is work for professionals in a position of trust with their clients. Unfortunately, professionalism and likewise trust seems to be in short supply in finance right now. Furthermore, most people are not really even interested in being 100% responsible for their own finances. They may want a enough of an understanding of things to have some piece of mind, but most are no more interested in managing their investments than they are in fixing their own car or filling their own cavities.

aristidb 14y ago
For most people, investing in the whole market (a.k.a. index) is the right thing. Period. It's not exactly rocket science either: Just buy the broadest index you can cheaply get. The MSCI World is probably a good candidate for that. The whole market is likely to be less volatile over the long run than any given segment. Sure, if you want to do your research, maybe you'll end up thinking that a certain market segment is more attractive than another. But don't claim that all people must do this. Having other people manager your finances is problematic, because that other person is not likely to have your best interests in mind, especially not if his income from this comes from kickbacks. It's simple really. Just. Buy. The. Market.
- lucisferre 14y ago
  Could you elaborate on why that is the best thing for most people? Also I did not say people should do their own research, I actually said the opposite, that even having done that most people will generally be their own worst enemies when it comes to investing as they are unable to remain impartial about their own money. I'm also admitting it can be hard, even impossible to get good advice at for a fee that makes sense. However the lack of the right service does not mitigate the need for it.
  - aristidb 14y ago
    Why it's the best for most people? Because study after study shows that generating alpha (excess returns that are not attributable to buying stuff with debt, basically) is _hard_. And if the risk is too high, just buy more US treasuries and less stocks. Just a few days ago I read that Bain Capital's nice 20-30% returns were mostly based on leverage in a favorable market environment... I think there are a few people who really are good at choosing market segments or individual stocks, but you or your advisor-for-hire are not likely to be them.
    - wtvanhest 14y ago
      And if the risk is too high, just buy more US treasuries and less stocks. US treasuries can carry high levels of interest rate risk if their duration is long. In otherwords if the maturity is really long, 10 years+, and interest rates go up, the principal value of your treasuries will fall dramatically. Now, you can wait it out, but that won't help you in the long term when the market is paying out 10% and you are getting 0.25%. Just a few days ago I read that Bain Capital's nice 20-30% returns were mostly based on leverage in a favorable market environment... I think there are a few people who really are good at choosing market segments or individual stocks, but you or your advisor-for-hire are not likely to be them. Bain did this by taking companies private, then re-IPOing them. They are a private equity company and to my knowledge do not choose stocks and market segments like mutual funds do.
      - 14y ago
cynicalkane 14y ago
Most people feel the inevitable urge to gamble in the stock market. Some advisers advocate a 10% allocation to "stock picks" for this reason. Personally, I feel that a smart and tasteful person can outguess Wall Street in areas he's an expert in. I don't think anyone could have predicted the meteoric rise of Apple, but I think plenty of nerds could have looked at Mac OS 10.1 back in the day and thought, "this is a good bet". The ideas is that Wall Street can efficiently price financials (except in speculative bubbles, but if can't judge if a stock is in a bubble then don't buy it!) but doesn't have the computer nerd expertise to judge the long-term viability of a product line or engineering culture. Along similar lines, I made a tidy profit in 2008 on banks because I knew a few people at these banks and knew which ones worked and which ones were dysfunctional at a high level--a sort of perfectly legal "insider" information. Of course when you do this stuff you're assuming risk.
- colmvp 14y ago
  As a computer nerd, I really felt like AMD was on it's way to great places in the early 2000s and believed in their product over Intel, as most of my friends who built their rigs were leaning towards the former. Alas, I couldn't have predicted them fizzling out so badly after the mid-2000s. http://www.pcpro.co.uk/features/372859/amd-what-went-wrong http://www.pcpro.co.uk/features/372859/amd-what-went-wrong
  - debacle 14y ago
    I've found that my weakest bets on fundamentals are with tech stocks. With anything else, I'm right as much as I expect to be - about 50% of the time. With tech, I find I'm much closer to being wrong 80% of the time. I think our knowledge of the industry makes us believe we have more information than everyone else, and thus that we're in a better position to make bets. In reality, the things we know that your average investor doesn't aren't as crucial to the bottom line.
    - aangjie 14y ago
      Obligatory confirmation bias link. http://en.wikipedia.org/wiki/Confirmation_bias http://en.wikipedia.org/wiki/Confirmation_bias
jonkelly 14y ago
I'll add that even in the high net worth category, buyer beware. You really need to do your own research as the quality of advice is uneven at best -- and quite likely to be self-serving (to the profit of the adviser). And if you believe in the Bogle-low-fee approach, you will not find a receptive audience.
nickbp 14y ago
An investor is best served by keeping things as simple as possible. The most they should be concerned with is the simple ratio of stocks/bonds/cash that meets their risk tolerance and time horizon. This can be easily determined through some simple survey questions[1] or comparison charts[2]. Most fund companies even offer target date funds, which make this simple decision even easier. And by keeping things so simple, the investor is discouraged from doing harm to their investments by repeatedly transferring it between the latest fads, something which advisers are definitely prone to do. Basic investing is only made to look complicated by people who depend on selling expensive advice and guidance that most people don't need. Paying an adviser 1% per annum means you lose 30% of your balance in 40 years, not including any bad decisions they make with your money in that time. [1] https://personal.vanguard.com/us/FundsInvQuestionnaire https://personal.vanguard.com/us/FundsInvQuestionnaire [2] http://www.mymoneyblog.com/choosing-an-asset-allocation-step-1-deciding-on-the-stocksbonds-ratio.html http://www.mymoneyblog.com/choosing-an-asset-allocation-step...
ericdykstra 14y ago
I am not a financial consultant, but some general guidelines for retirement investing that anyone can follow with minimal effort. This is only applicable if you believe that the world economic growth rate in publicly traded markets is growing at a rate greater than the safest investments (close to nothing as of late): - Invest first in employer-matching 401K. Even if the fund choices aren't 100% ideal, they're almost never awful, and you're getting free money. Invest second in IRA/Roth IRA, the choice won't make a huge deal of difference to most people, but do your own research to see what's best for your situation. If your employer doesn't match for 401K, fill that up after your IRA. The reason for all of this: tax benefits. If you still have money left over after these limits for your retirement plan, it probably is time to consult a financial professional. - If you're using your employers' 401K, and the options are limited, choose the one that reaches the most diversity (type of asset, all types of market caps of companies, and definitely with global reach). I'd stay away from money market funds (with such a small rate of return, I feel it's a waste of your tax-haven dollars), and focus on equity, real estate, and a smaller amount of government bonds. The reason for diversifying is that the more types of asset categories you are in, and the more diverse the assets inside of each of those categories, the less unnecessary risk you take on. - If you're choosing assets for your IRA, follow the same sort of guidelines. The easiest way to do this is to use ETFs, which track various markets. A very simple example ETF IRA portfolio might look something like this: 30% in a NYSE tracking ETF, 20% in a NASDAQ tracking ETF, 40% in a "non-us market" tracking ETF, 10% in a real-estate ETF. If you want to diversify with precious metal assets or bond assets, feel free to mix in whatever share you like, or make those investments outside of the IRA (if you've filled your IRA quota already). This is a simple guide that anyone can set up in a couple of hours, and maintain with a half hour or so per month. It's less risky and more financially sound than "picking stocks", and will very likely not be a loser by the time you retire unless the worldwide economy is, overall, a loser between now and the time you retire. The content of this post is for general information purposes only and does not constitute any investment advice.

aristidb 14y ago

For most people, investing in the whole market (a.k.a. index) is the right thing. Period. It's not exactly rocket science either: Just buy the broadest index you can cheaply get. The MSCI World is probably a good candidate for that. The whole market is likely to be less volatile over the long run than any given segment. Sure, if you want to do your research, maybe you'll end up thinking that a certain market segment is more attractive than another. But don't claim that all people must do this. Having other people manager your finances is problematic, because that other person is not likely to have your best interests in mind, especially not if his income from this comes from kickbacks. It's simple really. Just. Buy. The. Market.

lucisferre 14y ago
Could you elaborate on why that is the best thing for most people? Also I did not say people should do their own research, I actually said the opposite, that even having done that most people will generally be their own worst enemies when it comes to investing as they are unable to remain impartial about their own money. I'm also admitting it can be hard, even impossible to get good advice at for a fee that makes sense. However the lack of the right service does not mitigate the need for it.
- aristidb 14y ago
  Why it's the best for most people? Because study after study shows that generating alpha (excess returns that are not attributable to buying stuff with debt, basically) is _hard_. And if the risk is too high, just buy more US treasuries and less stocks. Just a few days ago I read that Bain Capital's nice 20-30% returns were mostly based on leverage in a favorable market environment... I think there are a few people who really are good at choosing market segments or individual stocks, but you or your advisor-for-hire are not likely to be them.
  - wtvanhest 14y ago
    And if the risk is too high, just buy more US treasuries and less stocks. US treasuries can carry high levels of interest rate risk if their duration is long. In otherwords if the maturity is really long, 10 years+, and interest rates go up, the principal value of your treasuries will fall dramatically. Now, you can wait it out, but that won't help you in the long term when the market is paying out 10% and you are getting 0.25%. Just a few days ago I read that Bain Capital's nice 20-30% returns were mostly based on leverage in a favorable market environment... I think there are a few people who really are good at choosing market segments or individual stocks, but you or your advisor-for-hire are not likely to be them. Bain did this by taking companies private, then re-IPOing them. They are a private equity company and to my knowledge do not choose stocks and market segments like mutual funds do.
    - 14y ago

cynicalkane 14y ago

Most people feel the inevitable urge to gamble in the stock market. Some advisers advocate a 10% allocation to "stock picks" for this reason. Personally, I feel that a smart and tasteful person can outguess Wall Street in areas he's an expert in. I don't think anyone could have predicted the meteoric rise of Apple, but I think plenty of nerds could have looked at Mac OS 10.1 back in the day and thought, "this is a good bet". The ideas is that Wall Street can efficiently price financials (except in speculative bubbles, but if can't judge if a stock is in a bubble then don't buy it!) but doesn't have the computer nerd expertise to judge the long-term viability of a product line or engineering culture. Along similar lines, I made a tidy profit in 2008 on banks because I knew a few people at these banks and knew which ones worked and which ones were dysfunctional at a high level--a sort of perfectly legal "insider" information. Of course when you do this stuff you're assuming risk.

colmvp 14y ago
As a computer nerd, I really felt like AMD was on it's way to great places in the early 2000s and believed in their product over Intel, as most of my friends who built their rigs were leaning towards the former. Alas, I couldn't have predicted them fizzling out so badly after the mid-2000s. http://www.pcpro.co.uk/features/372859/amd-what-went-wrong http://www.pcpro.co.uk/features/372859/amd-what-went-wrong
- debacle 14y ago
  I've found that my weakest bets on fundamentals are with tech stocks. With anything else, I'm right as much as I expect to be - about 50% of the time. With tech, I find I'm much closer to being wrong 80% of the time. I think our knowledge of the industry makes us believe we have more information than everyone else, and thus that we're in a better position to make bets. In reality, the things we know that your average investor doesn't aren't as crucial to the bottom line.
  - aangjie 14y ago
    Obligatory confirmation bias link. http://en.wikipedia.org/wiki/Confirmation_bias http://en.wikipedia.org/wiki/Confirmation_bias

jonkelly 14y ago

I'll add that even in the high net worth category, buyer beware. You really need to do your own research as the quality of advice is uneven at best -- and quite likely to be self-serving (to the profit of the adviser). And if you believe in the Bogle-low-fee approach, you will not find a receptive audience.

nickbp 14y ago

An investor is best served by keeping things as simple as possible. The most they should be concerned with is the simple ratio of stocks/bonds/cash that meets their risk tolerance and time horizon. This can be easily determined through some simple survey questions[1] or comparison charts[2]. Most fund companies even offer target date funds, which make this simple decision even easier. And by keeping things so simple, the investor is discouraged from doing harm to their investments by repeatedly transferring it between the latest fads, something which advisers are definitely prone to do. Basic investing is only made to look complicated by people who depend on selling expensive advice and guidance that most people don't need. Paying an adviser 1% per annum means you lose 30% of your balance in 40 years, not including any bad decisions they make with your money in that time. [1] https://personal.vanguard.com/us/FundsInvQuestionnaire https://personal.vanguard.com/us/FundsInvQuestionnaire [2] http://www.mymoneyblog.com/choosing-an-asset-allocation-step-1-deciding-on-the-stocksbonds-ratio.html http://www.mymoneyblog.com/choosing-an-asset-allocation-step...

ericdykstra 14y ago

I am not a financial consultant, but some general guidelines for retirement investing that anyone can follow with minimal effort. This is only applicable if you believe that the world economic growth rate in publicly traded markets is growing at a rate greater than the safest investments (close to nothing as of late): - Invest first in employer-matching 401K. Even if the fund choices aren't 100% ideal, they're almost never awful, and you're getting free money. Invest second in IRA/Roth IRA, the choice won't make a huge deal of difference to most people, but do your own research to see what's best for your situation. If your employer doesn't match for 401K, fill that up after your IRA. The reason for all of this: tax benefits. If you still have money left over after these limits for your retirement plan, it probably is time to consult a financial professional. - If you're using your employers' 401K, and the options are limited, choose the one that reaches the most diversity (type of asset, all types of market caps of companies, and definitely with global reach). I'd stay away from money market funds (with such a small rate of return, I feel it's a waste of your tax-haven dollars), and focus on equity, real estate, and a smaller amount of government bonds. The reason for diversifying is that the more types of asset categories you are in, and the more diverse the assets inside of each of those categories, the less unnecessary risk you take on. - If you're choosing assets for your IRA, follow the same sort of guidelines. The easiest way to do this is to use ETFs, which track various markets. A very simple example ETF IRA portfolio might look something like this: 30% in a NYSE tracking ETF, 20% in a NASDAQ tracking ETF, 40% in a "non-us market" tracking ETF, 10% in a real-estate ETF. If you want to diversify with precious metal assets or bond assets, feel free to mix in whatever share you like, or make those investments outside of the IRA (if you've filled your IRA quota already). This is a simple guide that anyone can set up in a couple of hours, and maintain with a half hour or so per month. It's less risky and more financially sound than "picking stocks", and will very likely not be a loser by the time you retire unless the worldwide economy is, overall, a loser between now and the time you retire. The content of this post is for general information purposes only and does not constitute any investment advice.