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The Best Investment Advice You'll Never Get (2008)

151 points by milesf 12y ago

oldspiceman 12y ago
tldr If you're suddenly rich, pay $10 and buy $1 Million of Vanguard Total Stock Market Index. Giving your money to anybody else over the last 10 years would have yielded same or worse performance at a higher cost.
- orofino 12y ago
  You may need to pay that $10 if you are investing through some other brokerage account. However, do yourself a favor, open an account with Vanguard directly and you can make that purchase without any fees. Additionally, I'd recommend se percentage be invested in the Vanguard total bond market fund as well. Holding se percentage there will reduce overall portfolio volatility, and can actually increase returns slightly.
  - p0ckets 12y ago
    To get the diversification benefit from holding the bond fund, you'd need to rebalance (every few months to every few years).
    - birken 12y ago
      If you are lazy you can just put your money into one of the 10+ Vanguard Target Retirement funds [1] which are just varying mixes of their stock/bond funds + automatic rebalancing. It goes from 90%/10% stock/bond mix (VTTSX) at the high end to 30%/70% at the low end (VTINX). 1: https://investor.vanguard.com/mutual-funds/target-retirement/#/ https://investor.vanguard.com/mutual-funds/target-retirement...
    - guyrt 12y ago
      If you are investing new money every month and attempting to maintain the same allocation over time, you are in a sense automatically rebalancing. Of course, this assumes your total investment over a given time period is roughly in line with the relative delta in performance.
  - jhulla 12y ago
    Asset diversification is more complicated than that. To a first order, yes stocks and bonds are inversely correlated. But it is not enough to hold just stocks and bonds. In order to maximize return over your preferred time frame (while minimizing risk), you have to examine the whole universe of investable assets, examine their volatility as well as correlations amongst themselves. From there, your goal is to assemble an ideal basket of assets maximizes your return for your personal level of risk. Running these filters and choosing when to rerun/rebalance is the basis of modern portfolio theory. Managing your money using MPT is the service that many investment houses sell. Rolling your own is absolutely possible, but it is not as simple as stocks vs bonds.
    - infinite8s 12y ago
      True, but for most people without 25M (ie most of us), is the arginal improvement in return on a 500k investment worth the extra complexity over a straight stock/bond mix? Unrelatedly, what are you thoughts on the permanent portfolio (if you've heard of it).
      - j_lev 12y ago
        Not sure if this was directed at jhulla (and actually I was about to ask it to svachalek). 25% in physical PMs is hard to justify but generally speaking I think Browne's Permanent Portfolio is a good base. Perhaps 20% each of domestic equities, international equities, PMs, cash and long term bonds would be more realistic, with rebalance bands at 17/23.
    - svachalek 12y ago
      Stocks and bonds being inversely correlated is an old rule that hasn't held as true since the 2008 crisis. Stocks, most bonds, and most other asset classes have been moving up and down together although with different degrees of volatility. Long term US treasuries are a standout as one of the only investments that has a clear inverse correlation to the general pattern. Having run a lot of simulations in determining my own portfolio I came to the conclusion that these things affected my returns, in decreasing order: 1. annual maintenance costs 2. tax effects 3. choice of index 4. diversifying beyond stocks/bonds I imagine most people who aren't using a passive strategy can chop 1 - 1.5% off their costs just by switching to indexes, and the remaining optimizations will pale in comparison. But as the size of the portfolio increases the additional effort becomes worthwhile. It's possible that over the long term the market will decouple again but keep in mind that most investment advice about "universal truths" about the "long term" are based on a little over 100 years of market data. Given that I started investing at age 20 and will hopefully live to old age, that's not a lot of training data in comparison to the amount of prediction it's generating.
  - jacquesm 12y ago
    You can only open an account with Vanguard directly if you are in the US.
- DMac87 12y ago
  Why Vanguard Total Stock Market? Why not SPDR S&P 500 ETF? Why not include international stocks, or bonds, or real estate? Choice of index is a hugely important decision, and can't be waved away so easily...
- bradleyjg 12y ago
  If want to invest $1M you can get managed tax loss harvesting that will pay for itself. Also you should probably have more asset classes than just US equities. Having said that, you could do a lot worse.
- prostoalex 12y ago
  You need to buy at least two funds to harvest those tax losses.
sharkweek 12y ago
I loved the first bit of this; that Google invested the time in their employee's education of what was about to happen with sudden riches. I know it's starting to happen, but professional sports needs this same educational process. Recently watched the 30 for 30 documentary 'Broke' and it was so heartbreaking to see what happens to these athletes who have come from nothing, get a ton of cash all the sudden, and find themselves back where they started after the paycheck stops.
- devonkim 12y ago
  The NBA passed a law a bit ago with this motivation. http://www.bloomberg.com/news/2012-07-12/nba-players-forced-to-save-toward-retirement-for-first-time.html http://www.bloomberg.com/news/2012-07-12/nba-players-forced-...
orofino 12y ago
This is great advice and what I have been doing for the last 3-4 years for our retirement portfolio. Prior to that we were using an 'investment guy' who had us in a bunch of high-cost funds. I sent the guy and email and ended the relationship and took a couple months to read and learn about this. I recommend the "investor's manifesto" by William Bernstein for anyone interested.
jhulla 12y ago
Assuming you believe the underlying assumptions (and they very well may not be true), modern portfolio theory allows you to build a mathematically ideal portfolio for a given amount of risk. The math behind MPT might be hand waved as followed: goal seek a maximum portfolio return by combining assets with minimal correlation under a fixed risk scenario. In the end, you will have portfolio that will give you the maximum theoretical return for your selected amount of risk. In practice, outside of running a hedge fund, or a mutual fund with explicit investment guidelines (e.g. we invest in emerging market energy companies), a responsible asset manager has no choice but to follow MPT. In other words, if you are not a specialized fund, there is no mathematical justification for deviating from an MPT constructed portfolio. By definition, any deviation from a MPT balanced portfolio means you have either a) taken on more risk than necessary or b) reduced your potential return or c) do not believe in the underlying assumptions of MPT. So what is the amateur person worth $25M to do today? As with all things, you should seek professional advice. There are many nuances of tax efficiency, estate efficiency, asset protection, personal needs, etc. that a professional advisor should guide you through. Apparently the folks at WealthFront and FutureAdvisor are selling MPT driven portfolios to employees of SF bay area tech firms. edit: As a couple of users point out below, there is controversy over the effectiveness of MPT including: whether the models effectively capture the distribution of risk vs return and whether the values desired by the models can be calculated with proper accuracy. PMPT (post-modern portfolio theory) builds upon MPT. Lastly there are critics such as Nassim Taleb (of Black Swan fame) who find some of the core assumptions flawed.
- hkmurakami 12y ago
  >So what is the amateur person worth $25M to do today? As with all things, you should seek professional advice. There are many nuances of tax efficiency, estate efficiency, asset protection, personal needs, etc. that a professional advisor should guide you through. While this is true, the problem that most advisors that a $25MM net worth individual has access to are mostly duds and/or salesmen. Identifying true value add advisors is easier said than done, imo.
  - deleted 12y ago
    [deleted]
dd36 12y ago
bogleheads.org Also, the Frontline episode, "The Retirement Gamble"
MCRed 12y ago
Regarding "Don't beat the market", Warren Buffet says "The game is really easy when your opponent decides not to play". Unfortunately, giving up has a lot of appeal: It means it's not your fault you didn't beat the market. It lets people say the game is rigged and take comfort. How many times have you seen buying company stock compared to gambling? Even though, on its face this comparison is ludicrous. (Especially here on HN where so many of you are giving up $40k a year for 0.0004% of a company that is %98 likely to be worthless.) It becomes like a religion, where anyone saying "Hey, it's easy to beat the market" becomes a "bad guy" who is advising "risky strategies". The reality is, the tools available to the individual investor are such that you can control the level of risk you want. You can take a stock of high risk and make it low risk with option hedges. You can take a stock of low risk and make it high risk with different options. "%90 of options expire worthless, the real money is in selling them!" -- Abraham Lincoln Of course, that's true-- if you have the ability to borrow from the Fed at the overnight rate. Most options are bought as they are intended- as a hedge to minimize risk. IF the underlying asset goes the expected direction, then the option will expire worthless. My point is really that you have to read books, and hear many points of view, and figure out what's right for you. Almost every professional and every ideologue is going to lead you down a bad path for you, because there is no one-size-fits all. There is no "best" advice.
- encoderer 12y ago
  I agree. The awful conventional wisdom that options are "riskier" than stock, that they're not appropriate for retail investors, has not done retail investors any favors. To me, it's like saying that sharp knives are too dangerous for the home cook. If you want returns similar to professional investors, you have to use professional tools. There's a learning curve, but that's true of most things in life that are worth knowing. Edit: People downvote what they don't understand, that's fine. But if you care about this subject at some point you will ask yourself "why do retail investors underperform" and you can either throw your hands up, call it a rigged game, and blame High Frequency Trading or El Nino or whatever. Or you can look at what a professional trader does differently, and adapt those techniques yourself.
  - 12y ago
jcdavis 12y ago
Decent article, but awfully linkbait-y headline. You'll get that advice at many places around the internet - I recommend those curious to read the wiki at bogleheads.org
Apocryphon 12y ago
General question about index funds: if a market is about to go into a steep correction or even a recession, wouldn't it be more advantageous to invest in specific stable stocks, rather than an index fund that tracks the entire market?
- 6581 12y ago
  Yes, but that would require you to reliably predict future market price movements. https://en.wikipedia.org/wiki/Market_timing https://en.wikipedia.org/wiki/Market_timing
- jcdavis 12y ago
  Sure, if you are sure the market is about to go into a steep correction or even a recession. But how do you know that? Why not go even further - If you knew for sure the market was going to drop, you could make a lot of money in options. Why aren't you doing that instead? You shouldn't be trying to time the market. Lots of people try, they tend to fail. Come up with an allocation plan, and stick to it.
  - freyr 12y ago
    >Lots of people try, they tend to fail. And with enough people constantly trying to predict the market, inevitably some get it right. They make a lot of money, they're heralded as geniuses, and we hear about them in the news. We don't hear about everyone else who failed, or when the market-timing winners turn out to be repeat failures in subsequent years. Put a bunch of people in a room and have them start flipping coins. If there are enough people playing the game, chances are somebody will end up tossing many heads in a row. If they keep flipping long enough, chances are they'll revert back to the mean. This is a pretty good model of market prognostication.
- vellum 12y ago
  That's what Wall Street calls "trying to catch a falling knife". You want to wait until after recovery starts, because you have no idea how far the price is going to fall. Of course, figuring out whether it's an actual recovery vs. a pit stop on the way to the bottom, is another issue. http://www.investopedia.com/terms/f/fallingknife.asp http://www.investopedia.com/terms/f/fallingknife.asp
OliverJones 12y ago
Work with an advisor who has access to DFA. Invest for the long term. Pull funds out when you want to use them.
prostoalex 12y ago
Schwab Intelligent Portfolios are launching next year, and will offer balanced portfolios with tax-loss harvesting for a low, low price of 0% of assets under management. https://intelligent.schwab.com/ https://intelligent.schwab.com/
Punoxysm 12y ago
I feel like I get this advice all the time. "Invest in Indexes" is ridiculously popular advice. I've also been exposed to portfolio theory in lots of academic literature. It's not obscure within finance or without.
- oldspiceman 12y ago
  These guys didn't know about it: http://www.hypun.com/gallery/1298/Top_10_NBA_Players_that_went_Broke http://www.hypun.com/gallery/1298/Top_10_NBA_Players_that_we...
tunesmith 12y ago
It's really hard to do MPT on your own. I got really into finding a collection of 10-12 mutual funds that are in a collection of sectors. I also mixed it with a strategy of selling each fund when it went below its 12-month moving average, and buying back in when it went above. I backtested it a bit and read some studies and it seemed reasonable. Sacrifice a little upside to protect against more downside. It sure would have saved me had I followed those strategies during the last two mega crashes; the dotcom bomb and the finsys crash. Of course, since doing that, the S&P has been on a sustained climb that I've only partially benefitted from since I've had some bond funds, etc. The selling/buying has worked ok - it's whipsawed me in some cases and saved me in others, but given that I'm not spending more than a day a month on it, and that I only have a surface level understanding of sector-balancing, and that while it seems my funds are cheap, who really knows for sure... I'm regularly tempted to just dump the whole thing and get back into one fund, just in time for the next crash the other part of my brain says. Also, it's worth pointing out that a lot of the "beat the market" talk is rubbish for entirely different reasons. People tend to get more cash to invest when times are good, and less when times are bad. That means that the average person is going to buy more when the market is high, and less when the market is low. I don't ever see this accounted for in studies. Even if you were to drop your money in an S&P-500 index fund whenever that money becomes available to you, you're still going to underperform the S&P-500 long-term by a moderate amount.
- zone411 12y ago
  Actually, it has been accounted for in the studies. See: http://www.stlouisfed.org/on-the-economy/the-cost-of-chasing-returns/ http://www.stlouisfed.org/on-the-economy/the-cost-of-chasing...
mangeletti 12y ago
Did anybody stop to notice the date of the article? I'm confused by the conversation herein. I thought this was posted as a sort of mockery of the author. After-all, if you put your money into an index right when this guy told you to, you would have lost your shirt. If you had a while until retirement, that wouldn't be a big deal, since it would now be back along with more, but what about the folks moving their IRA out of balanced bond and commodity based funds with some growth stocks, etc. (i.e., hedged) and essentially into the S&P 500, at 60 years old... like my parents did. The best advice to anyone is to buy indexes after a major market crash; only then will you reap rewards without nearly as great a risk. Here's the catch: most of you will disagree; that's why 10% play and the other 90% pay.
- pessimizer 12y ago
  >After-all, if you put your money into an index right when this guy told you to, you would have lost your shirt. Not if you held it until now.
- MiguelVieira 12y ago
  The S&P 500 is up 36% since the article was written.
- EliRivers 12y ago
  Even if you invest at peaks, and watch it all crash shortly afterwards, you can still do very well. Just start early so you're not staring at retirement the year after your first investment. http://awealthofcommonsense.com/worlds-worst-market-timer/ http://awealthofcommonsense.com/worlds-worst-market-timer/
nopinsight 12y ago
In my opinion, there are probably some persistent quirks and patterns in human minds and computer programs (also written by humans) which may not be fully exploited by most market participants in some markets (esp. Emerging and Frontier markets). One well-known pattern is Momentum trading, which is also a basis of Market Crash prediction model by Prof. Sornette, with a history of several accurate predictions. [1] > “a few funds that at any given moment outperform the indexes.” But over the years, he explains, their performances invariably decline.. There are a few hedge funds that, over decades, still beat the market. Medallion Fund, according to public knowledge, consistently generates above-market returns, never had a down year, and even returned 80% in 2008, when stock markets all over the world crashed. Its trading model is a highly guarded secret. It does not even let outsiders invest (with exceptions for a few). The fund belongs to Renaissance Technologies, founded by a renowned Mathematical Physics professor, Jim Simons, and employs many PhDs in Physics and Math. (This book writes about it in fair detail. [2]) [1] How we can predict the next financial crisis: http://www.ted.com/talks/didier_sornette_how_we_can_predict_the_next_financial_crisis http://www.ted.com/talks/didier_sornette_how_we_can_predict_... [2] The Physics of Wall Street: http://www.amazon.com/The-Physics-Wall-Street-Unpredictable/dp/0544112431 http://www.amazon.com/The-Physics-Wall-Street-Unpredictable/...
- pbreit 12y ago
  The reference was to other mutual funds. Hedge funds are not accessible to the average retail investor and invest in things that average investors don't have access to.
- pessimizer 12y ago
  If results were randomly distributed, you'd expect a very few funds to perform that way.
jasonwilk 12y ago
It would be hard to debate someone about paying management fees for mutual funds vs no fees on index funds like NASDAQ. This graph should say it all (10 year graph): https://www.google.com/finance?cid=13756934 https://www.google.com/finance?cid=13756934 While I do invest in index funds, I have the majority of my money invested in Google, Apple and LinkedIn. I truly just believe in these companies and ignore short term speculation. I am no investment expert, but these stocks combined have by far beaten all the index funds by a significant multiple. Go for the long term, ignore stock tips and earnings reports and you can be successful at investing too.
dave1619 12y ago
I think the key to picking individual stocks is the ability to evaluate companies in both a financial/quantitative and qualitative manner. This is easier said than done. But by no means impossible. Even Warren Buffett has said multiple times that if one has the skill to evaluate companies than they should pick individual companies and not choose an index fund because they will do far better with picking individual stocks. The problem is the vast majority of people are not skilled in evaluating companies and that's why Warren Buffett suggests them to choose a low-cost index fund. I've chosen the path of picking individual stocks and I've done very well with it. But I have a deep background in the many skills required to analyze companies. And also it takes a great deal of time to keep updated on the companies I follow.
- kevinskii 12y ago
  I have a very bright friend who works for a hedge fund. He's a Stanford engineering grad with an MBA from a top 10 school, and he had considerable success in his engineering career before shifting to finance several years ago. He spends most of his waking life analyzing about six medtech companies. That's right, only six. One might assume that he knows a few things about each company. And yet, whenever he recommends buying or selling one of their stocks, he's wrong almost exactly 50% of the time. (I actually track his predictions.) You might be good at picking individual stocks, but I don't think he is. And if he isn't, I don't think most people would be either--myself included. I'll stick to the index funds.
  - dave1619 12y ago
    I don't know your friend so I can't say why he's right/wrong 50% of the time. But I'd say that's pretty typical with analysts in the financial industry. It's really tough to blend quantitative and qualitative analysis together, but IMO this is a requirement to make consistently good investment choices. I think this is the secret behind Warren Buffett. Most of Wall Street though tends to focus on the quantitative (and only a few quarters out) and they tend to be highly influenced by each other, trends and sentiment. Again, I generally agree with the advice of going with low-cost index funds for the vast majority of people. However, I do think that there are some people (albeit not many) with the right background, skills, training and commitment who can consistently beat the markets (ie., this was the thesis of Peter Lynch's book Beating the Street).
mahyarm 12y ago
I don't think you should try to become a 'professional full time investor' and put everything in index funds until you reach the ratio of funds that would significantly beat your current salary, compared to the average returns of an index market portfolio. Lets assume the average return is %5, so if you make $200k/yr annually in your engineering craft, then you would need $4 million minimum to match the market for your salary, and probably at least $6 million before you would consider switching your career to 'managing your own money'.
- falsedan 12y ago
  Your numbers are off: - average long-term return on the stock market is 8-12% - full-time wealth management means no more tech job, means no need to live in the bay area, means $100k p.a. nets you a comfortable lifestyle You're looking at $1-1.5MM before retiring to the quiet life.
  - DennisP 12y ago
    That's the average long-term return over the past century or so, but not necessarily the return over any particular 30 or 40 year period. Sometimes it's quite a bit lower, and it's probably a good idea to take that into consideration. Periods that start with PE ratios as high as they are now tend to do especially poorly.
  - k3strel 12y ago
    Also remember that what matters are real returns after inflation and taxes. The S&P 500 has returned 11% a year since 1983, but 6% after taxes and inflation. http://www.thornburginvestments.com/pdfs/TH1401.pdf http://www.thornburginvestments.com/pdfs/TH1401.pdf
  - marktangotango 12y ago
    I agree with these guys, the real return is lower, and the years that are negative to 4% will be diminish your nest egg unless you eat raman in those years. A millionaire eatinv raman? Maybe.
zone411 12y ago
The main point of the article - that most mutual funds underperform the index funds is so widely known by now that I'm surprised to see it reposted here in 2014. "The high failure rate should come as no surprise, given how hedge funds operate. There’s no working model, so they vary widely, but the basic idea is that they rely on risky, untraditional investment strategies—ranging from arbitrage to taking over floundering companies, as Lampert did—to make big money fast. " No, that's not the basic idea at all. And untraditional doesn't have to mean risky (a market-neutral strategy is an example).
pbreit 12y ago
Also, pretty much guaranteed to improve outcomes for almost investor: 1) pay off your credit cards before investing 2) max out your IRA/401(k)
- sopooneo 12y ago
  I agree. But I think then there is still some question of which funds to invest in of those available through your 401K.
  - pbreit 12y ago
    Index funds, broader, the better. S&P 500 is a good start.
lordnacho 12y ago
Buying the index is the orthodoxy. There isn't a strategy that I've heard more often from non-industry friends. It's so orthodox even relatively straightforward ways of beating the index are largely ignored. Look up Falkenblog. He's got a thesis about it. If I didn't run a hedge fund, I don't know what I'd do differently though. Costs are pretty high on individual accounts. One thing you can do is invest via spread betting, which is tax free in the uk. Also the sheer a mount of infrastructure, both in terms of financial data, modelling, and the systems used to execute strategies, makes it a bigger job than one person can do.
staplo 12y ago
I've been following (or, trying to follow) the index investing strategy for years on my own, and the final culmination of that was switching to betterment.com for my small savings and retirement accounts (no affiliation). They use MPT and a host of other things to take the decision making control out of the hands of the investor (except for risk tolerance) and provide a really great modern product to do that. And the best part is that it's probably cheaper than just setting up your own online brokerage account and paying fees for transactions. They charge a percentage fee for assets under management like a normal advisor might. Anyway, I just feel strongly that the robo advisor category is major win for average people trying to invest and I wish more people looked into it rather than getting killed in the market or paying high fees to managers. Lets you just put your money in and just focus on your own life and achieving your goals, which is often the point of investing for an average person. Wealthfront is also good, but from what I understand betterment has better returns (and I prefer their interface)
- j_lev 12y ago
  The overwhelming opinion of the bogleheads crowd is that even these robo-advisers are ridiculously overpriced for what you get. And the fact that Wealthfront started as a sales portal for actively-managed (ie high-fee, high kickback) funds has tarred their image for a lot of people.
j_lev 12y ago
Of course, choosing stocks/index funds/mutual funds/hedge funds/asset allocation/tilt/tax-minimization/etc all only come into play after everything else is in order. I refer most people who ask to Dilbert's 9-Point Plan, which Scott Adams originally published in 2002 but has been reproduced many times all over the Internet eg https://retirementplans.vanguard.com/VGApp/pe/PubVgiNews?ArticleName=DilbertGuidetoPersonalFinance https://retirementplans.vanguard.com/VGApp/pe/PubVgiNews?Art... If you can't click through, here's the list: Everything you need to know about financial planning 1. Make a will. 2. Pay off your credit cards. 3. Get term life insurance if you have a family to support. 4. Fund your 401(k) to the maximum. 5. Fund your IRA to the maximum. 6. Buy a house if you want to live in a house and you can afford it. 7. Put six months’ expenses in a money market fund. 8. Take whatever money is left over and invest 70% in a stock index fund and 30% in a bond fund through any discount broker and never touch it until retirement. 9. If any of this confuses you, or you have something special going on (retirement, college planning, tax issues) hire a fee-based financial planner, not one who charges a percentage of your portfolio. "What to invest in" is only answered in #8, which you shouldn't even think about until you've worked through the previous 7 steps. Yes, write that damn will already!
- dmerrick 12y ago
  Naive question: why is a will so important?
  - j_lev 12y ago
    If you have kids then you get to specify somewhat how you want them to be raised. Regardless, it is believed that you owe it to the people you leave behind to be clear with your intentions. People dying intestate is a massive drain on society, and it often brings out the worst in people. Of course, the opposing argument is "yeah but I'll be dead so what do I care?" and to be honest it's hard to argue with this. If I may give a couple of my own personal reasons: 1) It's not that hard. My first one was written at a "Will Writing Party" where no-one had kids, so we all just either left everything to our partner or to be divided up among our siblings. One guy had neither so his estate was bequeathed to his parents, and if they were no longer alive to everyone in attendance at the party (except one poor person who was to be the witness and therefore excluded from being recipient to the estate). For most of us the will we wrote at that party served us until we married. 2) It forces you to think about "the end." Stephen Covey first highlighted the importance of "beginning with the end in mind," and it's something that everyone just puts out of their mind as long as they are able. Also in my case, I married someone for their child-raising skills rather than their ability to climb the corporate ladder (not that these are mutually exclusive), and sitting down to rewrite a will forced me to think about the added cost of term life insurance because I was taking her prime marrying years from her, and I don't want to leave her unable to remarry and only suited for unskilled labor with no cushion. My wife is also a basket case with investments so you can have some say in that regard too. 3) It forms evidence if you have to show proof of your commitment to someone. In my case our respective wills formed part of the evidence when applying for my wife's visa.
mamcx 12y ago
And what if you live outside USA?

151 points by milesf 12y ago

tldr If you're suddenly rich, pay $10 and buy $1 Million of Vanguard Total Stock Market Index. Giving your money to anybody else over the last 10 years would have yielded same or worse performance at a higher cost.

orofino 12y ago
You may need to pay that $10 if you are investing through some other brokerage account. However, do yourself a favor, open an account with Vanguard directly and you can make that purchase without any fees. Additionally, I'd recommend se percentage be invested in the Vanguard total bond market fund as well. Holding se percentage there will reduce overall portfolio volatility, and can actually increase returns slightly.
- p0ckets 12y ago
  To get the diversification benefit from holding the bond fund, you'd need to rebalance (every few months to every few years).
  - birken 12y ago
    If you are lazy you can just put your money into one of the 10+ Vanguard Target Retirement funds [1] which are just varying mixes of their stock/bond funds + automatic rebalancing. It goes from 90%/10% stock/bond mix (VTTSX) at the high end to 30%/70% at the low end (VTINX). 1: https://investor.vanguard.com/mutual-funds/target-retirement/#/ https://investor.vanguard.com/mutual-funds/target-retirement...
  - guyrt 12y ago
    If you are investing new money every month and attempting to maintain the same allocation over time, you are in a sense automatically rebalancing. Of course, this assumes your total investment over a given time period is roughly in line with the relative delta in performance.
- jhulla 12y ago
  Asset diversification is more complicated than that. To a first order, yes stocks and bonds are inversely correlated. But it is not enough to hold just stocks and bonds. In order to maximize return over your preferred time frame (while minimizing risk), you have to examine the whole universe of investable assets, examine their volatility as well as correlations amongst themselves. From there, your goal is to assemble an ideal basket of assets maximizes your return for your personal level of risk. Running these filters and choosing when to rerun/rebalance is the basis of modern portfolio theory. Managing your money using MPT is the service that many investment houses sell. Rolling your own is absolutely possible, but it is not as simple as stocks vs bonds.
  - infinite8s 12y ago
    True, but for most people without 25M (ie most of us), is the arginal improvement in return on a 500k investment worth the extra complexity over a straight stock/bond mix? Unrelatedly, what are you thoughts on the permanent portfolio (if you've heard of it).
    - j_lev 12y ago
      Not sure if this was directed at jhulla (and actually I was about to ask it to svachalek). 25% in physical PMs is hard to justify but generally speaking I think Browne's Permanent Portfolio is a good base. Perhaps 20% each of domestic equities, international equities, PMs, cash and long term bonds would be more realistic, with rebalance bands at 17/23.
  - svachalek 12y ago
    Stocks and bonds being inversely correlated is an old rule that hasn't held as true since the 2008 crisis. Stocks, most bonds, and most other asset classes have been moving up and down together although with different degrees of volatility. Long term US treasuries are a standout as one of the only investments that has a clear inverse correlation to the general pattern. Having run a lot of simulations in determining my own portfolio I came to the conclusion that these things affected my returns, in decreasing order: 1. annual maintenance costs 2. tax effects 3. choice of index 4. diversifying beyond stocks/bonds I imagine most people who aren't using a passive strategy can chop 1 - 1.5% off their costs just by switching to indexes, and the remaining optimizations will pale in comparison. But as the size of the portfolio increases the additional effort becomes worthwhile. It's possible that over the long term the market will decouple again but keep in mind that most investment advice about "universal truths" about the "long term" are based on a little over 100 years of market data. Given that I started investing at age 20 and will hopefully live to old age, that's not a lot of training data in comparison to the amount of prediction it's generating.
- jacquesm 12y ago
  You can only open an account with Vanguard directly if you are in the US.
DMac87 12y ago
Why Vanguard Total Stock Market? Why not SPDR S&P 500 ETF? Why not include international stocks, or bonds, or real estate? Choice of index is a hugely important decision, and can't be waved away so easily...
bradleyjg 12y ago
If want to invest $1M you can get managed tax loss harvesting that will pay for itself. Also you should probably have more asset classes than just US equities. Having said that, you could do a lot worse.
prostoalex 12y ago
You need to buy at least two funds to harvest those tax losses.

sharkweek 12y ago

I loved the first bit of this; that Google invested the time in their employee's education of what was about to happen with sudden riches. I know it's starting to happen, but professional sports needs this same educational process. Recently watched the 30 for 30 documentary 'Broke' and it was so heartbreaking to see what happens to these athletes who have come from nothing, get a ton of cash all the sudden, and find themselves back where they started after the paycheck stops.

devonkim 12y ago
The NBA passed a law a bit ago with this motivation. http://www.bloomberg.com/news/2012-07-12/nba-players-forced-to-save-toward-retirement-for-first-time.html http://www.bloomberg.com/news/2012-07-12/nba-players-forced-...

orofino 12y ago

This is great advice and what I have been doing for the last 3-4 years for our retirement portfolio. Prior to that we were using an 'investment guy' who had us in a bunch of high-cost funds. I sent the guy and email and ended the relationship and took a couple months to read and learn about this. I recommend the "investor's manifesto" by William Bernstein for anyone interested.

jhulla 12y ago

Assuming you believe the underlying assumptions (and they very well may not be true), modern portfolio theory allows you to build a mathematically ideal portfolio for a given amount of risk. The math behind MPT might be hand waved as followed: goal seek a maximum portfolio return by combining assets with minimal correlation under a fixed risk scenario. In the end, you will have portfolio that will give you the maximum theoretical return for your selected amount of risk. In practice, outside of running a hedge fund, or a mutual fund with explicit investment guidelines (e.g. we invest in emerging market energy companies), a responsible asset manager has no choice but to follow MPT. In other words, if you are not a specialized fund, there is no mathematical justification for deviating from an MPT constructed portfolio. By definition, any deviation from a MPT balanced portfolio means you have either a) taken on more risk than necessary or b) reduced your potential return or c) do not believe in the underlying assumptions of MPT. So what is the amateur person worth $25M to do today? As with all things, you should seek professional advice. There are many nuances of tax efficiency, estate efficiency, asset protection, personal needs, etc. that a professional advisor should guide you through. Apparently the folks at WealthFront and FutureAdvisor are selling MPT driven portfolios to employees of SF bay area tech firms. edit: As a couple of users point out below, there is controversy over the effectiveness of MPT including: whether the models effectively capture the distribution of risk vs return and whether the values desired by the models can be calculated with proper accuracy. PMPT (post-modern portfolio theory) builds upon MPT. Lastly there are critics such as Nassim Taleb (of Black Swan fame) who find some of the core assumptions flawed.

hkmurakami 12y ago
>So what is the amateur person worth $25M to do today? As with all things, you should seek professional advice. There are many nuances of tax efficiency, estate efficiency, asset protection, personal needs, etc. that a professional advisor should guide you through. While this is true, the problem that most advisors that a $25MM net worth individual has access to are mostly duds and/or salesmen. Identifying true value add advisors is easier said than done, imo.
- deleted 12y ago
  [deleted]

dd36 12y ago

bogleheads.org Also, the Frontline episode, "The Retirement Gamble"

MCRed 12y ago

Regarding "Don't beat the market", Warren Buffet says "The game is really easy when your opponent decides not to play". Unfortunately, giving up has a lot of appeal: It means it's not your fault you didn't beat the market. It lets people say the game is rigged and take comfort. How many times have you seen buying company stock compared to gambling? Even though, on its face this comparison is ludicrous. (Especially here on HN where so many of you are giving up $40k a year for 0.0004% of a company that is %98 likely to be worthless.) It becomes like a religion, where anyone saying "Hey, it's easy to beat the market" becomes a "bad guy" who is advising "risky strategies". The reality is, the tools available to the individual investor are such that you can control the level of risk you want. You can take a stock of high risk and make it low risk with option hedges. You can take a stock of low risk and make it high risk with different options. "%90 of options expire worthless, the real money is in selling them!" -- Abraham Lincoln Of course, that's true-- if you have the ability to borrow from the Fed at the overnight rate. Most options are bought as they are intended- as a hedge to minimize risk. IF the underlying asset goes the expected direction, then the option will expire worthless. My point is really that you have to read books, and hear many points of view, and figure out what's right for you. Almost every professional and every ideologue is going to lead you down a bad path for you, because there is no one-size-fits all. There is no "best" advice.

encoderer 12y ago
I agree. The awful conventional wisdom that options are "riskier" than stock, that they're not appropriate for retail investors, has not done retail investors any favors. To me, it's like saying that sharp knives are too dangerous for the home cook. If you want returns similar to professional investors, you have to use professional tools. There's a learning curve, but that's true of most things in life that are worth knowing. Edit: People downvote what they don't understand, that's fine. But if you care about this subject at some point you will ask yourself "why do retail investors underperform" and you can either throw your hands up, call it a rigged game, and blame High Frequency Trading or El Nino or whatever. Or you can look at what a professional trader does differently, and adapt those techniques yourself.
- 12y ago

jcdavis 12y ago

Decent article, but awfully linkbait-y headline. You'll get that advice at many places around the internet - I recommend those curious to read the wiki at bogleheads.org

Apocryphon 12y ago

General question about index funds: if a market is about to go into a steep correction or even a recession, wouldn't it be more advantageous to invest in specific stable stocks, rather than an index fund that tracks the entire market?

6581 12y ago
Yes, but that would require you to reliably predict future market price movements. https://en.wikipedia.org/wiki/Market_timing https://en.wikipedia.org/wiki/Market_timing
jcdavis 12y ago
Sure, if you are sure the market is about to go into a steep correction or even a recession. But how do you know that? Why not go even further - If you knew for sure the market was going to drop, you could make a lot of money in options. Why aren't you doing that instead? You shouldn't be trying to time the market. Lots of people try, they tend to fail. Come up with an allocation plan, and stick to it.
- freyr 12y ago
  >Lots of people try, they tend to fail. And with enough people constantly trying to predict the market, inevitably some get it right. They make a lot of money, they're heralded as geniuses, and we hear about them in the news. We don't hear about everyone else who failed, or when the market-timing winners turn out to be repeat failures in subsequent years. Put a bunch of people in a room and have them start flipping coins. If there are enough people playing the game, chances are somebody will end up tossing many heads in a row. If they keep flipping long enough, chances are they'll revert back to the mean. This is a pretty good model of market prognostication.
vellum 12y ago
That's what Wall Street calls "trying to catch a falling knife". You want to wait until after recovery starts, because you have no idea how far the price is going to fall. Of course, figuring out whether it's an actual recovery vs. a pit stop on the way to the bottom, is another issue. http://www.investopedia.com/terms/f/fallingknife.asp http://www.investopedia.com/terms/f/fallingknife.asp

OliverJones 12y ago

Work with an advisor who has access to DFA. Invest for the long term. Pull funds out when you want to use them.

prostoalex 12y ago

Schwab Intelligent Portfolios are launching next year, and will offer balanced portfolios with tax-loss harvesting for a low, low price of 0% of assets under management. https://intelligent.schwab.com/ https://intelligent.schwab.com/

Punoxysm 12y ago

I feel like I get this advice all the time. "Invest in Indexes" is ridiculously popular advice. I've also been exposed to portfolio theory in lots of academic literature. It's not obscure within finance or without.

oldspiceman 12y ago
These guys didn't know about it: http://www.hypun.com/gallery/1298/Top_10_NBA_Players_that_went_Broke http://www.hypun.com/gallery/1298/Top_10_NBA_Players_that_we...

tunesmith 12y ago

It's really hard to do MPT on your own. I got really into finding a collection of 10-12 mutual funds that are in a collection of sectors. I also mixed it with a strategy of selling each fund when it went below its 12-month moving average, and buying back in when it went above. I backtested it a bit and read some studies and it seemed reasonable. Sacrifice a little upside to protect against more downside. It sure would have saved me had I followed those strategies during the last two mega crashes; the dotcom bomb and the finsys crash. Of course, since doing that, the S&P has been on a sustained climb that I've only partially benefitted from since I've had some bond funds, etc. The selling/buying has worked ok - it's whipsawed me in some cases and saved me in others, but given that I'm not spending more than a day a month on it, and that I only have a surface level understanding of sector-balancing, and that while it seems my funds are cheap, who really knows for sure... I'm regularly tempted to just dump the whole thing and get back into one fund, just in time for the next crash the other part of my brain says. Also, it's worth pointing out that a lot of the "beat the market" talk is rubbish for entirely different reasons. People tend to get more cash to invest when times are good, and less when times are bad. That means that the average person is going to buy more when the market is high, and less when the market is low. I don't ever see this accounted for in studies. Even if you were to drop your money in an S&P-500 index fund whenever that money becomes available to you, you're still going to underperform the S&P-500 long-term by a moderate amount.

zone411 12y ago
Actually, it has been accounted for in the studies. See: http://www.stlouisfed.org/on-the-economy/the-cost-of-chasing-returns/ http://www.stlouisfed.org/on-the-economy/the-cost-of-chasing...

mangeletti 12y ago

Did anybody stop to notice the date of the article? I'm confused by the conversation herein. I thought this was posted as a sort of mockery of the author. After-all, if you put your money into an index right when this guy told you to, you would have lost your shirt. If you had a while until retirement, that wouldn't be a big deal, since it would now be back along with more, but what about the folks moving their IRA out of balanced bond and commodity based funds with some growth stocks, etc. (i.e., hedged) and essentially into the S&P 500, at 60 years old... like my parents did. The best advice to anyone is to buy indexes after a major market crash; only then will you reap rewards without nearly as great a risk. Here's the catch: most of you will disagree; that's why 10% play and the other 90% pay.

pessimizer 12y ago
>After-all, if you put your money into an index right when this guy told you to, you would have lost your shirt. Not if you held it until now.
MiguelVieira 12y ago
The S&P 500 is up 36% since the article was written.
EliRivers 12y ago
Even if you invest at peaks, and watch it all crash shortly afterwards, you can still do very well. Just start early so you're not staring at retirement the year after your first investment. http://awealthofcommonsense.com/worlds-worst-market-timer/ http://awealthofcommonsense.com/worlds-worst-market-timer/

nopinsight 12y ago

In my opinion, there are probably some persistent quirks and patterns in human minds and computer programs (also written by humans) which may not be fully exploited by most market participants in some markets (esp. Emerging and Frontier markets). One well-known pattern is Momentum trading, which is also a basis of Market Crash prediction model by Prof. Sornette, with a history of several accurate predictions. [1] > “a few funds that at any given moment outperform the indexes.” But over the years, he explains, their performances invariably decline.. There are a few hedge funds that, over decades, still beat the market. Medallion Fund, according to public knowledge, consistently generates above-market returns, never had a down year, and even returned 80% in 2008, when stock markets all over the world crashed. Its trading model is a highly guarded secret. It does not even let outsiders invest (with exceptions for a few). The fund belongs to Renaissance Technologies, founded by a renowned Mathematical Physics professor, Jim Simons, and employs many PhDs in Physics and Math. (This book writes about it in fair detail. [2]) [1] How we can predict the next financial crisis: http://www.ted.com/talks/didier_sornette_how_we_can_predict_the_next_financial_crisis http://www.ted.com/talks/didier_sornette_how_we_can_predict_... [2] The Physics of Wall Street: http://www.amazon.com/The-Physics-Wall-Street-Unpredictable/dp/0544112431 http://www.amazon.com/The-Physics-Wall-Street-Unpredictable/...

pbreit 12y ago
The reference was to other mutual funds. Hedge funds are not accessible to the average retail investor and invest in things that average investors don't have access to.
pessimizer 12y ago
If results were randomly distributed, you'd expect a very few funds to perform that way.

jasonwilk 12y ago

It would be hard to debate someone about paying management fees for mutual funds vs no fees on index funds like NASDAQ. This graph should say it all (10 year graph): https://www.google.com/finance?cid=13756934 https://www.google.com/finance?cid=13756934 While I do invest in index funds, I have the majority of my money invested in Google, Apple and LinkedIn. I truly just believe in these companies and ignore short term speculation. I am no investment expert, but these stocks combined have by far beaten all the index funds by a significant multiple. Go for the long term, ignore stock tips and earnings reports and you can be successful at investing too.

dave1619 12y ago

I think the key to picking individual stocks is the ability to evaluate companies in both a financial/quantitative and qualitative manner. This is easier said than done. But by no means impossible. Even Warren Buffett has said multiple times that if one has the skill to evaluate companies than they should pick individual companies and not choose an index fund because they will do far better with picking individual stocks. The problem is the vast majority of people are not skilled in evaluating companies and that's why Warren Buffett suggests them to choose a low-cost index fund. I've chosen the path of picking individual stocks and I've done very well with it. But I have a deep background in the many skills required to analyze companies. And also it takes a great deal of time to keep updated on the companies I follow.

kevinskii 12y ago
I have a very bright friend who works for a hedge fund. He's a Stanford engineering grad with an MBA from a top 10 school, and he had considerable success in his engineering career before shifting to finance several years ago. He spends most of his waking life analyzing about six medtech companies. That's right, only six. One might assume that he knows a few things about each company. And yet, whenever he recommends buying or selling one of their stocks, he's wrong almost exactly 50% of the time. (I actually track his predictions.) You might be good at picking individual stocks, but I don't think he is. And if he isn't, I don't think most people would be either--myself included. I'll stick to the index funds.
- dave1619 12y ago
  I don't know your friend so I can't say why he's right/wrong 50% of the time. But I'd say that's pretty typical with analysts in the financial industry. It's really tough to blend quantitative and qualitative analysis together, but IMO this is a requirement to make consistently good investment choices. I think this is the secret behind Warren Buffett. Most of Wall Street though tends to focus on the quantitative (and only a few quarters out) and they tend to be highly influenced by each other, trends and sentiment. Again, I generally agree with the advice of going with low-cost index funds for the vast majority of people. However, I do think that there are some people (albeit not many) with the right background, skills, training and commitment who can consistently beat the markets (ie., this was the thesis of Peter Lynch's book Beating the Street).

mahyarm 12y ago

I don't think you should try to become a 'professional full time investor' and put everything in index funds until you reach the ratio of funds that would significantly beat your current salary, compared to the average returns of an index market portfolio. Lets assume the average return is %5, so if you make $200k/yr annually in your engineering craft, then you would need $4 million minimum to match the market for your salary, and probably at least $6 million before you would consider switching your career to 'managing your own money'.

falsedan 12y ago
Your numbers are off: - average long-term return on the stock market is 8-12% - full-time wealth management means no more tech job, means no need to live in the bay area, means $100k p.a. nets you a comfortable lifestyle You're looking at $1-1.5MM before retiring to the quiet life.
- DennisP 12y ago
  That's the average long-term return over the past century or so, but not necessarily the return over any particular 30 or 40 year period. Sometimes it's quite a bit lower, and it's probably a good idea to take that into consideration. Periods that start with PE ratios as high as they are now tend to do especially poorly.
- k3strel 12y ago
  Also remember that what matters are real returns after inflation and taxes. The S&P 500 has returned 11% a year since 1983, but 6% after taxes and inflation. http://www.thornburginvestments.com/pdfs/TH1401.pdf http://www.thornburginvestments.com/pdfs/TH1401.pdf
- marktangotango 12y ago
  I agree with these guys, the real return is lower, and the years that are negative to 4% will be diminish your nest egg unless you eat raman in those years. A millionaire eatinv raman? Maybe.

zone411 12y ago

The main point of the article - that most mutual funds underperform the index funds is so widely known by now that I'm surprised to see it reposted here in 2014. "The high failure rate should come as no surprise, given how hedge funds operate. There’s no working model, so they vary widely, but the basic idea is that they rely on risky, untraditional investment strategies—ranging from arbitrage to taking over floundering companies, as Lampert did—to make big money fast. " No, that's not the basic idea at all. And untraditional doesn't have to mean risky (a market-neutral strategy is an example).

pbreit 12y ago

Also, pretty much guaranteed to improve outcomes for almost investor: 1) pay off your credit cards before investing 2) max out your IRA/401(k)

sopooneo 12y ago
I agree. But I think then there is still some question of which funds to invest in of those available through your 401K.
- pbreit 12y ago
  Index funds, broader, the better. S&P 500 is a good start.

lordnacho 12y ago

Buying the index is the orthodoxy. There isn't a strategy that I've heard more often from non-industry friends. It's so orthodox even relatively straightforward ways of beating the index are largely ignored. Look up Falkenblog. He's got a thesis about it. If I didn't run a hedge fund, I don't know what I'd do differently though. Costs are pretty high on individual accounts. One thing you can do is invest via spread betting, which is tax free in the uk. Also the sheer a mount of infrastructure, both in terms of financial data, modelling, and the systems used to execute strategies, makes it a bigger job than one person can do.

staplo 12y ago

I've been following (or, trying to follow) the index investing strategy for years on my own, and the final culmination of that was switching to betterment.com for my small savings and retirement accounts (no affiliation). They use MPT and a host of other things to take the decision making control out of the hands of the investor (except for risk tolerance) and provide a really great modern product to do that. And the best part is that it's probably cheaper than just setting up your own online brokerage account and paying fees for transactions. They charge a percentage fee for assets under management like a normal advisor might. Anyway, I just feel strongly that the robo advisor category is major win for average people trying to invest and I wish more people looked into it rather than getting killed in the market or paying high fees to managers. Lets you just put your money in and just focus on your own life and achieving your goals, which is often the point of investing for an average person. Wealthfront is also good, but from what I understand betterment has better returns (and I prefer their interface)

j_lev 12y ago
The overwhelming opinion of the bogleheads crowd is that even these robo-advisers are ridiculously overpriced for what you get. And the fact that Wealthfront started as a sales portal for actively-managed (ie high-fee, high kickback) funds has tarred their image for a lot of people.

j_lev 12y ago

Of course, choosing stocks/index funds/mutual funds/hedge funds/asset allocation/tilt/tax-minimization/etc all only come into play after everything else is in order. I refer most people who ask to Dilbert's 9-Point Plan, which Scott Adams originally published in 2002 but has been reproduced many times all over the Internet eg https://retirementplans.vanguard.com/VGApp/pe/PubVgiNews?ArticleName=DilbertGuidetoPersonalFinance https://retirementplans.vanguard.com/VGApp/pe/PubVgiNews?Art... If you can't click through, here's the list: Everything you need to know about financial planning 1. Make a will. 2. Pay off your credit cards. 3. Get term life insurance if you have a family to support. 4. Fund your 401(k) to the maximum. 5. Fund your IRA to the maximum. 6. Buy a house if you want to live in a house and you can afford it. 7. Put six months’ expenses in a money market fund. 8. Take whatever money is left over and invest 70% in a stock index fund and 30% in a bond fund through any discount broker and never touch it until retirement. 9. If any of this confuses you, or you have something special going on (retirement, college planning, tax issues) hire a fee-based financial planner, not one who charges a percentage of your portfolio. "What to invest in" is only answered in #8, which you shouldn't even think about until you've worked through the previous 7 steps. Yes, write that damn will already!

dmerrick 12y ago
Naive question: why is a will so important?
- j_lev 12y ago
  If you have kids then you get to specify somewhat how you want them to be raised. Regardless, it is believed that you owe it to the people you leave behind to be clear with your intentions. People dying intestate is a massive drain on society, and it often brings out the worst in people. Of course, the opposing argument is "yeah but I'll be dead so what do I care?" and to be honest it's hard to argue with this. If I may give a couple of my own personal reasons: 1) It's not that hard. My first one was written at a "Will Writing Party" where no-one had kids, so we all just either left everything to our partner or to be divided up among our siblings. One guy had neither so his estate was bequeathed to his parents, and if they were no longer alive to everyone in attendance at the party (except one poor person who was to be the witness and therefore excluded from being recipient to the estate). For most of us the will we wrote at that party served us until we married. 2) It forces you to think about "the end." Stephen Covey first highlighted the importance of "beginning with the end in mind," and it's something that everyone just puts out of their mind as long as they are able. Also in my case, I married someone for their child-raising skills rather than their ability to climb the corporate ladder (not that these are mutually exclusive), and sitting down to rewrite a will forced me to think about the added cost of term life insurance because I was taking her prime marrying years from her, and I don't want to leave her unable to remarry and only suited for unskilled labor with no cushion. My wife is also a basket case with investments so you can have some say in that regard too. 3) It forms evidence if you have to show proof of your commitment to someone. In my case our respective wills formed part of the evidence when applying for my wife's visa.

mamcx 12y ago

And what if you live outside USA?