Since that phrase is somewhat ambiguous, let me clarify for anyone who misunderstood it on first reading, like I did. :-)
I'm pretty sure you don't mean "It may be a good idea to invest all your money in the company you work for."
But rather "Consider this very bad thing that may happen if you invest all your money in the company you work for."
Yep, I really mangled that sentence. Sorry to everyone who just invested their life savings into the company they work for.
I guess I really meant...
> Consider the scenario of investing all your money in the company you work for.
This is the part that kills my ability to "set it and forget it". So many things bother me about this. I know I have to do it (because Japan), but how much and on what markets?
* I don't like the idea of investing in emerging markets. Having grown up in one, I know how shady those can be and how cooked the books are. Growth is often an illusion. If an emerging market is "promising", I'd rather wait until it achieves developed status.
* Developed market indexes are dominated by Japanese stocks, which have gone nowhere in almost 3 decades. You have to accept that a good chunk of your money is going into a no-growth sink.
* I don't know what to expect from Europe. Or even Canada for that matter. When I look at those countries from a distance, I see that 1) their large corporations have been established looong ago (i.e. no new ones are created) and 2) heavy taxation and regulations in those countries doesn't seem to leave much room for profits, at least not as much as in the US. I'm probably wrong though, so please educate me.
I know home bias is supposedly wrong, but the American market is well studied, well known, highly liquid, and there's a cultural aspect to its growth in that its part of the general population's mindset to invest in it for long term goals. I don't think that's the case in all (or even most) countries.
Part of me wants to go full jlcollinsnh/Bogle/Buffet, folks who say you don't need international diversification. Another part of me wants to go as blind as possible into it and just invest in a "world index" ETF like ACWI or VT. And yet another part of me wants to do something in between but has no idea what to do :)
Invest into multiple emerging markets, chances are they won't all do bad at the same time, especially if they are in different parts of the globe (take India, Brazil and Indonesia for example), put some into an european index fund, etc.
You seem to be most comfortable with the US market, so the bulk of the assets you decided to invest in equities go there, say 70% and to make things easy put 15% into Europe and 15% into emerging markets. Now you have some diversification, but could still feel comfortable enough to not be worried about your money disappearing over night.
Put your money into it. Walk away.
So what? If your target retirement date was 20+ years in the future, this is arguably the right call. If your retirement date was closer, they still more heavily weighted you toward safer assets.
The fact that they did this before a market crash is irrelevant — nobody can predict these things with any reliability. Not you, not me, not Vanguard.
> They definitely chase performance.
They definitely do not.
> Increased international allocation when they saw it was performing well.
Increased international allocation to track overall market better.
> Besides, they hold international currency-hedged bonds, something that no one seems to be able to come up with a good reason for.
From their website: The fund employs currency hedging strategies to protect against uncertainty in future exchange rates, so investment returns are expected to reflect the underlying performance of international bonds.
Hit this link: http://www.kalzumeus.com/2013/04/24/marketing-for-people-who... and search in the page for Motley Fool.
The only other data point I have to add is that a year or two ago, The Motley Fool published a breathless blog post announcing that 3D printing was about to destroy Chinese manufacturing, and that everyone should invest in companies that make 3D printers or CAD software.
They are a "diversified financial brand" which does a lot of e.g. telling people to get out of credit card debt (a good idea!) and save for retirement (a good idea!). Then they also tell people that "with just a little work, you too can read company numbers and outperform the stock market" (a really bad idea!) and "if you want to do less work, buy our newsletters and we'll give you picks which mumble mumble maybe mumble mumble will make you into Warren Buffet" (a really bad idea!).
[0] https://en.wikipedia.org/wiki/Variance#Sum_of_uncorrelated_v...
You can investment just like Buffet if you Berkshire Hathaway Class B (BRKB). Currently ~$145 per share.
I got that from the introduction to an investment book about Buffet.
His successful leveraged investments are analogous to negative expected value bets that people would typically relegate to degenerates.
He advocates indexing for the little people. This has nothing to do with what he did, or does now. (And there's nothing wrong with that)
It's unlikely even Buffet himself could replicate his initial stock picking success over a long period of time and he would be the first to admit that.
Hint: he never sells.
He sells.
https://www.bogleheads.org/wiki/Bogleheads%C2%AE_investment_...
FWIW Vanguard has about 35% allocated to international for me, so it's surprising to see that Bogle wouldn't recommend international exposure.
The risks can be higher but so are the rewards. The most important thing is to not just invest in a market blindly. Try your best to understand that market and keep tabs on that market.
You don't have to diversify for the sake for diversification. You can invest domestically and diversify by industries.
[0] https://www.google.com/finance?chdnp=1&chdd=1&chds=1&chdv=1&...
Yeah, this is an over-generalization. There are plenty of index funds for European companies at a variety of risk levels, just like in the U.S.
Also, there are worldwide funds too. Capital World Growth and Income Fund (CWGIX) [0] is one example that covers the U.S., Europe, and Asia. Note that this is a mutual fund, not an index fund.
Edit: Perhaps the downvotes are because this is an actively managed fund. The point of giving the example was trying to counter the specific concern OP stated. For passive, a specific Vanguard fund that's similar, at least the closest I found, is Vanguard Total World Stock Index Fund (VTWSX) [1]. It is very diversified.
(All figures quoted above are "price" and ignore dividends, which is bad but I don't have easy access to dividends-included figures.)
Edit: I think I found one — VTWSX is +35% over the same time period. Accounting for fees vs the managed fund, probably means a better return here.
Yes, I've heard that a million times, but that kind of advice presupposes a bull market. What if it's 1967, and you're about to go into a 15 year period of up and down markets, with no real growth in stock prices? And that's before inflation; the market fell substantially during the horrible 70s if measured in real dollars. All kinds of stock enthusiasts (like most folks here) got eaten alive. Pessimism reigned by the early 80s. Most people said "I'll never buy stocks again.".
Ironically, when investors finally capitulated, the great bull market of the 80s and 90s started.
My point is that most people here are mesmerized by that bull market, and by recent gains. But historically the indexes have had huge, long term swings that probably exceed most people's investment horizon.
"Past performance is no guarantee of future results" is not just a legal disclaimer. It's a bitter truth. Our current optimism is strongly colored by recent gains.
What if you had retired in 1929? You would have received nary a return for 25 years.
Sure, indexes average 8 percent or so, over the very long term, but it can be an intolerably long averaging interval.
http://awealthofcommonsense.com/2014/02/worlds-worst-market-...
> What if you had retired in 1929? You would have received nary a return for 25 years.
That just isn't true? You're looking at charts without dividends reinvested. Plug 1929-1950 into https://www.measuringworth.com/datasets/sap/ for example. It had bounced back above 1929 by 1937; never falls below the starting value after 1944.
Social security was signed into law in 1935 (6 years later).
The problem isn't lasting the first 6-15 years (4% rule of thumb = 25x yearly spending; in very low risk cash/bonds obviously that lasts around 25 years), it's having any money left over to last the rest.
And keep in mind, 1929 and ~1965 are the two worst years to retire in in US history.
Definitely this. I personally believe "Always be invested in the market" is very irresponsible advice to give, precisely because it completely ignores this fundamental truth.
Just because markets have averaged a positive return in the past doesn't mean they necessarily will continue to average a positive return in the future. And as the saying goes, the market can remain irrational far longer than you can remain solvent.
That said, I still do invest most of my money in the market, but I don't try to pretend it's anything but a gamble. I've weighed my options, and the upside of investing in the stock market is much higher compared to all my other available options for investment, and I can afford to lose this gamble at this early stage in my life.
But when people ask me for investment advice, I will tell them it's a gamble and let them make that decision for themselves, rather than try to propagate this ridiculous urban myth that the stock market will always somehow eventually end up higher, and add fuel to what has essentially become a massive pyramid scheme.
The easiest way to tell if someone understands financial markets is to find out whether they believe they can time the market. If they believe they can predict the market, they don't know what they are talking about.
[edited - removed ending]
You are astoundingly unlikely to know more about any stock from reading the newspaper, seeing their chart on Google Finance, or consuming their quarterly reports than a team of PhDs who did nothing but study that stock for the last year, and accordingly are vanishingly unlikely to trade stocks in such a fashion that you do better than the market once you account for fees and tax impact.
It gets to why these comment threads can sometimes have people talking past each other. Someone will say "You can't time the market", and mean 'you' in the same way Patrick does, but someone else will come along and think the statement meant "no one can time the market". Then the discussion goes off into a whole rabbit hole about quant hedge funds and the like.
"You are astoundingly unlikely to create something better and more-secure from seeing a blog-post, reading some Wikipedia articles, etc. than a team of PhDs who did nothing but study mathematical theory, cryptography, and code-breaking for the last few years, and accordingly are vanishingly unlikely to create a new scheme which is more secure than existing standards once you account for performance and maintenance."
If you have a reasonable way of distributing software updates, signed-DH with an AES-based AEAD with termination detection for transport authentication, and a signed hash tree for data authentication, is going to be more secure than RANDOM_SECURITY_STANDARD.
Thankfully, there are some good well-written implementations of that (https://www.tarsnap.com/spiped.html, https://nacl.cr.yp.to), but picking a standard randomly will not get you them.
This is the comment equivalent of a loaded question. Or it's like those people who dismiss those arguing against them because of who they are rather than what their argument is.
for example, I'm heavily invested in the market but recent events are leading me to consider halfing my investment rate to be more cautious. I'm not going to take any money out or stop investing but by your def I'm "timing" the market, but really I'm "timing" my life. I don't feel confident that I can afford the risk, and I'm lowering my exposure rate.
The important point I haven't seen mentioned is that the money you put in the market should not be needed for 10 years. Not money you plan to buy a house in about 5 years, or maybe use to get married about 10 years from now. From 1929 to 1933 the DJIA went down 88% before starting to recover. Ten years is really too short a time horizon, you should have a 20 year perspective or longer. If you had invested the day before the 1929 crash and kept your money in the whole time you would not have broken even, adjusting for inflation, until 1957 - 28 years later.
Would I be market timing if instead of moving out of the market to avoid the Trump winning risk, I borrowed money to buy shares in an election market?
https://iemweb.biz.uiowa.edu/quotes/Pres16_quotes.html
If Trump wins, I triple the money I put into election shares but lose in my 401k. If Trump loses, the increase in my 401k will cover my loss in the election market.
Time in the market beats timing the market - the adage is as old as time itself. Not sure that knowing it makes you understand the markets especially well. Similarly, not sure that not knowing it says anything about you either.
I had a friend in college who played World of Warcraft. When the first expansion was announced, he invested $10,000 in Blizzard stock. His reasoning? "It's going to be awesome and sell a lot of copies!"
He didn't understand that the stock price at the time he made the purchase already reflected that information (that there was an expansion coming out soon).
And... just to go a step further. My comment included the word 'easiest' to describe how to find out someone doesn't know what they are talking about. IMO, if someone starts talking about timing the market, I know right away that they do not know what they are talking about.
Other indicators are much harder to diagnose. A self proclaimed market timer is just the easiest to identify.
That's not always the case, just making the point that rebalancing a portfolio is not necessarily the same thing as trying to time a particular market.
You could see cash as a specific kind of market as well with your definition. I'm sure there were time periods when holding cash was your best option.
Rebalancing is not timing the market, unless you're changing your ratios.
Let's say I want 80% equities and 20% cash. The market bombs, and now I have 50% equities and 50% cash. If I thought all the information was already priced into the market, then reallocating to get back to 80/20 makes sense. Not rebalancing would be more like timing the market, because I would be assuming that the current value doesn't represent some "true value" of the market.
> The question still remains: When would you move to other asset classes?
Somewhat regularly, but not constantly because that takes time and has transaction costs. The specific time doesn't matter.
> I'm sure there were time periods when holding cash was your best option.
Definitely, it's just very very hard to identify which periods they are until after they've happened.
Edit: Clarified that both are local.
People also unwittingly imply have actions where, if you asked them, they'd say they couldn't predict the market, but they'll say things like "I'm waiting for the market to cool off"
This. Another way to think of it: if you are out of the market when it goes up by X% that is functionally equivalent to an X% loss, i.e. you have X% less money than you otherwise would have had.
(Well, OK, technically it's equivalent to a loss of X/(1+X) but that's pretty close to X for X<<100%.)
The larger American companies are global companies, so you get that anyway. The proof is look what happens to the US markets when some foreign event happens, like Brexit.
Also, what are your feelings about various robo advisors like Wealthfront and Betterment and the competing products that Schwab and Vanguard have out now?
Say you have Fund A and Fund B set to automatically invest 50/50 your $100 dollar contribution bi-weekly, with a buy commission of $5. You pay buy commissions on fund A and B 4 total times a month, so you've wasted 10% of your monthly investment ability ($200 - $20). In a year that money is $194 at 8%. (This used to be the case with old ShareBuilder/ING/Capital One---not sure about the new-style other brokers)
Consider a monthly payment to Fund A and two weeks later a monthly payment to Fund B. You saved half commission cost of above, and in a year your return is ~$205.
Robo Advisors like Wealthfront are still just advisors, and that means they're just guessing like real-life advisors. And as has been proven time and again, they underperform index funds.
* http://www.investopedia.com/articles/investing/060216/3-reas... * http://finance.yahoo.com/news/buffett-most-mportant-investme...
Tax loss harvesting is limited to 3000 per year, but you can carry over until you've exhausted the losses.
Of course TLH is only good if you're in a taxable account with them.
I also don't buy it being easy- particularly with trying to avoid the pitfalls of wash sales and the paperwork to actually claim it.
Typical brokerages can do that too :-).
> rebalance automatically
The value of which is maybe dubious, as pointed out elsewhere in the thread. It doesn't need to be done frequently, if at all, and is pretty trivial with a simple 3-fund portfolio.
> Tax loss harvesting is limited to 3000 per year, but you can carry over until you've exhausted the losses.
Right. But you only get so many working years.
> Of course TLH is only good if you're in a taxable account with them.
> I also don't buy it being easy- particularly with trying to avoid the pitfalls of wash sales and the paperwork to actually claim it.
You need to be aware of how wash sales work even if you use a robo-advisor to do the TLH. You need to be sure you don't have substantially equivalent securities in your IRAs and 401(k), etc. The actual mechanic is pretty easy — sell one index fund (with shares held over 30 days), buy another extremely similar index (but not the exact same index).
As far as the paperwork — it's imported automatically with Turbotax etc and is exactly the same paperwork as is needed for capital gains.
TLH is also only good while you're working. If you have enough TLH saved up to cover the rest of your working years at $3k/year, you can stop paying the robo-advisor premium.
I'm sure there are people that are heavily invested in long duration bonds that do not understand how much interest rate risk they are taking.
Its a little different from a Robo advisor, but I'd probably pay 0.05%+ (5 basis points) annually to know my factor exposures.
I am likely exposed to factors that I am not even aware of.
Hmm. Citation needed. They've barely been letting people invest long enough for that to be "proven" once, let alone "time and again".
I don't believe said evidence exists, here's why.
First, the robo advisors distribute your money directly against and amongst several index funds.
Second, the money-saving benefits robo advisors provide that direct indexing doesn't, like very frequent automatic rebalancing and automated (aggressive) tax-loss harvesting.
Third, the ability to diversify any amount of money. You can put $1k into Wealthfront and diversify across five Vanguard index funds. But directly on Vanguard, this is impossible because the minimum investment in most Vanguard funds is $3k [0].
With that, take their Total Stock Market Index Fund as an example. If you can only invest $3k in it, your expense ratio is 0.16% [1]. If you can invest $10k in it, your expense ratio is 0.05% [2]. Through Wealthfront, I can hold the VTI ETF at 0.05% expense ratio, which I don't have to pay directly, only indirectly out of the standard Wealthfront fees.
The best possible claim I can imagine then is that for very large accounts, excluding tax-loss harvesting benefits and any benefits of rebalancing, it is cheaper to index invest — for example, if you have a $100k account and can spend less than $225 worth of your time [4] in the entire year keeping up on it, rebalancing if you wish, etc., then in some cases you could beat the robos. The tradeoff of going direct is arguably not free though. I also don't believe this level of investment applies to most people, at least most Americans.
In fact, for accounts under $10k, the Wealthfront fee is zero. I can't think of a good reason why everyone shouldn't take advantage of that.
[0]: https://investor.vanguard.com/mutual-funds/fees
[1]: https://personal.vanguard.com/us/funds/snapshot?FundId=0085&...
[2]: https://personal.vanguard.com/us/funds/snapshot?FundId=0585&...
[3]: https://personal.vanguard.com/us/FundsSnapshot?FundId=0970&F...
Well, they charge additional fees. They have to make that up somewhere or it's the same (but at higher cost) as buying the indices directly.
> very frequent automatic rebalancing
This actually costs money and doesn't improve outcomes. Scroll to "study for the NYTimes on rebalancing" on http://johncbogle.com/wordpress/category/ask-jack/ . Or http://www.morningstar.com/cover/videocenter.aspx?id=615379 .
> automated (aggressive) tax-loss harvesting
Tax-loss harvesting has very limited benefit. Mostly you can offset income. But it's only $3k/year. You can harvest enough losses by hand to easily take the $3,000 deduction too.
> Third, the ability to diversify any amount of money. You can put $1k into Wealthfront and diversify across five Vanguard index funds. But directly on Vanguard, this is impossible because the minimum investment in most Vanguard funds is $3k.
No... you can buy the same Vanguard ETFs with no minimum.
> With that, take their Total Stock Market Index Fund as an example. If you can only invest $3k in it, your expense ratio is 0.16% [1]. If you can invest $10k in it, your expense ratio is 0.05% [2]. Through Wealthfront, I can hold the VTI ETF at 0.05% expense ratio
You can just buy VTI as an individual. You still get the 0.05% rate.
> The best possible claim I can imagine then is that for very large accounts, excluding tax-loss harvesting benefits and any benefits of rebalancing, it is cheaper to index invest — for example, if you have a $100k account and can spend less than $225 worth of your time [4] in the entire year keeping up on it, rebalancing if you wish, etc., then in some cases you could beat the robos.
Yeah. Reducing expenses is the goal.
I feel like you may have overlooked some of the nuances in my answer, because I've already specifically pointed out how the robo advisors can be cheaper than buying the indexes directly for a lot of people.
If that's what you think, you've missed some of my post :-). Specifically, I said:
> you can buy the same Vanguard ETFs with no minimum.
As an individual you can get 0.05% VTI directly from Vanguard. No $3k minimum (minimums are a mutual fund thing).
>>I stopped putting money into the stock market since a while ago
These two statements are in conflict with one another. You are literally timing the market by not investing anymore. Just invest every month and you will be much better off.
You realize you are trying to time the market, right?
There's a big difference between timing the market and looking at p/e ratios or debt load for stocks (or entire indexes) and deciding that they are way over valued. If you also think bond interest rates are too low likely to climb, hold your cash and come back to pick up stocks when they are cheaper. There's nothing wrong with that strategy as long as you are buying and selling on value and not trying to time a crash. Let the mob chase the yield down the rabbit hole.
If no one did this and everyone was just long everything forever, the market would be immediately broken.
edit: While I think John Bogle is a hero of the investment world with advice that all investors should heed, the Boglehead-Dunning-Kruger-effect can be profoundly annoying. They are a fantastic starting point and they address the most common mistakes, but it's a wee bit more complicated than Bogle's rules if you really want to learn equities and investing.
counterpoint: http://www.economist.com/blogs/buttonwood/2016/01/investing
To conclude, I think it is prudent to review your asset allocation maybe once or twice a year, and shift things around a bit.
I'm glad you don't adhere to the defeatist approach of Efficient Market Hypothesis proponents. Always be in the market, yes. Always follow the market, no.
here's something to think about, and i know i'll take downvotes to hell for all this: if everyone agrees and everyone is investing (for retirement etc) identically (long stocks bonds whatevers), what are the odds it's "cheap" or represents future extraordinary gains?
If I have 99% cash and 1% in VTI for 10 years, am I "always invested in the market" during this time?
I'd add a few things that I've learned over the years:
1) Always be invested in the market. Corollary, don't time the market. This is by far the largest mistake people make.
Investors typically pull money out at the bottom after they've suffered a physiologically devastating loss, like at the end of 2008 and hence they miss the rebound, like 2009-now. This isn't quite the same but it shows what missing the top 25 days in the market over the past 45 years does to your returns.
http://www.marketwatch.com/story/how-missing-out-on-25-days-...
If you are an investor you need to be in the market, period.
2) Accept that you will lose money some years. If you are buying index funds then you will get market performance, ex fees. Markets go down sometimes. Stay the course.
3) Don't look every day or you will go nuts.
Keep in mind that the largest draw down (top to bottom) will be larger than what the returns look like if you just look year over year. Ie if you look and see the S&P lost 28% in 2008, understand that if you watched the S&P every day of 2008 then it probably lost more than 28% from its top to its bottom but rebounded slightly at the end of the year to make the year over year loss less than the maximum loss.
4) Have some exposure to outside of the US markets. Consider the scenario of investing all your money in the company you work for. In a rough time for your company you get the double whammy of losing money and possibly your job at the same time.
Similarly to how you are told to not invest all your money in the company you shouldn't invest solely in the country you live in, same principle.
EDIT see child comment, I mangled the English language in point 4