[1] https://www.cnbc.com/2018/01/03/why-warren-buffett-says-inde...
There are plenty of hedge funds which beat the market so significantly and so consistently over long timespans (even decades) that choosing any single one of them would have handily won the bet. But the bet was for a “fund of funds” approximately tracking the aggregate hedge fund industry, not any particular one. Buffett wouldn’t have taken a bet involving any of the single superlative funds because he understands this point already.
The core thesis vindicated by that bet is simply this: most participants in the market don’t do well. You didn’t really need a public bet with a famous investor to prove this - the stats have been available for quite a while. Buffett obviously believes people can beat the market, or he wouldn’t be in the business he’s in.
Therefore, the point stands. It’s dogmatic to act as though beating the market is impossible. It’s not necessarily advisable to try it because it’s quite difficult, but throwing around citations of Buffett’s bet don’t really improve honest education. Most people aren’t going to become pro athletes either, so you shouldn’t bank your future on it. But that doesn’t mean it’s impossible or that you can’t (responsibly) pursue it.
And even if you can beat the market, how much time, money and energy are you going to use to beat it? Taking into account the margins by which you may beat it by, is it worth it? Probably not for a single individual even thinking about this question.
Common now.
The point here is that it’s dogmatic to continually say, “you won’t beat the market, don’t even try, look what Buffett says about it”. I have laid out, in this thread and others I’ve linked to, how it is possible to beat the market in principle. No, not everyone will do it, but people will want to try anyway, so in my opinion they may as well be equipped for success, insofar as they can be.
I haven’t tried to undermine the position that index funds are the best option for most investors. I’m just providing perspective for those who understand that and want to try actively trading anyway. I dislike the blind advocation of index funds in a matter of fact manner - it doesn’t actually improve financial education as poignantly as discussions such as this one do. A complete presentation should include the subject in entirety, not the, “We know what’s best for you” version.
> There are plenty of hedge funds which beat the market so significantly and so consistently over long timespans (even decades) that choosing any single one of them would have handily won the bet
You say there are plenty that would beat the market, OK, sure. How many would not? What percentage of the funds would win? The way you frame the conversation is disingenuous, given this entire conversation (grand parent and post before that) are about retirement strategies, presumably for average folks.
Beating the market may not be strictly impossible, but no one here other than you claimed that. The fact that it is improbable is just that, a fact. So yeah, disproving a claim no one made and denouncing dogma is pretty disingenuous, imo.
I’m not sure what in particular you’re arguing against, because it doesn’t appear to be relevant to my central point as I’ve explained it in this thread. You act as though I’m saying that it’s easy to beat the market, when my entire thesis here has been that it’s not correct to declare people will fail out of hand. If anything, I think I’ve taken rather extreme pains to tediously and explicitly point out the caveats so as not to be disingenuous in my points.
In fact, I literally made a comparison to professional athletics in my first comment, which is (statistically) a lottery. If that isn’t enough, what more do you want? More pertinently, I am focused more on complete education that allows people to be self-sufficient: would you advocate saying to kids, “Don’t even bother trying to go pro, you’ll fail.”, or would you advocate explaining to them the honest chances, encouraging them to have fallback plans for their careers, and then providing them with the best chance they can have for what they already want to do? People respond far more favorably to neutral, complete presentations of facts than they do to imperative statements that don’t provide a clear context for their justification.
The original comment that said "you will lose" is in jest, obviously. Someone who's confident that they wouldn't lose wouldn't be here reading a step by step plan to become a millionaire as they'd already be far beyond that.
The other problem is you're measuring success in hindsight, not from the beginning. (You could restate it as if from the beginning if you had the full list of initial hedge funds - including those that no longer exist).
The point is that you can't predict which funds will be successful.
Buffett beats the market - but he does it by understanding the businesses behind their stocks, their value and prospects, compared with their present price. He buys value for money, and generally holds it for the long term. He isn't an active trader, which to him is speculation.
To give a concrete example, GETCO circa 2009 was the premiere HFT firm trading 19% of US equities market volume and earned high 9 figures in trading profits on a tiny capital base. They were doing millions of little trades daily and made profits almost every day, if not every day. The odds of someone doing that due to chance are infinitesimally small.
They had been doing this since the early 2000s, quietly building an empire, and the people there were incredibly bright. They had their pick of the litter from every top school and one of the toughest interview processes. Retention was impressive, too, as the firm made many employees into millionaires in their early 20s and gave them plenty of autonomy. You'd look at this operation and expect it'd never end.
But it did, and quite quickly. Competitors eventually learned what they were doing and saturated the market. Their market share plummeted, as did profits, while the cost base grew. High speed data and microwave lines became a new cost of doing business. Layoffs happened. Once loyal employees defected and with them went even more of the firm's ideas.
Eventually they got a soft landing by buying out KCG, and the entire operation was later acquired by Virtu, but from what I understand, few of the original GETCO trades still exist or make any profits.
So I believe they won due to skill at the time, not luck, but more skillful competition came along to replace them. Some small group will always beat the market, but I'd need more evidence to believe one group would do it for a long time. Brain power and guarding IP are necessary but not sufficient.
No, they cannot be. I meant outlier in the sense of a probability distribution with e.g. standard deviations, not to imply randomness. I’ll start by quoting what I wrote the last time this topic came up on HN:
“Virtu only lost money trading one day out of 1278 trading days between 2009 and 2014. In the most uncharitable analysis (1278/2; or the lost day happened in the middle), they had a 0.5^639 chance of doing that.
Maybe you disagree with 0.5 per day. Let's make it 0.9!
...But that's still 5.7 x 10^-30. How many firms do we need to exist for this to emerge by chance?”
Draw up a probability space for me and actually quantify what you’re asserting. What is an event? Is it a single trade? A trading day? A trading year? How many of these events are there, total, in that timespan? Of those, how many win? Can you map each of these events to a boolean function, such as a coin toss, or are the chances more nuanced? This is before we even get to the issue of quantifying risk as a metric.
How about we make the event a trading year; how many funds would need to exist to explain hedge funds like RenTech or Baupost? Moreover, can you explain three decades of extraordinary returns in a single fund as an outcome consistent with a uniform distribution across all eligible hedge funds?
This armchair probability analysis turns up every so often on HN, but to be blunt, the onus is on the analysis to actually make it empirical. You can’t just say “well, they’re doing this by chance, we can expect some of these to eventually emerge because statistics and coin tosses” without formally proving that there are actually sufficiently many hedge funds and criteria to satisfy that claim.
> Buffett beats the market - but he does it by understanding the businesses behind their stocks, their value and prospects, compared with their present price. He buys value for money, and generally holds it for the long term. He isn't an active trader, which to him is speculation.
This is false. Buffett is, by his own admission, an active investor. He picks stocks - what is your definition of an “active investor” if not someone who makes active decisions about how to invest? His letter, “The Superinvestors of Graham and Doddsville”, specifically outlines his investing and describes it as an active strategy.[1] In fact, the way you’ve described his work is an investment thesis consistent with modern trading strategies. At their core, statistical arbitrage and high frequency methods seek to identify price inefficiencies just as Buffett does, but on much smaller timescales. It’s a difference of degree, not category.
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1. https://www8.gsb.columbia.edu/rtfiles/cbs/hermes/Buffett1984...
Select your set of traders today. Make predictions on how they will perform. Compare with what happened.
Of course we should expect them to be better than pure chance. This article itself is about insider trading, which should give an edge. And yet, the hedge fund average is indeed worse than chance investment in the market (which approaches the index). The point is: we don't know who will do well. We only know in hindsight.
Hedge funds also have management fees (higher than index funds), and pay more in brokerage for their active trading.
> statistical arbitrage and high frequency methods seek to identify price inefficiencies just as Buffett does, but on much smaller timescales. It’s a difference of degree, not category.
A difference is the sustainability of the inefficiencies identified. Perhaps if Buffett was purely an old-school value investor, picking up discarded cigars for a few puffs, there's an argument for similarity. But (as I carefully stated in my comment), he also looks at prospects, not just value. A business with a long-term sustainable economic moat makes money at a compounding rate.
Now, I think we could have a largely semantic argument about whether buying a business with those prospects is just identifying price inefficiencies. To be honest, I can't really forsee how that argument would turn out, because of course you can view it as mispricing. Perhaps I can submit: more of the work is in evaluating the prospects, than the price (maybe you can argue the same for trading); simply because of the time-scale of long-term investing, you get to keep it longer, so it's more stable (but you can argue that that's covered by difference in timescales).
PS. Also, I do wonder that Buffett also has better information. His dad was a senator, and he knows lots of influential people. I don't think it explains away his success, but it would be some help.
If most of them don't beat an index fund and there's no way to tell winning funds from losing funds in advance, then the smart money is to never invest in a hedge fund.
You can absolutely beat the market, but you have to work on it and put the effort, same as you can heal people (as be a doctor), create awesome businesses (as entrepreneur), etc...
As a result it's not really fair to compare the long term performance of a hedge fund with an index fund. Index funds are more aggressively invested and thus more volatile.
Volatility isn't a binary thing. Although the less-volatile more-return funds are out of reach for regular people, the less-volatile less-return funds are not, and these still have a lot of value for people who are less tolerant of risk.
While I'm here, it's "c'mon, now".
The sheer magnitude of success of the various index funds that invest proportionally to the market cap of the top 500 stocks, in aggregate, could have the effect of perpetuating the status quo, masking indicators from non-index investor activity.
If the bet had been for a single fund, Simons or Klarman or any other hedge fund manager who has been beating the market by a large margin for 20 - 30 years could have won easily. But that bet wouldn’t have been instructive, because the world really doesn’t need to be shown that there are a minority of funds capable of winning the bet - on the contrary, it’s helpful to show that a representative sample of them fares poorly on average. Moreover, being a fund manager himself, Buffett would have been silly and hypocritical to actually support the former type of bet.
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This is just based on a quick spot check, but I’m worried the passive investment craze has weakened the link between business fundamentals and pricing for the stocks in the most popular indexes.
If so, that increases correlations in the pricing of assets that were explicitly chosen because their prices have no or negative correlation with each other.
"The way to become rich is to put all your eggs in one basket and then watch that basket." - Andrew Carnegie
The way Buffett invests is by reading all day, everyday and once in a while making a very informed investment. Most people haven't even reached the level of staying away from 'sure things' and panic selling during bad news.
How many people would've been able to stay away from IT stocks during the dotcom boom, to even not invest in the company of one of your friends. (Bill Gates and Buffett have known each other since '91)
How often do you, as a 'master', break rules that you would tell a 'apprentice' are immutable?
You and I don't have that ability.
However, you are right that the /r/personalfinance mantra of "S&P index or bust" is not actually good. In particular, as index funds become more popular in aggregate, they become worse investments, because they put continuous "buy pressure" on a select few stocks. Furthermore, the S&P isn't really diversified in that it only contains big cap stocks, afaik has no foreign stocks either (although of course many S&P businesses are global enterprises), and only has low exposure to industries like biotech.
Also /r/pf does a poor job talking about non-stock investments. Sometimes a better investment might be to start your own business, purchase real estate, or bonds. If you have time you can research growth stocks (e.g. pharmaceutical companies undergoing FDA trials) and pick the promising ones. Even learning a skill is often the best investment possible for most people - /r/pf constantly says that you can use about 4% of your wealth as yearly income, so you'd think there would be more people trying to get better jobs, since that makes a $20,000/year raise approx. equivalent to $500,000.
Your points about index funds getting worse as they get bigger would apply to Vanguard too. And the whole idea that risk can be measured & mitigated in the first place requires predicting the future. Bankers in 2008 believed their portfolios were not overly risky either. Measuring risk is almost a contradiction, risk is the residual uncertainty that can't be measured after measuring/predicting everything else.
Overall, you are describing the modern economic portfolio theory approach to investing. Yes, its backed by some prestigious people but no one can predict how it will do going forwards. Its important to remember that uncertainty. In 20 years we might see inflation has swallowed up the returns of those investors and only people who invested in stock X made any money. We might see the reverse. Who knows?
Those FDA trials are expensive. Those companies have many experts in the field that believe those trials have a reasonable chance of success. Otherwise, they would not proceed with them. Even the FDA itself believes those trials have a good chance of success. There are plenty of Wall Street analysts who are also evaluating these trials. Regular Joe is not going to outsmart all those people.
The top 5% can approach investing with a more personalized strategy, but for most of us, esp. those who don't give a damn what a stock is, this advice is pretty sound.
http://ritholtz.com/2014/02/the-best-investment-advice-youll...
”One by one, some of the most revered names in investment theory were brought in to school a class of brilliant engineers, programmers, and cybergeeks on the fine art of personal investing, something few of them had thought much about. First to arrive was Stanford University’s William (Bill) Sharpe, 1990 Nobel Laureate economist and professor emeritus of finance at the Graduate School of Business...”
In the UK you can contribute 100% of your gross annual income every year, and get full tax relief up to the lifetime contribution limit of £1M ($1.38M).
We also have tax free savings & investment wrappers, called ISAs, in which you can deposit $28,000/yr, and within which all growth is free of any kind of tax.
http://www.businessinsider.com/401k-retirement-savings-gop-t...
The argument against unlimited tax free contributions is that above a certain point it becomes a tax break only for the rich.
That's where the lifetime cap comes in I guess. £1M isn't that crazy over a ~40 year timeframe for someone on a high income who isn't necessarily 'rich' and, at current annuity rates, won't buy you absolute luxury in retirement.
Also, as a self-employed person you can contribute up to $55,000 in the year depending on your income, in what's called a SEP IRA.
And some W-2 employees can contribute up to $55,000 in their employer 401(k) as well via "after-tax" contributions.
Can you elaborate?
What's the argument for having two different tiers of retirement accounts? Just let everyone contribute $18k to an IRA and end 401Ks entirely. The selection of funds in most company 401K plans is meager and the funds are expensive because the contributors are, in effect, a captive market.
I do think there is some advantage to the fact that it's possible to have a portion of one's paycheck go directly to a 401k without ever hitting your bank account. You can't currently do that with an IRA. It seems like that could be fixed though.
It gets even stupider when you realize that IRAs have limits on deductibility when your spouse has access to 401k, but you don't.
This does not have to be the case. I don’t mean to encourage people not to invest in index funds (passive indexing is generally the best idea!), but if they’re going to try it anyway, it’s not helpful to simply declare it to be unprofitable from the outset. Your guide is well tailored for people who want to pursue consistent, modest gains on their capital beyond what inflation will gradually eat away.
If someone with the right technical skills wants to generate a profit that consistently beats the market, they can do so with two caveats: 1) they will have significantly less capital than institutional funds, and 2) they will have to engage in the research and deployment of trading strategies on their own (as opposed to with the support of a full infrastructure and team). But profiting in the market is, at its core, a game of identifying price inefficiencies. Prices become more efficient through greater information diffusion and greater liquidity. If you have data that is not available in the broader market, you can make forecasts with an edge over what e.g. the aggregate analyst consensus suggests.
In essence, programmers can take advantage of their smaller capital capacities to utilize strategies that might not be given as much attention by larger funds, because they’ll become capacity constrained much sooner (i.e. won’t scale). A software engineer who finds, collects and curates a source of data entirely on their own that maps directly to the revenue of particular companies (or more abstractly, to the future price of particular securities) can do well reliably. It’s not easy (or everyone would do it), but if you’re determined and understand what’s required, you can do it.
I outlined how this can be done in several steps in an HN comment just yesterday:
https://news.ycombinator.com/item?id=16349011
This is not to say that you should abandon index funds and try to beat the market. But if you’re already inclined to try, you might as well hear this advice and a gentle caution that it’s very difficult instead of hearing “don’t do it, you’ll lose” over and over. Some people will want to actively trade to be contrarian, or because they enjoy the intellectual challenges (there are plenty!), or simply because they think they can profit. They might as well go into it clear-eyed.
by playing on-line Poker?!?
Just because clever people win doesn't mean you will win because you're clever. In order for you to win someone else has to lose.
"But I'm recognising inherent market inefficiencies and adding value, not profiting off other's failed gambles". Phooey.
No, there is no guarantee. But you can develop an edge that is statistically distinguishable from random outcomes, and less formally, that distinguishes your activity from gambling.
> In order for you to win someone else has to lose.
Single trades imply a zero sum game in which one counterparty has to lose for the other to profit, yes. But the market itself is not a zero sum game. The net, aggregate result of trading activity is positive value.
> "But I'm recognising inherent market inefficiencies and adding value, not profiting off other's failed gambles". Phooey.
You’re doing both, if we’re being frank about it. This is a positive statement - it’s plainly true and follows from reasonably agreed upon definitions. You can assign a normative (moral) value to the concept of arbitrage in zero sum games one way or the other, but that’s not really relevant to the discussion at hand. If you don’t want to participate in active trading, you don’t have to - you can invest in passive index funds, which is a perfectly sane and well-reasoned decision.
Professional traders don’t try to disguise the fact that they profit from a zero sum activity between consenting adults. But that has nothing to do with the process of price discovery, which is a well-recognized economic concept that is facilitated by active trading. Price discovery is not a moral imperative, it’s just a thing that happens through economically incentivized asset exchange.
Sure, it isn't gambling, but there are lies, damn lies and statistics. The effect of survivorship bias in this field is massive.
Consider that the random element isn't necessarily the stock performance over 12 months. The indicators the traders use are, in a sense, randomly determined by the trader's personality and knowledge. If the stock market operates in a deterministic fashion for, say, 10 year stretches (which I think is about the time between major recessions) then the rules get changed in a major way, this "statistically distinguishable" edge may well disappear taking a hypothetical small-time saver's retirement fund with it.
We see this every time there is a crash, where a bunch of firms with a clear statistical edge go bankrupt because the statistical edge relied on some specific market condition.
A lot of people make more money than me with clever deals, but at the end of the day the only strategy that everyone can follow simultaneously is creating more than they consume and stockpiling the excess. Maybe stockpile a little on the low side if they have faith in continuing benefits from technology growth outpacing population growth.
Please explain why this is necessarily true in the stock market.
You buy X at $Y. Then sell X to me for $Y+1. You won.
I then sell X to someone else for $Y+2. I won.
Hence in that transaction, we both win.
That's like calling a pyramid scheme a win-win-win-win-win-win-OHFUCK situation.
However, there are outcomes where I buy a stock and hold it. The company's profits increase over time. They start paying dividends, and I never sell. There are many companies that generate enduring profit and thereby enable win-win.
So, like any job, you better either like it better then the other things you'd be doing instead, or you'd better be confident you can make it pay more than the other things you'd be doing instead.
I agree - this is why it’s a particularly important caveat that even if you have the skill and wherewithal to beat the market, you’ll need to also do it without a team or software infrastructure. I’d generally recommend that people interested in this learn as employees of an established firm, then go out on their own if it makes sense.
And unfortunately, doing it as a hobby for the fun of it, isn't a workable compromise, precisely b/c beating the market requires so much work.
A poor person is not going to be able to get past step one, let alone step two which requires a decent job and thousands of dollars of discretionary income to save each year.
It works.
Start a business. You probably won't hit the unicorn lottery but making enough to retire in your early X shouldn't be out of reach. Find a solution to a problem and learn some sales and marketing.
On the other hand, you could get some party animals that will trash the property and when they leave you will have to spend lot of money to repair the damage. They might also cause other problems like annoying neighbours etc.
AKA instead of paying your mortgage at 4% interest, you invest it in something that make 5.5% and gain an additional 1.5%-a few percent in taxes+a few tents of a percent in taxes on the 4% interest.
Frankly, its a good theory, but given the volatility of the markets, its hard to guarantee your going to actually come out ahead. Particularly since interest rates are generally computed by people who are looking at the risk/reward factors, and the interest rates have to be high enough to attract the risk adverse capital.
The one thing that is for sure, is that you should never really be sending early payments to your mortgage company despite all the financial advisors telling you to to do so. If you want to pay your mortgage off early your better off putting the money in a low risk investment and then paying it off when the outstanding mortgage balance falls below the value of your savings. That is because overwhelmingly your just giving your mortgage company an interest free loan due to the fact that they apply the over-payment to the final payments and don't adjust the amortization schedule.
https://www.bankrate.com/finance/mortgages/what-is-mortgage-...
Recasting works sort of like refinancing .. but your rate doesn't change and neither does your mortgage term.
Instead, a lump sum that you provide is deducted directly from your principal. Your monthly payment is then recalculated based on that reduced principal amount.
The financial institutions usually impose limits (minimum lump-sum amount, how many times per year you can do it, etc.) And they don't advertise it or make it easy, because there's no money in it for them.
And since the principal/interest ratio is front-loaded (so that much of the money that they make from you is in the first seven years or so of a 30-year loan), then if you can recast early in the life of the loan, the benefit is increased. (And that's the real reason why the industry advises upgrading every seven years - that 30-year, front-loaded clock gets reset in their favor.)
I'm pretty sure this is NOT how it works with my mortgage company (BofA) I make principle-only payments that reduce the principle, which immediately affects the amount of my monthly check that goes toward principle/interest.
My mum drummed into me from a young age that it's better to not be in debt, but she was no financial whiz. I kind of understand what you're saying but I think I really just need to do some spreadsheet calculations to work out the scenarios. It isn't immediately obvious to me.
There is also a diversification problem. Paying off a mortgage could tie up a large part of someone's wealth in their house.
Related to the point right above, paying off a mortgage ties up a large portion of cash in a fairly non-liquid investment.
What else could you do right now with that cash flow - not only in direct alternative financial investments, but in indirect investments in your own well-being and quality of life?
Another thing to do if you want to get fancy is to shift some bond holdings to riskier or junk bond funds when you're younger, such as Vanguard's VWEHX, that will generate FAR higher returns than a typical basket of bond holdings.
This is all assuming the target retirement age is 65 or later.
Also market timing is hard and subject to many factors (such as those you pointed out) that one doesn't have knowledge and awareness of. It's better to just buy, and hold. When the market goes down, buy some more, but don't expect to access that money for many years.
Don't worry. The federal government is working on doing that for you.
Edit: I think I get your larger point though, runaway deficit spending of the kind we've had in recent years does destabilize the riskiness of holding US assets / currency.
If people forget anything about index funds, it's that they're not guaranteed to go up, just like any other investment vehicle. It's a reasonable choice to make to put decades' worth of savings away for retirement, because the stock market trends positive over the long-term, but people are kind of looking at index funds right now as "if I put my money in index funds then I'll be set for retirement because they're 'de-facto guaranteed' to go up over the long-term" and well, that's a dangerous over-simplification.
There is no evidence that I'm aware of suggesting that active management "generally' outperforms the market. In fact, most evidence points to the majority of active managers performing worse than the market in the long run.
Reminds me of John Stossel throwing darts into the newspaper stock section, and doing just as well as managed funds.
https://web.stanford.edu/~wfsharpe/art/active/active.htm
For every smart active manager that beats the index someone else is on the other side of the bet losing.
https://www.bloomberg.com/view/articles/2015-07-22/index-fun...
Are more people currently contributing to their IRA's than cashing them out? Is there tipping point going by current population dynamics??
No? Then too bad.
Because "equality of opportunity" in the US is only available to those who are more equal than others.
Such children born into the bottom quintile of income, are pretty likely to end up in any quintile. The probability of ending up in each quintile from bottom to top, is 17%, 23%, 20%, 20%, 19%. Seems pretty fair to me; totally fair would be 20% chance of each.
It's a little skewed for people born into the top quintile, but not so much: 10%, 13%, 21%, 27%, 30%.
Source: https://www.brookings.edu/blog/social-mobility-memos/2014/08...
If there were no exceptions, then how could those born into wealth persuade themselves of their own moral superiority?
It's uncomfortable and nobody ever wants to hear it, and it's quick to get shouted down (especially in forums like HN where everyone is either wealthy or only "temporarily" poor), but if you can't afford to put $5500 into an IRA each year while also keeping your emergency fund topped up for 12 months' expenses while also still having enough extra for at least one little vacation that year -- then you're poor. Not middle class, but poor.
And, statistically speaking, if you're poor now, then you're likely to be poor for the rest of your life. America continues to run on the idea that that's not true, but that's a clever bit of marketing intended to keep people from realizing just how truly screwed they are.
This isn't to say that you're destitute or that it's impossible to live well at more modest means. Many people do.
Yep. Not really a laughing matter.
> Only 39% of Americans have enough savings to cover a $1,000 emergency
https://www.cnbc.com/2018/01/18/few-americans-have-enough-sa...
Relying on unemployment, disability, or having enough money (or, in most cases, credit) to "expense a hiccup or two" is not middle class. And people under 40 should have an easier time developing an emergency fund, because their expenses should be lower. People over 40 should have an easier time maintaining the emergency fund because it should be an investment account that they started before they were 30.
Your reply is a pretty good example of the amazing impact that political marketing has had on popular views towards wealth and poverty in this country. People have become entirely convinced that they aren't poor so long as they "can survive", that poverty is something that happens to the other people they hear about on the television.
$5500 a year, plus one vacation, plus building or maintaining an emergency fund, should amount to saving about $10,000 a year. The second-to-bottom, 15% tax bracket tops out at $37,950 for single people, and IRA contributions are 100% tax deductible, so you can safely gross up to $43,450 in that bracket. (edit: math.)
If it sounds difficult to squirrel away 25% gross annually in that bracket, that's because that's not the middle class bracket. It's the "poor" bracket.
Second, where did you come up with this rationale that you’re poor unless X, Y, and Z?
It seems just as arbitrary to say that you’re not poor if you can put $2000 into an IRA, have a three month emergency fund, and take a week vacation.
Or let’s go the other way, why not: if you can’t put $30k per year into savings, have a three year emergency fund, and take eight weeks off per year, you’re not middle class, you’re poor.
See, we can all pull random numbers and standards out our ass!
In actuality, “poor” and “middle class” are actual defined terms with relatively well-defined meanings, none of which have anything to do with your bizarre markers of what constitutes different steps on the socioeconomic ladder.
Okay, show me a non-arbitrary definition of "poor" and "middle class". Bonus points: show me the official definition that everyone agrees on. I'll wait.
Oh, and while you're doing that, let's also pause for a moment and reflect on whether you disagree that someone that can't save $10k per year is poor, or if you were just looking for an argument on the internet.
As for definitions, here’s an official, non-arbitrary one for poverty that’s widely used. I’m sure you’ll just declare it arbitrary, which is fine, but my point is that you just came up with a random definition without anything to back it up or any reasoning as to why that’s the right threshold. Federal poverty guidelines aren’t perfect but they’re not a number out of a hat, which is what you’ve got.
However, the Fed has asked a different question intended to drill down into the same problem, and found that 47% of people responding would pay for a $400 emergency by borrowing money or selling something (https://www.theatlantic.com/magazine/archive/2016/05/my-secr..., also cites Bankrate though).
I'm unaware though of any studies finding that the majority of Americans have a significant amount of money (let's say a thousand or more) in a liquid asset of some kind. If you know of any, that would be some welcomed good news.
No. It's not that most people can't save enough for retirement. It's just that they won't, due to a combination of bad habits and financial decisions.
People in the US are, on average, not nearly as frugal as they should be, and the sorry state of savings in this country is at least partly due to those habits. Even people with 6 figure take home salaries frequently are only a few months of savings away from financial ruin or tapping their retirement savings, if they lose their job. For them, it's a planning and discipline problem, not a problem of some evil system keeping them down.
You need to watch the discussions around "entitlement reforms" that's being promoted currently. Voters can't reject candidates after the fact, who won't seek re-election after passing (or being the lightning-rod of) unpopular legislation, opting instead for cushy "jobs" in the industry they legislated in favor of against their consituents interests.
If your portfolio allocation is incorrect, sure. But by the time people get close to retirement, most of their investments should be in bonds, which are quite insulated from the ups and downs of the stock market.
If things are in such horrible shape that the market fails to recover over any given 7-year period of time, expect shotgun shells and canned food to be the new currency anyway.
Your approach has validity, but it's valid for people who a) have no time or b) inclination to learn the market.
It's just ONE approach. You've presented it as "the" approach, full stop. It stems presumably from the idea that you can't "beat" the market.
But that depends what you invest in. And as a human with a brain, and a human with 24/7 Internet, you can do a little research and invest in conservative, dividend-yielding mammoth blue-chip-type companies, or you can seek value.
What I do is:
Step 1. Move all my 401k holdings from previous employers into a Vanguard IRA brokerage account (there are brokerage and non-brokerage variants of the IRA, the latter allowing you to purchase individual domestic stocks and ETF's online).
Step 1b. Create a Seeking Alpha account and add stocks, ETF's, etc. that I'm interested in to my portfolio. I'll watch these stocks for weeks/months as well as read some of the material / URL news links that appear (including analyses).
Step 2. Allocate a certain percentage of the entire portfolio "Boglehead" type funds/companies of the exact type you've just described. Baby boomer nervous-can't-be-bothered investor mindsets.
Step 3. Allocate a certain percentage to companies I know either because I may have worked there, I use their products, or as I work in technology I like the idea of the product or company. AAPL is an example.
Step 4. Allocate a certain percentage to a 'gambling' value stocks. I find these by looking at the NYSE "Biggest losers" and "Biggest winners" lists. If I see something interesting, perhaps I feel I'll either ride a pump and dump trade cycle or simply I feel that the company was unfairly oversold, I'll add that to my Seeking Alpha portfolio, follow it for a few weeks/months, and purchase on a low.
There are a lot of different trading strategies. If you were railing against day trading only, I perhaps would agree with you. But here you're suggesting that the only valid form of stock market investment is to follow a mediocre approach (which is high risk: what if it's time to retire and the market corrects right before?!)
A company has a product, which is sold to consumers. A company has a structure, which includes employee counts, capital expenses, and so forth. A company has a roadmap. And dividends.
It's not "zero risk" but to suggest that it's no different than tossing chips on a roulette number or a blackjack dealer is completely absurd.
When you buy a stock, you pay two main fees: the basic broker fee and the market spread to the mid price. The moment you make a trade, you're down.
When you toss chips on a roulette number, you pay one fee. You know there's 36-1 chance of your number being chosen but there's also the zeros that give the house the edge, which give you a 36-1 payout on a 38-1 event (depending how many zeros). The fee is 2-3% percent (on a european roulette table). Moreover, you actually KNOW the real probability in the casino and you KNOW the house edge.
In the market, you have absolutely no idea what the real price is. Maybe Steve Jobs dies earlier in an alternate universe and the company implodes before the iPhone money press gets going. Maybe in another universe, he lives longer and tanks the company because he starts believing the hype about himself. Who knows? In this universe your AAPL bet paid off wonderfully. Liking a product and buying shares in the company is a completely reasonable thing to do, but unless you genuinely know something others don't it's gambling and convincing yourself otherwise is a really really dangerous thing to do.
That's an incredibly broad definition of gambling you're offering: if I purchase an asset (from another entity) with the expectation that it will go up, but information I have is at or below what the other players in this 'bet' then it's no different than betting on Black #26 on a roulette wheel? And all this, you suggest, because I can calculate the odds in the latter case, but I'm too unsophisticated to calculate the odds in the stock purchase case? Stock value is based on an underlying asset, which as a whole, is at least expected to go up, as the economy produces more wealth. And anything CAN happen (eg., a company blows up, a product fails, etc.) But a casino, the house is ALWAYS expected to come out ahead. That's why the odds are so long.
Moreover, you actually KNOW the real probability in the casino and you KNOW the house edge.
By your definition, the house I purchased for investment could fall into this category as there was no way I had all the information the others had (seller, for certain, brokers, and other players).
What's your conclusion about gambling, then? That since the odds are known, and they aren't (by myself), in a stock purchase, then __?
Buying insurance is gambling, as is not buying it. Both courses are sensible in different situations.
The trader who buys aapl after massive amounts of research and maybe a new, key insight is STILL gambling. They probably have an edge to the market, though.
Let me put it this way: if you only ever buy a couple of stocks in your life then there's really no good way of picking them. The expected variance in the rate of return on those stocks is so high that any edge you may have is effectively lost. If you win, you win. Great. But if you buy and sell 10 stocks a day for years, you have absolutely no chance of making money without a real edge, as your skill (or lack thereof) becomes the main signal, not variance.
Your strategy will fail longterm. Buying stocks is the very definition of gambling: buying something hoping it will go up in value. Buying a house is probably a decent bet most of the time. Buying house insurance against fire is a loss making bet when analysed in aggregate (insurers make profit) but so useful to you that it becomes a good bet. Buying mobile phone insurance, if you're not young, drunk and clumsy, is a bad bet. Buying aapl on a hunch is a bad bet, but it paid out. Congratulations.
But here's the problem. While everyone is arguing back and forth about competing against Wall St., game theory, probability and the quibbling over "gambling" which turns out to be nothing more than a convention in conversation (others below admit that index funds and housing are also betting, but to a lesser degree), what no one is addressing is what specific trading strategies we're competing against here.
IF you are a day trader and you compete against other retail day traders and Wall Street trading floors, automated trading systems, high frequency and such, that's one thing. IF you stock pick but pick your stocks for multi-quarter or yearly outlooks, and you absorb information about -- not the stocks -- the companies, following news and understanding what their risks are, then that is a totally different strategy.
Much of Wall St. cares across quarters and short-term. Many retail investors too. I would only advocate medium and long-term stock picking.
Everyone brings up Buffett and his advocating of index funds. What no one here has mentioned is that he's a value investor, buying up stocks when companies are, in his estimation, undervalued.
You folks are guilty of sweeping the individual under the rug in favor of the overall statistics. As if the individual who wishes to buck the trend is, at best, lucky, and at worst, an imbecile.
If you're not interested in the area of stock picking, then that's understandable. But if you're pre-emptively convinced that you can never win, because your knowledge is average, well I suggest that if you're an intelligent person that you reconsider. Again, no one here is advocating day trading or beating Wall St at their own game.
You are missing out by not taking a chance on companies that you think might expand in the coming years. Nothing is guaranteed, and I think many folks on here seem to miss that part of the equation.
Most index return comes from a few stocks that generate extreme returns. By picking a single or a few companies, you're likely to miss out on those outsized returns. Buy the whole market and you can't miss.
(Sidenote: clearly, VCs have done the same or very similar calculus with startups.)
Also, for you to have made money on AAPL you would have had to gamble on something. You had to have bought at a lower stock price. If you bought recently, it would be that Tim Cook doesn't suck and they don't botch the new iPhone. If you bought 6 years ago, it would be something else. If you bought 10 years ago it's that the iPhone would remain dominant, etc. etc.
When you buy the shares of company A instead of company B, because you want to gain more, you are betting that the price of company A is undervalued on the market compared to company B. This is perfectly fine IMHO, but it's still a bet.
So, if you distribute your investment and use index funds for stocks, I would definitely say you're not gambling by any reasonable definition of the word. In between, I'll leave it to everybody to decide for themselves where they want to put the threshold.
I would be interested to hear more of your thoughts about this.
http://fortune.com/2015/02/03/berkshires-buffett-adds-to-his...
All securities are held by someone and the total return of the market is the total return of all those securities. For someone to outperform the market he has to hold a mix of securities that outperforms and whoever holds the opposite mix underperforms. Sock market returns are very much zero sum.
>the other side of well managed hedge funds are usually poorly managed pension funds/hedge funds
How do you pick ones from the others?
>index fund ETFs that blindly buy a bunch of stocks without looking over their financial statements
That's the point of those ETFs, replicate the index exactly. If they're replicating the market average then they're doing exactly their jobs.
Well, I think there's "actively managed funds" and there's yourself. Funds are companies with infrastructures, eyes on them, politics in them. And so forth. I think it's a valid point that it's hard to time the markets and such.
But as a simple person looking at companies you believe in, you can buy and hold. An example. If in 2001/2 when you saw an iPod for the first time, you thought to yourself that the company that made it has potential, maybe you bought some shares in it. That's just one of a lot of examples. Also it helps if you're in the industry that you're examining. We're in tech so maybe we've used some of the products that we believe in, and others we don't believe in.
So that's one consideration.
Also, hedge funds and asset managers do a bit more than buy and sell stocks. They do complex, sometimes crazy things that involve leverage, options/contracts, and very complicated instruments.
There's nothing WRONG with buying a stock index fund, but if you see a company you think might have a winning product, and from some quick analysis seems like it's reasonably well managed, then that's something.
Not everything has to be technical analysis of high risk biotech stocks, shorting strategies and so forth.
And for the retail folks like us, we don't have to "trade" actively, as in buy and sell every day.
That's my middle ground between "competing against high frequency traders or golf course CEO conversations" and "buy index fund and close my eyes for 15 years".
https://blog.projectpiglet.com/2018/01/causality-in-cryptoma...
Basically, we used it to generate pretty awesome returns, and we bias our "trade potential" advice towards reduced risk: https://projectpiglet.com/
It was easy for us to rack up some nice returns:
https://blog.projectpiglet.com/2018/01/30-weekly-returns-usi...
All that being said, I personally limit my exposure to volatile assets - so I wont put more than I'm willing to lose in cryptocurrencies, and regularly pull out profits.
1. Are you actually getting any alpha using this method? Averaged over multiple years?
2. If you are, are you earning a decent hourly rate for researching companies and following the market?
2 - that's an extreme perspective, since there's value in learning that doesn't have an hourly cost. The TOC of my time may or may not be higher than what a fund manager would cost (or the index fund approach being discussed). Then again, monitoring the portfolio 3-4 times a day for a couple of minutes isn't that bad. Initially finding the stocks of interest and doing some basic research does take time.
[edit: grammar]
Had my money in one of these accounts for 3-4 years (not sure if vanguard but another major investment firm if not) - it lost money every single year despite the market going up across asset types and geography. Years. not months. Needless to say this makes me highly suspicious of these 'magic' accounts..
However, I tend to agree with your comment. There may be no upper bound to sovereign debt, but economic good times can't last forever, what goes up must come down. And should creditors ever need to collect that debt there must either be high inflation or high taxes, or not pay back loans and risk sanctions.
https://www.forbes.com/sites/robertlenzner/2013/11/25/the-fe...
Step 0: Spend all your money on toys
Step 1: Run out of money
Step 2: Look under couch cushions and car seats for coins so you can buy dinner
Step 3: Spend $19 on beer and $4 on food
Step 4: Do this regularly despite being on a high income
I am excellent at this adult thing.
The startups behave more reputably in this space than the incumbent players that added robos as an afterthought.
For instance, one big bank advertises zero management fees, but then keeps a pile of your invested money in cash (to invest for its own uses, I guess), and then lets a third party exercise the robo trades.
The third party pays to do this because they can make money from arbitrage by sneaking their own trades in before your trades.
(I have no affiliation with anyone in this space—just a happy customer. I’m going to great pains to avoid naming names, since you should do your own research.)
The benefit from TLH caps out at a $3,000 deduction annually (and the loss rolls over to future tax years). For someone in the 35% bracket (fairly high) that's a $1050 annual value. Not huge. Meanwhile, the fees do not have a cap.
$1050 in annual value equates to $420,000 in assets under management with a 0.25% fee rate. So even in a high tax bracket (the best case for TLH), you're losing money with the robo adviser at that level of assets.
(In the 22% tax bracket, that's $660 in annual benefit or a break-even point of only $264,000 in assets before you're losing money. Both of these figures generously assume the robo-adviser can hit that $3,000 of losses every year consistently.)
I think the robo advisors like to advertise the case where clients have about $100,000 under management because it's one of the few points on the curve where their TLH is a value-add after fees.
Of course that assumes users with small account sizes actually have enough losses to harvest, but that seems likely when there is a market downturn like last week.
> Of course that assumes users with small account sizes actually have enough losses to harvest, but that seems likely when there is a market downturn like last week.
Exactly -- small account sizes have fewer losses to harvest. Maybe they see a slight benefit over totally passive investment net of fees, but the magnitude will be small.
And you can easily tax loss harvest without the robo-adviser anyway.
Why don't they exist as ETFs? This is a good question. It's probably only a matter of time before we see such products. Especially that given the current pace of things, there is a new ETF everyday in the US. I've personally looked into building target date ETFs through my work as well.
I wouldnt put too much trust in robo advisors as they are very new. Unless, we're talking Schwab's robo advisor which benefits from the scale of being in an already bigger place.
Cognitive biases have a large effect on minimizing one's returns. I recommend reading "Thinking Fast and Slow" by Daniel Kahneman for an analysis of how those biases sabotage one's returns.
Those biases are hard to overcome even when you're aware of them, but at least one can try :-)
I really don't understand why some of you take this "advice" so to heart. As if this is just cut into stone, and you follow it to the letter. This is a good general guideline to follow for someone that is completely clueless about what to do with investing. You've got guys further down the thread proposing you write your own day trading software, because THAT will surely work out in your favor. Do your research. Geez.
There's absolutely a middle ground here, folks. One can have a portfolio of conservative picks (index funds), self-selected individual picks, cash, bonds, so on and so forth.
This should hopefully be picked up by n-gate to make a mockery of us.
Joking aside, I'm curious what some of you who are actually paid to write front office software by Wall St. think of all of these threads.
There's no simple answer. There might be a right answer, but so far no consensus view has lasted for long. Most of the arguments I've seen have been heavily dependent on bond yields at the time the arguments were made, and are therefore not universal advice. For example, 50/50 made a lot more sense when treasury bonds were paying more than 7% per year.
Another interesting strategy would be investing the risky part of your retirement into startups or tech you believe in. But you can't do that by law unless you are already rich(accredited investor).
Step 1: Pay off your high interest debts. School loans, credit cards.
Step 2a: If your company matches a 401k, take advantage of free money. Max out their contribution.
Step 2b: Go to vanguard.com, open a Roth IRA, choose a Vanguard Retirement that matches your retirement date, dump $5500/year in until you're 50, then $6500 after that.
Step 3: After emergency money is handled, take excess invest in the following index funds at Vanguard. Admiral shares require minimum $10,000 in each. However you can start with the standard share version, and then move them to admiral once your balance reaches $10k.
56% Total Stock Market Index Admiral Shares – VTSAX
24% Total International Stock Index Admiral Shares - VTIAX
20% Total Bond Market Index Admiral Shares – VBTLX
Enjoy your millionaire retirement status.