There's an even better alternative for someone willing to put in the leg work:
(1) Figure out your investment horizon. For many people, this is way shorter than suggested by generic advice, which makes some diversification beyond "stonks go up" meaningful.
(2) Figure out what costs you'll incur by rebalancing etc.
(3) Write a short script that optimises the amount of activity in portfolio management that improves performance over your investment horizon, given your costs.
Unsurprisingly, the result can vary a lot between people. The result is most likely going to involve a very low level of activity, but the process of finding it out is very informative.
What I've found out (and this is replicated also by more authoritative people like Carver) is that for almost everyone, mixing in some 10--20 % of a safer asset like 10 year bonds and rebalancing yearly outperforms a pure equity portfolio over most realistic investment horizons.
I would suggest a step beyond though, because rebalancing your portfolio is fun year 1-5, but not so fun year 5-20: have a look at e.g. Vanguard retirement target funds.
Essentially, it's an ETF with a rebalancing rule included for a specific target date. For instance if you buy the target 2050 (your hypothetical retirement age), the ETF rebalances itself between bonds/monetary fund/stocks until it reaches that date, u til it's pretty much all cash in 2050.
Lowest hassle diversified retirement scheme I found.
Rebalancing into bonds and mmmfs is a form of insurance against catastrophic losses equities. But if you have a sufficiently large account then catastrophic losses that affect your life are extremely rare, if they do occur they will likely affect your bond portfolio as well, and the expected loss vs 100% equities over 15-20 years is significant, something like 10x the value of the insurance you are buying.
If you want insurance for a large account then long-dated put options 20% of the money are much cheaper.
US large cap has certainly recently outperformed the other parts of the target date fund (international stocks, bonds). But there is certainly no guarantee that it will happen "every time". In the last 10 years, US equity has been the best overall performing asset class for the past decade but 7 out of those 10 years at least one other category outperformed it: https://www.blackrock.com/corporate/insights/blackrock-inves...
> Like pension funds I bet Vanguard is one of these so-called LPs who give money to VCs like Y Combinator to help ivy league kids follow their dreams.
You can look up the holdings of VFIFX or any other Vanguard fund. There is no private equity or private credit.
Guaranteeing mediocre performance. Not my cup a tea.
What you describe sounds like a kind of momentum/market cap investing, which is favourable in the short term, but suffers a lot when things go bad.
(This is assuming one cannot predict future returns better than the rest of the market. If you do that all the better!)
Seems like there's a lot of confusion on this. I'll see if I can get a fuller article up.
I can point couple companies that suddenly dropped from $90 a share to below $10 and then they never got up “Just eat takeaway.com” between 2018 and 2022 it was looking like they would go to the moon. In 2022 you can see hell of a drop and it is not going back.
If you would sell parts of it before 2022 you would lock at least some of the gains.
But I think you know better when to switch companies ;)
It's not easy to suppress the panic.
Most of my investing is just in passive S&P index funds, but I do occasionally buy individual shares.
Sometimes I make decent money, sometimes I lose money…turns out I consistently do worse than the S&P long term.
I treat buying individual shares as yuppie gambling at this point. It can be fun, but it’s usually a bad strategy.
Naw, that's boomer gambling.
Options are yuppie gambling.
I would actually recommend the opposite - buy shares of a few companies that you know exceptionally well. That is, not just the companies, but also the market, the industry trends, etc. Charlie Munger recommends holding 5 stocks at max, while Peter Lynch suggests industries that are tangential to your work and daily life. Both solid advice. Revisit the list every year, and you'll already do better than most of the blind duds investing in the S&P500 (which arguably contains a lot of duds).
The problem with most ETFs is that you'll still be investing in a bunch of dud companies, whose only reason for staying in the market is by virtue of being big (think HPs and IBMs, for example).
Don't just blindly buy an ETF that fits your investment goals. Many of those bespoke ETFs have 1%+ management fees.
You can look up how even a 1% fee can gobble up piles of money over years.
I know that passively-managed ETFs aren't necessarily "optimal" (as your parent comment mentioned, there's a risk of them having a few duds there for legacy reasons), but I think the value that they provide come down to the fact that they're automatically rebalanced and diversified, and 0.04% seems like a pretty reasonable cut for them doing that for me.
I think there's value in having things diversified and rebalanced automatically, especially if you don't have any confidence in your own ability to do so. Yes, you sometimes get stuff that's overvalued and thus over-represented, but in theory if the stock tanks the portfolio will be rebalanced and thus become a smaller percentage of the total holdings.
That sounds like exceedingly bad advice.
Eg I work in software (like many people here). So my career itself already heavily exposes me to ups and downs of that industry; but it's also the industry I know best. The advice you quote would see me increase my already outsized exposure to that industry ever more.
Diversification is the only free lunch in finance. Your advice rejects it.
> The problem with most ETFs is that you'll still be investing in a bunch of dud companies, whose only reason for staying in the market is by virtue of being big (think HPs and IBMs, for example).
Feel free to use the gambling money part of your portfolio to short them.
And since HP and IBM etc are publicly traded, there are already lots of short sellers around making sure the prices stay reasonable.
I call that "minimizing your gains" and "locking in your losses", and just hold instead. If I "locked in the gains" I would have missed out on 10x returns.
Of course, I did ride Enron all the way to zero (!), but it didn't matter. Think of it this way - buy 10 stocks. 3 go to zero. 6 have modest returns. 1 is a 10x winner, that more than makes up for the failures, and becomes the tentpole for your assets.
out of 10 stocks, 1 being a 10x winner is an absolutely rarity and the fact that you would manage to pick it is pure luck tbh.
- You have to be lucky enough to find it when it's cheap.
- You have to be lucky enough to hold on to it even if it loses money
- You have to be lucky enough to not sell it when it's at only 5x and hold off for the top
- you have to be lucky enough to have bought enough initially that the return is meaningful to you
These are the thoughts that made me clean up how I invest and stop thinking I'll get lucky at some point just rolling the dice. It's way more luck required than just buying in early.
Of course, the reason he didn’t buy more was because he knew it was a lottery ticket and putting most of his money in the S&P500 in his 401k was obviously more prudent.
I suppose it's dependent on your time horizon. MSFT is up around 10x since Nadella took over. It's more common over 20 years, obviously.
I'm not an IRS agent and have no idea what they mean by substantially similar. You might want to talk to your tax accountant.
They actually use the word 'identical' instead of 'similar', if that matters. It seems to be a grey area with ETFs, and I'm not a financial advisor, so won't make any further claims.
> You might want to talk to your tax accountant.
Absolutely agreed. You can also just let a reputable robo do it for you if you don't have the time or energy for it, there are multiple. It is what I ended up doing. It's modest but every bit helps.
Isn't it the case that a few large cap stocks have the vast majority of the growth? If you didn't like Tesla, didn't like Nvidia, didn't like big 5 tech, you might have had very mediocre returns.
I think DCA is the most effective investment strategy. Unfortunately I don't have the discipline to keep it up during a downturn. Next time I try it again with picked stocks will be my 4th time, but for now, I'm doing it with index funds. I'm not going to feel as inclined to pause my purchases during an index fund downturn.
If you do rebalancing then you might as well hold an ETF that does it for you at the lowest cost. If you hold individual equities, keep your winners.
The only thing a small investor can control are fees. Minimising transactions minimises fees.
Here's a similar article:
https://www.businessinsider.com/forgetful-investors-performe...
The standard advice for equities investors (at least in the UK) has been to invest in tracker funds for a very long time.
it is possible to beat the market. Many years ago I double my money in approx an year - but I invested heavily in I had been covering as a analyst (one of my previous careers) until immediately before. I am more cautious now.
How much are total costs in the US?
If you trade frequently even low brokers fees add up. If its 0.1% and you trade monthly it ends up being 1.2% over the course of an year.
Now it's effectively 0 for most common trades. Here is Schwab for example:
https://www.schwab.com/pricing
If someone is a big options trader they can probably find a better per contract price out there.
Anyone who really cares about spreads will be using limit orders. Otherwise you're talking about pennies on highly liquid shares.
The fact that we're even discussing the possible spread differences between market makers shows just how commoditized retail trading has become.
I suspect they're in the business of collecting the spread on lots of small trades that they can assume are largely random.
But yes, the market maker doesn't run the risk of trading with someone with knowledge and a lot of capital to apply it.
NBBO requires that if there is something better that Robinhood gives it to you.
If you just hold your index fund, you don't pay these recurring spreads.
They also earn some money from 'payment for order flow'.
I bet the uninvested cash product drives some weird incentives - kpis around increasing ratio of sells to buys and increasing pain around removing cash.
...No? Then, uh, a punitive judgment?
>Small fine that amounts to a cost-of-doing-business.
Ah. Hm.
It doesn't show up anywhere in your statement, but it's a real trading fee nonetheless, so it's still better not to trade too much
"Most successful chimpanzee on Wall Street" - https://www.guinnessworldrecords.com/world-records/most-succ...
At the time the bitcoins were lost, they were worth ~$575 each.
Today those returned tokens are worth close to $100,0000 each.
I doubt anyone who was affected by that hack realized they just got involuntarily forced into the best investment of their lives.
I haven't seen any reporting on that. Bitfinex, the corporate entity, is receiving the coins recovered from the feds. It's up to Bitfinex how they device to dole out those funds, if at all.
When these things happen, often times exchanges will make their customers whole by giving back the monetary value of the coins at time of loss. It's very rare they repay them 1:1 in bitcoin.
AFAIK the only crypto company who have been hacked (and there are a lot) and returned funds as BTC and not in dollars is, ironically, Mt. Gox. Users got repaid in Bitcoin 10 years after the fact. FTX bagholders were compensated ~120% in "equivalent value" dollars. Lost crypto was not repaid.
Apparently they created a token that entitles you to the lost bitcoin should they be recovered.
Because if I already need to have some stocks, than this being the #1 strategy feels like those advice that you get on the internet where if you want to be rich just get born into a wealthy family.
Statistically probably true, but not really doable. :/
I feel like you can only do the 'dead man strategy' when your already dead, since before that it's probably better to keep adding money into the portfolio.
Money Magazine a few years ago compared various investment strategies in stocks. The #2 best performing one was investing in the S&P 500. The #1 best performing strategy was the "dead man strategy".
The dead man strategy comes into play when the investor dies, and his estate gets frozen until it winds its way through the courts. It turns out that doing nothing with your stock investments is (statistically) the best strategy.
I know for a fact that when I do nothing with my stocks, they also perform better.