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The best investment advice you'll never get

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Re: The best investment advice you'll never get

#81

Post by borism »

yummyfajitas wrote: post #70
borism wrote: post #63

Earlier quoted context omitted.

I don't quite understand what you're saying. From what I understand when the ETF achieves cash position needed to generate 1 creation unit (usually 50k ETF shares, as you correctly point out), then the fund is absolutely required to purchase underlying shares that index it's tracking requires it to hold. It can't just hold cash and promise to track index nevertheless. Or do you mean that first comes the Creation Unit…

You don't trade cash for the creation unit, you trade one creation unit of shares in the underlying securities. If 1 share of AMSETF is claimed to be equal to 0.5 shares in AAPL and 0.5 shares in MS, you hand 50k shares of AAPL and 50k shares of MS to the managers of AMSETF. They create 50k shares of AMSETF and hand them to you. No cash changes hands (unless cash is one of the underlying assets of the ETF), so the ET…

okay, I was sloppy in my description of ETF mechanics.

but from investor point of view it still works as I described - she goes to market, places bid for ETF shares. Then the process splits as following:

a) if there are sellers in the market she gets her shares from them b) if there are no sellers, market makers will still sell her the ETF shares

then once market maker accumulates enough cash from buyers, he purchases/borrows shares needed for exchange for N creation units from ETF trust.

I don't think market makers just go and create ETF shares without there first being demand for them?

Re: The best investment advice you'll never get

#82

Post by jules »

drblast wrote: post #67
jules wrote: post #53

Earlier quoted context omitted.

> Their opposites, passive investors, will by definition do about average. In aggregate their positions will more or less approximate those of an index fund. Therefore the balance of the universe—the active investors—must do about average as well. However, these investors will incur far greater costs. So, on balance, their aggregate results after these costs will be worse than those of the passive investors. This arg…

He's making the (correct) assumption that the speculative stock market where active investors expect to make their money is a zero-sum game. For there to be winners in "buy low, sell high" there have to be an equal amount of losers. So, if there are going to be winners, there have to be an equal amount of losers. It's difficult to siphon money off of someone passively invested in an index fund, so the active investor…

That's exactly part of what I'm saying. The other part is: Even though you can't siphon money off passive investors, you can siphon money off other active investors.

Re: The best investment advice you'll never get

#83

Post by a5seo »

cynicalkane wrote: post #56
philfreo wrote: post #25

Interesting comment on that article: Index investing (applied to extremely wide market indexes) makes an assumption that there will be a continuous and infinite increase in the total market capitalization of that index. As time marches forward I beleive we will experience a deceleration of worldwide market cap increase. Anyone have thoughts on this?

Well, 1) The world is getting bigger over time. 2) The world's industry, per capita, is getting more valuable over time. 3) Even if the first two were untrue, there is still a time value to money. People will spend capital to get value immediately, and investing is the opposite of that.

This is a question of economic growth, which this paper handily explains...

http://www.stanford.edu/~promer/EconomicGrowth.pdf

If you believe it's feasible for economic growth to continue, then you believe it's feasible for the indexes to continue to rise, perhaps to something that rounds to infinity (at least for my purposes).

Re: The best investment advice you'll never get

#84

Post by a5seo »

Natsu wrote: post #33
a5seo wrote: post #5

Earlier quoted context omitted.

true, you get this advice everywhere. but actually implementing it for realz isn't for the faint of heart. it's not impossible either, especially if you don't mind horseshoes-and-hand-grenades approximation. If you want optimal as in mathematically optimal fund selection, then Bill Sharpe's startup, Financial Engines, does that (if you have at least $100k at Vanguard, you get it for free, also through many employers)…

> (if you have at least $100k at Vanguard, you get it for free, also through many employers) Actually, the people my employer go through just dumped Vanguard and a few other funds and would've automatically enrolled us all in a fund that changes every single year to be "optimum" for your age. I opted out and I informed my coworkers that there were good reasons to be incredibly suspicious of this move, but I wonder wh…

good to be suspicious; employer-selected investments are like employer-provided health care, there's a big imbalance in incentives.

2 things to watch: fund expenses and composition

if churning is an issue, it will be reflected in the expense ratio. but if the expense ratio is comparable to actively-managed funds and the fund's composition is index funds, then it might be ok since you're only paying for management services once.

Re: The best investment advice you'll never get

#85

Post by Natsu »

a5seo wrote: post #84
Natsu wrote: post #33

Earlier quoted context omitted.

> (if you have at least $100k at Vanguard, you get it for free, also through many employers) Actually, the people my employer go through just dumped Vanguard and a few other funds and would've automatically enrolled us all in a fund that changes every single year to be "optimum" for your age. I opted out and I informed my coworkers that there were good reasons to be incredibly suspicious of this move, but I wonder wh…

good to be suspicious; employer-selected investments are like employer-provided health care, there's a big imbalance in incentives. 2 things to watch: fund expenses and composition if churning is an issue, it will be reflected in the expense ratio. but if the expense ratio is comparable to actively-managed funds and the fund's composition is index funds, then it might be ok since you're only paying for management ser…

Oh, the new age-balanced funds are not composed of index funds at all. They're composed of a mix of pretty much everything that they swap out every year for something else. So when you're young, you get mostly stocks, when you're old, they buy more bonds. But they have to trade them around all the time to generate fees.

Anything that didn't generate enough fees got kicked out of the program (unless you opted out). Thankfully, I was in one of the safer funds (the only one currently showing a profit) before the crash. I wish I could move it over to Vanguard now, but it's too late. They didn't give us much warning, and they certainly gave us no time to switch, when we either had to opt out or get enrolled in their shiny new fee-generating fund.

Re: The best investment advice you'll never get

#86

Post by brisance »

achompas wrote: post #31
brisance wrote: post #26

Earlier quoted context omitted.

Or maybe the "analysts" are just not any good. For a specific example, look at how the "hobbyists" are beating the "professional" analysts at predicting Apple's quarterly performance, time and time again. http://tech.fortune.cnn.com/2010/04/20/apples-blow-out-quart...

If there's one company where hobbyists will beat professionals, it's Apple. Do you have any other examples?

There are many objective studies that show that individuals with their own specific trading/investing strategies can beat the street. But that's not really the point.

The point is that AAPL is now only second to XOM in terms of market cap, and is not exactly a tiny blip on the radar. It is a stock that is being watched by literally millions. If these "professional" analysts have so many resources at their disposal, have the inside track on confidential information and are operating at such an uneven playing field as the parent postulates, then why would they consistently be beaten by the "hobbyists"?

Re: The best investment advice you'll never get

#87

Post by citrik »

borism wrote: post #81
yummyfajitas wrote: post #70

Earlier quoted context omitted.

You don't trade cash for the creation unit, you trade one creation unit of shares in the underlying securities. If 1 share of AMSETF is claimed to be equal to 0.5 shares in AAPL and 0.5 shares in MS, you hand 50k shares of AAPL and 50k shares of MS to the managers of AMSETF. They create 50k shares of AMSETF and hand them to you. No cash changes hands (unless cash is one of the underlying assets of the ETF), so the ET…

okay, I was sloppy in my description of ETF mechanics. but from investor point of view it still works as I described - she goes to market, places bid for ETF shares. Then the process splits as following: a) if there are sellers in the market she gets her shares from them b) if there are no sellers, market makers will still sell her the ETF shares then once market maker accumulates enough cash from buyers, he purchase…

It sounds like you are expecting the ETF would be creating more shares frequently which it does not. That would have to happen as a secondary offering and it would dilute the value of all the other shares in circulation, Assuming they are the same class share.

Re: The best investment advice you'll never get

#88

Post by wrs »

antareus wrote: post #71

I'm 28, and I don't want to end up like Liz Lemon ("well I have $12,000 in checking"). What's a good primer on investing? I don't have a ton of money but I'd like to get into it.

I recommend Andrew Tobias's classic _The Only Investment Guide You'll Ever Need_. Very sensible, and very readable. http://www.andrewtobias.com/theonly.html

Re: The best investment advice you'll never get

#89

Post by sesqu »

joshhart wrote: post #78
SkyMarshal wrote: post #66

Earlier quoted context omitted.

Warren Buffet said sort of the same thing in one of his annual shareholder letters a few years ago. That exponential economic growth has natural limits, and that if we extrapolate the stock market's 20th century returns to the 21st century, you end up with a mind bogglingly (and unrealistically) large market cap in 2099. I forgot what year he wrote that, but it was sometime between 2006 and now. I don't have time to…

I'm not the person to refute Warren Buffet, but I will point out that the Dow Jones had abysmal performance from 1970-1979. One decade isn't enough to judge the economy for the next century. Do I think DJIA will hit 2 million in 100 years? No. But I don't think it's unreasonable to expect hundreds of thousands.

For those watching at home, 100k from 13k in 92 years would mean 2.24% annually, 500k 4.05% and 1M 4.83%.

I agree that over 5% is optimistic, but 3% for the century might be achievable. Note, though, the given that the rate of growth isn't constant, the most impactful rates are the ones we're getting early, i.e. now.

Re: The best investment advice you'll never get

#90

Post by borism »

citrik wrote: post #87
borism wrote: post #81

Earlier quoted context omitted.

okay, I was sloppy in my description of ETF mechanics. but from investor point of view it still works as I described - she goes to market, places bid for ETF shares. Then the process splits as following: a) if there are sellers in the market she gets her shares from them b) if there are no sellers, market makers will still sell her the ETF shares then once market maker accumulates enough cash from buyers, he purchase…

It sounds like you are expecting the ETF would be creating more shares frequently which it does not. That would have to happen as a secondary offering and it would dilute the value of all the other shares in circulation, Assuming they are the same class share.

There's no dilution with ETF. When ETF shares are created (via formation of Creation Unit), the ETF holdings increase by equal amount of underlying assets. You can create as many ETF shares as market demands (until you run out of possibility to buy underlying assets).
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