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I'm Too Risk-Averse for Index Investing

paranoidvalueinvestor.substack.com

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Re: I'm Too Risk-Averse for Index Investing

#151

Post by bern4444 »

belval wrote: post #131
Traster wrote: post #94

So there's two things I don't really understand this article. Firstly, what is the difference between you "value investing" your own money, and sticking your money in a hedge fund which does "value investing" for you? Other than the fact that you're doing this in your spare time whilst the hedge fund manager is doing it full time. Surely what this article is basically saying is "89% of hedge funds underperform the in…

1) Management fees. A fund will usually get ~1% as a management fee. That means that if their allocation strategy gives return of 5%, you will see a return of 4%. Index funds have really low fees ( You can think of it as moving your average return up by 0.8%, that's very significant, especially when you consider that on average funds don't beat the market. 2) Correct, the article is either written by someone with a l…

On top of the management fee (which typically is around 2%, they also will take a large percentage of any returns they generate on your behalf (10% - 20%).

So if they earn $x of return, you only keep .8 * x.

This is the typical 2 and 20 quote. Sometimes it may be 1.5 and 15 or even 1 and 10 but that's the typical range.

Re: I'm Too Risk-Averse for Index Investing

#152

Post by marcosdumay »

lottin wrote: post #117

This is not very good advice. An index investor is exposed to systemic risk, that is, risks that affect the market as a whole, but the problem is you can't escape systemic risk by investing in individual stocks, because individual stocks also have the same systemic risk... in addition to other risks which are collectively known as idiosyncratic risk. In short, stock-picking is always inherently more risky than index…

Even if he does beat the market, and you manage to pick the same stocks as he, at the same time, it doesn't mean you will also beat the market.

Investing is heavily biased for favoring large players. A normal person has to take that bias into account too.

Re: I'm Too Risk-Averse for Index Investing

#153

Post by VBprogrammer »

thomasfl wrote: post #70
impostervt wrote: post #2

Buying value stocks may be better than buying an index, but identifying value stocks is hard and time consuming. Wouldn't the average investor be better off buying index funds, since the average investor does not have the time, inclination, or training to find value stocks?

Actively managed funds with low costs and a value investment style, can be a good alternative to picking stocks. It can be a good idea to identify actively managed funds that have performed better than the market in the past (ie. they have got alpha). Which investment style the fund has used, can be identified using number crunching (using fama french factor analysis). For example Warren Buffet uses a mixture of valu…

Actively managed funds don't tend to come with low costs as a general rule. It's more expensive to pay a bunch of interns to sit around generating reports and a rockstar to actually pick which stocks to buy or sell at each moment than it is to simply make a few trades to keep the portfolio in line with the market.

Re: I'm Too Risk-Averse for Index Investing

#154

Post by glofish »

julienchastang wrote: post #145
glofish wrote: post #134

Go to Fidelity.com and search for VTV (Vanguard Value Index Funds) Plot the stock price then select compare to SP500. You can select 1 year, 2 year, 5 year, 10 year, Max range What will you find? For all of those ranges SP500 outperformed VTV. The longer the the period, the larger the margin. As an example over 10 years SP500 went up 220% VTV went up 160% Now your choice is to trust paranoidvalueinvestor.substack.com…

Your time range is not long enough and it too skewed to a small number of companies that are dominating the sp500. For all of those espousing value investing in this HN discussion, try to read this pay-walled WSJ article one or another: https://www.wsj.com/articles/how-to-understand-this-crazy-ye...

I went ahead and compared VTV (Small Value Index) to VTI (Total Stock Market index) that includes all US companies.

On the 1 year range the VTI underperformed.

Over 2, 5, 10 and Max (18 years) VTI outperforms VTV, the longer the period the larger the difference.

But I will say the author is right in that VTV shows less volatility, thus it may offer one more peace of mind.

Re: I'm Too Risk-Averse for Index Investing

#155

Post by manojlds »

joosters wrote: post #12

You can't look at a chart of an index price and simply say "it's down from the peak, I would have lost money". If you do that, you are forgetting that stocks pay dividends, and they aren't included in the index price. Instead, you should be looking at index tracking fund / ETF prices, which will include the value of dividends (and also account for fees).

Or just look at the TRIs (Total Return Indices)

Re: I'm Too Risk-Averse for Index Investing

#156

Post by zhdc1 »

awillen wrote: post #49
eatsyourtacos wrote: post #39

Earlier quoted context omitted.

This is 1000000% true. The entire system is completely broken. It is literally designed to make the markets keep going up, which as usual benefits the wealthy far more than the average person. And people who are even middle class barely really benefit from it. While the lower class and poor don't benefit at all. I choose not to participate in "investing" because it's not investing. It's literally gambling. You can't…

But how do you fund higher guaranteed social security? You need more money, which means either higher taxes or more people earning taxable money. The speed of population growth is declining, which is a big problem for the latter, and the former clearly has its limits. You're saying stocks are a Ponzi scheme, but as a solution you're proposing something that constantly needs more people paying in money or it will coll…

> You need more money, which means either higher taxes or more people earning taxable money. The speed of population growth is declining, which is a big problem for the latter, and the former clearly has its limits.

What's worse is that a lot (most?) countries use exactly this model. Mandatory social security contributions are the reason why income tax percentages in many EU countries are so much higher than in the US. Look at https://stats.oecd.org/index.aspx?DataSetCode=TABLE_I4.

Re: I'm Too Risk-Averse for Index Investing

#158

Post by someelephant »

cissou wrote: post #16
joosters wrote: post #12

You can't look at a chart of an index price and simply say "it's down from the peak, I would have lost money". If you do that, you are forgetting that stocks pay dividends, and they aren't included in the index price. Instead, you should be looking at index tracking fund / ETF prices, which will include the value of dividends (and also account for fees).

100%. European markets are known to pay out more dividends whereas the US market is known to prioritize stock price growth. Return-wise that makes no theoretical difference.

This is due to the fact that European indices are heavily weighted towards stocks in low growth industries: banks, mining, utilities, cars, chemistry insurance. Lack of incentives in Europe has led to poor equity and economic growth versus the United States and this pattern will continue for decades to come.

Re: I'm Too Risk-Averse for Index Investing

#159

Post by kazinator »

Index investing does eliminate risks:

- an index contains a basket of equities, so it is less risky compared to picking one stock

- an index eliminates the risk of the fund manager's investment choices, which may be wonky

- it eliminates some management fees (the "risk" of which is 100%).

Value investing is almost certainly will be more risky than index investing.

If it uses fewer stocks, it's risky due to poor diversification.

It can make poor choices. Even if some companies have objective value, they can succumb to a host of other problems and competition. The stock market isn't the only irrational market; the consumer market also is: it doesn't always reward value.

If you get someone else to do value investing for you, you may be paying fees. As an individual, small investor, you may need to get into a bigger value fund to get the benefits. And now you're just into another managed fund.

Re: I'm Too Risk-Averse for Index Investing

#160

Post by lordnacho »

vishnugupta wrote: post #135
lordnacho wrote: post #82

Earlier quoted context omitted.

If you have a Bloomberg terminal, you can look up the corresponding total return indices. German DAX is a rare example of a total return index IIRC. I don't think it changes his conclusions much, the indices can easily fluctuate by more than what you bank in dividends.

> If you have a Bloomberg terminal Sorry, but I must point out that if you have access to Bloomberg terminal then it almost certainly implies that your full time job is market research & investment. A Bloomberg terminal costs between $20K - $24K per year .

Or you could be a university student, they sponsor terminals.
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