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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

#171

Post by ryandrake »

scarface74 wrote: post #81
brightball wrote: post #8

Earlier quoted context omitted.

All completely true. The average investor should probably be using a financial advisor. One of the biggest reasons that most of these funds work is the volume of people in the US with 401k plans that have fund-only options. Every pay period the stocks in these funds get automatically purchased without many decisions involved so you're going to continue seeing them steadily and safely increase. Ultimately, investing b…

No one should be using a financial advisory unless they are a fiduciary who gets paid based on the amount of assets under management. Most people don’t need a financial advisor when they are in the accumulation phase. After paying off high interest debt, save 3-6 months in retirement, put as much as you can in an index fund or a target date fund in a 401K and call it a day. Most people can’t afford to max out their r…

Extremely few people can actually max out all of their tax-advantaged opportunities, including retirement plans. Some examples, assuming a married couple:

401(k): $61,000 (under 50 years old), $67,500 (50 and older) each This is the 2022 tax year limit for all contributions, including effective deferral ($20,500 or $27,000 for 50+) plus employer matches and any post-tax contributions.

IRA: $6,000 each Either Roth or traditional. Both are tax advantaged.

HSA (family): $7,300 (under 55 years old), $8,300 (50 and older) These funds are triple tax advantaged when used for medical expenses.

Then you can get into treasury bonds, where interest is exempt from state and local taxes. For example a Series-I bond, which are protected from inflation (current rate is 7.12%): You can purchase a maximum of $10,000 worth of these a year.

So, just with a few tools, a family of two over 55 years old can invest up to $175,300 in highly tax-advantaged investments. A family of two under 50 can invest up to $161,300. How many families actually have enough money laying around to contribute even close to that?

If you've exhausted all that and still have money left over to invest, then you can start thinking about opening a taxable account at a brokerage and finding a fiduciary advisor.

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

#172

Post by matheusmoreira »

oliv__ wrote: post #166
marcosdumay wrote: post #152

Earlier quoted context omitted.

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.

"Investing is heavily biased for favoring large players" How?

I assume it's because large investors move huge amounts of money. When they trade, they cause ripples all over the market. When we trade, the price barely changes.

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

#173

Post by martin_a »

zzleeper wrote: post #168
derf_ wrote: post #126

Earlier quoted context omitted.

Maybe from 10,000 feet. Buffett only invests in certain kinds of companies (those within his "circle of competence"), so you only get so much diversity. Also, because Berkshire is a conglomerate, businesses which generate large amounts of cash (e.g., insurance float, or businesses that would pay dividends if they were a stand-alone companies) can be used to fund capital-intensive businesses (railroads, energy compani…

You made me think. The weights of e.g. the SP500 are not ideal then. Berkshire is in the SP500, but so are Apple, Coca Cola, Amex, BoA, etc. which are Berkshire largest investments. So if Coca Cola has an idiosyncratic hit, then you get hit twice by it: first in your KO holdings, then in your BRK.A holdings. At the extreme, if there is a company that then invests in Berkshire and so on, you could end up overweighting…

> So if Coca Cola has an idiosyncratic hit, then you get hit twice by it

I think that is neglibile, depending on how big you define a hit. If Burger King gets hit, that will probably effect Coca Cola as the largest supplier (just saying it like that, don't know if they really have that kind of business with each other), too.

There's lots of dependency in the modern world, I don't think it really matters.

edit: If Coca Cola does well, you profit twice. Maybe see it that way... ;-)

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

#174

Post by gruez »

zzleeper wrote: post #168
derf_ wrote: post #126

Earlier quoted context omitted.

Maybe from 10,000 feet. Buffett only invests in certain kinds of companies (those within his "circle of competence"), so you only get so much diversity. Also, because Berkshire is a conglomerate, businesses which generate large amounts of cash (e.g., insurance float, or businesses that would pay dividends if they were a stand-alone companies) can be used to fund capital-intensive businesses (railroads, energy compani…

You made me think. The weights of e.g. the SP500 are not ideal then. Berkshire is in the SP500, but so are Apple, Coca Cola, Amex, BoA, etc. which are Berkshire largest investments. So if Coca Cola has an idiosyncratic hit, then you get hit twice by it: first in your KO holdings, then in your BRK.A holdings. At the extreme, if there is a company that then invests in Berkshire and so on, you could end up overweighting…

It might be if your investment strategy was to allocate equal amounts to each sector, but that's not how most passive funds work. Instead, they allocate based on market-cap weighted basis, which means there's no double-count going on.

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

#175

Post by skybrian »

oliv__ wrote: post #166
marcosdumay wrote: post #152

Earlier quoted context omitted.

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.

"Investing is heavily biased for favoring large players" How?

In Buffett's case, he sometimes gets to buy investments at discounts not available to the general public, and then the stock goes up on the news that he bought them.

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

#176

Post by BeetleB »

eatsyourtacos wrote: post #127
JKCalhoun wrote: post #60

Earlier quoted context omitted.

I agree, but you have to specify where you're going pull those taxes from. We need a "sustainable tax base".

How about re-increasing the corporate tax rate? How about taxing self employed people social security/medicare without a cap instead of stopping at ~140k? How about massively increasing long-term capital gains, or even just getting rid of it. Income is income- tax it the same. Even just increase the standard tax on people. If the average person paid 10% instead of 7.5% into SS/medicare but their SS doubled in the lon…

> How about re-increasing the corporate tax rate?

No argument there.

> How about taxing self employed people social security/medicare without a cap instead of stopping at ~140k?

Why limit this to self employed people? The cap is there for all workers. And self employed people pay double the tax - if you are not self employed, your employer is paying half of it. Self employed people already have a larger burden.

> How about massively increasing long-term capital gains, or even just getting rid of it. Income is income- tax it the same.

Because then people won't invest in ... much. My guess is the majority of current investments that are profitable would no longer be if taxed as regular income.

That then means many businesses will stop existing since people will not invest in them.

> If the average person paid 10% instead of 7.5% into SS/medicare but their SS doubled in the long run, are you really saying the average person would be against that?

Definitely. Even though it likely is a good solution.

The real problem is that the US government, by law, is not allowed to keep the excess SS funds they collect in an "SS bucket". If the SS payouts are less than SS tax collected, the excess is required to be spent elsewhere. We've lost decades of excess SS collections because of this.

> There are a billion ways to do this. I am not an expert, but I'm not clueless either.

The CBO exists to do such calculations. Increasing SS/Medicare tends to work. Removing incentives to invest, however, is disastrous.

> "Oh I get to choose what investments to put my money into even though I have zero control over the actual outcome, great!"

There's a disconnect between saying "long term capital gains benefit the rich" and "investments are bad because I have zero control over the outcome." The latter statement is as true for you as it is for rich people. If you think investing is such a bad thing with low returns, then let them have their long term capital gains tax.

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

#177

Post by Thrymr »

queuebert wrote: post #108
JKCalhoun wrote: post #67

Earlier quoted context omitted.

I agree, but you can Google "dividend aristocrat" stocks to find a list of stocks that are paying dividends above their weight. Just don't expect better than a 5% ROI.

Dividends are taxed punitively, though.

Less punitively than earned wages, in the US, for most people.

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

#178

Post by dragosmocrii »

oliv__ wrote: post #166
marcosdumay wrote: post #152

Earlier quoted context omitted.

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.

"Investing is heavily biased for favoring large players" How?

If you have 1000$ to invest and it appreciated 7%, that made you a 70$ profit, which is not much from a coat of living perspective. If you had 1,000,000$ to invest, that gives you 70,000$ profit, which is pretty good at covering living expenses, bit not leaving you much else. Now if you have 10,000,000$ to invest that yields 700,000$ in profit, that is marginally way more and covers living expenses, plus gives you room to invest in other actives, thus improving your chance to grow your wealth.

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

#179

Post by jslaby »

lordnacho wrote: post #82
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).

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.

Hey, no one make a call! I'm going to log in to the Bloomberg terminal.

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

#180

Post by gruez »

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 .

you can also search "total return" for the ticker, eg. https://www.google.com/search?client=firefox-b-1-e&q=SPY+tot...
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