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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

#211

Post by ac29 »

marcosdumay wrote: post #192
oliv__ wrote: post #166

Earlier quoted context omitted.

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

Between fixed cost fees, things that are sealed behind an accreditation process, investments that need real person to person negotiation, opportunities that aren't widely published, and even data that isn't shared with anybody that shows up, I'm really surprised that anybody can be even be mildly surprised by that phrase. There is absolutely no investment transaction where it's not obvious that larger players have it…

> There is absolutely no investment transaction where it's not obvious that larger players have it better. Even when entering in a shared fund, more money means lower fees.

Fees are so low on index funds that I'm not sure this is really true any more. VTI, the largest broad US stock market ETF, has fees of 3 bp (0.03%). Fidelity even offers some zero fee funds like FZROX (presumably actual expenses are subsidized by other products, though).

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

#212

Post by PaulDavisThe1st »

sbelskie wrote: post #32
assbuttbuttass wrote: post #15

There's something really insidious about tying 401ks and other retirement accounts to the stock market. People including myself end up with a large portion of our assets essentially gambled on the future success of US corporations. It gives some false legitimacy to this idea that our media is constantly pushing, that if the stock market is going well then regular Americans are doing well.

I can understand that feeling but what offers average Americans a better option for growing and securing wealth than investing (most) savings in the stock market?

An actual pension fund!

The idea is basically the same as any insurance system: the bigger the pool of people participating, the more "shocks" can be absorbed without affecting the long term viability. If you have a tiny pension fund for just one person (e.g. your typical 401(k)), if it has invested its value in a way that makes it impossible to fund that person's retirement, then that person is totally screwed.

On the other hand, if you have 300 million people with upcoming retirements spread over a 45 year timeframe all as part of the same pool, the system can absorb short-term catastrophes without affecting the ability to pay people their expected pensions.

But you only get this by having a coordinated, centralized system. You do not get this by having every individual invest in the stock market, because there's no way to shift money from those currently well-ahead of expectations to those currently needing payout. There's also no way to "borrow" from the capital assets in the expectation that over a period of 30 years you'll be able to repay.

All of this was broadly understood in the 1930s-1980s. But then people were mislead to about the benefits of individual investing, of how their 401(k) would pay out more than the company or state pension plan. While that is certainly possible, it is also unlikely, and the side-effect is that the risk exposure to individuals is substantial. The only winner has been the financial services sector, which has made out like bandits on fees/commissions etc from managing these funds that used to be locked away in corporate/state pension organizations.

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

#214

Post by eatsyourtacos »

zhdc1 wrote: post #138
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…

> Instead of real retirement plans, higher guaranteed social security. This comes out in practice as PAYGO, or "pay as you go". A lot of countries use this model, and it goes bad quickly when tax receipts aren't enough to cover retirement outlays. With poor demographics in almost all large economies, PAYGO plans are going to cause a lot of pain in the next couple of decades. > They have shifted nearly all the risk to…

>The US has more than 150% of its GDP invested in retirement savings. Some of these savings are invested in equities. It has to go somewhere.

But that's all by design, which is my point.

Let's say from.. I don't know, 50 years ago. Taxes were increased such that social security is 2-3x what it is now. Some level which basically guarantees you have descent money for retirement. Sure you should still save some more over the years, but you won't be completely fucked.

In that situation, there is no way 150% of the GDP would be invested in retirement savings. The social security pot would be massive, instead of inflating the stock market.

Trust me, I get what you are saying.. but that is also my point. It was all designed to do this, and it was designed to benefit the rich- NOT individuals.

Individuals (as a whole) would be FAR better off being able to depended on social security. And I think what's lost here, is we are discussing on HN- a place where most people (myself included) make FAR more than the median income. Like many multiples. I guess that just makes it a foreign concept- but most people in this country can't throw 10-20k a year into retirement funds. That's a massive part of most peoples income. So for the solution to be "hey, no retirement plans and low SS for you.. but don't worry, throw your money into the markets and over time it will be great!" is meaningless when you don't have a high income to begin with.

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

#215

Post by skeeter2020 »

This article doesn't make an sense. If the timeline for extrapolation supporting an index is too short, how can any single item comprised within the index be better? Do you want to go broke with an index? That will potentially take > 100 years. Everything else is combination of luck and quicker.

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

#216

Post by skeeter2020 »

meany wrote: post #17

The author uses Buffets essay to justify value investing over index funds, but Buffet is a strong proponent of index funds for non professional investors. Instead of stock picking, Buffett suggested investing in a low-cost index fund. “I recommend the S&P 500 index fund,” Buffett said, which holds 500 of the largest companies in the U.S., “and have for a long, long time to people.” He’s even putting 90% of his own es…

Plus Buffet gets deals that no one else would ever be offered. The benefit is huge signal value from his investment that none of us can provide, and companies pay for that with way better terms. This value gets priced in BH shares and the circle continues.

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

#217

Post by eatsyourtacos »

Auracle wrote: post #56
eatsyourtacos wrote: post #46

Earlier quoted context omitted.

Why should that be how it works though? We should be taxing people more, and guaranteeing much higher social security so we don't have to gamble our savings in a giant ponzi scheme. It shouldn't be on the individual to be lucky that a massive recession doesn't hit when they want to retire.. or depend on the market making a few percent a year just to survive.

Most 401ks are probably in funds that automatically start allocating more and more bonds as they approach retirement age. And frankly, if I could stop contributing to social security and invest it instead I would in a heartbeat. It’s effectively a Ponzi scheme that relies on more and more citizens paying in. That’s unsustainable, and by the time I retire I’m sure they’re at least going to move the age to collect up.

Calling social security a ponzi scheme while thinking your 401k isn't a ponzi scheme is completely backwards.

Your 401k depends way more on people continuing to inflate it upwards. And you have ZERO guarantee, anything can happen.

At least social security is a government backed program, and they can ALWAYS find more money. Maybe it's the best solution at the time, but they can. They can raise taxes, borrow, simply print more money. And don't nitpick these points, because yes I understand there are issues and it's more complicated.. but they can do it.

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

#218

Post by scarface74 »

eatsyourtacos wrote: post #129
scarface74 wrote: post #92

Earlier quoted context omitted.

Because surely nothing could go wrong with depending on government for your financial security. The government doesn’t need more income. Have you seen how the federal government’s budget is allocated?

>Because surely nothing could go wrong with depending on government for your financial security Yeah because surely nothing could go wrong with having all your money in a volatile market you have no control over.. The government already guarantees social security, what is your point? If you trust the financial markets over the guarantee of the U.S. Government then I can't convince you otherwise.

The government can “guarantee” a lot of stuff. What happens when the government can no longer borrow money and either cuts benefits or starts printing money that leads to inflation?

We have already seen that in other countries.

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

#219

Post by bern4444 »

eatsyourtacos wrote: post #195
jstx1 wrote: post #123

Earlier quoted context omitted.

> I choose not to participate in "investing" because it's not investing. It's literally gambling. You can't control what a company does. You can't control if a pandemic hits just when you want to retire and your assets as cut in half. If you have money, you need to allocate it in some way - how are you allocating yours in a way that isn't investing, isn't gambling and gives you control over the performance of your as…

>If you have money, you need to allocate it in some way Why do you "need" to allocate it? This is my whole point. Everyone acts like "oh my god, I must have my money making more money!" What the hell do you think 80% of the country who has no substantial assets do? They can't do anything. The whole concept of getting rich off your own money is honestly sickening to me. >how are you allocating yours in a way that isn'…

> Why do you "need" to allocate it?

You don't "need" to allocate it. If you don't allocate it though, the buying power of your saved cash will decrease every year from inflation.

You can argue whether low inflation should be a policy goal of the FED in the first place - I believe it should personally, it incentivizes economic growth - but regardless, you have to take the situation as it is. Inflation exists and no amount of wishing will make it go away.

In the face of inflation, what can you do to at the very least preserve the buying power of your cash. If you do nothing, you can watch it wither away.

Currently, there are few viable options that will help you preserve cash; interest rates on savings accounts are 0, CDs are extremely low, bonds are low but starting to move up, etc. The only remaining option is equities (stocks, bonds etc).

> The whole concept of getting rich off your own money is honestly sickening to me.

What do you find sickening about it?

> Even my house, for example.. I don't consider an "investment".

I agree with this mindset. While you can take out a loan with your house as collateral, it's a bad idea to consider your home as an investment IMO. As you say, you ned a home to live in.

But housing that you own that don't live in can absolutely be considered an investment (as an alternative to equities) and this can be far more liquid since you don't need it to live in.

Not everything has to be thought of as an investment though. That's up to you as an individual to decide.

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

#220

Post by ericmay »

skybrian wrote: post #175
oliv__ wrote: post #166

Earlier quoted context omitted.

"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.

Yes, but Buffet doesn't then turn around and sell at that higher price, and even if he did the price would start going down as he sold his position. If his purchase is bad, in the long run the market will punish him, even if the stock price goes up in the short-term due to the positive signal from his purchase.

I certainly agree that Buffet can make moves that normal people can't, though. Goldman Sachs in 2008 is a great example.

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