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I'm Too Risk-Averse for Index Investing

paranoidvalueinvestor.substack.com

221–230 of 286 posts

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

#221

Earlier quoted context omitted.

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…

IRAs have income limits.

Series I bonds by definition only keep you level with inflation. Which doesn’t help if house prices, rent and healthcare continue to outpace inflation.

L

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

#222
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…

>individual stocks also have the same systemic risk

What do yo mean by the "same" systemic risk? Yes, all stocks have some systemic risk, but at varying levels as measured by beta. I wouldn't say that's the same. That's like saying all sports have the same injury risk. Sure, there's some inherent risk in every sport but at varying levels.

There's an older investment technique called "betting-against-beta" that selects individual stocks due to the lowered systemic risk.

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

#223

Earlier quoted context omitted.

i don't think it has. also, it has less volatility.

How do you define volatility? How can a market weighted index of the top 500 publicly listed US companies be more volatile than a single company? Which itself is 25%+ invested in a single other company and then the rest spread out over a handful of other companies. Edit: also, BRK’s outsize AAPL investment is the only reason BRK is even close to keeping up with SP500 index.

Volatility is a statistical measurement. It's calculated by:

1. Find the mean of the data points

2. Calculate the difference between each data value and the mean (variance)

3. Square those variances

4. Add the squared variances together

5. Divide the sum of the squared variations by the number of data values

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

#224
post #186

Earlier quoted context omitted.

You can't hit those 401k numbers without employer cooperation (e.g. being self-employed)... I don't think it's reasonable to say that someone paying the $20,500 annual max isn't maxing it out. > For example a Series-I bond ... current rate is 7.12% Entirely from the variable part-- their fixed rate is 0% right now, and since the interest is taxed when you close the bond, this is an investment that is guaranteed to un…

Yea, I'm not saying I-bonds are great investments, but they are good if 1. your investment goals emphasize tax deferral/avoidance and 2. you need to diversify an equity heavy portfolio. I agree with OP in that you don't really need an advisor if you're just contributing to your retirement plan, and I'd add "...or to other tax-deferred accounts that don't offer much choice in securities". The types of investments I li…

I agree completely with taking advantage of every tax advantaged means of savings. For me that means.

- I-bonds up to the amount needed for an “unemployment fund”

- max out my 401K

- max out the company managed “after tax 401K”

- max out the HSA and use after tax dollars to pay medical expenses

That takes me to $42K before I turn 50 in a couple of years.

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

#225
I do think the author is correct to imply that there's substantial survivorship bias when people talk about US market returns over the 20th century. (A stronger statement than the author makes: the causality is bidirectional; strong US market returns are not merely a consequence of the 20th century being "the American century", but a cause of it.)

But equally weighting other country markets is also nonsensical; the lower returns of the Nikkei in the last 20 years go hand-in-hand with that exchange have a smaller total market cap.

A more meaningful comparison would be to look at whole-world market-weighted returns, and try to correct for survivorship bias, as the authors of this paper have done: https://www.nber.org/digest/jul97/century-global-stock-marke....

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

#226

Earlier quoted context omitted.

> If you don’t like stocks keep it in bonds or cash. This is disingenuous advice considering all financial vehicles for savers have been gutted. You can't even hedge inflation without the stock market (or real estate, if you can afford the buy-in). Take a look at some historical CD rates. https://www.bankrate.com/banking/cds/historical-cd-interest-...

> You can't even hedge inflation without the stock market (or real estate, if you can afford the buy-in). See also: treasury inflation-protected securities (TIPS).

The shortest maturing TIPS is 5 years. While you can sell your TIPS early, it has to be through the secondary market. And that involves transferring your TIPS to a 3rd party broker (and fees). I can't imagine its worth the trouble unless you need to get out of a 10 or 30 year TIPS. TIPS doesn't compare at all to a personal savings account.

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

#227

If you assume that a bad bear market is a 40% drawdown, and since 2009 the S&P 500 has gained 20% on a good year, you only need just 2 good years or a mixture of some good and mediocre years to offset a bear market. So this means staying out of the market even for just 2-4 years may mean never having the chance to buy back at a lower price even in a bear market. Indeed, the market crashed in early 2020 due to Covid b…

> If you assume that a bad bear market is a 40% drawdown, and since 2009 the S&P 500 has gained 20% on a good year, you only need just 2 good years or a mixture of some good and mediocre years to offset a bear market. This is one of the most basic mathematical errors you can make... 100 - (100 * 0.4) = 60 60 + (60 * 0.2) = 72 + (72 * 0.2) = 86.4

I think this is Buffet's first rule is "don't lose money" and his second rule is "don't forget the first rule."

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

#228
post #188

This idea that even professional money managers, let alone amateurs with their own retirement funds, can consistently beat a market index has been debunked for decades by Jack Bogle, Burton Malkiel and others. There is still no good evidence that anyone (no, not even Warren Buffet) can reliably beat the market, and even if there were, you as an average investor would have no chance of identifying them before the fact…

Your statement about no investors beating the market is demonstrably false. Look at Michael Burry for example. What the statements about index funds say about is the average investor, not the atypical high performer. The argument is also weakened by $0 commission trading which did not exist when those studies were being done.

https://en.m.wikipedia.org/wiki/Michael_Burry

> After shutting down his website in November 2000, Burry started the hedge fund Scion Capital, funded by an inheritance and loans from his family. He named it after Terry Brooks' The Scions of Shannara (1990), one of his favorite novels. He quickly earned extraordinary profits for his investors. According to author Michael Lewis, "in his first full year, 2001, the S&P 500 fell 11.88%. Scion was up 55%. Burry was able to achieve these returns by shorting overvalued tech stocks at the peak of the internet bubble.[13] The next year, the S&P 500 fell again, by 22.1%, and Scion was up again: 16%. The next year, 2003, the stock market finally turned around and rose 28.69%, but Burry beat it again, with returns of 50%. By the end of 2004, he was managing $600 million and turning money away."[6]

In 2005, Burry started to focus on the subprime market. Through his analysis of mortgage lending practices in 2003 and 2004, he correctly predicted that the real estate bubble would collapse as early as 2007. His research on the values of residential real estate convinced him that subprime mortgages, especially those with "teaser" rates, and the bonds based on these mortgages, would begin losing value when the original rates were replaced by much higher rates, often in as little as two years after initiation. This conclusion led him to short the market by persuading Goldman Sachs and other investment firms to sell him credit default swaps against subprime deals he saw as vulnerable.[14][15][16]

During his payments toward the credit default swaps, Burry suffered an investor revolt, where some investors in his fund worried his predictions were inaccurate and demanded to withdraw their capital. Eventually, Burry's analysis proved correct: He made a personal profit of $100 million and a profit for his remaining investors of more than $700 million.[6] Scion Capital ultimately recorded returns of 489.34% (net of fees and expenses) between its November 1, 2000 inception and June 2008. The S&P 500, widely regarded as the benchmark for the US market, returned just under 3%, including dividends over the same period.[6]

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

#229

Earlier quoted context omitted.

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…

No. The S&P 500, like most other market-cap-weighted indexes, uses float-adjusted market cap, meaning that they exclude shares owned by other public companies when computing the weightings. So the fact that BRK.A owns shares in other companies in the index is accounted for; you don't get double counting, and so your exposure is not inflated.

You're right on float adjustment. But shares of coke held by Berkshire are still considered part of float.

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

#230
post #35

Earlier quoted context omitted.

If you're an elite you want to tie the fortunes of the wider population to your own. It's a good way to secure your position. The stock market doesnt keep going up because of the economy. It does so because of politics.

Maybe it goes up because the businesses it represents keep making more money? And they make more and more money thanks to the exponential forward march of technology, thanks in part to the people on this forum. This has held true through thick and thin from the Industrial Revolution on

let's be sure to also give thanks to inflation and cheap over seas labor!
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