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The Best Investment Advice You'll Never Get (2008)

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Re: The Best Investment Advice You'll Never Get (2008)

#11

Post by [deleted] »

hkmurakami wrote: post #10
jhulla wrote: post #7

Assuming you believe the underlying assumptions (and they very well may not be true), modern portfolio theory allows you to build a mathematically ideal portfolio for a given amount of risk. The math behind MPT might be hand waved as followed: goal seek a maximum portfolio return by combining assets with minimal correlation under a fixed risk scenario. In the end, you will have portfolio that will give you the maximu…

>So what is the amateur person worth $25M to do today? As with all things, you should seek professional advice. There are many nuances of tax efficiency, estate efficiency, asset protection, personal needs, etc. that a professional advisor should guide you through. While this is true, the problem that most advisors that a $25MM net worth individual has access to are mostly duds and/or salesmen. Identifying true value…

[deleted]

Re: The Best Investment Advice You'll Never Get (2008)

#12

Post by MCRed »

Regarding "Don't beat the market", Warren Buffet says "The game is really easy when your opponent decides not to play".

Unfortunately, giving up has a lot of appeal: It means it's not your fault you didn't beat the market. It lets people say the game is rigged and take comfort.

How many times have you seen buying company stock compared to gambling? Even though, on its face this comparison is ludicrous. (Especially here on HN where so many of you are giving up $40k a year for 0.0004% of a company that is %98 likely to be worthless.)

It becomes like a religion, where anyone saying "Hey, it's easy to beat the market" becomes a "bad guy" who is advising "risky strategies".

The reality is, the tools available to the individual investor are such that you can control the level of risk you want. You can take a stock of high risk and make it low risk with option hedges. You can take a stock of low risk and make it high risk with different options.

"%90 of options expire worthless, the real money is in selling them!" -- Abraham Lincoln

Of course, that's true-- if you have the ability to borrow from the Fed at the overnight rate. Most options are bought as they are intended- as a hedge to minimize risk. IF the underlying asset goes the expected direction, then the option will expire worthless.

My point is really that you have to read books, and hear many points of view, and figure out what's right for you.

Almost every professional and every ideologue is going to lead you down a bad path for you, because there is no one-size-fits all. There is no "best" advice.

Re: The Best Investment Advice You'll Never Get (2008)

#13

Post by abuteau »

jhulla wrote: post #7

Assuming you believe the underlying assumptions (and they very well may not be true), modern portfolio theory allows you to build a mathematically ideal portfolio for a given amount of risk. The math behind MPT might be hand waved as followed: goal seek a maximum portfolio return by combining assets with minimal correlation under a fixed risk scenario. In the end, you will have portfolio that will give you the maximu…

There's ton of criticism on MPT. Would like to hear you on that ! Are they valid ? Should we use PMPT ?

Re: The Best Investment Advice You'll Never Get (2008)

#14

Post by encoderer »

hkmurakami wrote: post #10
jhulla wrote: post #7

Assuming you believe the underlying assumptions (and they very well may not be true), modern portfolio theory allows you to build a mathematically ideal portfolio for a given amount of risk. The math behind MPT might be hand waved as followed: goal seek a maximum portfolio return by combining assets with minimal correlation under a fixed risk scenario. In the end, you will have portfolio that will give you the maximu…

>So what is the amateur person worth $25M to do today? As with all things, you should seek professional advice. There are many nuances of tax efficiency, estate efficiency, asset protection, personal needs, etc. that a professional advisor should guide you through. While this is true, the problem that most advisors that a $25MM net worth individual has access to are mostly duds and/or salesmen. Identifying true value…

Personally, i think that's more of a problem for the guy with the $500k retirement account. You will have no shortage of white gloved managers eager to help you invest your $25M. But anything short of $1MM you're solidly in Edward Jones territory. At that point you're probably better off keeping it stuffed under your mattress.

If you're not a multi millionare, IMO it's worth the time to learn how to manage your own money. Because nobody will ever care as much about your money as you will. A good place to start IMO is by subscribing to the TastyTrade podcast. It's the only investing infotainment I've found that treats the listener like an adult and an equal.

Re: The Best Investment Advice You'll Never Get (2008)

#15

Post by DMac87 »

abuteau wrote: post #13
jhulla wrote: post #7

Assuming you believe the underlying assumptions (and they very well may not be true), modern portfolio theory allows you to build a mathematically ideal portfolio for a given amount of risk. The math behind MPT might be hand waved as followed: goal seek a maximum portfolio return by combining assets with minimal correlation under a fixed risk scenario. In the end, you will have portfolio that will give you the maximu…

There's ton of criticism on MPT. Would like to hear you on that ! Are they valid ? Should we use PMPT ?

Yeah, this whole "a responsible asset manager has to use MPT" is completely not true. A responsible asset manager has to consider risk and return, of course, but how they measure and evaluate risk and return is an art as much as a science. MPT-driven portfolios have been shown to underperform more naive formulations, mainly due to model risk and mis-estimation of parameters.

Re: The Best Investment Advice You'll Never Get (2008)

#16

Post by jhulla »

hkmurakami wrote: post #10
jhulla wrote: post #7

Assuming you believe the underlying assumptions (and they very well may not be true), modern portfolio theory allows you to build a mathematically ideal portfolio for a given amount of risk. The math behind MPT might be hand waved as followed: goal seek a maximum portfolio return by combining assets with minimal correlation under a fixed risk scenario. In the end, you will have portfolio that will give you the maximu…

>So what is the amateur person worth $25M to do today? As with all things, you should seek professional advice. There are many nuances of tax efficiency, estate efficiency, asset protection, personal needs, etc. that a professional advisor should guide you through. While this is true, the problem that most advisors that a $25MM net worth individual has access to are mostly duds and/or salesmen. Identifying true value…

You need a good estate planning attorney (ask rich friends), and a good accountant (ask rich friends), and a good financial advisor.

Of these three, if you believe in MPT, the financial advisor is simply a coin-operated sales guy. At a 1% fee against $25 million, your business represents $250K/yearly. That is a solid sum of money to any business.

But practically speaking, what is that financial advisor going to sell you? Odds are after you get past the glossy color printed custom, just-for-you, spiral bound investment plan, you will see a custom portfolio that will be assembled with MPT. This is the product that sell every day to every other $25 millionaire that walks in the door.

Sure, you get to tune the outcome based on your risk threshold, or other biases you may have. But unless you are rolling your own investment strategy based on your own perception of future returns across asset classes (in other words running your own micro-hedge fund) you are buying MPT.

Are there managers and funds that beat everyone else year in and year out. Yes there are. Why don't you get the chance to park your $25 million with them? Because even the choice of parking your funds with them is bound by the math of MPT.

Re: The Best Investment Advice You'll Never Get (2008)

#17

Post by encoderer »

MCRed wrote: post #12

Regarding "Don't beat the market", Warren Buffet says "The game is really easy when your opponent decides not to play". Unfortunately, giving up has a lot of appeal: It means it's not your fault you didn't beat the market. It lets people say the game is rigged and take comfort. How many times have you seen buying company stock compared to gambling? Even though, on its face this comparison is ludicrous. (Especially he…

I agree. The awful conventional wisdom that options are "riskier" than stock, that they're not appropriate for retail investors, has not done retail investors any favors. To me, it's like saying that sharp knives are too dangerous for the home cook. If you want returns similar to professional investors, you have to use professional tools. There's a learning curve, but that's true of most things in life that are worth knowing.

Edit: People downvote what they don't understand, that's fine. But if you care about this subject at some point you will ask yourself "why do retail investors underperform" and you can either throw your hands up, call it a rigged game, and blame High Frequency Trading or El Nino or whatever. Or you can look at what a professional trader does differently, and adapt those techniques yourself.

Re: The Best Investment Advice You'll Never Get (2008)

#18

Post by DMac87 »

oldspiceman wrote: post #2

tldr If you're suddenly rich, pay $10 and buy $1 Million of Vanguard Total Stock Market Index. Giving your money to anybody else over the last 10 years would have yielded same or worse performance at a higher cost.

Why Vanguard Total Stock Market? Why not SPDR S&P 500 ETF? Why not include international stocks, or bonds, or real estate? Choice of index is a hugely important decision, and can't be waved away so easily...

Re: The Best Investment Advice You'll Never Get (2008)

#19

Post by infinite8s »

jhulla wrote: post #9
orofino wrote: post #3

Earlier quoted context omitted.

You may need to pay that $10 if you are investing through some other brokerage account. However, do yourself a favor, open an account with Vanguard directly and you can make that purchase without any fees. Additionally, I'd recommend se percentage be invested in the Vanguard total bond market fund as well. Holding se percentage there will reduce overall portfolio volatility, and can actually increase returns slightly…

Asset diversification is more complicated than that. To a first order, yes stocks and bonds are inversely correlated. But it is not enough to hold just stocks and bonds. In order to maximize return over your preferred time frame (while minimizing risk), you have to examine the whole universe of investable assets, examine their volatility as well as correlations amongst themselves. From there, your goal is to assemble…

True, but for most people without 25M (ie most of us), is the arginal improvement in return on a 500k investment worth the extra complexity over a straight stock/bond mix?

Unrelatedly, what are you thoughts on the permanent portfolio (if you've heard of it).

Re: The Best Investment Advice You'll Never Get (2008)

#20

Post by birken »

p0ckets wrote: post #6
orofino wrote: post #3

Earlier quoted context omitted.

You may need to pay that $10 if you are investing through some other brokerage account. However, do yourself a favor, open an account with Vanguard directly and you can make that purchase without any fees. Additionally, I'd recommend se percentage be invested in the Vanguard total bond market fund as well. Holding se percentage there will reduce overall portfolio volatility, and can actually increase returns slightly…

To get the diversification benefit from holding the bond fund, you'd need to rebalance (every few months to every few years).

If you are lazy you can just put your money into one of the 10+ Vanguard Target Retirement funds [1] which are just varying mixes of their stock/bond funds + automatic rebalancing. It goes from 90%/10% stock/bond mix (VTTSX) at the high end to 30%/70% at the low end (VTINX).

1: https://investor.vanguard.com/mutual-funds/target-retirement...

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