I've been following (or, trying to follow) the index investing strategy for years on my own, and the final culmination of that was switching to betterment.com for my small savings and retirement accounts (no affiliation). They use MPT and a host of other things to take the decision making control out of the hands of the investor (except for risk tolerance) and provide a really great modern product to do that. And the best part is that it's probably cheaper than just setting up your own online brokerage account and paying fees for transactions. They charge a percentage fee for assets under management like a normal advisor might. Anyway, I just feel strongly that the robo advisor category is major win for average people trying to invest and I wish more people looked into it rather than getting killed in the market or paying high fees to managers. Lets you just put your money in and just focus on your own life and achieving your goals, which is often the point of investing for an average person. Wealthfront is also good, but from what I understand betterment has better returns (and I prefer their interface)
The Best Investment Advice You'll Never Get (2008)
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Re: The Best Investment Advice You'll Never Get (2008)
#92Re: The Best Investment Advice You'll Never Get (2008)
#93Earlier quoted context omitted.
The primary question is this: do we truly have models that can predict future asset correlations. In other words, are our assumptions about distribution of returns valid. Behavioral economics suggests that individuals react differently than mathematically predicted. Personally, I think the biggest problem with any ideal portfolio allocation tool are black swan events (Taleb).
> I think the biggest problem with any ideal portfolio allocation tool are black swan events (Taleb). Yes. Black Swans are certainly a problem. It's insane to think that investment returns are anything resembling a Gaussian distribution. In the financial crisis of 2008-2009, people were using phrases such as "a 9 sigma event" to describe the markets. Wrong! Basically THERE'S NO SUCH THING AS a 9 SIGMA EVENT. Wikipedi…
Are these works (esp the latter) accessible to people with no economics background, but a decent foundation in maths (calculus & algebra) and basic statistics (distributions etc)?
Re: The Best Investment Advice You'll Never Get (2008)
#94Earlier quoted context omitted.
Statistically, professional investors don't beat the market. People aren't "downvot[ing] what they don't understand", they're downvoting demonstrably poor advice.
It's not about "beating the market." It's about retail investors underperforming professional asset managers AND underperforming the market. Tell me this: Other than reducing basis, what can you do to increase your chances of success in an investment? If success is defined as "not losing money"? One way to reduce basis is by selling covered calls on your stock positions, limiting potential profit but adding no additi…
When you say "basis" are you talking about tax basis? Are you suggesting there is some positive tax implication to trading options? Or are you talking about something else?
Re: The Best Investment Advice You'll Never Get (2008)
#95I think the key to picking individual stocks is the ability to evaluate companies in both a financial/quantitative and qualitative manner. This is easier said than done. But by no means impossible. Even Warren Buffett has said multiple times that if one has the skill to evaluate companies than they should pick individual companies and not choose an index fund because they will do far better with picking individual st…
> I have a deep background in the many skills required to analyze companies
What would you say those skills are?
Re: The Best Investment Advice You'll Never Get (2008)
#96Regarding "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…
> "%90 of options expire worthless, the real money is in selling them!" -- Abraham Lincoln It's risk-reward thing, akin to 90% of disaster insurance policyholders won't make claims, but when the hurricane happens, you're gonna be screwed because the premium of the insurance is not calculated by an actuary but by the market where if you're an overzealous option seller, will have underpriced such that you may not have…
Maybe if you mean the 1860's :-)
Re: The Best Investment Advice You'll Never Get (2008)
#97Assuming 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? A person worth $25M already has it made. They could light $1,000 a day on fire for the rest of their lives and still not go broke. Their investment options aren't really so interesting because only deliberate idiocy could destroy their retirement. I think a more useful question is, what is the amateur person worth $25 K to do today? Or the young person with nega…
> I think a more useful question is, what is the amateur person worth $25K to do today? Or the young person with negative net worth? The usual "just dump it into the stock market and pray" seems very risky. Sure, long-term the overall stock market expected to go up on average, but that is if you can survive the variance. Netted out over the years, I'd guess that I've pretty much lost money on the stock market, and I'm skeptical of someone with a simple answer that amounts to "hand your money to Wall Street".
The big thing is to avoid the fees. The average money manager performs averagely, so unless you have some way of picking an above-average one, the fees you're paying are literally handing money to Wall Street. You're right to want something anticorrelated with the stock market, but everyone wants that, and paying a 2% fee to "diversify" probably costs more than you gain. I think there's some merit in the "fifty-fifty" approach - half your investment in an equity index fund, half in a cheap bond fund. But more exotic asset classes probably cost more than they're worth.
The other thing is to make sure your exposure to the housing market is appropriate (indeed I've heard a three-way split suggested). If you're paying a mortgage you'll do better to pay that off quicker rather than invest in stocks or bonds. If you're wealthy enough to own outright you want some of your "excess" wealth (over what you need to own the house you want to keep) in housing, either by buying another one to rent, or by having a big enough house that you could downsize if you needed to. If you're young and renting is the really tough part: if you buy then you're insulated from the market, but relying on your ability to repay the loan. But I guess books have been written on this already.
Re: The Best Investment Advice You'll Never Get (2008)
#98Earlier quoted context omitted.
> I think the biggest problem with any ideal portfolio allocation tool are black swan events (Taleb). Yes. Black Swans are certainly a problem. It's insane to think that investment returns are anything resembling a Gaussian distribution. In the financial crisis of 2008-2009, people were using phrases such as "a 9 sigma event" to describe the markets. Wrong! Basically THERE'S NO SUCH THING AS a 9 SIGMA EVENT. Wikipedi…
Are these works (esp the latter) accessible to people with no economics background, but a decent foundation in maths (calculus & algebra) and basic statistics (distributions etc)?
Yes. Well, with knowledge of basic statistics you might start getting angry at how much it's dumbed down.
Re: The Best Investment Advice You'll Never Get (2008)
#99Regarding "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…
1. Not everyone has the time to study finance. 2. According to Piketty, the market is doing pretty well over time, so simply following it is perfectly ok. That said, I've heard the best way to beat the market is to invest in undervalued, small, unglamorous and mostly unknown companies. Obviously, that requires some serious study and resistance to hype.
> That said, I've heard the best way to beat the market is to invest in undervalued, small, unglamorous and mostly unknown companies.
There's an almost opposite approach that has been beating the market at least in recent years, "dogs of the dow": the idea is to buy the large companies that no longer have much growth potential (I remember McDonalds and AT&T as examples). People like to own small companies that they can imagine making it big, so the market undervalues large, old, "boring" companies that generate steady returns.
The underlying idea is the same for both approaches though: find a human bias that makes people over- or undervalue certain companies, and do the opposite. If there's any way to beat the market, that'll be it - and even that will fall as more trading is done by impartial algorithms that're immune to hype.
Re: The Best Investment Advice You'll Never Get (2008)
#100Assuming 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…
How is MPT supposed to determine the risk in an individual security? The human element, and the number of variables under consideration seems to pretty much require MPT to be restated as "an approximation to a mathematically ideal portfolio for a given amount of risk". On the other hand, I don't know MPT at all. Can you give any info on how risk is quantified so well?
Both the risk an correlation are of course unknowns, so people use historical values, which of course are not realistic.