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Hard-won lessons about money and investing

mattcutts.com

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Re: Hard-won lessons about money and investing

#71

Post by nmjohn »

crdoconnor wrote: post #66
j_lev wrote: post #3

> If you’re an employee working for salary, it’s going to be hard to reach that level of independence. ... You can try to radically lower your financial burn rate, but few Americans have taken that step. So many people are quick to dismiss living well within one's means as a way to financial independence. Here's the link to the facts again: http://www.mrmoneymustache.com/2012/01/13/the-shockingly-sim... TL;DR: Live o…

>Assumptions: >– You can earn 5% investment returns after inflation during your saving years This would maybe make sense in the 1990s or early 2000s but it's 2014! ZIRP forever is the new normal, and judging by what happened in Japan post 1991, it's going to continue for at least two or three decades.

You should take a look at stock market returns over the last few years, this year included.

If you purchased shares of a s&p500 index fund at just about any point in history, your net gain will be well over 5% annual growth.

Even if you bought in at the peak of 2007 - the worst time you could have bought in recent history, before the ~35% decline in 2008, if you are still holding on to it today, it's about 6% annual growth.

> by what happened in Japan post 1991 1991 Japan and 2014 United States are no where near similar enough to draw that conclusion. I agree that ZIRP forever is not a good policy - and at some point in the next decade we will feel the results of it, but forecasting three decades of economic stagnation is just silly.

Re: Hard-won lessons about money and investing

#72

Post by oscilloscope »

arasmussen wrote: post #64
Matt_Cutts wrote: post #57

Earlier quoted context omitted.

Hey Dave, I approved your comment over on my blog--sorry about the delay. I also wrote a response which I'll paste below: Dave L, I concede that someone who is willing to put in the time and effort, they may become good at selecting stocks. Then again, they may not: I have friends who have spent a lot of time and effort studying individual stocks without much to show for it. And don’t even get me started on the finan…

> Because Buffett is counting on an index fund when he dies. That's completely irrelevant. Nobody is going to get Buffet rich from index funds. After Buffet dies he won't be around to decide what to invest the money in so he picked index funds because they're a good conservative decision that will outperform most investors. That does NOT mean that you can't do much, much better than that by, like Dave said, becoming…

Investing 90% of a portfolio in a large-cap US index fund and 10% in short-term treasuries is not considered a "conservative" asset allocation. It's missing a lot of low-hanging fruit in terms of portfolio diversification. For example:

The suggested portfolio isn't diversified with an International stock market fund. The S&P fund isn't exposed to small-cap and mid-caps, like Vanguard's Total Stock fund. The bond component is small and has no exposure to intermediate/long-term bonds or corporate bonds.

A more conservative portfolio would be, for example:

  60% Total US Stock Market
  20% Total US Bond Market
  20% Total International Stock Market
http://www.bogleheads.org/wiki/Three-fund_portfolio

Edit: I'm not saying that Buffett's suggested portfolio wouldn't outperform a conservative three-fund portfolio. Just that his 90/10 portfolio is very aggressive with a large-cap tilt.

Re: Hard-won lessons about money and investing

#73

Post by lucaspiller »

crdoconnor wrote: post #66
j_lev wrote: post #3

> If you’re an employee working for salary, it’s going to be hard to reach that level of independence. ... You can try to radically lower your financial burn rate, but few Americans have taken that step. So many people are quick to dismiss living well within one's means as a way to financial independence. Here's the link to the facts again: http://www.mrmoneymustache.com/2012/01/13/the-shockingly-sim... TL;DR: Live o…

>Assumptions: >– You can earn 5% investment returns after inflation during your saving years This would maybe make sense in the 1990s or early 2000s but it's 2014! ZIRP forever is the new normal, and judging by what happened in Japan post 1991, it's going to continue for at least two or three decades.

That's exactly why it's 5%, it's an average of the highs and lows. Right now it might be tricky to earn that (it's not impossible though), but in the early 2000s you could easily make that. With decent investments you can make two or three times what the same money sitting in a high interest bank account will make.

Re: Hard-won lessons about money and investing

#74

Post by usaar333 »

j_lev wrote: post #3

> If you’re an employee working for salary, it’s going to be hard to reach that level of independence. ... You can try to radically lower your financial burn rate, but few Americans have taken that step. So many people are quick to dismiss living well within one's means as a way to financial independence. Here's the link to the facts again: http://www.mrmoneymustache.com/2012/01/13/the-shockingly-sim... TL;DR: Live o…

Well, except for how difficult that is. Living on only 35% of after tax income requires you either A) live extremely cheaply or B) make tons of cash. Roughly speaking, in California, this requires living off of 20% of pre-tax income.

As an example, to live off $35k/year in SF as a single person (which would be considered modest in tech circles), you'd need to earn $175k/year.

With a family, this gets more unrealistic. Living off $100k/year (combined) would require earning something like $500k/year.

Re: Hard-won lessons about money and investing

#75

Post by lucaspiller »

JoachimSchipper wrote: post #35
adamio wrote: post #26

Earlier quoted context omitted.

What about rent or mortgage? In most major cities low rent could be easily 35% of after tax income already

Houses are pretty cheap, compared to how much money you need to retire.

Also as a rough estimate, most yearly rental prices are 5% - 15% the value of the property. If you get a long mortgage (in the UK, 30 years is pretty common) you can easily pay less per month than you would rent.

Re: Hard-won lessons about money and investing

#77

Post by crdoconnor »

nmjohn wrote: post #71
crdoconnor wrote: post #66

Earlier quoted context omitted.

>Assumptions: >– You can earn 5% investment returns after inflation during your saving years This would maybe make sense in the 1990s or early 2000s but it's 2014! ZIRP forever is the new normal, and judging by what happened in Japan post 1991, it's going to continue for at least two or three decades.

You should take a look at stock market returns over the last few years, this year included. If you purchased shares of a s&p500 index fund at just about any point in history, your net gain will be well over 5% annual growth. Even if you bought in at the peak of 2007 - the worst time you could have bought in recent history, before the ~35% decline in 2008, if you are still holding on to it today, it's about 6% annual…

>You should take a look at stock market returns over the last few years, this year included.

This is exactly what scares me about it. It's frothy as hell.

So is it a nice safe place to stash my retirements savings where it will yield 5% consistently until I retire? I don't think so.

>1991 Japan and 2014 United States are no where near similar enough to draw that conclusion

Let's see:

1) Huge crash in property prices caused by a debt bubble (us: 2008 / them: 1991).

2) Central bank responds by trying to reinflate asset values in order to make banks solvent again. They drop interest rates to zero and raise them as soon as growth returns which will be very very soon now, honest. (both countries did and said this; both promised it would be temporary)

3) Growth doesn't return. Banks still effectively insolvent and are propped up only by high asset values and extend & pretend. (both countries did this)

4) Central bank perpetually afraid of raising rates in case it causes a sharp economic contraction for which they will be blamed.

5) ZIRP thus becomes the new normal (it's been 6 years so far for us, and 23 years for them).

So far the path has been identical. Hell, we've even gotten plummeting birth rates too.

>forecasting three decades of economic stagnation is just silly.

I don't know how many decades it will be, but "the new normal" shows no signs of ending any time soon.

Forecasting safe 5% returns is bullshit, anyway.

Re: Hard-won lessons about money and investing

#78

Post by grimlck »

"Google worked out a deal with “full service” broker to give us free accounts"

That is actually really interesting. How much did this broker have to pay to get this box full of highly lucrative leads - access to a large set of newly wealthy individuals, many of which don't have experience with managing large amounts of money. A bunch of people who may be experts of technology, but probably are not experts on finance.

It seems like inviting the fox into the hen house, and telling the hens what it deal it was

Re: Hard-won lessons about money and investing

#79

Post by justin66 »

jandrewrogers wrote: post #65

For most people, the easiest way to become financially independent is to save aggressively. That aside, I have always invested in a small number of individual stocks, with minimal management or effort, and only moving positions between companies slowly over time. Basically, I make bets on long-term trends that I view as technologically inevitable. I don't invest in sexy companies (though some become sexy later), I in…

Based on what you've written, it doesn't appear that you've measured the performance of whatever method you're using against an appropriately risk-adjusted benchmark. For example, beating the S&P 500 over a certain time period is okay but if you're doing it with a bunch of small- or mid-cap tech stocks, it's quite possible you're not being compensated adequately for the risk you're taking.

For instance, if you're investing in companies with a market cap less than $10 billion, the risk and overall effort you're putting in is really indefensible if you aren't beating the S&P Mid-Cap Index. Which over the last twenty years - just a sample time period - outperformed the S&P 500 pretty hugely: http://finance.yahoo.com/echarts?s=%5EMID+Interactive#%7B%22...

Or do a little better and compare your performance against a real tech sector index. Do better still and use the tools of modern portfolio theory to measure your portfolio's performance.

> Of course, I could just be really lucky.

It's probably worth reading The Drunkard's Walk.

Re: Hard-won lessons about money and investing

#80

Post by JoachimSchipper »

Matt_Cutts wrote: post #60
steven2012 wrote: post #48

Earlier quoted context omitted.

I will when the time is right. Right now, I'm long.

I agree with your posts except for a couple things: - Most asset managers will try to rip you off, but Vanguard's culture and alignment with your interests makes them a different/better company than anyone else I know of. - I don't know if you were joking when talking about buying shorts, but it's really hard to time the stock market.

Actually, if there really is a 50% drop every 7-10 years, I'd be very surprised if you couldn't make a killing buying cheap, far-out-of-the-money shorts.
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