Comment by nostrademons | Hacker News Reader

Comment by nostrademons | Hacker News Reader

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I personally agree with much of your picture of the world, but I'd like to point out that building up a single picture of the world and investing based on that exposes you to a lot of risk that your model is wrong. And over a 20-30 year timespan, virtually all models of the world are wrong. The world is just too complex to model effectively: you're at the mercy of black swan events that completely invalidate all of your assumptions.

I'd also take issue with your advice to put your money into hedge funds or private equity. There is little reason to believe that the average hedge fund manager will outperform the market, because they are the market. By definition, the average fund manager gets average performance (actually slightly less than average, because investing returns are a skew distribution where the best hedge funds get outsize returns and there's a long tail of slightly-below-average funds to compensate). The best fund managers will outperform the market by a large margin, but you have no reason to believe that you'll be able to pick the best funds. You have less information available in choosing a fund manager than you do in choosing individual stocks. Past performance doesn't cut it - you might be looking at the particular fund simply because they have randomly beaten the market over 20 years.

And you'll get eaten alive by the fees, which are the one predictable part of the financial industry.

Agree about hedge funds.

To the OP, listen: The markets, all of them, are damn close to being efficient, and that means that nobody can really predict the future, unless they have the inside on some market defect. Think of financial advisers as psychics, who can be refuted with one question: "So, why aren't you rich from betting on the market?" Why do they work 9-to-5 for other people? Because they really don't know.

Also, people are being a bit too negative about targeting an interest rate. Right here, I think this is the largest bond fund in the world,

http://finance.yahoo.com/q/bc?s=PTTAX&t=2y&l=on&...

...a little over 5 percent (yahoo is out of date), and notice that even during the financial crisis it was in pretty good shape. Keep in mind that such funds already have better advisers than you could ever afford, and they know how to vet. Just divide your money into 10 or so such funds, put a few 100K of physical gold in a swiss vault if you're paranoid. Ta da.

If you want to be more active, research actually buying bonds yourself, as you won't lose that 1 percent to the managers. Most brokerages have this.

Good points. I ought to clarify: back to the idea of rebalancing. It is really about checking your assumptions and trimming your sails a few times a year.

As to fund managers: i think that is the case with mutual fund managers. But it certainly isn't the case with hedge funds or VC. VC for example guarantees you will lose money uness you chose a handful of funds whose identity you know a priori. As for hedge funds--they cover a broad church--of which two remain specially interesting: Special situations/global macro -- where you need to know and understand a manager (who is essentially a business man) and find someone who has decent risk management in place as well as a really good investment process.I like Paulson for this. The second interesting area is the the high frequency systematic trading if highly liquid instruments (CTAs, if you will) which have a very different risk/return profile especially in chop markets and actually have a distribution benefit.

Eaten alive isn't very precise--you can actually model your fees and work out how much of you will be eaten.

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