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World's Simplest Portfolio

dilbert.com

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For most investors, rather than the ETFs you'd be better off waiting until you had a few thousand and then buying the equivalent index funds from Vanguard. The reason is that most people will be adding to retirement investments on a monthly basis, and if you do that with ETFs your transactional cost to buy shares will dwarf the ETF's management fees for quite some time.

Although if my memory from several years ago is right, Vanguard charges a sale fee for the fund equivalent of their emerging market fund, to discourage people from trading into and out of it frequently. You can check that on their website -- it would tend to change the above result for most people here.

Disclosure: Upwards of 60% of my retirement accounts are ETFs, including the Vanguard ones mentioned. They most important thing, far more important than specific allocation, is that you contribute regularly and do not trade.

And this is despite the fact that on average, experts can't beat a monkey with a dartboard when it comes to picking stocks. Every study has shown this to be true.

If that is true (and I've certainly heard it repeated often enough), then why is the Harvard endowment managed by a private group of experts? Similarly for just about every large endowment, pension fund, and similar pool of money. If those experts aren't able to either offer improved returns or reduced risk vs. random stock selection (or buying an index fund etc.), then I suspect that the boards of these large institutions wouldn't be paying the money managers' fees.

My understanding is that the Harvard endowment is about the worst example you could've picked, unless there's a sarcastic subtext to your post that I'm overlooking.

If you mean the recent losses, then that is not the point: the boards must have a reason for hiring highly-paid money managers. Besides, the long-term returns for the Harvard/Yale/etc. endowments are very impressive, and the rumour is that they've made up much of their recent losses in the past year.

...and the rumour is that they've made up much of their recent losses in the past year

So have I, but you darned sure don't want me running any trusts at Harvard. :)

I'll assume you're being serious:

1 - Because Harvard invests in lots of things that aren't liquid and well-traded. It's hard to guess the next direction of the U.S. stock market in part because the market is very liquid and there is a lot of volume. But Harvard also invests in things like timber lands (low deal flow), private equity (low liquidity), and other things that are very hard to price. These investments aren't available to you and I unless you happen to have $50 million laying around.

2 - Because when you have $40 billion to invest, very small differences in return make a massive different in dollars. If you're investing $40,000 then the last few pennies don't matter; if you're investing $40 billion those "pennies" are scholarships for 10 more kids.

3 - Because, as the the article implies, financial planning gets a lot more complicated when you have a different time horizon than "sometime in the future." A school like Harvard has spending needs every year and can't ride out a downturn the same way that a young kid saving for retirement can. On the other side, Harvard also hopes to last forever, and can make investments that won't pay off for 50 years. Time planning gets a lot more complicated.

4 - Taxes.

Thanks! Interesting answer.

With respect to (1), wouldn't a mutual fund have access to the same sorts of low liquidity opportunities? That seems like a possible reason to prefer a managed fund over an index fund, despite the higher fees.

> wouldn't a mutual fund have access to the same sorts of low liquidity opportunities?

It depends on the fund's rules and mutual fund regulations.

Also, non-liquid assets make it hard to maintain the target allocation when the fund is attracting lots of new money or folks are bailing.

Fair enough -- presumably both of those are simplified if you s/mutual fund/hedge fund/.

> presumably both of those are simplified if you s/mutual fund/hedge fund/.

Possibly. I don't know the rules for hedge funds, the rules specific to other vehicles that are open to non-accredited investors, or the rules that apply to all such vehicles.

"The total value of Harvard’s endowment fell nearly 30 percent in the fiscal year ended June 30, 2009"

I wonder how the dart-throwing monkeys did in that same time span... =)

Assuming a dart-throwing monkey does about as well as the S&P, then nearly -30% as well: http://www.google.com/finance?chdnp=0&chdd=1&chds=1&...

Monkeys however wouldn't be paid $26 million per year to do their job. :)

I think the Harvard Trustees are asking themselves the same question -- they recently released salary info for the top managers. Harvard paid the top 5 managers $26 million per year as they oversaw the endowment drop 22%

http://www.upi.com/Top_News/US/2010/05/18/Harvard-releases-p...

As a caveat, it should be noted that John Bogle, founder of Vanguard (and the whole index investing movement, for that matter) is not a big fan of the ETFs.

Check out http://www.indexuniverse.com/sections/news/6012-bogle-invest... to see how Vanguard's ETFs performed against Vanguard's index funds (in short, not well).

I agree with Adams that index based investing is a great idea for hands off people, but do yourselves a favor and read Bogle's seminal book on index investing: http://www.amazon.com/Little-Book-Common-Sense-Investing/dp/... first.

It's very concise but it will serve you well.

Is anyone else kind of disappointed when they see dilbert.com listed as the URL for a story, but there's no Dilbert cartoon on the page?!

Nerdrage!

I first heard about index funds from "The Motley Fool Radio Show." Figuring I have the choice of dedicating at least a good chunk of my free time to understanding financial markets and trading stocks, or just dropping my money into index funds until I decide I want to play games with my money and then use that time to surf the web and peruse Hacker News, I chose the later.

Here's a simple portfolio: Short sell gold. You can wait a few more months, but really, short sell gold.

I'm with you. I'm about to put a healthy bet on GLL (2x short ETF).

You ever getting the feeling we never learn from all of these bubbles? I see people on every street corner dressed in pimp suits waiving signs to sell my gold at an abandoned gas station. I see people on blogs telling me gold can't lose it's value like the US dollar can.

This guy cracked me up:

And sometimes not, but nobody has ever gone hungry that had a safe full of gold when there were riots in the streets (like in Greece now) due to the debasement of the national currency.

Dude, if you have a safe full of gold, you also probably have enough other resources to ride out whatever instability is happening. Gold is a metal. It's not a currency. It's worth about $450 an ounce at the moment.

If you want to survive the apocalypse, stock up on oil or corn.

> Gold is a metal. It's not a currency. It's worth about $450 an ounce at the moment.

As of 10 minutes ago, gold is selling for over $1100 an ounce, so I'll gladly buy all that you're willing to sell me for $450 an ounce.

It costs about $450 an ounce to pull out of the ground and refine. Any price above that is artificial.

If people want to see what happens when a currency absolutely collapses (minus the whole Nazi thing) look at the Wiemar Republic. Gold was irrelevant than compared to bushes of corn, sacks of taters, oil, etc. Gold has little utility other than jewelry (not important in collapse) and sometimes in electronics apparently.

Gold's only worth is in its perception and its concentration, which to use the related Wiemar Republic failure, was that it was an easy payment to the people who sheltered/smuggled people out of genocidal areas.

And don't forget water for apocalypse survival.

It seems to me that the only thing wrong with "betting on the world's growth" in this way is that it's all denominated in US dollars... Maybe 20% in a gold fund like GLD to hedge against the possibility of hyperinflation?

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