Comment by HSO | Hacker News Reader

Comment by HSO | Hacker News Reader

There is more out there than just stocks but since your question mentions stocks explicitly, here is a practical suggestion:

Pick an index fund. Boom, you're diversified. Now, keep an eye on developments, read newspapers (I recommend FT, NYT, and Economist), something will start to tickle your fancy. When you feel like something looks interesting or resonates with you or your background, dig into it. Allocate, if you can, at least 2 full days, for example a weekend. Do on-the-side reading beforehand, gathering all sorts of material (reports, statements, articles, interviews, customer opinions, etc.), just read superficially, the goal is to get an idea and to narrow the sources down so you can do your final research in the 2 pre-allocated days. When after a while, your interest is still there or better yet growing as you find out more, and only then, pull the trigger and invest those 2 days. If you can't stomach the risk at the end of them, forget about the opportunity. If you feel good about it, pull the trigger again and take a position.

Start with a small position, shifting some of your index fund into the stock. Maintain and see how it feels to have the position "on". If it feels good, take more (long _or_ short). If it feels wrong, get out, whether you're ahead or behind.

Forget all about diversification too. Your goal is to iterate this until you have a portfolio of perhaps 4, 5, 6 positions. You are substituting "diversification" (you can't be better diversified than a broad index fund) with knowledge or insight or whatever you call it.

Just my 2 cents (har har, I know... ;)

Don't pick an index fund, pick an ETF which tracks an index. The tax savings are considerable and they usually have lower fees.

Depends on the index fund and depends on the tax situation. Some index funds are extremely low-cost.

One good thing about actively managed mutual funds (as opposed to index funds) is you get the experience of the money manager working in your favor. The majority of actively managed funds fail to beat the market, but if you do your research and find experienced managers who have been at their funds for a long time, an actively managed fund can be a good part of your portfolio.

Index funds should probably be the bulk of anyone's retirement portfolio. Fidelity (for example) has a total market fund that's 0.07% expense and no transaction fees (min 10K investment) -- hard to beat even with an ETF.

Read, read, read.

Picking individual stocks is very hard -- stick to funds and ETFs.

Having an active money manager working on your behalf costs money that could otherwise be sunk into growth capital in an ETF tracking an index. See Burton Malkiel "A Random Walk Down Wallstreet" for a very detailed and full explanation.

Sure, it costs money, but it also costs money to be in an index fund that falls 40-50%. No-load, low-expense index funds are extremely useful but not foolproof. Something to be said for cash right about now as well....

You commit the fallacy of assuming that if you pay someone to do a job he claims to be competent at, you'll get a better-than-random performance.

Statistics for active fund managers show that 85% do strictly worse than the benchmark index (usually S&P or DJ), 5% or so are comparable with the index (i.e., they do better but that gets eaten away by their cost), and only 10% beat the benchmark. And fewer than 3% or so consistently beat their benchmark year after year. (Those that know what they are doing are not fund managers; they run hedge funds and make a lot more for themselves. Which should _not_ be taken to mean the reverse - i.e. that people who run hedge funds know what they are doing).

Do read "A random walk down wall street"

Not suggesting that there are many good active funds, but the ones with long-term managers are worth at least some research -- you don't have to beat the benchmark each year to be a long-term success.

Actually, you mostly do need to beat the benchmark each year to be a long term success. Make 1% each year more than the benchmark for 10 years, and then lose 30% compared to the benchmark in one year, and you are a horrible failure. And that happens often.

And if you could name some of these "long term managers" it might actually be helpful for the discussion.

I don't know what your background is, but you come off this discussion as someone who knows how the world works, evidence be damned. I've been working in this field successfully for the last 8 years, and no one who _is_ successful (in the beating-the-benchmark sense) stays in index/mutual fund management -- they all go to "success fee" management (think private equity, hedge funds, etc).

If you're any good, why earn 1% of AUM per year, when you can earn 2% of AUM + 20% of profits?

At risk of a further beatdown:

Certainly not my intention to pretend special knowledge here, and I don't mean to be argumentative. Specifically I was thinking a long-short mutual fund like HSGFX might work as a hedge for a small investor in a situation such as now, where there's the possibility of futher downside risk (in the spirit of using the right tool for the right purpose). Now I could be completely wrong, and please correct me or suggest alternatives if I am.

I guess what concerns me about answering the OP's question with "buy index funds" is that it's only part of the equation, and it seems too many people just buy the index and never think about it again (the buy-and-hold scenario).

As someone with experience, what would you recommend the OP (or any index investor) do to help preserve capital?

I'm not familiar with HSGFX specifically. I've just compared them in Google Finance. If you put your money into HSGFX in the beginning of 2003, you would have been at +7% today; the SPY (benchmark) would be at +18% today. Depending on where you put your start date, you would sometimes be better off in HSGFX and sometimes better off in SPY. I see no indication from this past performance that there is any reason to believe it is any better than the SPY benchmark.

I was replying to "active managed mutual fund is better than index", which statistically speaking is WRONG approximately 5 times more often than it is right.

"Buy index fund" is (statstically) the right answer to "which stocks should I buy" which was more or less the original question.

> As someone with experience, what would you recommend the OP (or any index investor) do to help preserve capital?

Stay away from the stock market until 2013 at least, possibly later. The stock market has completely decoupled from fundamentals and performance. Last year's rally had no fundamental support whatsoever.

The things that are likely to preserve capital are gold, and some government bonds. My personal strategy is to diversify on currencies (counting gold as a currency here), using strictly CDs and government bonds. I'm trying to make sure I have RETURN OF CAPITAL, rather than maximize RETURN ON CAPITAL at the moment. Some governments _will_ default on some of their obligations in the next 5 years. Many banks, bond and debt issuers will too.

The stock market at the moment is, as far as the non-professional is concerned, an HFT casino. Stay away, unless you like gambling. Investment is a foreign concept to this stock market.

If you want to learn more about the market, read Denninger ("the market ticker"), ZeroHedge and Michael Shedlock ("global economic analysis"). Only listen to CNBC, CNN, Jim Cramer and friends if you plan on losing money.

There is more out there than just stocks

I mentioned stocks because they are the only investment I was able to find that gives a decent return against inflation and is possible to do without huge amounts of money (like real estate).

But if you would like to elaborate, I am interested.

Options, warrants, futures, currencies, bonds, ETFs, et al. Check out: http://en.m.wikipedia.org/wiki/Financial_instrument, but obviously, these are often or the more advanced (with the exception of ETFs, which are traded as stocks, or bonds).

It's worth pointing out that index funds can be overvalued and undervalued. For example, the S&P, up until recently, had been overvalued for a long time.

The advantage, though, is that whereas it takes days to figure out whether a stock is overvalued, it takes minutes to do the same for a broad-market stock index. Just look at price:long term earnings ratio. In general, under 15 is a probable buy, over 20 means sell if there are better priced assets out there. And don't put all your eggs in one asset class.

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