Hacker News Reader

Comment by overcast | Hacker News Reader

Step 0: Forget trading on the stock market. You will lose.

Step 1: Pay off your high interest debts. School loans, credit cards.

Step 2a: If your company matches a 401k, take advantage of free money. Max out their contribution.

Step 2b: Go to vanguard.com, open a Roth IRA, choose a Vanguard Retirement that matches your retirement date, dump $5500/year in until you're 50, then $6500 after that.

Step 3: After emergency money is handled, take excess invest in the following index funds at Vanguard. Admiral shares require minimum $10,000 in each. However you can start with the standard share version, and then move them to admiral once your balance reaches $10k.

56% Total Stock Market Index Admiral Shares – VTSAX

24% Total International Stock Index Admiral Shares - VTIAX

20% Total Bond Market Index Admiral Shares – VBTLX

Enjoy your millionaire retirement status.

View on HN

Step -1: Read too much /r/personalfinance, come to believe the dogma that all investment is completely unpredictable, diversification is the ONLY possible way to make money and that past results are a sure-fire indicator of the future. Preach your dogma as the one true answer to anyone who will listen.

Top investor Warren Buffet agrees with this "dogma." He just won a bet that index funds would outperform hedge funds during 2007-2017. [1] Trust him, not /r/personalfinance.

[1] https://www.cnbc.com/2018/01/03/why-warren-buffett-says-inde...

The advice to use index funds is sound and most people should follow it. But that “bet” is a very weak argument for it. Buffett bet against a particular hedge fund manager who as far as I can tell was only in it for the publicity.

There are plenty of hedge funds which beat the market so significantly and so consistently over long timespans (even decades) that choosing any single one of them would have handily won the bet. But the bet was for a “fund of funds” approximately tracking the aggregate hedge fund industry, not any particular one. Buffett wouldn’t have taken a bet involving any of the single superlative funds because he understands this point already.

The core thesis vindicated by that bet is simply this: most participants in the market don’t do well. You didn’t really need a public bet with a famous investor to prove this - the stats have been available for quite a while. Buffett obviously believes people can beat the market, or he wouldn’t be in the business he’s in.

Therefore, the point stands. It’s dogmatic to act as though beating the market is impossible. It’s not necessarily advisable to try it because it’s quite difficult, but throwing around citations of Buffett’s bet don’t really improve honest education. Most people aren’t going to become pro athletes either, so you shouldn’t bank your future on it. But that doesn’t mean it’s impossible or that you can’t (responsibly) pursue it.

This post is disingenuous. What percentage of hedge fund managers would beat an index fund? What percentage of people have access to said hedge funds?

And even if you can beat the market, how much time, money and energy are you going to use to beat it? Taking into account the margins by which you may beat it by, is it worth it? Probably not for a single individual even thinking about this question.

Common now.

My comment isn’t disingenuous. I’m neutrally presenting the reality that it is possible to beat the market. I’m not saying most people should try it, and in fact I specifically stated most people should stick to index funds. I also specifically admitted most people who beat the market are outliers, just like professional athletes.

The point here is that it’s dogmatic to continually say, “you won’t beat the market, don’t even try, look what Buffett says about it”. I have laid out, in this thread and others I’ve linked to, how it is possible to beat the market in principle. No, not everyone will do it, but people will want to try anyway, so in my opinion they may as well be equipped for success, insofar as they can be.

I haven’t tried to undermine the position that index funds are the best option for most investors. I’m just providing perspective for those who understand that and want to try actively trading anyway. I dislike the blind advocation of index funds in a matter of fact manner - it doesn’t actually improve financial education as poignantly as discussions such as this one do. A complete presentation should include the subject in entirety, not the, “We know what’s best for you” version.

The part that is disingenuous is this:

> There are plenty of hedge funds which beat the market so significantly and so consistently over long timespans (even decades) that choosing any single one of them would have handily won the bet

You say there are plenty that would beat the market, OK, sure. How many would not? What percentage of the funds would win? The way you frame the conversation is disingenuous, given this entire conversation (grand parent and post before that) are about retirement strategies, presumably for average folks.

Beating the market may not be strictly impossible, but no one here other than you claimed that. The fact that it is improbable is just that, a fact. So yeah, disproving a claim no one made and denouncing dogma is pretty disingenuous, imo.

I’ll repeat, I never made a claim that any percentage other than outliers beat the market. Let me restate my point succinctly for you: I consider it dogmatic to frame the conversation as the grandparent comment did, which is saying, “Don’t even try, you’ll lose.” That is dogmatic, which is dentrimental to financial education in general - the reasoning of facts is as important for independent learning as the facts themselves. I provided nuance in the discussion by explaining how it’s possible to beat the market, without ever disagreeing that the best course of action is to simply invest passively. I’ve actually reiterated several times now that most investors should just invest in index funds.

I’m not sure what in particular you’re arguing against, because it doesn’t appear to be relevant to my central point as I’ve explained it in this thread. You act as though I’m saying that it’s easy to beat the market, when my entire thesis here has been that it’s not correct to declare people will fail out of hand. If anything, I think I’ve taken rather extreme pains to tediously and explicitly point out the caveats so as not to be disingenuous in my points.

In fact, I literally made a comparison to professional athletics in my first comment, which is (statistically) a lottery. If that isn’t enough, what more do you want? More pertinently, I am focused more on complete education that allows people to be self-sufficient: would you advocate saying to kids, “Don’t even bother trying to go pro, you’ll fail.”, or would you advocate explaining to them the honest chances, encouraging them to have fallback plans for their careers, and then providing them with the best chance they can have for what they already want to do? People respond far more favorably to neutral, complete presentations of facts than they do to imperative statements that don’t provide a clear context for their justification.

I'm not arguing anything. I'm just expressing an opinion that the comment you made is disingenuous since it's entirely centered around a claim around impossibility that no one made other than you.

The original comment that said "you will lose" is in jest, obviously. Someone who's confident that they wouldn't lose wouldn't be here reading a step by step plan to become a millionaire as they'd already be far beyond that.

If they're "outliers", their success can be explained by chance. With many people tossing coins, some will do very well by the laws of probability.

The other problem is you're measuring success in hindsight, not from the beginning. (You could restate it as if from the beginning if you had the full list of initial hedge funds - including those that no longer exist).

The point is that you can't predict which funds will be successful.

Buffett beats the market - but he does it by understanding the businesses behind their stocks, their value and prospects, compared with their present price. He buys value for money, and generally holds it for the long term. He isn't an active trader, which to him is speculation.

You're both right. There are traders who beat the market in a way that's clearly statistically significant and doesn't involve selling tail risk or other cheats. However, they can stop being successful at any time.

To give a concrete example, GETCO circa 2009 was the premiere HFT firm trading 19% of US equities market volume and earned high 9 figures in trading profits on a tiny capital base. They were doing millions of little trades daily and made profits almost every day, if not every day. The odds of someone doing that due to chance are infinitesimally small.

They had been doing this since the early 2000s, quietly building an empire, and the people there were incredibly bright. They had their pick of the litter from every top school and one of the toughest interview processes. Retention was impressive, too, as the firm made many employees into millionaires in their early 20s and gave them plenty of autonomy. You'd look at this operation and expect it'd never end.

But it did, and quite quickly. Competitors eventually learned what they were doing and saturated the market. Their market share plummeted, as did profits, while the cost base grew. High speed data and microwave lines became a new cost of doing business. Layoffs happened. Once loyal employees defected and with them went even more of the firm's ideas.

Eventually they got a soft landing by buying out KCG, and the entire operation was later acquired by Virtu, but from what I understand, few of the original GETCO trades still exist or make any profits.

So I believe they won due to skill at the time, not luck, but more skillful competition came along to replace them. Some small group will always beat the market, but I'd need more evidence to believe one group would do it for a long time. Brain power and guarding IP are necessary but not sufficient.

> If they're "outliers", their success can be explained by chance. With many people tossing coins, some will do very well by the laws of probability.

No, they cannot be. I meant outlier in the sense of a probability distribution with e.g. standard deviations, not to imply randomness. I’ll start by quoting what I wrote the last time this topic came up on HN:

“Virtu only lost money trading one day out of 1278 trading days between 2009 and 2014. In the most uncharitable analysis (1278/2; or the lost day happened in the middle), they had a 0.5^639 chance of doing that.

Maybe you disagree with 0.5 per day. Let's make it 0.9!

...But that's still 5.7 x 10^-30. How many firms do we need to exist for this to emerge by chance?”

Draw up a probability space for me and actually quantify what you’re asserting. What is an event? Is it a single trade? A trading day? A trading year? How many of these events are there, total, in that timespan? Of those, how many win? Can you map each of these events to a boolean function, such as a coin toss, or are the chances more nuanced? This is before we even get to the issue of quantifying risk as a metric.

How about we make the event a trading year; how many funds would need to exist to explain hedge funds like RenTech or Baupost? Moreover, can you explain three decades of extraordinary returns in a single fund as an outcome consistent with a uniform distribution across all eligible hedge funds?

This armchair probability analysis turns up every so often on HN, but to be blunt, the onus is on the analysis to actually make it empirical. You can’t just say “well, they’re doing this by chance, we can expect some of these to eventually emerge because statistics and coin tosses” without formally proving that there are actually sufficiently many hedge funds and criteria to satisfy that claim.

> Buffett beats the market - but he does it by understanding the businesses behind their stocks, their value and prospects, compared with their present price. He buys value for money, and generally holds it for the long term. He isn't an active trader, which to him is speculation.

This is false. Buffett is, by his own admission, an active investor. He picks stocks - what is your definition of an “active investor” if not someone who makes active decisions about how to invest? His letter, “The Superinvestors of Graham and Doddsville”, specifically outlines his investing and describes it as an active strategy.[1] In fact, the way you’ve described his work is an investment thesis consistent with modern trading strategies. At their core, statistical arbitrage and high frequency methods seek to identify price inefficiencies just as Buffett does, but on much smaller timescales. It’s a difference of degree, not category.

______________________

1. https://www8.gsb.columbia.edu/rtfiles/cbs/hermes/Buffett1984...

You misquoted me with "active investor"; I said he wasn't an "active trader". As I reinforced by saying he was long term, he is an investor rather than a trader.

Select your set of traders today. Make predictions on how they will perform. Compare with what happened.

Of course we should expect them to be better than pure chance. This article itself is about insider trading, which should give an edge. And yet, the hedge fund average is indeed worse than chance investment in the market (which approaches the index). The point is: we don't know who will do well. We only know in hindsight.

Hedge funds also have management fees (higher than index funds), and pay more in brokerage for their active trading.

> statistical arbitrage and high frequency methods seek to identify price inefficiencies just as Buffett does, but on much smaller timescales. It’s a difference of degree, not category.

A difference is the sustainability of the inefficiencies identified. Perhaps if Buffett was purely an old-school value investor, picking up discarded cigars for a few puffs, there's an argument for similarity. But (as I carefully stated in my comment), he also looks at prospects, not just value. A business with a long-term sustainable economic moat makes money at a compounding rate.

Now, I think we could have a largely semantic argument about whether buying a business with those prospects is just identifying price inefficiencies. To be honest, I can't really forsee how that argument would turn out, because of course you can view it as mispricing. Perhaps I can submit: more of the work is in evaluating the prospects, than the price (maybe you can argue the same for trading); simply because of the time-scale of long-term investing, you get to keep it longer, so it's more stable (but you can argue that that's covered by difference in timescales).

PS. Also, I do wonder that Buffett also has better information. His dad was a senator, and he knows lots of influential people. I don't think it explains away his success, but it would be some help.

Isn't this basically the Texas Sharpshooter Fallacy? There are how many thousands of hedge funds? Of course some of them will beat the market. (And some will not beat the market, and all of them will charge fees far greater than an index fund.)

If most of them don't beat an index fund and there's no way to tell winning funds from losing funds in advance, then the smart money is to never invest in a hedge fund.

No, it’s not the Texas Sharpshooter Fallacy. See my response to the other commenter in this thread forwarding (essentially) the same argument. You cannot claim that some event is reducible to chance just because it’s in a small minority of successes out of many more failures. There are stat arb funds which have beaten the market for decades consistently. HFT firms make millions of trades per day with a consistently positive win rate. No matter what you define as a trading event, the probablity analysis is not going to hold up.

I do absolutely agree with dsacco even though I had my share of arguments in the past with him...

You can absolutely beat the market, but you have to work on it and put the effort, same as you can heal people (as be a doctor), create awesome businesses (as entrepreneur), etc...

Sure, an index fund may win over time, but part of what a hedge fund is supposed to do is to hedge against the market. A lot of hedge fund customers are pension funds, people close to retirement, etc. For these people, the long term health of fund is of course important, but they can't afford the volatility - if their investment loses 10% of its value in a year, they may not be able to make the payments or subsist on the income as much as they wished.

As a result it's not really fair to compare the long term performance of a hedge fund with an index fund. Index funds are more aggressively invested and thus more volatile.

OK, but what about the (many) hedge funds that are volatile? There are indeed funds that are better than index funds, but they're inaccessible to the average person, and therefore irrelevant.

You're right, there are volatile hedge funds, although it might be accurate to say that there are more and less volatile funds than indices. Moreover, there are plenty of bad funds that only exist to dupe clueless retail investors into giving them their money. I wouldn't say that all hedge funds are good, and in fact regular people are probably screwed when it comes to picking a good one (in part because some hedge funds are what I like to call "20/20 funds" and are just statistical testaments to the fact that some fraction of poorly managed funds will still do well).

Volatility isn't a binary thing. Although the less-volatile more-return funds are out of reach for regular people, the less-volatile less-return funds are not, and these still have a lot of value for people who are less tolerant of risk.

Calling someone disingenuous is a very strong claim you didn't even attempt to justify. The only argument you offered is aimed at a strawman: GP never disputed that beating the market is really hard and trying it is probably dumb.

While I'm here, it's "c'mon, now".

How long can the index fund advice be sound as index funds are moving from following the market to making the market?

The sheer magnitude of success of the various index funds that invest proportionally to the market cap of the top 500 stocks, in aggregate, could have the effect of perpetuating the status quo, masking indicators from non-index investor activity.

My understanding was that Buffet invited a bet from any hedge fund manager, and the guy he ended up betting against was the only fund manager in the industry willing to bet on his own product.

That’s not correct. The actual bet was always for a “portfolio of funds of hedge funds.”[1]

If the bet had been for a single fund, Simons or Klarman or any other hedge fund manager who has been beating the market by a large margin for 20 - 30 years could have won easily. But that bet wouldn’t have been instructive, because the world really doesn’t need to be shown that there are a minority of funds capable of winning the bet - on the contrary, it’s helpful to show that a representative sample of them fares poorly on average. Moreover, being a fund manager himself, Buffett would have been silly and hypocritical to actually support the former type of bet.

___________________________

1. http://longbets.org/362/

I noticed that the stocks that ETFs and stock screening algorithms like moved had much higher correlation with the indexes during last week’s correction.

This is just based on a quick spot check, but I’m worried the passive investment craze has weakened the link between business fundamentals and pricing for the stocks in the most popular indexes.

If so, that increases correlations in the pricing of assets that were explicitly chosen because their prices have no or negative correlation with each other.

Check out https://heisenbergreport.com/. Hes was talking about this last year a lot.

Mr. Buffet has made his whole fortune beating the index. What he bet on was on average returns across hedge funds would be beaten by the index. Constituting this average will be some funds who make a lot of money for their investors consistently and some that lose money.

Why doesn't Warren Buffett follow this strategy himself? Clearly there are other factors at play.

(copy from a comment I made half a year ago)

"The way to become rich is to put all your eggs in one basket and then watch that basket." - Andrew Carnegie

The way Buffett invests is by reading all day, everyday and once in a while making a very informed investment. Most people haven't even reached the level of staying away from 'sure things' and panic selling during bad news.

How many people would've been able to stay away from IT stocks during the dotcom boom, to even not invest in the company of one of your friends. (Bill Gates and Buffett have known each other since '91)

How often do you, as a 'master', break rules that you would tell a 'apprentice' are immutable?

Buffett is essentially following the strategy - a diversified portfolio of long-term value assets. He's able to beat the market in part because the mere hint of his involvement in a stock causes it's value to go up.

You and I don't have that ability.

Diversification is obviously not the only possible way to make money, but it helps minimize risk, and I think your tone is a little unnecessarily mean

However, you are right that the /r/personalfinance mantra of "S&P index or bust" is not actually good. In particular, as index funds become more popular in aggregate, they become worse investments, because they put continuous "buy pressure" on a select few stocks. Furthermore, the S&P isn't really diversified in that it only contains big cap stocks, afaik has no foreign stocks either (although of course many S&P businesses are global enterprises), and only has low exposure to industries like biotech.

Also /r/pf does a poor job talking about non-stock investments. Sometimes a better investment might be to start your own business, purchase real estate, or bonds. If you have time you can research growth stocks (e.g. pharmaceutical companies undergoing FDA trials) and pick the promising ones. Even learning a skill is often the best investment possible for most people - /r/pf constantly says that you can use about 4% of your wealth as yearly income, so you'd think there would be more people trying to get better jobs, since that makes a $20,000/year raise approx. equivalent to $500,000.

Sorry my comment was unnecessarily mean. I was trying to make a point regarding your advice on investing everything in Vanguard stock/bond funds (agree with everything before that re: saving, avoiding debt etc.)

Your points about index funds getting worse as they get bigger would apply to Vanguard too. And the whole idea that risk can be measured & mitigated in the first place requires predicting the future. Bankers in 2008 believed their portfolios were not overly risky either. Measuring risk is almost a contradiction, risk is the residual uncertainty that can't be measured after measuring/predicting everything else.

Overall, you are describing the modern economic portfolio theory approach to investing. Yes, its backed by some prestigious people but no one can predict how it will do going forwards. Its important to remember that uncertainty. In 20 years we might see inflation has swallowed up the returns of those investors and only people who invested in stock X made any money. We might see the reverse. Who knows?

> you can research growth stocks (e.g. pharmaceutical companies undergoing FDA trials) and pick the promising ones

Those FDA trials are expensive. Those companies have many experts in the field that believe those trials have a reasonable chance of success. Otherwise, they would not proceed with them. Even the FDA itself believes those trials have a good chance of success. There are plenty of Wall Street analysts who are also evaluating these trials. Regular Joe is not going to outsmart all those people.

Fair. But I meant that as an example - by research I was thinking of looking in depth at the drug and where it is in the pipeline, what it treats / the market the drug might enter, how promising its research looks, how similar drugs/analogues faired in FDA trials, etc. I wouldn't suggest someone with a poor background in chemistry or pharmaceuticals to try doing that - I think if you're looking at riskier companies, you should mostly only invest in what you know.

I think most behavioral finance people would agree 95% of Americans should follow this "dogma" because the biggest risk for them is making dumb speculative investments.

The top 5% can approach investing with a more personalized strategy, but for most of us, esp. those who don't give a damn what a stock is, this advice is pretty sound.

I would say more like less than 1% of us should make more complicated investments than index. And that is generous, considering that there are much fewer people than that in the US today that have made consistent money picking winners and losers. Almost anyone you know that makes a consistent living in the stock market is actually making money through commissions and management fees.

The entire point of a hedge fund is to do this for people, for a fee. An index fund, on the other hand, is simply a direct purchase of stocks. 95% of Americans should not be blindly investing in indices because that would completely divorce the index constituents' valuations from their fundamentals - and as a result, when this is corrected, a lot of people would lose a lot of money.

Alternative Step-1: Read /r/WallStreetBets, lose all your money in poorly planned, gung-ho margin trading adventures. :P

What did the noble laureate economist among others tell the Google employees before they came into their IPO wealth? Yep, the “dogma”

http://ritholtz.com/2014/02/the-best-investment-advice-youll...

”One by one, some of the most revered names in investment theory were brought in to school a class of brilliant engineers, programmers, and cybergeeks on the fine art of personal investing, something few of them had thought much about. First to arrive was Stanford University’s William (Bill) Sharpe, 1990 Nobel Laureate economist and professor emeritus of finance at the Graduate School of Business...”

Always blows my mind that US citizens can only contribute a meager $5,500/yr to a pension for tax relief purposes.

In the UK you can contribute 100% of your gross annual income every year, and get full tax relief up to the lifetime contribution limit of £1M ($1.38M).

We also have tax free savings & investment wrappers, called ISAs, in which you can deposit $28,000/yr, and within which all growth is free of any kind of tax.

At the same time the GOP had considered capping the tax deferred part to $2,400 to offset the money lost from tax cuts given to corporations and the wealthy.

http://www.businessinsider.com/401k-retirement-savings-gop-t...

You can contribute more if you have access to a 401k. The current limit there is $18,500.

The argument against unlimited tax free contributions is that above a certain point it becomes a tax break only for the rich.

> The argument against unlimited tax free contributions is that above a certain point it becomes a tax break only for the rich.

That's where the lifetime cap comes in I guess. £1M isn't that crazy over a ~40 year timeframe for someone on a high income who isn't necessarily 'rich' and, at current annuity rates, won't buy you absolute luxury in retirement.

Right, and oftentimes (but not always, anymore) companies contribute to your 401k as well.

Also, as a self-employed person you can contribute up to $55,000 in the year depending on your income, in what's called a SEP IRA.

Self-employed persons can also contribute to a Solo (or "Individual") 401(k), which has slightly more generous contribution limits as a percentage of self-employed income.

And some W-2 employees can contribute up to $55,000 in their employer 401(k) as well via "after-tax" contributions.

And some W-2 employees can contribute up to $55,000 in their employer 401(k) as well via "after-tax" contributions.

Can you elaborate?

https://www.madfientist.com/after-tax-contributions/

The SEP IRA sounds like the equivalent to a SIPP in the UK, basically a DIY pension, although there's no requirement on you having to be self-employed to get one.

> You can contribute more if you have access to a 401k. The current limit there is $18,500.

What's the argument for having two different tiers of retirement accounts? Just let everyone contribute $18k to an IRA and end 401Ks entirely. The selection of funds in most company 401K plans is meager and the funds are expensive because the contributors are, in effect, a captive market.

As far as I can tell there is no good reason and it's an artifact of a somewhat confused legislative process. I definitely think the US system of tax deferred retirement accounts could be simplified significantly.

I do think there is some advantage to the fact that it's possible to have a portion of one's paycheck go directly to a 401k without ever hitting your bank account. You can't currently do that with an IRA. It seems like that could be fixed though.

The simplest and in my opinion, the likeliest explanation, is that it gives large employers who can afford to offer 401k another advantage over smaller employers. Just like being able to offer tax exempt health insurance.

It gets even stupider when you realize that IRAs have limits on deductibility when your spouse has access to 401k, but you don't.

That £1m limit keeps going down...

Right, but you get tax rebates up front, so if it goes down next year it won't effect any funds you have already put in the hole.

I expect the higher rate tax relief will go soon as well.

> Step 0: Forget trading on the stock market. You will lose.

This does not have to be the case. I don’t mean to encourage people not to invest in index funds (passive indexing is generally the best idea!), but if they’re going to try it anyway, it’s not helpful to simply declare it to be unprofitable from the outset. Your guide is well tailored for people who want to pursue consistent, modest gains on their capital beyond what inflation will gradually eat away.

If someone with the right technical skills wants to generate a profit that consistently beats the market, they can do so with two caveats: 1) they will have significantly less capital than institutional funds, and 2) they will have to engage in the research and deployment of trading strategies on their own (as opposed to with the support of a full infrastructure and team). But profiting in the market is, at its core, a game of identifying price inefficiencies. Prices become more efficient through greater information diffusion and greater liquidity. If you have data that is not available in the broader market, you can make forecasts with an edge over what e.g. the aggregate analyst consensus suggests.

In essence, programmers can take advantage of their smaller capital capacities to utilize strategies that might not be given as much attention by larger funds, because they’ll become capacity constrained much sooner (i.e. won’t scale). A software engineer who finds, collects and curates a source of data entirely on their own that maps directly to the revenue of particular companies (or more abstractly, to the future price of particular securities) can do well reliably. It’s not easy (or everyone would do it), but if you’re determined and understand what’s required, you can do it.

I outlined how this can be done in several steps in an HN comment just yesterday:

https://news.ycombinator.com/item?id=16349011

This is not to say that you should abandon index funds and try to beat the market. But if you’re already inclined to try, you might as well hear this advice and a gentle caution that it’s very difficult instead of hearing “don’t do it, you’ll lose” over and over. Some people will want to actively trade to be contrarian, or because they enjoy the intellectual challenges (there are plenty!), or simply because they think they can profit. They might as well go into it clear-eyed.

>If someone with the right technical skills wants to generate a profit that consistently beats the market, they can do so [...]

by playing on-line Poker?!?

Just because clever people win doesn't mean you will win because you're clever. In order for you to win someone else has to lose.

"But I'm recognising inherent market inefficiencies and adding value, not profiting off other's failed gambles". Phooey.

> Just because clever people win doesn't mean you will win because you're clever.

No, there is no guarantee. But you can develop an edge that is statistically distinguishable from random outcomes, and less formally, that distinguishes your activity from gambling.

> In order for you to win someone else has to lose.

Single trades imply a zero sum game in which one counterparty has to lose for the other to profit, yes. But the market itself is not a zero sum game. The net, aggregate result of trading activity is positive value.

> "But I'm recognising inherent market inefficiencies and adding value, not profiting off other's failed gambles". Phooey.

You’re doing both, if we’re being frank about it. This is a positive statement - it’s plainly true and follows from reasonably agreed upon definitions. You can assign a normative (moral) value to the concept of arbitrage in zero sum games one way or the other, but that’s not really relevant to the discussion at hand. If you don’t want to participate in active trading, you don’t have to - you can invest in passive index funds, which is a perfectly sane and well-reasoned decision.

Professional traders don’t try to disguise the fact that they profit from a zero sum activity between consenting adults. But that has nothing to do with the process of price discovery, which is a well-recognized economic concept that is facilitated by active trading. Price discovery is not a moral imperative, it’s just a thing that happens through economically incentivized asset exchange.

> No, there is no guarantee. But you can develop an edge that is statistically distinguishable from random outcomes, and less formally, that distinguishes your activity from gambling.

Sure, it isn't gambling, but there are lies, damn lies and statistics. The effect of survivorship bias in this field is massive.

Consider that the random element isn't necessarily the stock performance over 12 months. The indicators the traders use are, in a sense, randomly determined by the trader's personality and knowledge. If the stock market operates in a deterministic fashion for, say, 10 year stretches (which I think is about the time between major recessions) then the rules get changed in a major way, this "statistically distinguishable" edge may well disappear taking a hypothetical small-time saver's retirement fund with it.

We see this every time there is a crash, where a bunch of firms with a clear statistical edge go bankrupt because the statistical edge relied on some specific market condition.

A lot of people make more money than me with clever deals, but at the end of the day the only strategy that everyone can follow simultaneously is creating more than they consume and stockpiling the excess. Maybe stockpile a little on the low side if they have faith in continuing benefits from technology growth outpacing population growth.

I make some money holding Amazon, and decide to rebalance because I'm uncomfortable with my portfolio concentration. You buy Amazon shares from me. Amazon continues to go up. Which of us just won?

>> In order for you to win someone else has to lose.

Please explain why this is necessarily true in the stock market.

You buy X at $Y. Then sell X to me for $Y+1. You won.

I then sell X to someone else for $Y+2. I won.

Hence in that transaction, we both win.

Which of the two transactions you described is the win-win?

They are both win-win, even if the wins are not simultaneous.

Sure, if you ignore the impact on the third party you've introduced.

That's like calling a pyramid scheme a win-win-win-win-win-win-OHFUCK situation.

I see your point.

However, there are outcomes where I buy a stock and hold it. The company's profits increase over time. They start paying dividends, and I never sell. There are many companies that generate enduring profit and thereby enable win-win.

An honest take on the idea of a personal active trading should always mention the opportunity cost. Doing the necessary research is a job. One that takes significant time to learn, and one that will continue to take significant time once you've mastered it.

So, like any job, you better either like it better then the other things you'd be doing instead, or you'd better be confident you can make it pay more than the other things you'd be doing instead.

> An honest take on the idea of a personal active trading should always mention the opportunity cost. Doing the necessary research is a job. One that takes significant time to learn, and one that will continue to take significant time once you've mastered it.

I agree - this is why it’s a particularly important caveat that even if you have the skill and wherewithal to beat the market, you’ll need to also do it without a team or software infrastructure. I’d generally recommend that people interested in this learn as employees of an established firm, then go out on their own if it makes sense.

I have read arguments that if you believe you have the skills to beat the market, a job on Wall Street is the best course of action - Other People’s Money means no risk to you, and the expected value of your incentive pay exceeds your own returns unless you have a ton of personal capital to play with already. If it turns out you’re right, take your saved bonuses and strike out on your own. If you’re wrong, being a Wall Stret alum opens plenty of career opportunities.

What are some examples of established firms that would be good places to learn?

That's exactly right. You might be able to beat the market if you put a lot of time into your stock picking research, but can you beat the market and pay yourself more than minimum wage for your time? Almost certainly not.

And unfortunately, doing it as a hobby for the fun of it, isn't a workable compromise, precisely b/c beating the market requires so much work.

This is the poor conservative person's guide to not being totally broke when they're old, it's not a guide to wealth.

Doesn't seem like a guide for poor people at all to me.

A poor person is not going to be able to get past step one, let alone step two which requires a decent job and thousands of dollars of discretionary income to save each year.

You have a very skewed perception of "poor." Following this will net you a very substantial retirement account, especially if you are married and your spouse does the same.

I'm at something like 1st percentile age-group wealth on 4th or 5th percentile age-group income following this simple strategy. On track to retire before 40.

It works.

Really, how much wealth do you need? I don't need a yacht or a mansion. I also don't feel the need to take on a lot of risk in the hopes of a yacht and mansion.

Indeed, you also want to enjoy your life when you a virile. What's the point of working until your retirement when you are at a point you hardly can take advantage of it.

Start a business. You probably won't hit the unicorn lottery but making enough to retire in your early X shouldn't be out of reach. Find a solution to a problem and learn some sales and marketing.

Even though people say not to, I’ve paid off my first house and now rent it out. The second house will be paid within 5 months. If you can, i really recommend it for the freedom of mind, even if it’s not the best financial decision.

Yep, if you want to put up with renters, it's a great way to rack up cash.

What does putting up with renters involve?

Tail risk. Some renters are terrible and will trash your house. The repair costs can easily wipe out years worth of rent.

Depends on renters. You can be lucky and get some nice couple or young professionals who will take care of the property and when they leave the property will be in fine condition and will only need small repairs.

On the other hand, you could get some party animals that will trash the property and when they leave you will have to spend lot of money to repair the damage. They might also cause other problems like annoying neighbours etc.

Curious: why (and where) do people say not to pay off your house?

In theory you can make more by putting the money in something with higher returns. Plus, you get to deduct a portion of the interest from your taxes, and in theory putting the excess money somewhere else is additional diversification.

AKA instead of paying your mortgage at 4% interest, you invest it in something that make 5.5% and gain an additional 1.5%-a few percent in taxes+a few tents of a percent in taxes on the 4% interest.

Frankly, its a good theory, but given the volatility of the markets, its hard to guarantee your going to actually come out ahead. Particularly since interest rates are generally computed by people who are looking at the risk/reward factors, and the interest rates have to be high enough to attract the risk adverse capital.

The one thing that is for sure, is that you should never really be sending early payments to your mortgage company despite all the financial advisors telling you to to do so. If you want to pay your mortgage off early your better off putting the money in a low risk investment and then paying it off when the outstanding mortgage balance falls below the value of your savings. That is because overwhelmingly your just giving your mortgage company an interest free loan due to the fact that they apply the over-payment to the final payments and don't adjust the amortization schedule.

Another option, once you have some cash built up and are otherwise diversified, is to occasionally request that the loan be recast.

https://www.bankrate.com/finance/mortgages/what-is-mortgage-...

Recasting works sort of like refinancing .. but your rate doesn't change and neither does your mortgage term.

Instead, a lump sum that you provide is deducted directly from your principal. Your monthly payment is then recalculated based on that reduced principal amount.

The financial institutions usually impose limits (minimum lump-sum amount, how many times per year you can do it, etc.) And they don't advertise it or make it easy, because there's no money in it for them.

And since the principal/interest ratio is front-loaded (so that much of the money that they make from you is in the first seven years or so of a 30-year loan), then if you can recast early in the life of the loan, the benefit is increased. (And that's the real reason why the industry advises upgrading every seven years - that 30-year, front-loaded clock gets reset in their favor.)

> That is because overwhelmingly your just giving your mortgage company an interest free loan due to the fact that they apply the over-payment to the final payments and don't adjust the amortization schedule.

I'm pretty sure this is NOT how it works with my mortgage company (BofA) I make principle-only payments that reduce the principle, which immediately affects the amount of my monthly check that goes toward principle/interest.

Ah ok thanks. Here in Australia we can't deduct the interest portion from our taxable income unless the loan is for an investment property.

My mum drummed into me from a young age that it's better to not be in debt, but she was no financial whiz. I kind of understand what you're saying but I think I really just need to do some spreadsheet calculations to work out the scenarios. It isn't immediately obvious to me.

Given that we just left a period of very low rates, paying off a low interest mortgage might not make the best financial sense if you can put the money to work elsewhere.

There is also a diversification problem. Paying off a mortgage could tie up a large part of someone's wealth in their house.

Related to the point right above, paying off a mortgage ties up a large portion of cash in a fairly non-liquid investment.

Random conversations, Reddit personal finance, podcasts. Reason is, the interest is low and by investing the money elsewhere you can get a higher rate of return.

For most people, a house payment also represents a direct impact to their ongoing cash flow. If your house payment is $2000 a month, paying off your house automatically increases your cash flow by that amount.

What else could you do right now with that cash flow - not only in direct alternative financial investments, but in indirect investments in your own well-being and quality of life?

This is a great plan! One change I'd make is to reduce VBTLX to below 5% when you're under 40 and gradually increase the bond holdings by 2/3% a year after that. More stock exposure means more returns.

Another thing to do if you want to get fancy is to shift some bond holdings to riskier or junk bond funds when you're younger, such as Vanguard's VWEHX, that will generate FAR higher returns than a typical basket of bond holdings.

This is all assuming the target retirement age is 65 or later.

You’re both assuming this year is a stable point or low point for valuations for people under 40. I don’t see it. There are clear high values on stocks across the board. There are international pressures just coming into play that will have large, probably negative effects.

Definitely agree there, although 15+ years is enough to time for us to get through the cycle of highs and lows.

Also market timing is hard and subject to many factors (such as those you pointed out) that one doesn't have knowledge and awareness of. It's better to just buy, and hold. When the market goes down, buy some more, but don't expect to access that money for many years.

> if you want to get fancy is to shift some bond holdings to riskier or junk bond funds

Don't worry. The federal government is working on doing that for you.

If you're referring to US federal government debt, it's basically got a zero risk of default. You'll always get your principal and interest back in full. Why? The debt is denominated in USD and who can print any amount of USD at will? The Fed.

Edit: I think I get your larger point though, runaway deficit spending of the kind we've had in recent years does destabilize the riskiness of holding US assets / currency.

It has a very non-zero inflation risk, though.

It was just a throwaway line. I should have said municipal, but given the target audience and all. I'm not even a deficit hawk, but i thought it was funny :)

With so many people doing this these days, I wonder if this will continue to hold true.

The market is always shifting. People who deeply understand the companies in their portfolio will generally outperform the market at large by finding and exploiting mismatches in the market (i.e. active management). The question is how much people are willing to pay for active management. The more that investment moves towards index funds, the larger the gains to be made from active management. Higher demand for active management results in higher fees for actively managed funds, and investment capital goes back to index funds, and the cycle repeats.

If people forget anything about index funds, it's that they're not guaranteed to go up, just like any other investment vehicle. It's a reasonable choice to make to put decades' worth of savings away for retirement, because the stock market trends positive over the long-term, but people are kind of looking at index funds right now as "if I put my money in index funds then I'll be set for retirement because they're 'de-facto guaranteed' to go up over the long-term" and well, that's a dangerous over-simplification.

>People who deeply understand the companies in their portfolio will generally outperform the market at large by finding and exploiting mismatches in the market (i.e. active management)

There is no evidence that I'm aware of suggesting that active management "generally' outperforms the market. In fact, most evidence points to the majority of active managers performing worse than the market in the long run.

Agree. Once the management fees are considered, you don’t come out any better than an index fund. At least that’s the conclusion in A Random Walk Down Wall Street.

Reminds me of John Stossel throwing darts into the newspaper stock section, and doing just as well as managed funds.

In aggregate it's mathematically impossible for active management to outperform the market:

https://web.stanford.edu/~wfsharpe/art/active/active.htm

For every smart active manager that beats the index someone else is on the other side of the bet losing.

Note though that once the market is majority passive - which seems likely within the next decade - it actually is theoretically possible for active to slightly outperform passive.

That's pretty much my point.

I was reinforcing that it wasn't a matter of "evidence" it's just impossible.

If everyone indexes (they won't) and that causes the market to become opaque and inefficient (that's debatable), there will be plenty of money to be made in active investing. Once people notice that and start making money, many others will follow, and eventually the market will become so efficient that it will once again make sense to index. So it seems to be a self-solving problem, and an equilibrium.

If you're seriously interested in this, just read Matt Levine every day - it's something he talks about on nearly a weekly basis.

https://www.bloomberg.com/view/articles/2015-07-22/index-fun...

I'm guessing the tldr is that there are issues. Just read this article which is taking about potential solutions (or the lack there of).

Also been wondering how much this has been propping up the stock markets. If everyone is putting some percent of every paycheck into the stock market without even thinking about it, seems like it would have some systemic effect on prices.

Are more people currently contributing to their IRA's than cashing them out? Is there tipping point going by current population dynamics??

What exactly is the alternative? Not investing your money? The entire world runs on it. It's not going to change.

You only need to study successful rich people or use common sense to figure out that you don't become wealthy by investing to some index funds. You do that after you have sold your business and want to shield your wealth for carefree life.

Pensions (dne), social security (ha), somehow make your own business capable of supporting you into old age, work until you die.

Pensions are going to the same place...

Want to be rich? Are you rich already?

No? Then too bad.

Because "equality of opportunity" in the US is only available to those who are more equal than others.

At least for children who grow up with married parents, there's still quite a bit of income mobility.

Such children born into the bottom quintile of income, are pretty likely to end up in any quintile. The probability of ending up in each quintile from bottom to top, is 17%, 23%, 20%, 20%, 19%. Seems pretty fair to me; totally fair would be 20% chance of each.

It's a little skewed for people born into the top quintile, but not so much: 10%, 13%, 21%, 27%, 30%.

Source: https://www.brookings.edu/blog/social-mobility-memos/2014/08...

This sentiment is the driving force behind the popularity of many crypto currencies. Crypto enables class mobility where there was none before. For instance, purchasing $1,000 of Nano (XRB) at 10 cents (4 months ago) would be around $87,000 now if it didn't get stuck on bitgrail.

You can trade penny stocks in the normal market, too.

That's demonstrably false. You could make an argument that on average it has become harder to change your social class, but plenty of people start life poor or middle class and end life rich.

It's true to a first order approximation.

If there were no exceptions, then how could those born into wealth persuade themselves of their own moral superiority?

It only works because everyone does it. Usually not a good idea to follow the herd when investing. DYOR don't expect an easy dogmatic formula.

Good advice. Worth noting that IRAs have income caps for contributions.

https://www.rothira.com/roth-ira-limits

It's possible to get around that limitation with a backdoor Roth [0]. I've been doing this for my wife's account the last few years and it's fairly straightforward.

[0]https://www.bogleheads.org/wiki/Backdoor_Roth_IRA

So, if you don't have a job where you can put away $6500 a year into an IRA and max out your match with a 401K are you screwed?

Realistically: yes.

It's uncomfortable and nobody ever wants to hear it, and it's quick to get shouted down (especially in forums like HN where everyone is either wealthy or only "temporarily" poor), but if you can't afford to put $5500 into an IRA each year while also keeping your emergency fund topped up for 12 months' expenses while also still having enough extra for at least one little vacation that year -- then you're poor. Not middle class, but poor.

And, statistically speaking, if you're poor now, then you're likely to be poor for the rest of your life. America continues to run on the idea that that's not true, but that's a clever bit of marketing intended to keep people from realizing just how truly screwed they are.

This isn't to say that you're destitute or that it's impossible to live well at more modest means. Many people do.

Lol, by that measure 80%+ of the US is poor. The reality is much of that 80% of people are doing okay, and can survive a hiccup or two either by having enough money to expense themselves through it, unemployment or disability. If you’re in a high COL area I’d say that’s where you need to have a lot more money stashed. 12 months expenses isn’t reasonable for most people under 40.

> Lol, by that measure 80%+ of the US is poor.

Yep. Not really a laughing matter.

> Only 39% of Americans have enough savings to cover a $1,000 emergency

https://www.cnbc.com/2018/01/18/few-americans-have-enough-sa...

Relying on unemployment, disability, or having enough money (or, in most cases, credit) to "expense a hiccup or two" is not middle class. And people under 40 should have an easier time developing an emergency fund, because their expenses should be lower. People over 40 should have an easier time maintaining the emergency fund because it should be an investment account that they started before they were 30.

Your reply is a pretty good example of the amazing impact that political marketing has had on popular views towards wealth and poverty in this country. People have become entirely convinced that they aren't poor so long as they "can survive", that poverty is something that happens to the other people they hear about on the television.

$5500 a year, plus one vacation, plus building or maintaining an emergency fund, should amount to saving about $10,000 a year. The second-to-bottom, 15% tax bracket tops out at $37,950 for single people, and IRA contributions are 100% tax deductible, so you can safely gross up to $43,450 in that bracket. (edit: math.)

If it sounds difficult to squirrel away 25% gross annually in that bracket, that's because that's not the middle class bracket. It's the "poor" bracket.

First, your tax ignores payroll tax, and IRA contributions are pre-income-tax but post-payroll-tax. Just FYI. So taxes take a bigger bite than you’re portraying.

Second, where did you come up with this rationale that you’re poor unless X, Y, and Z?

It seems just as arbitrary to say that you’re not poor if you can put $2000 into an IRA, have a three month emergency fund, and take a week vacation.

Or let’s go the other way, why not: if you can’t put $30k per year into savings, have a three year emergency fund, and take eight weeks off per year, you’re not middle class, you’re poor.

See, we can all pull random numbers and standards out our ass!

In actuality, “poor” and “middle class” are actual defined terms with relatively well-defined meanings, none of which have anything to do with your bizarre markers of what constitutes different steps on the socioeconomic ladder.

IRA contributions for most people are above-the-line 1040 deductions, i.e., they count as a direct adjustment to your income regardless of how the rest of your taxes are structured (with exceptions for people who have employer IRA plans available or are self-employed or half a dozen other conditions, I am not a tax adviser, etc. etc.).

Okay, show me a non-arbitrary definition of "poor" and "middle class". Bonus points: show me the official definition that everyone agrees on. I'll wait.

Oh, and while you're doing that, let's also pause for a moment and reflect on whether you disagree that someone that can't save $10k per year is poor, or if you were just looking for an argument on the internet.

IRA contributions are subject to FICA taxes, as are employee contributions to 401k, etc. FICA taxes withheld from your paycheck regardless of your contributions, and there’s no credit to give some of it back to you on the 1040 because you made an IRA contribution.

As for definitions, here’s an official, non-arbitrary one for poverty that’s widely used. I’m sure you’ll just declare it arbitrary, which is fine, but my point is that you just came up with a random definition without anything to back it up or any reasoning as to why that’s the right threshold. Federal poverty guidelines aren’t perfect but they’re not a number out of a hat, which is what you’ve got.

https://aspe.hhs.gov/poverty-guidelines

You’re the one creating your own definitions and making assertions, accusing someone else of just looking for an argument seems disingenuous.

That source is absolutely wrong though - it originated from a report from Bankrate which only counted money in people’s savings (not checking) accounts. With rates under 1% for the past decade many people haven’t been even using a savings account.

That's a fair criticism. The Bankrate report was marketing material, based on a survey, and someone's answer would depend on what they considered a "savings account" to be. I don't have a savings account with my bank because, as you say, it's not worth it. I do have a small amount of savings in an investment account. Whether I'd consider that when asked about a savings account or not, I dunno.

However, the Fed has asked a different question intended to drill down into the same problem, and found that 47% of people responding would pay for a $400 emergency by borrowing money or selling something (https://www.theatlantic.com/magazine/archive/2016/05/my-secr..., also cites Bankrate though).

I'm unaware though of any studies finding that the majority of Americans have a significant amount of money (let's say a thousand or more) in a liquid asset of some kind. If you know of any, that would be some welcomed good news.

>>Lol, by that measure 80%+ of the US is poor.

No. It's not that most people can't save enough for retirement. It's just that they won't, due to a combination of bad habits and financial decisions.

It's a beautiful system where not only do the poor get to suffer, but their suffering allows the wealthy to luxuriate in perceived moral superiority.

This is silly and infantilizing. You can walk down any street in any of the many non-depressed area of the US and see a parade of bad financial decisions driving by in the form of newish $30k+ cars, along with a number of $50k+ pickup trucks, doubtless financed with debt. No one here is talking about people who can't afford food, he's talking about a much larger percentage of the population that makes an objectively large amount of money and still doesn't save nearly any of it.

People in the US are, on average, not nearly as frugal as they should be, and the sorry state of savings in this country is at least partly due to those habits. Even people with 6 figure take home salaries frequently are only a few months of savings away from financial ruin or tapping their retirement savings, if they lose their job. For them, it's a planning and discipline problem, not a problem of some evil system keeping them down.

It's way better than that: at the extremes the deep poverty of the poorest earns more money through usurious credit for the rich too.

I mean, it takes money to make money. It's also not required to max anything out. If you can only put $10 a week into retirement, put $10 a week into retirement, until you can put $15 a week.

I'm honestly not sure why your getting downvoted. Maybe the "takes money to make money" line? Otherwise that seems like reasonable advice. If you can't max out your IRA every year then that's just how it is but it's certainly a good idea to contribute what you can. Right? Could someone shed some light if I'm missing something?

Not missing anything. It's better to save the dollar you can now, even if it doesn't seem like much.

The 'good' news here is that Social Security isn't a terrible ROI at low incomes.

Right, if Social Security hasn't collapsed by the time you need it.

Social Security existence is based on the state ability to extract taxes, and voters rejecting candidates who want to dismantle it. 401k depends on stock market being up in the critical time you need it. If I were to bet what is more likely to collapse, it’s rather stock market.

> Social Security existence is based on the state ability to extract taxes, and voters rejecting candidates who want to dismantle it.

You need to watch the discussions around "entitlement reforms" that's being promoted currently. Voters can't reject candidates after the fact, who won't seek re-election after passing (or being the lightning-rod of) unpopular legislation, opting instead for cushy "jobs" in the industry they legislated in favor of against their consituents interests.

>>401k depends on stock market being up in the critical time you need it.

If your portfolio allocation is incorrect, sure. But by the time people get close to retirement, most of their investments should be in bonds, which are quite insulated from the ups and downs of the stock market.

What do you do when the stock market collapses as you start moving into bonds?

If you want to take an ultra-conservative approach, then 7 years from retirement, transfer 7 years worth of expected draws against your portfolio into bonds. If the market crashes the day before the "7 years from retirement" point, then wait 7 years to make that move into bonds and do it just when you retire.

If things are in such horrible shape that the market fails to recover over any given 7-year period of time, expect shotgun shells and canned food to be the new currency anyway.

That’s something you do by degrees over years. A couple years’ blip isn’t going to hurt that much.

Collecting a growing pot of tax revenue from a shrinking pool of workers will not be without challenges. Emigration seems likely, although I suppose the elderly majority can then vote in an exit visa scheme.

I had to downvote this because of how smug it is.

Your approach has validity, but it's valid for people who a) have no time or b) inclination to learn the market.

It's just ONE approach. You've presented it as "the" approach, full stop. It stems presumably from the idea that you can't "beat" the market.

But that depends what you invest in. And as a human with a brain, and a human with 24/7 Internet, you can do a little research and invest in conservative, dividend-yielding mammoth blue-chip-type companies, or you can seek value.

What I do is:

Step 1. Move all my 401k holdings from previous employers into a Vanguard IRA brokerage account (there are brokerage and non-brokerage variants of the IRA, the latter allowing you to purchase individual domestic stocks and ETF's online).

Step 1b. Create a Seeking Alpha account and add stocks, ETF's, etc. that I'm interested in to my portfolio. I'll watch these stocks for weeks/months as well as read some of the material / URL news links that appear (including analyses).

Step 2. Allocate a certain percentage of the entire portfolio "Boglehead" type funds/companies of the exact type you've just described. Baby boomer nervous-can't-be-bothered investor mindsets.

Step 3. Allocate a certain percentage to companies I know either because I may have worked there, I use their products, or as I work in technology I like the idea of the product or company. AAPL is an example.

Step 4. Allocate a certain percentage to a 'gambling' value stocks. I find these by looking at the NYSE "Biggest losers" and "Biggest winners" lists. If I see something interesting, perhaps I feel I'll either ride a pump and dump trade cycle or simply I feel that the company was unfairly oversold, I'll add that to my Seeking Alpha portfolio, follow it for a few weeks/months, and purchase on a low.

There are a lot of different trading strategies. If you were railing against day trading only, I perhaps would agree with you. But here you're suggesting that the only valid form of stock market investment is to follow a mediocre approach (which is high risk: what if it's time to retire and the market corrects right before?!)

Your profits on AAPL are nothing to do with you being smarter than the market. You've just presented a strategy of gambling as better than a long term tracker. I absolutely do not believe you can out perform a tracker long term.

How is that gambling?

A company has a product, which is sold to consumers. A company has a structure, which includes employee counts, capital expenses, and so forth. A company has a roadmap. And dividends.

It's not "zero risk" but to suggest that it's no different than tossing chips on a roulette number or a blackjack dealer is completely absurd.

The question isn't whether you like ipods 10 years ago or not. It's what information you had, that you incorporated into a model that you then traded on that gave you a real, statistically valid edge to the market price when making that trade.

When you buy a stock, you pay two main fees: the basic broker fee and the market spread to the mid price. The moment you make a trade, you're down.

When you toss chips on a roulette number, you pay one fee. You know there's 36-1 chance of your number being chosen but there's also the zeros that give the house the edge, which give you a 36-1 payout on a 38-1 event (depending how many zeros). The fee is 2-3% percent (on a european roulette table). Moreover, you actually KNOW the real probability in the casino and you KNOW the house edge.

In the market, you have absolutely no idea what the real price is. Maybe Steve Jobs dies earlier in an alternate universe and the company implodes before the iPhone money press gets going. Maybe in another universe, he lives longer and tanks the company because he starts believing the hype about himself. Who knows? In this universe your AAPL bet paid off wonderfully. Liking a product and buying shares in the company is a completely reasonable thing to do, but unless you genuinely know something others don't it's gambling and convincing yourself otherwise is a really really dangerous thing to do.

Liking a product and buying shares in the company is a completely reasonable thing to do, but unless you genuinely know something others don't it's gambling and convincing yourself otherwise is a really really dangerous thing to do.

That's an incredibly broad definition of gambling you're offering: if I purchase an asset (from another entity) with the expectation that it will go up, but information I have is at or below what the other players in this 'bet' then it's no different than betting on Black #26 on a roulette wheel? And all this, you suggest, because I can calculate the odds in the latter case, but I'm too unsophisticated to calculate the odds in the stock purchase case? Stock value is based on an underlying asset, which as a whole, is at least expected to go up, as the economy produces more wealth. And anything CAN happen (eg., a company blows up, a product fails, etc.) But a casino, the house is ALWAYS expected to come out ahead. That's why the odds are so long.

Moreover, you actually KNOW the real probability in the casino and you KNOW the house edge.

By your definition, the house I purchased for investment could fall into this category as there was no way I had all the information the others had (seller, for certain, brokers, and other players).

What's your conclusion about gambling, then? That since the odds are known, and they aren't (by myself), in a stock purchase, then __?

Buying a house is gambling. It's a gamble most people take and is usually a good one to make. You're trading one asset (cash) for another (house) hoping that the combination of the house value and your derived utility from that house retain higher value than the cash. This does not always work out in the house owners favour. It's a gamble. It's not a stupid gamble, usually, though.

Buying insurance is gambling, as is not buying it. Both courses are sensible in different situations.

The trader who buys aapl after massive amounts of research and maybe a new, key insight is STILL gambling. They probably have an edge to the market, though.

Let me put it this way: if you only ever buy a couple of stocks in your life then there's really no good way of picking them. The expected variance in the rate of return on those stocks is so high that any edge you may have is effectively lost. If you win, you win. Great. But if you buy and sell 10 stocks a day for years, you have absolutely no chance of making money without a real edge, as your skill (or lack thereof) becomes the main signal, not variance.

Your strategy will fail longterm. Buying stocks is the very definition of gambling: buying something hoping it will go up in value. Buying a house is probably a decent bet most of the time. Buying house insurance against fire is a loss making bet when analysed in aggregate (insurers make profit) but so useful to you that it becomes a good bet. Buying mobile phone insurance, if you're not young, drunk and clumsy, is a bad bet. Buying aapl on a hunch is a bad bet, but it paid out. Congratulations.

Great. So that boils down to "skills." Which is essentially what this very active thread is implicitly all about.

But here's the problem. While everyone is arguing back and forth about competing against Wall St., game theory, probability and the quibbling over "gambling" which turns out to be nothing more than a convention in conversation (others below admit that index funds and housing are also betting, but to a lesser degree), what no one is addressing is what specific trading strategies we're competing against here.

IF you are a day trader and you compete against other retail day traders and Wall Street trading floors, automated trading systems, high frequency and such, that's one thing. IF you stock pick but pick your stocks for multi-quarter or yearly outlooks, and you absorb information about -- not the stocks -- the companies, following news and understanding what their risks are, then that is a totally different strategy.

Much of Wall St. cares across quarters and short-term. Many retail investors too. I would only advocate medium and long-term stock picking.

Everyone brings up Buffett and his advocating of index funds. What no one here has mentioned is that he's a value investor, buying up stocks when companies are, in his estimation, undervalued.

You folks are guilty of sweeping the individual under the rug in favor of the overall statistics. As if the individual who wishes to buck the trend is, at best, lucky, and at worst, an imbecile.

If you're not interested in the area of stock picking, then that's understandable. But if you're pre-emptively convinced that you can never win, because your knowledge is average, well I suggest that if you're an intelligent person that you reconsider. Again, no one here is advocating day trading or beating Wall St at their own game.

You are missing out by not taking a chance on companies that you think might expand in the coming years. Nothing is guaranteed, and I think many folks on here seem to miss that part of the equation.

It's not that Apple is unsound. It's that you picked ONE company. If you had said 100 years ago that you would trust not the long term viability of stock in the Pennsylvania Railroad Company (it paid out annual dividends for over 100 years unbroken), people at that time would have called you certifiably insane. Then history unfolded. Will Apple be around in 50 years? 10 years? It's an unfolding probability. Will you correctly get out and find the next such company in a manner that beats low cost passive diversified indexing? Doubtful.

http://www.efficientfrontier.com/ef/900/15st.htm

Most index return comes from a few stocks that generate extreme returns. By picking a single or a few companies, you're likely to miss out on those outsized returns. Buy the whole market and you can't miss.

(Sidenote: clearly, VCs have done the same or very similar calculus with startups.)

By that theory, you should diversify away from those that are not going to be "superstocks" (in the post, Dell grew 550x and pushed up the entire index). For example, HP or Exxon or UPS will probably do okay, but will not outperform the rest of S&P by a huge margin. Therefore, they will only weigh down your big earners.

It's that it's stacked against you, like this article explains, just like a casino is stacked against you.

Also, for you to have made money on AAPL you would have had to gamble on something. You had to have bought at a lower stock price. If you bought recently, it would be that Tim Cook doesn't suck and they don't botch the new iPhone. If you bought 6 years ago, it would be something else. If you bought 10 years ago it's that the iPhone would remain dominant, etc. etc.

> How is that gambling?

When you buy the shares of company A instead of company B, because you want to gain more, you are betting that the price of company A is undervalued on the market compared to company B. This is perfectly fine IMHO, but it's still a bet.

So then, it logically follows that buying an index fund per your definition is also gambling, because you're betting that the stock market index as a whole will continue to go up. It may be a bet with better odds or worse odds, but it's still a bet.

We're entering sorites paradox(1) terrain here. I would say that what differentiates "gambling" from "investing" is the amount of risk you're choosing to take. The lowest risk you can take is distributing your savings between money, stocks, bonds and real estate. For the stocks part, the lowest risk strategy is buying index funds.

So, if you distribute your investment and use index funds for stocks, I would definitely say you're not gambling by any reasonable definition of the word. In between, I'll leave it to everybody to decide for themselves where they want to put the threshold.

1) https://en.wikipedia.org/wiki/Sorites_paradox

So I have considered taking a more active approach to investing, but every time I think about I am dissuaded by the findings that actively managed funds get beat over the long run by index funds. For example, the Buffet bet of S&P500 beating mutual funds, the lack of correlation between fund performance from year to year, the darts thrown at NYTimes fund, etc. All these things suggest to me that actively managing can beat the indices in some years, but will be balanced out in others.

I would be interested to hear more of your thoughts about this.

Buffett structured his bet in a very specific manner to maximize management fees of the other side. His bet was the S&P 500 vs any five funds of funds hedge funds. This is like betting the S&P 500 vs the average return of 20 hedge funds. Of course Buffett is going to be a favorite when the investments are diluted so much and you take into account all the fees on top of fees. I think he would be a dog vs a single hedge fund or five hedge funds.

If the other side was so obviously weak, why did Protégé Partners (who chose the fund-of-funds approach, actually) take the bet?

http://fortune.com/2015/02/03/berkshires-buffett-adds-to-his...

In aggregate the market is zero sum so if you think 1 or 5 hedge funds would beat the average easily who are the suckers taking the other side of those bets?

The stock market is not zero sum. The people taking the other side of well managed hedge funds are usually poorly managed pension funds/hedge funds, index fund ETFs that blindly buy a bunch of stocks without looking over their financial statements, or dumb public retail investor money.

>The stock market is not zero sum

All securities are held by someone and the total return of the market is the total return of all those securities. For someone to outperform the market he has to hold a mix of securities that outperforms and whoever holds the opposite mix underperforms. Sock market returns are very much zero sum.

>the other side of well managed hedge funds are usually poorly managed pension funds/hedge funds

How do you pick ones from the others?

>index fund ETFs that blindly buy a bunch of stocks without looking over their financial statements

That's the point of those ETFs, replicate the index exactly. If they're replicating the market average then they're doing exactly their jobs.

Why would you expect someone to hold the opposite mix of securities that you hold? That's a curious approach you're taking.

The market is not zero sum.

Thanks.

Well, I think there's "actively managed funds" and there's yourself. Funds are companies with infrastructures, eyes on them, politics in them. And so forth. I think it's a valid point that it's hard to time the markets and such.

But as a simple person looking at companies you believe in, you can buy and hold. An example. If in 2001/2 when you saw an iPod for the first time, you thought to yourself that the company that made it has potential, maybe you bought some shares in it. That's just one of a lot of examples. Also it helps if you're in the industry that you're examining. We're in tech so maybe we've used some of the products that we believe in, and others we don't believe in.

So that's one consideration.

Also, hedge funds and asset managers do a bit more than buy and sell stocks. They do complex, sometimes crazy things that involve leverage, options/contracts, and very complicated instruments.

There's nothing WRONG with buying a stock index fund, but if you see a company you think might have a winning product, and from some quick analysis seems like it's reasonably well managed, then that's something.

Not everything has to be technical analysis of high risk biotech stocks, shorting strategies and so forth.

And for the retail folks like us, we don't have to "trade" actively, as in buy and sell every day.

That's my middle ground between "competing against high frequency traders or golf course CEO conversations" and "buy index fund and close my eyes for 15 years".

Here's the problem with this. Most people won't even change their own oil in the car, they aren't going to research and develop their own trading strategy. You do what works for you, but for everyone else, index funds are a great set it, and forget it strategy.

You should checkout my startups blog post on causality in cryptomarkets:

https://blog.projectpiglet.com/2018/01/causality-in-cryptoma...

Basically, we used it to generate pretty awesome returns, and we bias our "trade potential" advice towards reduced risk: https://projectpiglet.com/

It was easy for us to rack up some nice returns:

https://blog.projectpiglet.com/2018/01/30-weekly-returns-usi...

All that being said, I personally limit my exposure to volatile assets - so I wont put more than I'm willing to lose in cryptocurrencies, and regularly pull out profits.

I upvoted you because your post adds a valid discussion point, but I have to ask:

1. Are you actually getting any alpha using this method? Averaged over multiple years?

2. If you are, are you earning a decent hourly rate for researching companies and following the market?

1 - So far so good, but it hasn't been many years. In a bull market, I'm also (in addition to some other winners) partly 'betting' (as per the conversations above) on some value stocks that underperformed during this time. One of them is based on geopolitical issues in one particular country that I'm expecting to be resolved based on the best knowledge I have while following the politics of this particular country and the industry of the company in question (and the company's legal disputes with the government). Another is a promising technology that was recently trialed successfully commercially. There are a few others like this. My educated guess is that even should the broader index go down when the bull market eventually subsides, these will picks still benefit and climb due to the underlying fundamentals. They're hedges along with a basket of other picks, some of which are very conservative (and include Vanguard funds). In the worst case, I don't think my picks will underperform a bear market.

2 - that's an extreme perspective, since there's value in learning that doesn't have an hourly cost. The TOC of my time may or may not be higher than what a fund manager would cost (or the index fund approach being discussed). Then again, monitoring the portfolio 3-4 times a day for a couple of minutes isn't that bad. Initially finding the stocks of interest and doing some basic research does take time.

[edit: grammar]

> Vanguard Retirement that matches your retirement date

Had my money in one of these accounts for 3-4 years (not sure if vanguard but another major investment firm if not) - it lost money every single year despite the market going up across asset types and geography. Years. not months. Needless to say this makes me highly suspicious of these 'magic' accounts..

Unless you are over 50, Between now and your retirement age, the long running story of the greatest accumulation of debt in peace time will likely have come to its conclusion which will invariably be either high inflation or financial collapse. Past performance is not indicative of future results. Some people's savings will get wiped out.

I have also read and heard from different financial articles and podcasts that there is no known upper bound to amount of sovereign debt a country can have before keeling over - it is more important that creditors and investors have faith that the government can pay it off, or that the country is good for the money.

However, I tend to agree with your comment. There may be no upper bound to sovereign debt, but economic good times can't last forever, what goes up must come down. And should creditors ever need to collect that debt there must either be high inflation or high taxes, or not pay back loans and risk sanctions.

You might find this interesting. TLDR is that the Fed now owns 40% of T-bills > 5 yrs. In other words, during the big rounds of quantitative easing our government bought a ton of our own debt. It's going to be really nasty unwinding this.

https://www.forbes.com/sites/robertlenzner/2013/11/25/the-fe...

So what is your counter-proposal? Save nothing, spend it all now, and plan on having no retirement?

I thought it was:

Step 0: Spend all your money on toys

Step 1: Run out of money

Step 2: Look under couch cushions and car seats for coins so you can buy dinner

Step 3: Spend $19 on beer and $4 on food

Step 4: Do this regularly despite being on a high income

I am excellent at this adult thing.

Instead of messing with the etf’s directly, take a look at the robo advisors. They auto rebalance, and can be much more tax efficient than ETFs as your portfolio grows.

The startups behave more reputably in this space than the incumbent players that added robos as an afterthought.

For instance, one big bank advertises zero management fees, but then keeps a pile of your invested money in cash (to invest for its own uses, I guess), and then lets a third party exercise the robo trades.

The third party pays to do this because they can make money from arbitrage by sneaking their own trades in before your trades.

(I have no affiliation with anyone in this space—just a happy customer. I’m going to great pains to avoid naming names, since you should do your own research.)

Robo advisors are just a way to nickel and dime investors for a very minimal service. Go to an ordinary discount brokerage like Vanguard, Schwab, or Fidelity, and buy 2-4 mutual funds or ETFs (total US stock, total international stock, total bond).

Look up tax loss harvesting. For most people the money Wealthfront/Betterment save you via tax deductions will be more than their fees.

I'm familiar with tax loss harvesting. I don't think you need a robo adviser to do it, and I don't think the benefit overcomes the robo advisers' fees.

The benefit from TLH caps out at a $3,000 deduction annually (and the loss rolls over to future tax years). For someone in the 35% bracket (fairly high) that's a $1050 annual value. Not huge. Meanwhile, the fees do not have a cap.

$1050 in annual value equates to $420,000 in assets under management with a 0.25% fee rate. So even in a high tax bracket (the best case for TLH), you're losing money with the robo adviser at that level of assets.

(In the 22% tax bracket, that's $660 in annual benefit or a break-even point of only $264,000 in assets before you're losing money. Both of these figures generously assume the robo-adviser can hit that $3,000 of losses every year consistently.)

I think the robo advisors like to advertise the case where clients have about $100,000 under management because it's one of the few points on the curve where their TLH is a value-add after fees.

Average Wealthfront account is 44k according to their form ADV, far less than the 420k threshold you gave. It seems reasonable to guess that the account sizes follow a Pareto distribution so probably more (potentially much more) than 50% of accounts are below 44k. So for the majority, (potentially the vast majority) of their customers TLH makes their service a net positive.

Of course that assumes users with small account sizes actually have enough losses to harvest, but that seems likely when there is a market downturn like last week.

You can't state that authoritatively, as most customers will probably also be in lower tax brackets than 35%, which produced the $420,000 figure. And who knows if they are hitting $3k/year, every year.

> Of course that assumes users with small account sizes actually have enough losses to harvest, but that seems likely when there is a market downturn like last week.

Exactly -- small account sizes have fewer losses to harvest. Maybe they see a slight benefit over totally passive investment net of fees, but the magnitude will be small.

And you can easily tax loss harvest without the robo-adviser anyway.

Two things I don’t get about the robovisers: first isn’t there an ETF which does equivalent for any given risk profile? If not why not? And secondly whenever I look at a roboviser I check all of the risk happy YOLO boxes and they still recommend a very hedged portfolio, ie don’t get near the risk of a basic sp500 etf.

What you're asking for are "target date" ETFs. Similar (non-ETF) products exist in some shape at the big money managers like Vanguard and Schwab...

Why don't they exist as ETFs? This is a good question. It's probably only a matter of time before we see such products. Especially that given the current pace of things, there is a new ETF everyday in the US. I've personally looked into building target date ETFs through my work as well.

Those tickers mentioned are mutual funds.

I wouldnt put too much trust in robo advisors as they are very new. Unless, we're talking Schwab's robo advisor which benefits from the scale of being in an already bigger place.

> Forget trading on the stock market. You will lose.

Cognitive biases have a large effect on minimizing one's returns. I recommend reading "Thinking Fast and Slow" by Daniel Kahneman for an analysis of how those biases sabotage one's returns.

Those biases are hard to overcome even when you're aware of them, but at least one can try :-)

I bet most of us don't qualify for IRA tax benefits.

Which is where a backdoor Roth comes into view (I'm assuming you're speaking about workers at American companies making over the tax limits)

I feel slightly uncomfortable with a blanket allocation such as this one. Being 80% equities usually works for someone just starting out their careers in life. Typically as you get closer to retirement you would want to move the balance of your money to lower volatility fixed income products.

Which is exactly what Vanguard Retirement funds do, automatically.

I really don't understand why some of you take this "advice" so to heart. As if this is just cut into stone, and you follow it to the letter. This is a good general guideline to follow for someone that is completely clueless about what to do with investing. You've got guys further down the thread proposing you write your own day trading software, because THAT will surely work out in your favor. Do your research. Geez.

The people here seem to be presenting extreme positions. On the one side, you can't beat the market unless you're a hedge fund or big player with special knowledge and equipment, so buy index funds or you're a naughty gambler. On the other side, we degenerate into self-creating automated trading software.

There's absolutely a middle ground here, folks. One can have a portfolio of conservative picks (index funds), self-selected individual picks, cash, bonds, so on and so forth.

This should hopefully be picked up by n-gate to make a mockery of us.

Joking aside, I'm curious what some of you who are actually paid to write front office software by Wall St. think of all of these threads.

Rule of thumb: 100 - your age = % of your portfolio you should have in stocks.

There have been a lot of rules of thumb over the years. 50/50 and 60/40 used to be common advice, no matter the age of the investor. When modern portfolio theory became influential, the "age in bonds" rule of thumb became common. Now some people, e.g. Burton Malkiel and others who are involved with the robo-investing companies, say that young people don't need bonds at all, and that high-dividend blue chip stocks can be a good substitute: https://blog.wealthfront.com/investor-bond-market/

There's no simple answer. There might be a right answer, but so far no consensus view has lasted for long. Most of the arguments I've seen have been heavily dependent on bond yields at the time the arguments were made, and are therefore not universal advice. For example, 50/50 made a lot more sense when treasury bonds were paying more than 7% per year.

I take no position on this particular rule of thumb but to note it is much less aggressive than more broadly held advice on the subject.

Sounds like what Dave Ramsey preaches. Though $1M does not cut it these days. I already have that at mid career, and sure as hell don’t feel rich, not with 2x kids college to save for.

If you live in a high-cost location, you might consider moving at some point?

This is the best way to invest if your don't want to put any effort or time learning/researching. Set it and forget it.

Great advice. I have Fidelity. What are the equivalent low-cost funds would you recommend on Fidelity?

Does 2a include maxing IRS limit?

I think it really depends on the fees being charged by the firm handling your 401k. It could potentially cost you hundred of thousands of dollars over a lifetime, that won't be recouped by employer matching.

Reply on news.ycombinator.com