Hacker News Reader

Comment by spinlock | Hacker News Reader

The red flag that I see which tells me that this guy doesn't know what he's doing is his inclusion of a leveraged ETF into a long term (i.e. not day traded) portfolio. Leveraged ETFs are weird and they _do no_ return 2x over a long period of time. I'm not talking about their fees, I'm talking about the fundamentals of how they are put together. These funds attempt to give you 2x every day and they reset every day so that over the course of a week they have tried to double the index's returns 5 times over five separate days. They have not tried to double the index's return over the entire week.

tl;dr Leveraged ETFs are for day-trading not buy and hold investing.

View on HN

It may be worth taking a quick trip into why the math of leveraged ETFs doesn't work. The fundamental problem is that they lose more on losses by the underlying investment than they gain on gains by the underlying investment.

Suppose that the underlying investment starts priced at 100, jumps 25% on Monday to 125, then on Tuesday drops 20% back to 100.00. It ended as it began with no gain or loss.

What did our 2x ETF do? It began at 100, ended Monday at 100 + 50% = 150.00, then ended Tuesday at 150.00 - 40% = 90. It lost a big chunk of value relative to its completely unchanged underlying investment.

In other words, the volatility of oil prices can kill your leveraged investment even if your long term bet on rising oil prices is correct

I came here to just post this. The author does not understand leveraged ETFs in the slightest, and sounds dangerous to boot.

He begins by decrying the stock pickers, and then goes on to endorse ARM. Ahem?

Burton Malkiel (author of "A Random Walk Down Wall Street"), the guy who popularized index investing, doesn't condemn individual stock picking. He is fine with it, and he does it himself, provided you have a pool of safer investments in index funds to back you up in case you fail. Which is basically what I'm recommending.

Reference: watch the video at http://finance.yahoo.com/tech-ticker/article/535789/Burton-M...

Malkiel says that picking a few stocks is fine as long as the core of your portfolio is indexed. The majority of your exposure to equities is in a single stock, and it's an extremely-hyped tech stock.

Point taken. I switched my recommendation from UCO to DBO. (I kept the original text there so as not to invalidate your comment.)

No! You don't get off so easily - you have publicly recommended an investment strategy that allocates 15% (15%!) to a vehicle that you didn't understand and was completely innappropriate.

"switch your recommendation" ??? This is like suggesting a bank use memcached for transactional data, and when called on it, just casually walking it back and saying that maybe Oracle is more appropriate.

It's fantastic that you are getting involved with planning your finances, but you have a lot to learn before giving advice.

:EDIT - This may seem harsh, but I don't believe you have gone through the pain of giving someone investing advice and having it really substantially costing them. I have, and it's very painful. And it could have been worse for me because in that situation the person was young enough to recover and it wasn't a substantial amount of money. Imagine losing an older, retired person a substantial portion of their nest egg with bad advice and consigning them to a lower standard of living for the rest of their life.

I have been investing my own money in stocks, funds, and to a small extent, options for about a decade. I participate of message boards, read books, and participate in stock picking competitions. I still don't feel qualified to give good financial advice. YMMV.

Come on. We're all adults here. It's not like every Grandpa and Gramma on penny pensions would've taken the advice of Joe Random Blogger.

We need to stop treating investing as if people who aren't professionally on a trading floor are basically handling spent fuel rods while rollerskating naked passed Mt. Vesuvius. It's putting money down on a hunch, however educated or ignorant or risky or safe. There is no sure thing. It's either "slow money" or "gambling". There's n+1 bloggers doling out endless advice on everything from where to buy a home to how to haggle for a car. No one is going to look at one data point and say "you know what? That random-ass person makes sense. I'm cleaning out my accounts right now putting it all on ARMH!"

Also, "I still don't feel qualified to give good financial advice" is a bit disingenuous when you, in just a paragraph above it, said you used to.

In other words, let's not obsess over the very things that Jim Cramer does with panic-button sound effects and sweaty, dancing evangelism on a nightly basis. It's all advice, we're all aware. Take it with a grain of salt, etc.

I think you have frustrations with people other than me. I manage my own money, and clearly stated that I think it's fantastic that the original poster is managing his own. More people should do it.

I warned against giving financial advice because I had a bad experience doing it. I fail to see how that's disingenuous, consider it trying to help someone else learn from my mistakes. Making mistakes with your own money is fine, making mistakes with someone elses' is an awful feeling that I would just as soon help others avoid. The thing about investing success is that it makes a person cocky and more prone to offer advice at the the worst possible time, when their performance is most likely to regress to the mean.

You are ignoring an important point of mine - that the advice being offered here is terrible. He thought he was going to buy a leveraged oil fund and get double beta, when he was actually buying a day trading tool that tries to offer double beta on a daily basis. It's not the same as buying USO on margin. Anyone that holds UCO over the long term is almost assured of underperformance. That is a fundamental mistake, not nitpicking. And 5% is a larg-ish position in a concentrated porfolio, this was a 15% weighting. Don't get me started on the ARMH selection (well criticized elsewhere) and the age inappropriate / poorly timed 55% bond position.

Finally, it's not like I cherrypicked a random blog to criticize - this person wrote about it and submitted it to HN. I don't have time to police the internet, but this was inviting feedback, and mine is critical.

But that's my point. It wasn't that his advice wasn't wrongheaded or flat ignorant, it was your reaction.

"Oh, No! You have no _right_ to change your mind!" It's a blog post. It has as much legitimacy and authority over marketplaces as the entire CNBC network, i.e. none at all. Time and again, we see people on these so-called business networks doling out terribly wrong advice that, if followed, would cost you dearly, even in the short term (e.g., Jim Cramer's infamous "long on Bear Stearns" rant only a week before it went out of business). Cramer is a guy that's been a hedge fund manager and stock prognosticator for as long as some of us on HN (not me, mind you) have been alive and for some reason is just as stunningly ignorant of future events in the market as a market newbie.

This is the world that we live in now. We'll all just have to accept the fact that there are people who document everything that is going on in their minds, whether it's what they ate for lunch to their forex trading strategy to their insistence on voting for only old white Protestant men. Nothing OP did was immoral or illegal. It was content. Information, no matter how right or wrong, wants to be free. And, you're free to opine on it, and I on yours.

Of course the poster has a right to change his mind. I said I wasn't letting him off the hook so easily. Totally different things, and I agree with you completely on your point while standing by my original one.

Going long on a 2x leveraged oil ETF for the long term IS a surefire bet, just a very bad one.

Going long via a normal oil ETF for the long term is still quite questionable.

What the above poster is saying is - you're doing something with real consequences and, by writing about it you could hurt not just yourself but other people too.

Learn from his mistakes and given you are patently insufficiently informed to do this, don't do it. Given all you're trying to do is implement Scott Adams and NNT's advice why not just link to their articles and leave it at that. Why do you feel the need to pontificate to the world about this subject?

Reply on news.ycombinator.com