If what the FA says was true everyone would be doing this "value investing". It's about how you balance risk vs benefits.
Also, keep in mind: If you had invested all your money into a NASDAQ ETF at the peak of the Dotcom bubble 20 years ago, you would have earned about 300% in returns by now.
I think it is easy to dismiss indices in a bear situation. When in doubt, zoom out and relax.
It should be noted that the NASDAQ is heavily skewed to one particular sector, and so less diversified. Going for the S&P 500, US Total Market (Russell 3000), or world index would spread the risk around more.
Even investing only at market peaks, as long as you didn't panic and sell, would still give results most people would find satisfactory:
* https://awealthofcommonsense.com/2014/02/worlds-worst-market...
It can be a good idea to identify actively managed funds that have performed better than the market in the past (ie. they have got alpha). Which investment style the fund has used, can be identified using number crunching (using fama french factor analysis). For example Warren Buffet uses a mixture of value and quality investement style.
I work for a Fintech startup. We are working on a tool to do quantitative fund analysis.
* https://seekingalpha.com/article/4423498-berkshire-hathaway-...
Note: price only comparison. S&P 500 funds generally give dividends (which can be re-invested). The (very) recent pull back has evened things out a bit:
> Over the past year, Berkshire is up 33%, double the gain in the S&P 500. The stock is now ahead of the S&P 500 over the past 10 years, 15.4% annualized versus 14.5% for the index, but still behind in the past five years, 13.3% annualized against 14.9% for the index.
* https://www.barrons.com/articles/warren-buffetts-berkshire-h...
Ten years can be a long slog to stick with a particular stock if your future retirement / financial future depends on it.
> Ten years can be a long slog to stick with a particular stock if your future retirement / financial future depends on it.
Agreed. I hope to not be very invested in the stock market when I only have 10 years of work left. Seems too risky.
Edit: also, BRK’s outsize AAPL investment is the only reason BRK is even close to keeping up with SP500 index.
1. Find the mean of the data points
2. Calculate the difference between each data value and the mean (variance)
3. Square those variances
4. Add the squared variances together
5. Divide the sum of the squared variations by the number of data values
One of the biggest reasons that most of these funds work is the volume of people in the US with 401k plans that have fund-only options. Every pay period the stocks in these funds get automatically purchased without many decisions involved so you're going to continue seeing them steadily and safely increase.
Ultimately, investing boils down to finding something where you're comfortable. 401k investing makes people comfortable because of all the pre-tax benefits. Even if you make bad picks, you're still making the percentage of income tax every single time.
A lot of people invest directly in real estate or franchise businesses. Others in big, safe, dividend payers. Some people buy timber land.
IMO it's just going to be comfort level and experience.
Most people don’t need a financial advisor when they are in the accumulation phase. After paying off high interest debt, save 3-6 months in retirement, put as much as you can in an index fund or a target date fund in a 401K and call it a day.
Most people can’t afford to max out their retirement plans. After you do that, then a fiduciary advisor might come in handy.
401(k): $61,000 (under 50 years old), $67,500 (50 and older) each This is the 2022 tax year limit for all contributions, including effective deferral ($20,500 or $27,000 for 50+) plus employer matches and any post-tax contributions.
IRA: $6,000 each Either Roth or traditional. Both are tax advantaged.
HSA (family): $7,300 (under 55 years old), $8,300 (50 and older) These funds are triple tax advantaged when used for medical expenses.
Then you can get into treasury bonds, where interest is exempt from state and local taxes. For example a Series-I bond, which are protected from inflation (current rate is 7.12%): You can purchase a maximum of $10,000 worth of these a year.
So, just with a few tools, a family of two over 55 years old can invest up to $175,300 in highly tax-advantaged investments. A family of two under 50 can invest up to $161,300. How many families actually have enough money laying around to contribute even close to that?
If you've exhausted all that and still have money left over to invest, then you can start thinking about opening a taxable account at a brokerage and finding a fiduciary advisor.
> For example a Series-I bond ... current rate is 7.12%
Entirely from the variable part-- their fixed rate is 0% right now, and since the interest is taxed when you close the bond, this is an investment that is guaranteed to under-perform inflation (even if you don't believe their variable rate systematically understates real inflation).
I would personally argue you shouldn't be touching regular taxable investments like buying individual stocks or ETFs until you've literally maxxed out every tax-deferred options, but that's a more controversial opinion over which reasonable people can disagree.
- I-bonds up to the amount needed for an “unemployment fund”
- max out my 401K
- max out the company managed “after tax 401K”
- max out the HSA and use after tax dollars to pay medical expenses
That takes me to $42K before I turn 50 in a couple of years.
Series I bonds by definition only keep you level with inflation. Which doesn’t help if house prices, rent and healthcare continue to outpace inflation.
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You can also use an in-service distribution to move after-tax 401(k) contributions into your Roth IRA, the so-called Mega Backdoor Roth [2].
You need pretty high income and (for #2) a cooperating employer to make these work, but they're options for people who want to save even more tax-deferred. The proposed Build-Back-Better Act this year effectively removes [3] both 1 and 2, (so much for Biden's promise to not raise taxes for people making less than $400K) so this might be the last year to be able to do this.
1: https://www.nerdwallet.com/article/investing/backdoor-roth-i...
2: https://www.nerdwallet.com/article/investing/mega-backdoor-r...
3: https://www.asppa.org/news/crs-highlights-budget-bill’s-impa...
Most companies don’t let you do that directly. Mine allows “after tax contributions” up to 10% of base. Not to be confused with a Roth 401K.
It’s tough to draw the line in a conversation like this because I completely agree with everything you said.
An advisor only comes in at the point that a person is investing their money directly and consistently. Your average person doesn’t have the market knowledge or the time to learn it so an advisor is likely the best bet for the average person in that scenario.
Anyone willing to do some research and learn will likely find their own comfort zone without an advisor.
I've known more than one person with an advisor that shuffled them into opportunities that made money for the advisor or had complicated stories so that it sounded like the advisor was providing value-- and as a result massively underperformed the market.
The best advice for the average investor is extremely simple... and not worth paying a lot to receive since you can get it for free from bogleheads. As a result there are a lot of free or cheap advisors that make their money from customers in other ways ... and not necessarily to the customer's benefit.
So if one was able to invest in low-volatility index funds, the article's author would theoretically be able to avoid the massive bubble swings while still potentially beating the market (albeit probably not by large margins).
The low-volatility anomaly shows that investing in low volatility (low risk) assets tend to outperform over long stretches of time. It's a counter-intuitive result (hence being an anomaly) because the CAPM says lower risk assets should provide lower rates of return. So, as I understand it, the CAPM does imply volatility should correlate with returns because the risk-premium is weighted by beta.
I.e., low volatility stocks tend to be low beta stocks. lower beta implies lower returns under CAPM. The anomaly contradicts that model