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Comment by WJW | Hacker News Reader

The "just put your money in an index" advice is good for the vast majority of investors precisely because they can't afford to lose all of it. Research has shown time and time again that returns for the average retail investor gets lower and lower the more active they are and the less diversified they are.

It turns out that the average person is just not very good at picking stocks, especially when they have to compete in a market chock full of professionals with much deeper pockets and much better tooling. Investing it all in an index fund ties their returns to the returns of the wider market, which is a much better proposition than "you as an amateur get to go in the ring with the investment equivalent of Mike Tyson!".

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> good for the vast majority of investors precisely because they can't afford to lose all of it

No, no, no and NO.

The old adage "do not invest more than you can afford to loose" exists for a reason.

If you cannot afford to lose it, you do not invest it, full stop, no argument.

You put the stuff you cannot afford to loose in a bank account, preferably more than one bank account with completely different companies.

You absolutely cannot and should not rely on your investments, whether in passive indexes or active investments.

Index funds can go down a lot, VERY QUICKLY and take a long time to come back, just look at the charts ! It can take a year or more for a big drop to return to a previous value. That's not a comfortable position to be if you can't afford to loose a large chunk of your money overnight.

Also, remember that index funds, even the passive ETF ones, are a structured product. Even a passive ETF could be temporarily gated due to liquidity constraints, unlikely maybe, but it could if the circumstances were right. And even if they don't gate in such circumstances, you could expect the tracking error to widen and hence further reducing the amount of money you get back from a sale in such circumstances.

I think this is why the general advice is to transition to safer investments as you near retirement. When you're investing for retirement in your 20s or 30s you can wait out a 5 or 10 year downturn in your index funds. Not so much when you're 60 or 70.

Edit: > You put the stuff you cannot afford to loose in a bank account, preferably more than one bank account with completely different companies.

This is good advice. Counterparty risk is real and banks do fail. It may be rare, but 2008 wasn't that long ago and could have ended much worse. Even if your money is insured by some government entity like FDIC, it can take a while for that insurance claim to be paid.

> When you're investing for retirement in your 20s or 30s you can wait out a 5 or 10 year downturn in your index funds.

Sure, I know all that.

But the point, or rather the question, remains ... what are you investing ?

Which brings us back to "don't invest what you can't afford to loose", because by definition you can't afford to loose that for days or weeks, let alone 10 years !

You should really have 6–12 months worth of salary in hard cash in bank accounts. Then you only start "investing" whatever spare you have after that.

Why 6–12 months ? Because bad things have a habit of coming in pairs. You have an emergency that needs ca$h, you have a problem with your house that needs ca$h, you need to pay your mortgage with ca$h ..... and then your boss comes along and tells you that there's no job for you anymore.

6–12 months might sounds like an unreasonable amount, but if you lost your job tomorrow, nobody is going to be generous and wait for you to find another job, the bills will keep on coming.

Most people also don't have an ability to walk from one job to another. Realistically it will take (at least !) a couple of months to find another job if your departure from your previous one was unplanned.

Cash-in-the-bank provides you with a safe number that is a close to guaranteed as you can get. Meanwhile you cannot rely on selling off your passive index holdings to support you because the markets could drop 40% tomorrow without warning just because some dictator on the other side of the world got out the wrong side of bed and invaded the country next door.

Parking all your money in the bank is investing in currency. Depending on the currency it’s probably a lot safer than most stocks but there’s still an argument for diversification of aiming for as safe as possible.

> It turns out that the average professional portfolio manager is just not very good at picking stocks

FTFY. Time and time again we’ve seen evidence that portfolio manager success in a give year is largely random and does not persist. Very few (the superinvestors of Graham-and-Doddsville as a classic example) are capable of persistent alpha.

If I remember correctly professionals could beat the market - before costs.

Which is the problem; costs can’t be avoided.

It should be true of the average (median) investor as well. This is nearly tautological in fact.

The point isn’t that the average investor in a given year will perform at the market average (this is what I think you are referring to by the tautological claim). The point is that over time the correlation between winners (retail or professional) one time period to the next is essentially zero.

My main point was that the quote you were "fixing":

> It turns out that the average person is just not very good at picking stocks

Is accurate, and not in need of correction.

As a sibling comment pointed out, the average for professionals is higher: by almost exactly what they cost, as it turns out. For various ergodic reasons, that means that an investor without personal alpha should stick with index funds.

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