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Comment by WalterBright | Hacker News Reader

> I've ironically lost more money the more closely I've paid attention to my investments

Money Magazine a few years ago compared various investment strategies in stocks. The #2 best performing one was investing in the S&P 500. The #1 best performing strategy was the "dead man strategy".

The dead man strategy comes into play when the investor dies, and his estate gets frozen until it winds its way through the courts. It turns out that doing nothing with your stock investments is (statistically) the best strategy.

I know for a fact that when I do nothing with my stocks, they also perform better.

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A few years ago cost structures for managing one's investment portfolios were also significantly higher than today!

There's an even better alternative for someone willing to put in the leg work:

(1) Figure out your investment horizon. For many people, this is way shorter than suggested by generic advice, which makes some diversification beyond "stonks go up" meaningful.

(2) Figure out what costs you'll incur by rebalancing etc.

(3) Write a short script that optimises the amount of activity in portfolio management that improves performance over your investment horizon, given your costs.

Unsurprisingly, the result can vary a lot between people. The result is most likely going to involve a very low level of activity, but the process of finding it out is very informative.

What I've found out (and this is replicated also by more authoritative people like Carver) is that for almost everyone, mixing in some 10--20 % of a safer asset like 10 year bonds and rebalancing yearly outperforms a pure equity portfolio over most realistic investment horizons.

Agree with you 100%, I did the same simulations and found the same result.

I would suggest a step beyond though, because rebalancing your portfolio is fun year 1-5, but not so fun year 5-20: have a look at e.g. Vanguard retirement target funds.

Essentially, it's an ETF with a rebalancing rule included for a specific target date. For instance if you buy the target 2050 (your hypothetical retirement age), the ETF rebalances itself between bonds/monetary fund/stocks until it reaches that date, u til it's pretty much all cash in 2050.

Lowest hassle diversified retirement scheme I found.

This is one of those things where again, one will have to weigh the costs of both alternatives. A rebalancing ETF usually has higher costs (management fees, but possibly also internal trading costs that show up as performance beneath benchmark index), but of course, manually rebalancing also has a cost – the cost of one's time and effort!

Vanguard's ETFs are really cheap. The retirement funds in question are like 0.24%, which is in the cheaper range for ETFs

You still need to be invested in equities at retirement otherwise inflation just eats away at the value of the cash

That’s why these target funds go down to ~50% stocks [edit: at the target date] not 0.

At least at Vanguard the final stage of target date funds is ~30% stocks: https://investor.vanguard.com/investment-products/mutual-fun...

That fund is currently at 50% stocks. It does get more conservative as you get past the target date, but I was mainly referring to the stock percentage at target date, which the parent poster implied was almost zero.

There are scenarios where these target date funds are not good.

Rebalancing into bonds and mmmfs is a form of insurance against catastrophic losses equities. But if you have a sufficiently large account then catastrophic losses that affect your life are extremely rare, if they do occur they will likely affect your bond portfolio as well, and the expected loss vs 100% equities over 15-20 years is significant, something like 10x the value of the insurance you are buying.

If you want insurance for a large account then long-dated put options 20% of the money are much cheaper.

My target date 2050 funds have performed 50% less than my S&P 500 and like 30/40% less than my total stock market fund.

You mean VFIFX? What a disaster. My retirement plan put me in that until I realized investment advice for young people is a tax on the inexperienced and vulnerable. VFFSX (S&P 500) does 2x better returns every time. I feel guilty saying it on Hacker News. Like pension funds I bet Vanguard is one of these so-called LPs who give money to VCs like Y Combinator to help ivy league kids follow their dreams. Without these heroes I'm not sure there'd be a startup economy. I just don't want to be the one who pays for it. I think the future Wall-E predicted with Buy N' Large is probably closer to the truth.

> VFFSX (S&P 500) does 2x better returns every time

US large cap has certainly recently outperformed the other parts of the target date fund (international stocks, bonds). But there is certainly no guarantee that it will happen "every time". In the last 10 years, US equity has been the best overall performing asset class for the past decade but 7 out of those 10 years at least one other category outperformed it: https://www.blackrock.com/corporate/insights/blackrock-inves...

> Like pension funds I bet Vanguard is one of these so-called LPs who give money to VCs like Y Combinator to help ivy league kids follow their dreams.

You can look up the holdings of VFIFX or any other Vanguard fund. There is no private equity or private credit.

And now GLD with its 1 year return at 40% is outperforming them both, which is a really scary thought. How bad do things have to be, that all our blood sweat and tears scurrying off to work each mourning earns less than a piece of metal dug out of the ground that sits around doing nothing? I thought inflation was supposed to be a tax on poors, but even rich private equity which gets ahead by sucking the blood out of Americans digging themselves out the grave can't save itself.

Nope not all cash, it goes down to around 50% stocks at the target date (and actually continues to get slightly more conservative after). Just look at the current portfolio of the Vanguard 2025 fund: https://investor.vanguard.com/investment-products/mutual-fun...

I want to learn more about how to rebalance my portfolio. I started with ETFs and MFs and then bought some good stocks when they were low. But I have never rebalanced it. Would you be able to share some resources about it? Also, if possible, some pointers about your script.

Rebalancing is just selling the high performers and buying the low performers. In his example, you'd keep your "safe asset" allocation at say 15% - if your other stocks did well one year, you'd sell some and buy more "safe assets" so they again constitute 15% of your total value. If stocks tanked, you'd instead sell some "safe assets" and buy more stocks, again until your "safe assets" are back at 15% of total value.

> Rebalancing is just selling the high performers and buying the low performers.

Guaranteeing mediocre performance. Not my cup a tea.

Mediocre performance is better than your top performers dropping 30% or 60%.

I can point couple companies that suddenly dropped from $90 a share to below $10 and then they never got up “Just eat takeaway.com” between 2018 and 2022 it was looking like they would go to the moon. In 2022 you can see hell of a drop and it is not going back.

If you would sell parts of it before 2022 you would lock at least some of the gains.

But I think you know better when to switch companies ;)

Oh, I've had my portfolio drop 90% once. And drop 50% at other times, and 30% drops.

It's not easy to suppress the panic.

Not at all -- it uses volatility in one's favour, by cashing out on temporary peaks and buying in on temporary lows.

What you describe sounds like a kind of momentum/market cap investing, which is favourable in the short term, but suffers a lot when things go bad.

(This is assuming one cannot predict future returns better than the rest of the market. If you do that all the better!)

Seems like there's a lot of confusion on this. I'll see if I can get a fuller article up.

I'd be interested in reading more literature (e.g. from Carver) if you have any links!

I have only read half of Carver's Smart Portfolios yet but I find myself agreeing with much of it. I have started writing up a review of it sometime soon, although I might not publish it for free in a while!

Doing nothing saves trading costs which are a major drag.

The standard advice for equities investors (at least in the UK) has been to invest in tracker funds for a very long time.

it is possible to beat the market. Many years ago I double my money in approx an year - but I invested heavily in I had been covering as a analyst (one of my previous careers) until immediately before. I am more cautious now.

Trading fees are at or near zero in the US now unless you mean capital gains.

Not what I meant, but capital gains are another issue, but I am not in the US. In the UK we pay a 0.5% tax on ever transaction and often around £10 per transaction, so its quite substantial. I should probably have said costs, not fees.

How much are total costs in the US?

If you trade frequently even low costs add up. If its 0.1% and you trade monthly it ends up being 1.2% over the course of an year.

10+/trade is going back to the early 2000s for the US.

Now it's effectively 0 for most common trades. Here is Schwab for example:

https://www.schwab.com/pricing

If someone is a big options trader they can probably find a better per contract price out there.

How do they profit? There must be a cost somewhere? Another reply mentioned spreads - still a cost (you lose money when you trade).

AUM, managing high wealth clients, running their own funds with expense ratios (also some of the lowest in the industry), uninvested cash, etc... Retail trading is commoditized now.

Anyone who really cares about spreads will be using limit orders. Otherwise you're talking about pennies on highly liquid shares.

The fact that we're even discussing the possible spread differences between market makers shows just how commoditized retail trading has become.

the sell order flow to market makers who gobble up the other side of bad retail trades

Which means that your cost is market maker's spreads instead of fees. Still a cost to you.

Nope, this is one of the counterintuitive things about people paying RH for order flow. Market makers can offer tighter spreads when they know it’s a pool of dumb money.

tighter spreads are not zero spreads

What’s your point? The spreads are tighter than you would get on the open market.

NBBO requires that if there is something better that Robinhood gives it to you.

I think the point is that if you trade, you pay the spreads. Market makers can help you pay narrower spreads, but you still pay them.

If you just hold your index fund, you don't pay these recurring spreads.

I highly doubt market makers are in the business of betting against retail traders.

I suspect they're in the business of collecting the spread on lots of small trades that they can assume are largely random.

What you described is how you bet against retail traders. The bet is that they have no edge so it’s safe to run tight spreads and nice pure market making algos that assume random behavior at volume.

Feels weird to call it a 'bet against' when the other side can (potentially) benefit from the tighter spread you offer.

But yes, the market maker doesn't run the risk of trading with someone with knowledge and a lot of capital to apply it.

Yeah, I don’t like the phrase either, but market making in these pools is quite literally taking the other side of their trades.

Low cost brokerages mostly earn money from the interest rate differential, ie what they pay from your un-invested balances vs what interest they pay you.

They also earn some money from 'payment for order flow'.

All the major US brokers started doing free trades for stocks and etfs. For Vanguard, most of the index expense ratios are really low, like %.05 percent, but that’s not a trading fee.

Even for paid transactions that typically give better pricing (IBKR Pro), the prices are extremely cheap.

How do they make money from you as a customer?

You can Google it, but AUM at scale means .03% is a significant amount of money. There's also uninvested cash that the broker can invest in t-bills and take the spread.

Thanks for the lmgtfy :)

I bet the uninvested cash product drives some weird incentives - kpis around increasing ratio of sells to buys and increasing pain around removing cash.

Quite a lot of customers either have cash sitting in the account which they make interest on, or have margin debt which they charge for.

Interesting, thanks. For a minute I was expecting someone to say "ads"

Front-running your trade.

This is illegal and is absolutely the dumbest way to make money.

nice try buddy, that’s ILLEGAL

Oh no, I guess someone will be going to jail!

...No? Then, uh, a punitive judgment?

>Small fine that amounts to a cost-of-doing-business.

Ah. Hm.

You also pay a spread every time you trade, especially if you're using a retail brokerage like robin hood that sells order flow to market makers.

It doesn't show up anywhere in your statement, but it's a real trading fee nonetheless, so it's still better not to trade too much

Retail is offered tighter spreads because it’s safe to assume they have no edge at scale.

You pay the spread and you also have impact in the market.

If you’re trading US large-cap stocks at low frequency these are not really material costs for even a wealthy retail investor. Certainly not next to taxes.

The spread is a material cost, but the market impact is negligible for retail investors, yes.

The explicit fees are near zero, but if you watch your trade you always get an adverse price.

what are you talking about. you're not going to fill worse than nbbo

Just yesterday it was announced that Bitfinex will be returned the 95,000 bitcoin that were lost in a 2016 hack. These coins will be returned to the account holders which were affected by the hack.

At the time the bitcoins were lost, they were worth ~$575 each.

Today those returned tokens are worth close to $100,0000 each.

I doubt anyone who was affected by that hack realized they just got involuntarily forced into the best investment of their lives.

> These coins will be returned to the account holders which were affected by the hack.

I haven't seen any reporting on that. Bitfinex, the corporate entity, is receiving the coins recovered from the feds. It's up to Bitfinex how they device to dole out those funds, if at all.

When these things happen, often times exchanges will make their customers whole by giving back the monetary value of the coins at time of loss. It's very rare they repay them 1:1 in bitcoin.

IANAL but it seems like whoever is running Bitfinex should endeavour to make all the creditors whole in whatever medium their debt was denominated, according to seniority. So if they owe users X BTC and other creditors Y USD, and the BTC debts are senior, they should hand out the BTC to users regardless of its dollar value and, if there is any left, auction it off for the benefit of the (junior, in this scenario) USD creditors.

They could, but there's nothing requiring them to do so.

AFAIK the only crypto company who have been hacked (and there are a lot) and returned funds as BTC and not in dollars is, ironically, Mt. Gox. Users got repaid in Bitcoin 10 years after the fact. FTX bagholders were compensated ~120% in "equivalent value" dollars. Lost crypto was not repaid.

https://support.bitfinex.com/hc/en-us/articles/115003282929-...

Apparently they created a token that entitles you to the lost bitcoin should they be recovered.

Interesting part of the story is the hacker who stole them is a YC alumni, he founded mixrank. Kid only got 5 years in prison for stealing $1B.

This doesn’t surprise me in the slightest.

Most of my investing is just in passive S&P index funds, but I do occasionally buy individual shares.

Sometimes I make decent money, sometimes I lose money…turns out I consistently do worse than the S&P long term.

I treat buying individual shares as yuppie gambling at this point. It can be fun, but it’s usually a bad strategy.

> I treat buying individual shares as yuppie gambling at this point. It can be fun, but it’s usually a bad strategy.

Naw, that's boomer gambling.

Options are yuppie gambling.

I thought that was shorting biotech stock days before clinical trial results get announced?

For extra flavour, also invest solely using loaned money, preferably a student loan that never goes away!

Yuppies were a thing in the 1980s. I think you have your timelines off.

> I treat buying individual shares as yuppie gambling at this point. It can be fun, but it’s usually a bad strategy.

I would actually recommend the opposite - buy shares of a few companies that you know exceptionally well. That is, not just the companies, but also the market, the industry trends, etc. Charlie Munger recommends holding 5 stocks at max, while Peter Lynch suggests industries that are tangential to your work and daily life. Both solid advice. Revisit the list every year, and you'll already do better than most of the blind duds investing in the S&P500 (which arguably contains a lot of duds).

The problem with most ETFs is that you'll still be investing in a bunch of dud companies, whose only reason for staying in the market is by virtue of being big (think HPs and IBMs, for example).

The problem with ETFs is that many of them have crazy management fees.

Don't just blindly buy an ETF that fits your investment goals. Many of those bespoke ETFs have 1%+ management fees.

You can look up how even a 1% fee can gobble up piles of money over years.

That's why I am partial to the Vanguard funds. If you look at VUG and VTI and VOO, the fees are on the order of ~0.03-0.04%.

I know that passively-managed ETFs aren't necessarily "optimal" (as your parent comment mentioned, there's a risk of them having a few duds there for legacy reasons), but I think the value that they provide come down to the fact that they're automatically rebalanced and diversified, and 0.04% seems like a pretty reasonable cut for them doing that for me.

I didn't mean buy any ETFs either. I was making the case for individual stock holding, as a response to my parent comment.

To your point though, even Berkshire Hathaway invests in VOO and SPY: https://www.morningstar.com/funds/spy-vs-voo-which-warren-bu...

I think there's value in having things diversified and rebalanced automatically, especially if you don't have any confidence in your own ability to do so. Yes, you sometimes get stuff that's overvalued and thus over-represented, but in theory if the stock tanks the portfolio will be rebalanced and thus become a smaller percentage of the total holdings.

> That is, not just the companies, but also the market, the industry trends, etc.

That sounds like exceedingly bad advice.

Eg I work in software (like many people here). So my career itself already heavily exposes me to ups and downs of that industry; but it's also the industry I know best. The advice you quote would see me increase my already outsized exposure to that industry ever more.

Diversification is the only free lunch in finance. Your advice rejects it.

> The problem with most ETFs is that you'll still be investing in a bunch of dud companies, whose only reason for staying in the market is by virtue of being big (think HPs and IBMs, for example).

Feel free to use the gambling money part of your portfolio to short them.

And since HP and IBM etc are publicly traded, there are already lots of short sellers around making sure the prices stay reasonable.

The conventional wisdom is to sell your profitable stocks, to "lock in your gains", and sell your losers to "cut your losses."

I call that "minimizing your gains" and "locking in your losses", and just hold instead. If I "locked in the gains" I would have missed out on 10x returns.

Of course, I did ride Enron all the way to zero (!), but it didn't matter. Think of it this way - buy 10 stocks. 3 go to zero. 6 have modest returns. 1 is a 10x winner, that more than makes up for the failures, and becomes the tentpole for your assets.

I have a friend who retired, and decided to go into day trading. He spent hours each day glued to the trading portal, making trades. After a year, he ruefully admitted that he'd have made significantly more money if he'd simply done nothing.

Sometimes I ask GPT to run Bayesian analyses on varying hypotheses. I just did that for the several parent comments to see if we could get some reasons as to "why day trading doesn't work." Perhaps this will amuse you as well: https://chatgpt.com/share/67888cf4-1aa4-8011-b46b-77e5e9da12...

Yes, thanks for posting it!

Is there any reason to believe the probabilities involved in those computations are not just coming straight out of rand()?

> 1 is a 10x winner

out of 10 stocks, 1 being a 10x winner is an absolutely rarity and the fact that you would manage to pick it is pure luck tbh.

QQQ is up 5x in 10 years. Being an ETF, that means many of its components must be 10x.

I suppose it's dependent on your time horizon. MSFT is up around 10x since Nadella took over. It's more common over 20 years, obviously.

The other neat thing about ETFs is that there are so many similar, you can effectively use them for TLH to help offset future gains.

The IRS disallows wash sale deductions if you reinvest in a substantially similar investment within 30 days.

I'm not an IRS agent and have no idea what they mean by substantially similar. You might want to talk to your tax accountant.

> substantially similar investment

They actually use the word 'identical' instead of 'similar', if that matters. It seems to be a grey area with ETFs, and I'm not a financial advisor, so won't make any further claims.

> You might want to talk to your tax accountant.

Absolutely agreed. You can also just let a reputable robo do it for you if you don't have the time or energy for it, there are multiple. It is what I ended up doing. It's modest but every bit helps.

Robo advisors are intricately familiar with tax law? That's new to me.

US lets you claim $3k of capital losses each against income, so a robo advisor can optimize for this

Indeed, the wording is “substantially identical”, which is important. 2 different ETFs that track similar, but not identical indices (e.g. S&P500 vs Russell 1000 large cap, for example) are clearly not substantially identical, and make great tax-loss harvesting pairs. There’s tons of case law, opinions from tax experts, and automated tax-loss harvesting tools from a variety of brokers that agree with this viewpoint.

IIRC they have never defined "substantially similar" and they don't actually go after people who sell etf X and immediately buy etf Y with an identical price graph

Are 'many of its components up 10x'??

Isn't it the case that a few large cap stocks have the vast majority of the growth? If you didn't like Tesla, didn't like Nvidia, didn't like big 5 tech, you might have had very mediocre returns.

Oh there's more luck required than that. You have to get lucky many times to win at a 10x stock.

- You have to be lucky enough to find it when it's cheap.

- You have to be lucky enough to hold on to it even if it loses money

- You have to be lucky enough to not sell it when it's at only 5x and hold off for the top

- you have to be lucky enough to have bought enough initially that the return is meaningful to you

These are the thoughts that made me clean up how I invest and stop thinking I'll get lucky at some point just rolling the dice. It's way more luck required than just buying in early.

The 4th point (bought enough that the return is meaningful) is the killer one. There’s always “that guy” that brags about buying TSLA or NVDA in 2015 and having 100x his money. Then it turns out he only bought like $500 worth. Sure, $50K isn’t nothing, but it’s not going to be meaningful to the retirement of someone making tech worker wages.

Of course, the reason he didn’t buy more was because he knew it was a lottery ticket and putting most of his money in the S&P500 in his 401k was obviously more prudent.

I've done it repeatedly over the past ten years while DCA'ing. I basically made my own custom funds with 5-10 stocks, set daily purchases for a specific amount, and didn't think about it. Unfortunately I didn't invest enough each time for the amount to be significant, and I also stopped DCA'ing as soon as I couldn't resist checking, saw that I had reached or was approaching a 10% loss in my overall DCA portfolio, and stopped the auto-buys because I felt like I was starting to burn money, when this was actually the best time to continue investing. I haven't sold anything either though. Overall I'm up 80%, which is only $50k.

I think DCA is the most effective investment strategy. Unfortunately I don't have the discipline to keep it up during a downturn. Next time I try it again with picked stocks will be my 4th time, but for now, I'm doing it with index funds. I'm not going to feel as inclined to pause my purchases during an index fund downturn.

Well, also the market has done almost nothing but go up over the last 10 years, correct?

No, I went under significantly multiple times, including 80%+ losses that eventually reversed on some. Though these dips wouldn't have been as drastic if I had not stopped DCA purchases.

I'm guessing "DCA" means "dollar-cost averaging": https://www.investopedia.com/terms/d/dollarcostaveraging.asp

Yes, and it's silly and doesn't work.

Exactly. I started buying NVDA in 2020 and I still hold almost all of it.

If you do rebalancing then you might as well hold an ETF that does it for you at the lowest cost. If you hold individual equities, keep your winners.

This reminds me of that Mythbusters episode in which they test what is the fastest strategy in a traffic jam or congestion - switching lanes or keeping your lane. IIRC the result was that it's the same, but zigzagging makes you feel it's faster

So invest in s&p 500 and do nothing, right? That's a good strategy for someone young, because it makes sense to be risk tolerant then. As you age you want more and more of your portfolio in bonds/cash, because you want the reduced fluctuation in purchasing power (i.e. comfort) that that brings you. These are the bare fundamentals of portfolio management.

If you are young, you might even want to invest more than 100% of your portfolio into the S&P 500.

Did they include the Monkeys?

"Most successful chimpanzee on Wall Street" - https://www.guinnessworldrecords.com/world-records/most-succ...

This is the same for cryptocurrency. The people who lost accessa and subsequently regained it usually made more than those with ready access who sold earlier or played the market.

> turns out that doing nothing with your stock investments is (statistically) the best strategy

The only thing a small investor can control are fees. Minimising transactions minimises fees.

You also get heavily taxed for the short term gains.

Depending on jurisdiction.

No, you can also control diversification and taxes.

P.S. I'm not a financial advisor. Make your own decisions.

I can think of at least one situation, like expiring options, that you wouldn't want to have happening during your "court frozen" period...

I assume that in-the-money options are automatically exercised at expiration in the dead-man situation?

Yes, they will automatically exercise if your dead, the same way they auto execute when you are alive. I have sold many options over the years, with many of them exercising. If they expire ITM, you don't have a choice (whether dead or alive) past expiration.

Thank you for the confirmation!

How can I use the 'dead man strategy' if I've just started investing and don't own any stocks?

Because if I already need to have some stocks, than this being the #1 strategy feels like those advice that you get on the internet where if you want to be rich just get born into a wealthy family.

Statistically probably true, but not really doable. :/

I feel like you can only do the 'dead man strategy' when your already dead, since before that it's probably better to keep adding money into the portfolio.

Do you have a link to that article?

I wish I had clipped and saved it. I can't even tell you what year it was. Sorry. But what I wrote is all one needs to know about it.

Here's a similar article:

https://www.businessinsider.com/forgetful-investors-performe...

Thanks anyway, this is still interesting.

That's worked for me, for well over 30 years.

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