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Comment by skohan | Hacker News Reader

The problem some have pointed out is that these companies are such a huge portion of the market right now.

The sound advice for the past decades has been, just invest in a low-cost ETF tracking the S&P instead of picking stocks to minimize risk and invest in the market broadly.

So a huge number of people have done that, believing they're diversified, while tech makes up 40% of the index.

Yes you could sell your S&P and find things to invest in least likely to be impacted by a potential bubble, but your average 9-5'er with automated contributions to their 401k is probably not sophisticated enough to do that.

And that's assuming only these companies would be affected if there was a massive draw-down in tech/AI related stocks. We haven't really seen a situation like this before, so it's not easy to predict what effects there might be in the broader economy.

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It’s probably not even a good idea to try and defend against the bubble by switching up your stock allocation. After all the whole reason passive investing works is that active investment rarely beats the market and if you’ve just been in SPY the whole time it’s unlike you have any edge to gain by switching to an active strategy every time fear creeps up

All of that is only true if the market is sufficiently diversified and not manipulated for profit extraction.

Right now it's not clear that is true.

It’s one thing to predict a crash, it’s another to actually make money off of it. If you’ve watched The Big Short even those who predicted the housing crisis correctly nearly lost their shirt before and after it happened because timing the crash is the hard part. There is a whole body of research showing that passive strategies outperform active after crashes

no one that needs to rely on their investments for their actual retirement still has them in equities. theres a reason target date funds automatically adjust asset allocation as it nears its target date. you should be in majority bonds and cds well before your actual retirement date.

That is an overly conservative approach that sacrifices a lot of growth for not much more safety. It also exposes you to inflation risk, which is a significant concern these days.

Most people in actual retirement I know do something like keep ~2 years of cash in short-term treasuries and everything else in equities. That gives you a lot of buffer to time-shift equity drawdown, which is the main risk with equities, while retaining almost all of the benefit of equities. Simple and relatively robust.

i dont think you want to ever be in a position where you arent making money and your net worth could drop 50% in a year. but hey, if you want the risk go for it i guess.

It literally doesn't matter if drops 50% in a year. That is a paper loss and you have years worth of cash you can spend while waiting for it to recover. If you panic-sell at the bottom of that market then that's on you. It isn't necessary in order to pay the bills.

What you propose takes on a huge amount of inflation risk. How are you hedging that risk? A guaranteed yield doesn't mean you aren't getting poorer. Obsessing over one type of risk and ignoring another isn't rational.

Reducing variance of net worth has a very high cost. Over-indexing on that singular property, particularly when most people can afford some variability, is a recipe for relative impoverishment.

> That is a paper loss and you have years worth of cash you can spend while waiting for it to recover.

not if you're 80 dude...

Retiring at 80 requires very different financial planning than retiring at 65.

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