Author Topic: "How to make money in the stock market" - Why MMM is wrong.  (Read 5338 times)

LuigiNMario

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"How to make money in the stock market" - Why MMM is wrong.
« on: March 03, 2020, 11:22:57 AM »
First, I am a 26yr old Canadian mustachian investing for fat-FIRE by the time I'm 35.

Buying the S&P500 is a NOT a proper investment strategy This article is about proper Asset Allocation for a portfolio, as I found this article from MMM lacking in basic principles of proper asset allocation:

https://www.mrmoneymustache.com/2011/05/18/how-to-make-money-in-the-stock-market/

A bit of information on my background. I studied/work in finance and have read pretty much every possible books on investing for individual investors. I also have a Canadian investor perspective, but this article also discusses US investing.

I will assume that readers know/agree with the following, as historical data (not 10 years, 50++ years) has shown that:
1. Diversification across asset classes, geographical location and sectors reduce portfolio volatility and increases return if rebalancing is done on a regular basis (quarterly/yearly).
2. Trying to find the ideal asset allocation is useless as it is never constant. Historical ideal asset allocation is no guarantee it will be the ideal allocation in the future. Therefore equal weight between asset classes should be pretty close to the ideal asset allocation in the long term.
3. Stock picking and market timing should be avoided, as it does not generate any excess return.
4. Costs matter a lot.

For reference, my portfolio strategy is the following:
1. 25% CAN Equity: ZLB
2. 25% US Equity: VUN
3. 12.5% Developed Ex North America: VIU
4. 12.5% Emerging Mrkts: VEE
5. 25% CAN ST Bonds: VSB
I make equal quarterly investments in each ETF, bringing back my AA to its target % each time. I also own a real estate rental property.

As a Canadian investor, there is a significant overexposure to three sectors: financials, energy and basic materials (>70% of the index). Indexing is therefore NOT a good idea in Canada, especially if you are like me and would prefer to eliminate investments in Oil and commodity companies for environmental/sustainable investing reasons. ZLB takes care of this problem by limiting exposure to these companies (smart-beta strategy - oil & commodities are volatile).
By having international exposure to the ROW for 50% of my savings, I diversify the single country risk and overexposure to single sectors, and also diversify across different currencies. The bond portion serves as an emergency fund, potential downpayment, liquidity, etc and also to lower portfolio volatility (see the intelligent asset allocator: a 90/10 PF outperforms a 100% equity PF)

I feel MMM's article is dangerous for new investors, who will assume they are properly diversified by investing 100% of their savings in the US market or their home country index. In some countries this is plain suicidal (in Canada you would have 70% of your savings in a few companies, in very sensitive/cyclical sectors, and there are many countries where overexposure to a few sectors is a problem).

While in the US there is less stock sector risk, there is still single country risk. Why would a US investor not hold developing and emerging markets stocks, simply as an insurance policy against potential problems in their home country? Furthermore, diversification and rebalancing tends to INCREASE returns and lower volatility. There have been many decades where the US market significantly underperformed ROW markets (2000-2010). If you are an early retiree, at the start of a 10yr flat US market and start withdrawing money this would have a significant negative impact.. The same could be said of the Japanese index which never returned from its previous highs with a huge contraction cycle of almost 20 years (1990-2010). Imagine being invested in an asset underperforming for 20years (an investor who would have held only the Nikkei 225 during this period..) would have been devastating to someone who is living off his investments. There have been bubbles and cycles for as long as we can remember (see: memoirs of extraordinary delusions and the madness of crowds). Empires rose and fell for as long as we can remember. Investing in a single asset class of a single country does not make sense, and advising anyone to do so is just foolish.. A proper portfolio consists of bonds and stocks across different geographical locations. For a US investor that might be:
40% Total US Market index
20% Developped markets
20% Emerging markets
20% US Bonds

TLDR: Everyone is jumping on the S&P500 bandwagon and bloggers including MMM recommends it, ignoring proper portfolio asset allocation.

dixonge

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Re: "How to make money in the stock market" - Why MMM is wrong.
« Reply #1 on: March 03, 2020, 11:38:01 AM »

LuigiNMario

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Re: "How to make money in the stock market" - Why MMM is wrong.
« Reply #2 on: March 03, 2020, 11:58:26 AM »
I agree 100% with indexing, but I don't agree with having the S&P500 as your only asset (or its home equivalent depending on your country). As for Mr. Buffet, his instructions are 10% ST gov bonds/90% S&P500.. Not 100% S&P500.

terran

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Re: "How to make money in the stock market" - Why MMM is wrong.
« Reply #3 on: March 03, 2020, 11:59:44 AM »
So what you're really saying that a blog written primarily for a US audience may not be entirely applicable to a Canadian?

Also, like most (US based) bloggers, MMM is recommending a total US market index tracker (like VTI), and only an S&P 500 tracker if that's the closest thing to a total market fund you have in your workplace retirement plan.

LuigiNMario

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Re: "How to make money in the stock market" - Why MMM is wrong.
« Reply #4 on: March 03, 2020, 12:23:24 PM »
I am saying that even for US investors, they should have investments in Non-US Developed markets and emerging markets, as well as bonds, rather than 100% in S&P500 or total US market (not much difference between the two as there is a significant overlap) which he recommends in his article. This is to reduce home bias risk.

The Canadian angle is to point out that this goes double for anyone outside the US.

harvestbook

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Re: "How to make money in the stock market" - Why MMM is wrong.
« Reply #5 on: March 03, 2020, 12:32:23 PM »
You may be right. So what?

FrugalFisherman10

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Re: "How to make money in the stock market" - Why MMM is wrong.
« Reply #6 on: March 03, 2020, 12:50:36 PM »
I can't respond to all your critiques/suggestions but I always thought Jl Collins thinking on International exposure was interesting and well laid out:

"With VTSAX you own ~3600 companies, virtually every publicly traded company in the USA.  More to the point, the largest of these are all international businesses, many of which generate 50% or more of their sales and profits overseas.
 
The top ten holdings of VTSAX, for example, are all international in scope.  Apple, GE, IBM, Exxon/Mobil and the like.

As are the S&P 500 which make up ~75% of VTSAX. This article has a cool graphic of showing the international exposure the S&P 500 companies have. Who would have guessed almost twice as much in Africa as in South America?

Since these companies provide solid access to the growth of world markets, while filtering out most of the additional risk, I don’t feel the need to invest further in international specific funds."
https://jlcollinsnh.com/2012/09/26/stocks-part-xi-international-funds-2/



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habanero

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Re: "How to make money in the stock market" - Why MMM is wrong.
« Reply #7 on: March 03, 2020, 01:14:28 PM »
This article has a lot of interesting thoughts on AA and diversification.

https://docsend.com/view/taygkbn

Its from Artemis Capital - a US volatility hedge fund and it discusses how to preserve intra-generatoinal wealth. Its main point is that investors focus too much on returns and not enough on asset classes with negative correlation to each other and that bonds and real estate are not sufficient diversification to equities. It discusses hedging tail risk and why gold, volatility and commodities should be components in a well-diversified portfolio resilient to shocks that have hit the market in the past.

One can agree or not agree, but it is well researched and I found it quite interesting. The strategies they discuss are to some extent hard to replicate for individuals without serious sums to invest so in that regard of somewhat limited use, but it has a lot of good points and some very interesting graphs.

Accessing the document requires putting in an email address, but you don't have to click on a link in an email or something so anything will do. There are a few other articles on their website, all of them are worth a read in my opinion.
« Last Edit: March 03, 2020, 01:16:44 PM by habaneroNorway »

magnet18

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Re: "How to make money in the stock market" - Why MMM is wrong.
« Reply #8 on: March 03, 2020, 01:59:37 PM »
The referenced image from a couple posts ago


Agreed that single country investing puts you at risk of things like political events, especially if it's a country other than the US with a smaller market. (US makes up 50% of the total global market)

Also to your point of looking at 50++ years of data, being 100% in the S&P has been an extremely good investment.

I would readily say it's better to get beginning investors up to speed on the basics and 100% in the S&P than try to tell them to balance 8 funds every 12 weeks for jargon reasons and have their eyes gloss over and have them give up on the idea entirely

fattest_foot

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Re: "How to make money in the stock market" - Why MMM is wrong.
« Reply #9 on: March 03, 2020, 02:17:38 PM »
This article has a lot of interesting thoughts on AA and diversification.

https://docsend.com/view/taygkbn

Its from Artemis Capital - a US volatility hedge fund and it discusses how to preserve intra-generatoinal wealth. Its main point is that investors focus too much on returns and not enough on asset classes with negative correlation to each other and that bonds and real estate are not sufficient diversification to equities. It discusses hedging tail risk and why gold, volatility and commodities should be components in a well-diversified portfolio resilient to shocks that have hit the market in the past.

One can agree or not agree, but it is well researched and I found it quite interesting. The strategies they discuss are to some extent hard to replicate for individuals without serious sums to invest so in that regard of somewhat limited use, but it has a lot of good points and some very interesting graphs.

Accessing the document requires putting in an email address, but you don't have to click on a link in an email or something so anything will do. There are a few other articles on their website, all of them are worth a read in my opinion.

The reason it doesn't matter too much is there becomes a certain point where the effort to eke out an extra percentage of safety isn't worth it anymore.

If there are any finance or accounting people here who had to physically write out and calculate the portfolio diversification formula, you quickly learn that the point of diminishing returns comes really fast.

Eventually the only thing you're left with is market risk, and by madly diversifying into all sorts of asset classes, you have to make the assumption that there's almost no correlation between any of them. That seems pretty short sighted in my opinion.

This isn't to say it's not valuable. If you enjoy tinkering with your portfolio asset classes and putting in the work to maintaining your optimal allocation, you very potentially will find a higher return. But for most people, that extra effort isn't worth it. You get a "good enough" return by utilizing your desired combination of index funds and/or bonds. As long as you realize the risks inherent in those asset classes, as well as the fact that you're not getting the absolute maximum possible return, you're essentially meeting the intent of MMM and JLCollins.

The tldr is, sure, I could absolutely diversify into large, mid, and small cap stocks in US, international, and developing markets. I can also throw a little into REIT's, actual real estate, commodities, crypto, and fine art. Is any of that effort worth it for the headache of managing it? Probably not. So you take the simplest shortcut that gets the best results.
« Last Edit: March 03, 2020, 02:19:29 PM by fattest_foot »

Buffaloski Boris

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Re: "How to make money in the stock market" - Why MMM is wrong.
« Reply #10 on: March 03, 2020, 02:26:57 PM »
Well first off, welcome to the forums @LuigiNMario ! I hope you decide to stick around.  I think you and I will get along.

As for your post, yeah. Diversification is where it’s at. Over time I’m heading that direction so that I’m fully diversified across assets, countries, and asset classes. This latest market temper tantrum is an opportunity to head further in that direction.

The article from MMM is dated.  And while the “put it all into VTSAX” approach is popular here, a vocal minority take a different perspective. People love to be right and tell other people about it, so we’ll hear more from the folks who took a different route if this market correction is shown to have legs.

nereo

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Re: "How to make money in the stock market" - Why MMM is wrong.
« Reply #11 on: March 03, 2020, 02:30:10 PM »
[snip]

For reference, my portfolio strategy is the following:
1. 25% CAN Equity: ZLB
2. 25% US Equity: VUN
3. 12.5% Developed Ex North America: VIU
4. 12.5% Emerging Mrkts: VEE
5. 25% CAN ST Bonds: VSB
I make equal quarterly investments in each ETF, bringing back my AA to its target % each time. I also own a real estate rental property.
[snip]

That's a cheap click-bait title - particularly for a new forum member with almost no posting history. 
Mostly I'm posting here so that others can see how flawed this in-your-face thread truly is.

Your verification of authority statement aside, the asset allocation you describe above is actually LESS diverse than someone who covers VTSAX or the SP500 index fund.  I'd go into how but three of the previous posters have already hit the highlights.  What matters about an SP500 strategy isn't that they are all companies registered in the US, but that they reflect the global marketplace and US and (to a high degree) the developed world's economy, and represent some $25T in market cap.  Profits are close to equally split between north america and the rest of the world, and employ almost 30 million people worldwide (more than half outside the US).

by investing much more heavily into other, smaller funds (primarily Canadian) you are weighting those much much smaller companies much more heavily.  Even though Hydro-One and Emera are Canadian companies and included in the Canadian index, they do less business inside Canada than many SP500 companies such as Apple and FB.

As another aside - you mentioned that you use frequent periodic contributions to rebalance and keep your AA within your set parameters - there really hasn't been any convincing evidence showing that rebalancing more than annually is benefitial, and it's very likely hurting you to constantly be pushing your investments back in line every paycheck or every month.  It short-circuits the practice of selling off assets that have done well for assets which have lagged (i.e. "sell high, buy low").

I suggest you read several of the very good articles linked in this thread.

Buffaloski Boris

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Re: "How to make money in the stock market" - Why MMM is wrong.
« Reply #12 on: March 03, 2020, 02:33:48 PM »
I can't respond to all your critiques/suggestions but I always thought Jl Collins thinking on International exposure was interesting and well laid out:

"With VTSAX you own ~3600 companies, virtually every publicly traded company in the USA.  More to the point, the largest of these are all international businesses, many of which generate 50% or more of their sales and profits overseas.
 
The top ten holdings of VTSAX, for example, are all international in scope.  Apple, GE, IBM, Exxon/Mobil and the like.

As are the S&P 500 which make up ~75% of VTSAX. This article has a cool graphic of showing the international exposure the S&P 500 companies have. Who would have guessed almost twice as much in Africa as in South America?

Since these companies provide solid access to the growth of world markets, while filtering out most of the additional risk, I don’t feel the need to invest further in international specific funds."
https://jlcollinsnh.com/2012/09/26/stocks-part-xi-international-funds-2/

Interesting you should bring up JL. You should listen to his latest interview on the What’s Up podcast. He seems to be reexamining his views on international.

Full disclosure: I like JL and agree with the bulk of what he says. He’s also greatly funny and seems like a great guy. I disagree with his views on VTSAX and cap weighted, large cap US indexes.

Buffaloski Boris

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Re: "How to make money in the stock market" - Why MMM is wrong.
« Reply #13 on: March 03, 2020, 02:48:34 PM »

I would readily say it's better to get beginning investors up to speed on the basics and 100% in the S&P than try to tell them to balance 8 funds every 12 weeks for jargon reasons and have their eyes gloss over and have them give up on the idea entirely

How much do we really want to dumb this down?  Being invested in 5 or 6 funds with say annual rebalancing isn’t above anyone’s skill level. You’re right, there is a risk that people’s eyes will glaze over. There is also a risk that they’ll bail and stay out once they get their butts handed to them in a stock crash. I think diversification across asset classes and countries is well worth explaining.

Telecaster

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Re: "How to make money in the stock market" - Why MMM is wrong.
« Reply #14 on: March 03, 2020, 03:06:23 PM »
I am saying that even for US investors, they should have investments in Non-US Developed markets and emerging markets, as well as bonds, rather than 100% in S&P500 or total US market (not much difference between the two as there is a significant overlap) which he recommends in his article. This is to reduce home bias risk.

The Canadian angle is to point out that this goes double for anyone outside the US.

You are of course correct, BUT the vast majority of people need a simple strategy.  One of the best assett allocations books I ever read is the Four Pillars of Investing

But boy, is it ever dense.  You can't sit down a beach and read it.  It is a slog.    For most people, an investing strategy that is easy and simple yet not optimized beats the shit out of something complicated.  Human nature, that.  The mistake people make is the say, emerging markets portion of the portfolio under performs for a few years, so they sell it, which is the exact opposite of what you should be doing. 

Here's the other thing though:  The MMM recommendation isn't all that bad.  If you invested in just the index over say, the last 20 or 25 years you did fine.  In fact, if you were investing steadily the whole time, you are probably sitting on a big, fat portfolio right now.   And that period includes two stock market crashes. 

PDXTabs

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Re: "How to make money in the stock market" - Why MMM is wrong.
« Reply #15 on: March 03, 2020, 03:56:26 PM »
So is your next post about how Warren Buffett is wrong too?

https://www.businessinsider.com/warren-buffett-recommends-index-funds-for-most-investors?r=MX&IR=T

I'll say it: Warren Buffet is wrong. Go look at Vanguard target date funds. I agree with Vanguard on this one.

American GenX

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Re: "How to make money in the stock market" - Why MMM is wrong.
« Reply #16 on: March 03, 2020, 04:03:07 PM »

I don't use MMM for investing advice, so who cares.  Reference the links to learn more about investing, then make the best decision for yourself.

LuigiNMario

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Re: "How to make money in the stock market" - Why MMM is wrong.
« Reply #17 on: March 03, 2020, 08:02:15 PM »
I can't respond to all your critiques/suggestions but I always thought Jl Collins thinking on International exposure was interesting and well laid out:

"With VTSAX you own ~3600 companies, virtually every publicly traded company in the USA.  More to the point, the largest of these are all international businesses, many of which generate 50% or more of their sales and profits overseas.
 
The top ten holdings of VTSAX, for example, are all international in scope.  Apple, GE, IBM, Exxon/Mobil and the like.

As are the S&P 500 which make up ~75% of VTSAX. This article has a cool graphic of showing the international exposure the S&P 500 companies have. Who would have guessed almost twice as much in Africa as in South America?

Since these companies provide solid access to the growth of world markets, while filtering out most of the additional risk, I don’t feel the need to invest further in international specific funds."
https://jlcollinsnh.com/2012/09/26/stocks-part-xi-international-funds-2/



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Valid points and I understand the idea that the US has many large multinationals, but so do many other countries. The US only represents 40% of the total market cap in the world, it is only logical to seek exposure to the other 60% AND to other asset classes. I get that it's a "good enough", but with our recency bias and the US markets that have been on fire for the past 10 years, you won't see many complainypants now, but once this shifts (and it will inevitably shift), it will get interesting - blame a poor asset allocation policy.

This article has a lot of interesting thoughts on AA and diversification.

https://docsend.com/view/taygkbn

Its from Artemis Capital - a US volatility hedge fund and it discusses how to preserve intra-generatoinal wealth. Its main point is that investors focus too much on returns and not enough on asset classes with negative correlation to each other and that bonds and real estate are not sufficient diversification to equities. It discusses hedging tail risk and why gold, volatility and commodities should be components in a well-diversified portfolio resilient to shocks that have hit the market in the past.

One can agree or not agree, but it is well researched and I found it quite interesting. The strategies they discuss are to some extent hard to replicate for individuals without serious sums to invest so in that regard of somewhat limited use, but it has a lot of good points and some very interesting graphs.

Accessing the document requires putting in an email address, but you don't have to click on a link in an email or something so anything will do. There are a few other articles on their website, all of them are worth a read in my opinion.

Thanks for the reference it is a very interesting read. Their research is thorough and the time period used is long enough to provide valid reference. The strategy described in their paper can be done by an individual investor, but one would have to be very sophisticated to get into derivative products.

[snip]

For reference, my portfolio strategy is the following:
1. 25% CAN Equity: ZLB
2. 25% US Equity: VUN
3. 12.5% Developed Ex North America: VIU
4. 12.5% Emerging Mrkts: VEE
5. 25% CAN ST Bonds: VSB
I make equal quarterly investments in each ETF, bringing back my AA to its target % each time. I also own a real estate rental property.
[snip]

That's a cheap click-bait title - particularly for a new forum member with almost no posting history. 
Mostly I'm posting here so that others can see how flawed this in-your-face thread truly is.

Your verification of authority statement aside, the asset allocation you describe above is actually LESS diverse than someone who covers VTSAX or the SP500 index fund.  I'd go into how but three of the previous posters have already hit the highlights.  What matters about an SP500 strategy isn't that they are all companies registered in the US, but that they reflect the global marketplace and US and (to a high degree) the developed world's economy, and represent some $25T in market cap.  Profits are close to equally split between north america and the rest of the world, and employ almost 30 million people worldwide (more than half outside the US).

by investing much more heavily into other, smaller funds (primarily Canadian) you are weighting those much much smaller companies much more heavily.  Even though Hydro-One and Emera are Canadian companies and included in the Canadian index, they do less business inside Canada than many SP500 companies such as Apple and FB.

As another aside - you mentioned that you use frequent periodic contributions to rebalance and keep your AA within your set parameters - there really hasn't been any convincing evidence showing that rebalancing more than annually is benefitial, and it's very likely hurting you to constantly be pushing your investments back in line every paycheck or every month.  It short-circuits the practice of selling off assets that have done well for assets which have lagged (i.e. "sell high, buy low").

I suggest you read several of the very good articles linked in this thread.


I already addressed the ''US companies generate a significant portion of their revenue internationally'' above. Regarding your points on my asset allocation being less diversified than the US total stock market.. I do have the US total market index in my PF plus canadian companies since I live here, and ROW companies.

Actually, William Bernstein in his book "The Intelligent Asset Allocator recommends rebalancing quarterly, and many other research points this way as well. Rebalancing annually may be fine as well, but I find a yearly basis is a long time to wait to invest in the market.

I am saying that even for US investors, they should have investments in Non-US Developed markets and emerging markets, as well as bonds, rather than 100% in S&P500 or total US market (not much difference between the two as there is a significant overlap) which he recommends in his article. This is to reduce home bias risk.

The Canadian angle is to point out that this goes double for anyone outside the US.

You are of course correct, BUT the vast majority of people need a simple strategy.  One of the best assett allocations books I ever read is the Four Pillars of Investing

But boy, is it ever dense.  You can't sit down a beach and read it.  It is a slog.    For most people, an investing strategy that is easy and simple yet not optimized beats the shit out of something complicated.  Human nature, that.  The mistake people make is the say, emerging markets portion of the portfolio under performs for a few years, so they sell it, which is the exact opposite of what you should be doing. 

Here's the other thing though:  The MMM recommendation isn't all that bad.  If you invested in just the index over say, the last 20 or 25 years you did fine.  In fact, if you were investing steadily the whole time, you are probably sitting on a big, fat portfolio right now.   And that period includes two stock market crashes. 

Honestly, if an individual investor is unable to manage at least two ETFs: a Total US stock market index and a Total Bond Index, I don't think they should be investing in financial markets at all.. For a US investor it can be a very dead simple portfolio of three ETFs: a bond ETF, a US market ETF and a ROW ETF

I have to agree with Buffaloski Boris on this:

I would readily say it's better to get beginning investors up to speed on the basics and 100% in the S&P than try to tell them to balance 8 funds every 12 weeks for jargon reasons and have their eyes gloss over and have them give up on the idea entirely

How much do we really want to dumb this down?  Being invested in 5 or 6 funds with say annual rebalancing isn’t above anyone’s skill level. You’re right, there is a risk that people’s eyes will glaze over. There is also a risk that they’ll bail and stay out once they get their butts handed to them in a stock crash. I think diversification across asset classes and countries is well worth explaining.

FrugalFisherman10

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Re: "How to make money in the stock market" - Why MMM is wrong.
« Reply #18 on: March 03, 2020, 08:37:51 PM »
Interesting you should bring up JL. You should listen to his latest interview on the What’s Up podcast. He seems to be reexamining his views on international.

Full disclosure: I like JL and agree with the bulk of what he says. He’s also greatly funny and seems like a great guy. I disagree with his views on VTSAX and cap weighted, large cap US indexes.
Sweet I'll check it out. I agree I think he might be starting to change his opinion on it, as I think he states in one of the addendums at the bottom of that article I referenced.

I often think I should maybe add some international exposure myself, broadly speaking.  I'm then reminded of the saying:
"The market can stay irrational longer than you can stay solvent."
I'm sure I butchered that but IYKYK

And I would say that same thing to the OP ...just because there's been a decade long "tide" of strong US market returns doesn't mean a changing tide to better ex-US returns is inevitable.
So just a caution to watch your thinking on that one. There's just no basis for it. Things don't work like that



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LuigiNMario

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Re: "How to make money in the stock market" - Why MMM is wrong.
« Reply #19 on: March 03, 2020, 08:50:45 PM »
@FrugalFisherman10 you're right, just because the US market has experienced a 10-yr run does not mean it could not go on for another 10 or even 20 years.

At some point, there will be a downturn, and US equity will underperform other markets for some time. It happened many times in the past, so if history is any guide we'll see it happen again. Unless you want to say the four most dangerous words in investment: this time it's different ;)

MustacheAndaHalf

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Re: "How to make money in the stock market" - Why MMM is wrong.
« Reply #20 on: March 03, 2020, 09:31:07 PM »
I agree 100% with indexing, but I don't agree with having the S&P500 as your only asset (or its home equivalent depending on your country). As for Mr. Buffet, his instructions are 10% ST gov bonds/90% S&P500.. Not 100% S&P500.
Was that a joke?  You're going to claim 90% S&P 500 and 100% S&P 500 are significantly different?

MustacheAndaHalf

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Re: "How to make money in the stock market" - Why MMM is wrong.
« Reply #21 on: March 03, 2020, 09:46:24 PM »
First, I am a 26yr old Canadian ...  I studied/work in finance and have read pretty much every possible books on investing for individual investors ...
You "work in finance" at age 26.  To clarify, you are not an authority on finance, correct?

We mostly agree that diversification is important.  Where it is least important is in the United States.  If you market cap weight the entire world, the U.S. holds more than half the world's market cap.  You can browse any "Total World" or "All Countries Index", and U.S. alone will comprise over 50% of the index / fund.

mies

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Re: "How to make money in the stock market" - Why MMM is wrong.
« Reply #22 on: March 04, 2020, 03:43:03 AM »
I would readily say it's better to get beginning investors up to speed on the basics and 100% in the S&P than try to tell them to balance 8 funds every 12 weeks for jargon reasons and have their eyes gloss over and have them give up on the idea entirely

This is spot on. Investing really can be as simple as holding an S&P 500 fund. It’s human nature to think the more complicated product or strategy is the superior one. It’s been my experience that the simpler solution is often the better one since it is easier to understand, implement, and track.

I think having a complicated investment strategy gives people a feeling of control since you have the investment equivalent of knobs and switches to fiddle with when the markets tank.

Holding just S&P 500 funds may not be a perfect investment, but it is good enough to get started.

mrmoonymartian

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Re: "How to make money in the stock market" - Why MMM is wrong.
« Reply #23 on: March 04, 2020, 03:53:15 AM »
As another aside - you mentioned that you use frequent periodic contributions to rebalance and keep your AA within your set parameters - there really hasn't been any convincing evidence showing that rebalancing more than annually is benefitial, and it's very likely hurting you to constantly be pushing your investments back in line every paycheck or every month.  It short-circuits the practice of selling off assets that have done well for assets which have lagged (i.e. "sell high, buy low").
Periodic rebalancing or redirecting distributions to underweight assets give about the same pre-tax result in Figure 8 of the below paper. You could view the distributions as 'selling' if you like. I don't see how adding wage income to the buy-low side of the equation is likely to be harmful. Would you rather they buy the other assets high or hold it as cash for up to a year?

https://www.vanguard.com/pdf/ISGPORE.pdf
« Last Edit: March 04, 2020, 03:54:55 AM by mrmoonymartian »

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Re: "How to make money in the stock market" - Why MMM is wrong.
« Reply #24 on: March 04, 2020, 05:04:31 AM »
OK, I'm going to be a condescending Gen-X-er here. I haven't had my coffee, and my patience for the millionth iteration of the same argument is low.

OP, keep reading. Your thesis statement is nothing new. There have been many, many discussions and arguments around how much international exposure is "correct" above and beyond what's baked into the US stock market indices.

Read more, post less.

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Re: "How to make money in the stock market" - Why MMM is wrong.
« Reply #25 on: March 04, 2020, 05:33:02 AM »
OK, I'm going to be a condescending Gen-X-er here. I haven't had my coffee, and my patience for the millionth iteration of the same argument is low.

OP, keep reading. Your thesis statement is nothing new. There have been many, many discussions and arguments around how much international exposure is "correct" above and beyond what's baked into the US stock market indices.

Read more, post less.
+1.
Similar topics have been discussed extensively.

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Re: "How to make money in the stock market" - Why MMM is wrong.
« Reply #26 on: March 04, 2020, 05:45:00 AM »
A proper portfolio consists of bonds and stocks across different geographical locations. For a US investor that might be:
40% Total US Market index
20% Developped markets
20% Emerging markets
20% US Bonds

I pretty much agree, and here's how to do it in a very simple, cheap, no fuss way:

Vanguard LifeStrategy Growth Fund (VASGX)
https://investor.vanguard.com/mutual-funds/profile/VASGX

Vanguard Total Stock Market Index Fund Investor Shares 48.30%
Vanguard Total International Stock Index Fund Investor Shares 31.40%
Vanguard Total Bond Market II Index Fund Investor Shares 14.20%
Vanguard Total International Bond Index Fund Investor Shares 6.10%

For a US based investor there is no need to work any harder.

magnet18

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Re: "How to make money in the stock market" - Why MMM is wrong.
« Reply #27 on: March 04, 2020, 07:45:46 AM »

I would readily say it's better to get beginning investors up to speed on the basics and 100% in the S&P than try to tell them to balance 8 funds every 12 weeks for jargon reasons and have their eyes gloss over and have them give up on the idea entirely

How much do we really want to dumb this down?  Being invested in 5 or 6 funds with say annual rebalancing isn’t above anyone’s skill level. You’re right, there is a risk that people’s eyes will glaze over. There is also a risk that they’ll bail and stay out once they get their butts handed to them in a stock crash. I think diversification across asset classes and countries is well worth explaining.

Diversification is certainly worth explaining,  but when you first start looking at investing, there is an absolute ocean of different opinions on what to do, and saying "Just get a broad based low cost index fund and. walk. away." is like a knife that cuts through the crapstorm that is investment advice.

You can give that advice to anybody, including stressed parents with no free time and investments spread across 6 different accounts, as logging in to each and just switching to the broadest index in each is easily graspable.  THEN they can worry about the (arguably diminishing) increased returns of increased diversification

If you tell those same people, "Stock investing is SUPER simple, and all the other guys are wrong, this is the REAL best way to do it, just make a sure you get 40% this and 20% this, and 15% this, and 5% this and 5% this and throw in about 10% this for good measure, and THEN you'll get the BEST returns.  So all you need to do is spend a couple hours making a spreadsheet of your balances, and all the available options from your 6 different investment accounts, and their expense ratios, and decide on your rebalancing schedule, and write down your strategy so you don't forget it, and..."

They've already completely tuned you out because you sound like all the other talking heads that know the "Best" way to invest, and they'll just stick with whatever high fee underperforming actively managed fund that their grandmas recommend financial advisor stuck them in, because she managed to retire so it's obviously good, and their middle child is currently throwing diapers at their head and they don't have time for this because they obviously will never be able to understand it themselves anyway



Investment advice looks like a complete labyrinth from the outside, and WE all know about this lovely little haven in the middle called index investing, where we can peacefully quabble about an extra couple percent of diversification for that fraction of a percent extra gain, but MOST people are still on the outside of the labyrinth, perhaps even being blocked from entering by an advisor, and the very simple "100% INDEX" strategy is like extending a bridge above the maze that they can take as a shortcut here.



So yea, I think it's worth dumbing it down, because that 20% effort gets people moving in the right direction for 80% of the benefit, and they can split hairs with optimization once they get their feet under them

celerystalks

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Re: "How to make money in the stock market" - Why MMM is wrong.
« Reply #28 on: March 04, 2020, 08:17:58 AM »

A bit of information on my background. I studied/work in finance and have read pretty much every possible books on investing for individual investors.

The fact that you stated this alone makes me less inclined to find you credible. People who work “in finance” often have very mediocre personal investment records. And you are likely over confident in your abilities — no one has read “pretty much every possible books on investing for individual investors.” Nor should they.

If you would be so kind as to look at your own personal brokerage account records in September of 2007.  Please tell exactly how much you had invested.  Feel free to explain your asset allocation at that time.  Then please let us know how much you personally had invested in March of 2009. Please also let us know how what you AA was in March of 2009 and how much more you invested over the months from late 2007 March 2009.  The amount of assets you personally had invested during this time and how you handled your emotions is better evidence of your skill as an investor than how skillfully you argue for or against an S&P 500 only strategy, and whether it is ideal to add international diversification. 

If the answer to these questions show that you had not much personally invested, or that you managed it poorly, I think the bigger concern is how you will handle the next recession, not whether you are correct that the ideal portfolio includes 12.5% EM.

« Last Edit: March 04, 2020, 11:42:13 AM by celerystalks »

jinga nation

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Re: "How to make money in the stock market" - Why MMM is wrong.
« Reply #29 on: March 04, 2020, 09:11:51 AM »
First, I am a 26yr old Canadian ...  I studied/work in finance and have read pretty much every possible books on investing for individual investors ...

Which ones from this list? https://www.bogleheads.org/wiki/Books:_recommendations_and_reviews

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Re: "How to make money in the stock market" - Why MMM is wrong.
« Reply #31 on: March 04, 2020, 09:28:03 AM »
So yea, I think it's worth dumbing it down, because that 20% effort gets people moving in the right direction for 80% of the benefit, and they can split hairs with optimization once they get their feet under them

It's actually like 98% of the benefit, maybe even more depending on how you look at it.   Over about the last 50 years, 100% US equities beat an 80/20 diversified portfolio, but with more volatility.   So, a blended port makes the drops were less gut wrenching, but you wind up with a smaller final portfolio value.  Which of those is more valuable to you?  Up do the individual.

So yeah, if you are going to write a one page blog post on how to get started investing, fire and forget on VTI is pretty good advice. 

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Re: "How to make money in the stock market" - Why MMM is wrong.
« Reply #32 on: March 04, 2020, 09:29:46 AM »

I pretty much agree, and here's how to do it in a very simple, cheap, no fuss way:

Vanguard LifeStrategy Growth Fund (VASGX)
https://investor.vanguard.com/mutual-funds/profile/VASGX

Vanguard Total Stock Market Index Fund Investor Shares 48.30%
Vanguard Total International Stock Index Fund Investor Shares 31.40%
Vanguard Total Bond Market II Index Fund Investor Shares 14.20%
Vanguard Total International Bond Index Fund Investor Shares 6.10%

For a US based investor there is no need to work any harder.

That's what I recommended for my MIL.  Plenty of diversification, and she doesn't have to do anything or make any decisions. 

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Re: "How to make money in the stock market" - Why MMM is wrong.
« Reply #33 on: March 04, 2020, 09:31:33 AM »
The fact that you stated this alone makes me less inclined to find you credible. People who work “in finance” often have very mediocre personal investment records. And you are likely over confident in your abilities — no one has read “pretty much every possible books on investing for individual investors.” Nor should they.

I just saw it as a hilarious appeal to authority backed up with the hubris of youth. The OP is twenty-six years old and works in finance!  I bet they're almost at the associate level by now. We should all take this person's wisdom to heart, because clearly they're an expert at this point.

Brother Esau

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Re: "How to make money in the stock market" - Why MMM is wrong.
« Reply #34 on: March 04, 2020, 10:32:49 AM »
The fact that you stated this alone makes me less inclined to find you credible. People who work “in finance” often have very mediocre personal investment records. And you are likely over confident in your abilities — no one has read “pretty much every possible books on investing for individual investors.” Nor should they.

I just saw it as a hilarious appeal to authority backed up with the hubris of youth. The OP is twenty-six years old and works in finance!  I bet they're almost at the associate level by now. We should all take this person's wisdom to heart, because clearly they're an expert at this point.

An expert for sure. The OP has read every possible book out there for individual investors. And all by the age of 26! That's MENSA territory right there.

habanero

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Re: "How to make money in the stock market" - Why MMM is wrong.
« Reply #35 on: March 04, 2020, 11:09:08 AM »
Well, depsite OP being only 26 years old the suggested, tad Canada-heavy AA makes a lot more sense than what a lot of people with a long career in finance has. Experience does not always make wiser when it comes to managing personal finances.

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Re: "How to make money in the stock market" - Why MMM is wrong.
« Reply #36 on: March 04, 2020, 11:29:50 AM »
Buying the S&P500 is a NOT a proper investment strategy

I don't know what makes an investment strategy "proper" but you can do a whole lot worse than stuffing everything in VFIAX. Sure, a portfolio with more asset classes and international exposure may very well outperform (my portfolio has 25% international stocks and 15% bonds). But 100% S&P 500 is still a solid choice.

celerystalks

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Re: "How to make money in the stock market" - Why MMM is wrong.
« Reply #37 on: March 04, 2020, 11:44:47 AM »
Well, depsite OP being only 26 years old the suggested, tad Canada-heavy AA makes a lot more sense than what a lot of people with a long career in finance has. Experience does not always make wiser when it comes to managing personal finances.

Neither does youth. And some things can only be learned through experience...

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Re: "How to make money in the stock market" - Why MMM is wrong.
« Reply #38 on: March 04, 2020, 12:09:17 PM »
Buying the S&P500 is a NOT a proper investment strategy

I don't know what makes an investment strategy "proper" but you can do a whole lot worse than stuffing everything in VFIAX. Sure, a portfolio with more asset classes and international exposure may very well outperform (my portfolio has 25% international stocks and 15% bonds). But 100% S&P 500 is still a solid choice.

Yes, as much as I would never suggest 100% SP500 and I would not personally call it a "solid choice" it would still put you head of half of the population.

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Re: "How to make money in the stock market" - Why MMM is wrong.
« Reply #39 on: March 04, 2020, 12:49:23 PM »

A bit of information on my background. I studied/work in finance and have read pretty much every possible books on investing for individual investors.

If you would be so kind as to look at your own personal brokerage account records in September of 2007.  Please tell exactly how much you had invested.  Feel free to explain your asset allocation at that time.  Then please let us know how much you personally had invested in March of 2009. Please also let us know how what you AA was in March of 2009 and how much more you invested over the months from late 2007 March 2009.  The amount of assets you personally had invested during this time and how you handled your emotions is better evidence of your skill as an investor than how skillfully you argue for or against an S&P 500 only strategy, and whether it is ideal to add international diversification. 

If the answer to these questions show that you had not much personally invested, or that you managed it poorly, I think the bigger concern is how you will handle the next recession, not whether you are correct that the ideal portfolio includes 12.5% EM.

You're going to have to ask his parents because he was only 14 in 2007 and 16 in 2009. He couldn't have his own brokerage account, and it sure as hell wasn't full of money!!

LuigiNMario

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Re: "How to make money in the stock market" - Why MMM is wrong.
« Reply #40 on: March 04, 2020, 12:58:27 PM »
@jinga nation
Out of the list you sent, I did read these ones:

The Little Book of Common Sense Investing
All About Asset Allocation
The Only Investment Guide You'll Ever Need
Common Stocks and Uncommon Profits      
The Intelligent Investor
One Up on Wall Street      
A Random Walk Down Wall Street
Irrational Exuberance
Stocks for the Long Run
The Four Pillars of Investing
The Intelligent Asset Allocator   
The Bond Bible      
Protecting Your Wealth in Good Times and Bad
The ETF Book
All About Index Funds
The Permanent Portfolio
The Only Guide to a Winning Bond Strategy You'll Ever Need
Unconventional Success: A Fundamental Approach to Personal Investment
Rational Investing in Irrational Times
Common Sense Investing: Ten Simple Rules to Finance Your Dreams
The Little Book of Safe Money: How to Conquer Killer Markets, Con Artists, and Yourself
Predictably Irrational: The Hidden Forces That Shape Our Decisions - Dan Ariely      
Against the Gods: The Remarkable Story of Risk   
The Black Swan
Fooled By Randomness

I also read:
Memoirs of extraordinary delusions and the madness of crowds
The Bond Book
Value Averaging
The little book of big dividends
The little book of behavioral finance
A practioner's guide to asset allocation
Global investing
The CFA curriculum for levels 1, 2 and 3 (about 1500 pages/level of fun (not) portfolio investment information and theories).
As well as several real estate investing books and other classics like the magic of thinking big, rich dad poor dad, getting things done, deep work, etc

One of my favorites is Memoirs of extraordinary delusions and the madness of crowds, Taleb's books, as well as William Bernstein's books. :)

@celerystalks

The goal was not to come out as condescending, or to appear as a figure of authority, just so that people know where I come from/background.. I may have missed the mark there :') I was 15 I think when the last crisis happened, so the meager $5K salary/yr did not leave anything to invest after booze expenses..

The problem in recommending 100% US total stock market index ETF to a novice investor, without clearly knowing if that person will not mind a 50% hit to their net worth at some point.. Anytime someone asks if 100% equity is a fine strategy, I counter with this question. I have yet to see someone say "no problem I won't mind".

Having some bonds provides the opportunity to rebalance during a market downturn, and provides mental stability. As well, if you have a risky job and 100% of your savings are in equity, losing your job in a market downturn and having to draw on depleted equity savings may crush you financially and mentally, leaving you with fear of ever investing again in the market. Many of my bosses were like this, with all their savings in Deposit Certificates yielding 1% as they had been almost whiped out in the last market downturn.

I think the best advice to give to a novice investor is to stick with a mix of stocks/bonds they will feel comfortable holding for a very long time no matter what happens in the market. I really doubt many people can go 100% equity (I wouldn't), especially a novice.

nereo

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Re: "How to make money in the stock market" - Why MMM is wrong.
« Reply #41 on: March 04, 2020, 01:01:34 PM »

The goal was not to come out as condescending, or to appear as a figure of authority, just so that people know where I come from/background.. I may have missed the mark there :') I was 15 I think when the last crisis happened, so the meager $5K salary/yr did not leave anything to invest after booze expenses..


...you were spending $5k on booze when you were 15 years old?!!?
 
Sorry, that's just so antithetical to this forum it just jumped out.

LuigiNMario

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Re: "How to make money in the stock market" - Why MMM is wrong.
« Reply #42 on: March 04, 2020, 01:03:22 PM »
@catorbe

hahah, my dad did quite well in 2007-09 (he's been an old school kinda guy at 60/40 stocks/bonds), so he sold a lot of bonds to buy equities at discount.. don't think I've seen him ever this happy lol

LuigiNMario

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Re: "How to make money in the stock market" - Why MMM is wrong.
« Reply #43 on: March 04, 2020, 01:07:23 PM »
@nereo

Yeah that's probably right, life was easy at that time. Add some clothes/restaurants/videogames/bicycle R&M/other general going out and camping trips here and there and that's where the 5K$ was going.

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Re: "How to make money in the stock market" - Why MMM is wrong.
« Reply #44 on: March 04, 2020, 01:49:38 PM »
Buying the S&P500 is a NOT a proper investment strategy

I don't know what makes an investment strategy "proper" but you can do a whole lot worse than stuffing everything in VFIAX. Sure, a portfolio with more asset classes and international exposure may very well outperform (my portfolio has 25% international stocks and 15% bonds). But 100% S&P 500 is still a solid choice.

Yes, as much as I would never suggest 100% SP500 and I would not personally call it a "solid choice" it would still put you head of half of the population.

Good gracious, if we’re setting the bar at “most Americans”, then we could safely skip investing in bonds, stocks, or anything else. Just having an emergency fund of 3 months expenses would be a vast improvement.

Buffaloski Boris

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Re: "How to make money in the stock market" - Why MMM is wrong.
« Reply #45 on: March 04, 2020, 01:59:43 PM »

I would readily say it's better to get beginning investors up to speed on the basics and 100% in the S&P than try to tell them to balance 8 funds every 12 weeks for jargon reasons and have their eyes gloss over and have them give up on the idea entirely

How much do we really want to dumb this down?  Being invested in 5 or 6 funds with say annual rebalancing isn’t above anyone’s skill level. You’re right, there is a risk that people’s eyes will glaze over. There is also a risk that they’ll bail and stay out once they get their butts handed to them in a stock crash. I think diversification across asset classes and countries is well worth explaining.

Diversification is certainly worth explaining,  but when you first start looking at investing, there is an absolute ocean of different opinions on what to do, and saying "Just get a broad based low cost index fund and. walk. away." is like a knife that cuts through the crapstorm that is investment advice.

You can give that advice to anybody, including stressed parents with no free time and investments spread across 6 different accounts, as logging in to each and just switching to the broadest index in each is easily graspable.  THEN they can worry about the (arguably diminishing) increased returns of increased diversification

If you tell those same people, "Stock investing is SUPER simple, and all the other guys are wrong, this is the REAL best way to do it, just make a sure you get 40% this and 20% this, and 15% this, and 5% this and 5% this and throw in about 10% this for good measure, and THEN you'll get the BEST returns.  So all you need to do is spend a couple hours making a spreadsheet of your balances, and all the available options from your 6 different investment accounts, and their expense ratios, and decide on your rebalancing schedule, and write down your strategy so you don't forget it, and..."

They've already completely tuned you out because you sound like all the other talking heads that know the "Best" way to invest, and they'll just stick with whatever high fee underperforming actively managed fund that their grandmas recommend financial advisor stuck them in, because she managed to retire so it's obviously good, and their middle child is currently throwing diapers at their head and they don't have time for this because they obviously will never be able to understand it themselves anyway



Investment advice looks like a complete labyrinth from the outside, and WE all know about this lovely little haven in the middle called index investing, where we can peacefully quabble about an extra couple percent of diversification for that fraction of a percent extra gain, but MOST people are still on the outside of the labyrinth, perhaps even being blocked from entering by an advisor, and the very simple "100% INDEX" strategy is like extending a bridge above the maze that they can take as a shortcut here.



So yea, I think it's worth dumbing it down, because that 20% effort gets people moving in the right direction for 80% of the benefit, and they can split hairs with optimization once they get their feet under them

I run into the “eyes glazed over” all the time. I joke that I have basically 30 seconds to explain financial concepts. I’m all about dumbing down explanations. I’m NOT about dumbing down to markedly less optimal strategies. Of course understanding that getting the last .0001% of efficiency is a fools game.

Sounds to me like our communications about personal finance is what sucks. I think I can explain a diversification and investment strategy in one or two paragraphs. Sounds like a challenge.

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Re: "How to make money in the stock market" - Why MMM is wrong.
« Reply #46 on: March 04, 2020, 02:05:29 PM »

The goal was not to come out as condescending, or to appear as a figure of authority, just so that people know where I come from/background.. I may have missed the mark there :') I was 15 I think when the last crisis happened, so the meager $5K salary/yr did not leave anything to invest after booze expenses..


...you were spending $5k on booze when you were 15 years old?!!?
 
Sorry, that's just so antithetical to this forum it just jumped out.

I laughed. 

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Re: "How to make money in the stock market" - Why MMM is wrong.
« Reply #47 on: March 04, 2020, 02:07:22 PM »

I would readily say it's better to get beginning investors up to speed on the basics and 100% in the S&P than try to tell them to balance 8 funds every 12 weeks for jargon reasons and have their eyes gloss over and have them give up on the idea entirely

How much do we really want to dumb this down?  Being invested in 5 or 6 funds with say annual rebalancing isn’t above anyone’s skill level. You’re right, there is a risk that people’s eyes will glaze over. There is also a risk that they’ll bail and stay out once they get their butts handed to them in a stock crash. I think diversification across asset classes and countries is well worth explaining.

Diversification is certainly worth explaining,  but when you first start looking at investing, there is an absolute ocean of different opinions on what to do, and saying "Just get a broad based low cost index fund and. walk. away." is like a knife that cuts through the crapstorm that is investment advice.

You can give that advice to anybody, including stressed parents with no free time and investments spread across 6 different accounts, as logging in to each and just switching to the broadest index in each is easily graspable.  THEN they can worry about the (arguably diminishing) increased returns of increased diversification

If you tell those same people, "Stock investing is SUPER simple, and all the other guys are wrong, this is the REAL best way to do it, just make a sure you get 40% this and 20% this, and 15% this, and 5% this and 5% this and throw in about 10% this for good measure, and THEN you'll get the BEST returns.  So all you need to do is spend a couple hours making a spreadsheet of your balances, and all the available options from your 6 different investment accounts, and their expense ratios, and decide on your rebalancing schedule, and write down your strategy so you don't forget it, and..."

They've already completely tuned you out because you sound like all the other talking heads that know the "Best" way to invest, and they'll just stick with whatever high fee underperforming actively managed fund that their grandmas recommend financial advisor stuck them in, because she managed to retire so it's obviously good, and their middle child is currently throwing diapers at their head and they don't have time for this because they obviously will never be able to understand it themselves anyway



Investment advice looks like a complete labyrinth from the outside, and WE all know about this lovely little haven in the middle called index investing, where we can peacefully quabble about an extra couple percent of diversification for that fraction of a percent extra gain, but MOST people are still on the outside of the labyrinth, perhaps even being blocked from entering by an advisor, and the very simple "100% INDEX" strategy is like extending a bridge above the maze that they can take as a shortcut here.



So yea, I think it's worth dumbing it down, because that 20% effort gets people moving in the right direction for 80% of the benefit, and they can split hairs with optimization once they get their feet under them

I run into the “eyes glazed over” all the time. I joke that I have basically 30 seconds to explain financial concepts. I’m all about dumbing down explanations. I’m NOT about dumbing down to markedly less optimal strategies. Of course understanding that getting the last .0001% of efficiency is a fools game.

Sounds to me like our communications about personal finance is what sucks. I think I can explain a diversification and investment strategy in one or two paragraphs. Sounds like a challenge.

Consider yourself challenged. Please do.

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Re: "How to make money in the stock market" - Why MMM is wrong.
« Reply #48 on: March 04, 2020, 02:43:36 PM »
I'll take a crack:

Your investment portfolio is like a sailboat.  Stocks are like your sails.  That's the power that gets you were you want to be quickly.  More sail area, more power.  But in choppy seas you'll wind up vomiting over the rails, so you need some ballast.  Bonds are your ballast.   Add some ballast and the ride gets smoother.  Add a lot of ballast and the ride gets smoother still, but slower. 

Just like we don't know what the weather will be a month from now, no one actually knows what the optimum sail area/ballast ratio is for the future, but we can make some pretty good guesses based on the past.  And it also depends on what kind of sailor you are.  If you are going be vomiting over the rails at the first whitecap, you should have extra ballast.  But otherwise, a younger investor with a robust gut will be just fine with say, an 95/5% stocks/bonds ratio.  As you get closer to retirement, maybe 80/20.   Again, if you are vomiting, add more ballast.   But keep in mind, it doesn't stay rough forever.  It never does.  So don't panic and everything will be fine.  If you feel like vomiting, just look at the horizon.  Or fix yourself a boat drink or something. 

But how to decide how much ballast?  The oddly specific percentages should give you a clue.   Why 80/20 instead of 83/17?  And why exactly 12.5% in EM instead of say, 14.7%?  That's because no one actually knows what the proper ratio should be in the future so they are using made up, round numbers.  But history has shown if you invest mostly in stocks with the rest in bonds, everything works out fine, and the exact percentages barely matter at all.   If they can make up numbers, you can do.  The general percentage is the important thing. 

One thing you don't want to do is have a lot of course corrections.  By the time you fiddle around trying to catch the last gust of wind, the wind direction has changed.  So set it and forget it. 

In short:

1. Invest mostly in stocks with some bonds, based on your comfort level
2. Don't panic.  No matter how bad it seems like at the moment, everything will be fine. 
3. Don't fiddle with things.  It doesn't help and it is waste of time.

Wolfpack Mustachian

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Re: "How to make money in the stock market" - Why MMM is wrong.
« Reply #49 on: March 04, 2020, 02:59:12 PM »
I'll take a crack:

Your investment portfolio is like a sailboat.  Stocks are like your sails.  That's the power that gets you were you want to be quickly.  More sail area, more power.  But in choppy seas you'll wind up vomiting over the rails, so you need some ballast.  Bonds are your ballast.   Add some ballast and the ride gets smoother.  Add a lot of ballast and the ride gets smoother still, but slower. 

Just like we don't know what the weather will be a month from now, no one actually knows what the optimum sail area/ballast ratio is for the future, but we can make some pretty good guesses based on the past.  And it also depends on what kind of sailor you are.  If you are going be vomiting over the rails at the first whitecap, you should have extra ballast.  But otherwise, a younger investor with a robust gut will be just fine with say, an 95/5% stocks/bonds ratio.  As you get closer to retirement, maybe 80/20.   Again, if you are vomiting, add more ballast.   But keep in mind, it doesn't stay rough forever.  It never does.  So don't panic and everything will be fine.  If you feel like vomiting, just look at the horizon.  Or fix yourself a boat drink or something. 

But how to decide how much ballast?  The oddly specific percentages should give you a clue.   Why 80/20 instead of 83/17?  And why exactly 12.5% in EM instead of say, 14.7%?  That's because no one actually knows what the proper ratio should be in the future so they are using made up, round numbers.  But history has shown if you invest mostly in stocks with the rest in bonds, everything works out fine, and the exact percentages barely matter at all.   If they can make up numbers, you can do.  The general percentage is the important thing. 

One thing you don't want to do is have a lot of course corrections.  By the time you fiddle around trying to catch the last gust of wind, the wind direction has changed.  So set it and forget it. 

In short:

1. Invest mostly in stocks with some bonds, based on your comfort level
2. Don't panic.  No matter how bad it seems like at the moment, everything will be fine. 
3. Don't fiddle with things.  It doesn't help and it is waste of time.

I think this is a good analogy. In my very limited evaluation of bond allocations, it seems they serve mostly to make people feel better more than any actual numerical advantage. At least, from what I can see, this was true of the 2009 situation. It's not like stocks halved and bonds doubled (or even went up by a third or whatnot) so you could rebalance and buy stocks. It just stayed more stable - thus the emotional side of things seemed the only benefit.