Author Topic: Ask Someone Older  (Read 8380 times)

Trebek

  • 5 O'Clock Shadow
  • *
  • Posts: 34
Ask Someone Older
« on: May 17, 2012, 09:29:43 PM »
I'm 27.
Will be mortgage free in t-minus 3 years.
After that point wife and I will have NO debts, epic joint incomes and a continued frugal lifestyle.

After these 3 years have passed, I have the goal to be really well read and experienced at investing and managing money so that as soon as our "Home Repayments" expense disappears, we can simply redirect that same amount to our "Retirement Account" and continue living the happy life we live, all whilst watching our nest egg grow and grow.

I have already read a number of books and am going through the MMM reading list one by one, they are all very eye opening and excellent recommendations however I've noticed that a lot of comments and advice is given that are along the lines of "You can learn a lot in books, but you will learn far more by doing" so I have already started a savings fund that should soon get to around $5000 or so which I plan to invest with as a trial run / practise.

At the moment my plan is:
1. Save up the $5000 (should be done around September)
2. Continue reading many finance and investment books
3. Open a Vanguard LifeStrategy Fund Account and pop the $5000 into it once I hit the $5000 mark
4. ......
5. Profit?

Essentially this $5000 (although yes a lot of money) I am aiming to use basically as a "test case". A sum of money that I can use to run through a first try of investing and if it all goes up in smoke (hopefully it doesn't of course) well then so be it, at least I've learnt some valuable lessons. This way, when I start dealing with sums of $20,000... $50,000... $200,000+ later on I will have well learnt my lessons and be able to avoid MAJOR losses like $200,000 or whatever.

So, my question is basically does anyone who's already gone through the process of investing large amounts of money got any tips or suggestions on how I might improve this plan to start off?

I think I really just need to DO some real life investing, even if I fail miserably, just so I can get some feedback data and then make better, more informed decisions from then onwards.

Thanks!

AdrianM

  • Stubble
  • **
  • Posts: 158
  • Location: Queensland , AUS
Re: Ask Someone Older
« Reply #1 on: May 17, 2012, 10:03:51 PM »
Mate,

Go to your library.
find a book on value investing.
I like rule one investing by Phil Townsend
http://www.philtown.typepad.com/

Then give yourself $50000 imaginary money to invest and go practice.
Keep a record of each investment.
This way when you fu*k up it won't hurt.

And by the time you have your first $5000 I am sure you will have found at least 1 company that you want to invest in.
And you wont be a total newb.

Once you have read enough books on investing you will realise that they are all saying the same thing.

happy hunting.


astadt

  • 5 O'Clock Shadow
  • *
  • Posts: 68
Re: Ask Someone Older
« Reply #2 on: May 18, 2012, 12:01:46 AM »
Mate,

Go to your library.
find a book on value investing.
I like rule one investing by Phil Townsend
http://www.philtown.typepad.com/

Then give yourself $50000 imaginary money to invest and go practice.
Keep a record of each investment.
This way when you fu*k up it won't hurt.

And by the time you have your first $5000 I am sure you will have found at least 1 company that you want to invest in.
And you wont be a total newb.

Once you have read enough books on investing you will realise that they are all saying the same thing.

happy hunting.



I say keep reading, play around with some fake money, but if youre going to be investing in LifeStrat funds...you can relax a little. Theres always a chance you'll loose money, but if you end up loosing it all...the entire country will be in serious trouble and we'll be worried about more than retirement.

The huge draw of funds like LifeStrat is that you dont need to do anything. You accept slightly higher expense ratios for a managed AA throughout your savings years.

Im 27 too though, so its grain of salt time!

Trebek

  • 5 O'Clock Shadow
  • *
  • Posts: 34
Re: Ask Someone Older
« Reply #3 on: May 18, 2012, 07:00:41 AM »
Mate,

Go to your library.
find a book on value investing.
I like rule one investing by Phil Townsend
http://www.philtown.typepad.com/

Then give yourself $50000 imaginary money to invest and go practice.
Keep a record of each investment.
This way when you fu*k up it won't hurt.

And by the time you have your first $5000 I am sure you will have found at least 1 company that you want to invest in.
And you wont be a total newb.

Once you have read enough books on investing you will realise that they are all saying the same thing.

happy hunting.

After having a read some of that site one quote from Buffett struck me as interesting but I don't quite understand it. It's "Develop an audited record of performance as early as possible."

Does this just mean track ALL your investments? Like what you bought, how long you held them, how much they returned each year etc etc? Because I'm pretty sure I'll be doing that. Or does it mean something different?

As for your suggestion of "giving myself $50,000 and go practice" I'm not talking about "buying Company X's shares" when I say investing. I mean investing for the very long term future. Minimum 10 years, more likely for 20+ or forever. I want to practice and get good at investing for our personal retirement fund. I will be buying shares... but they will likely be index funds like the S&P500 and holding them for effectively forever. At least that's what I've seen is one of the best ways to go so far.

Most investment books do tend to say the same things:
- Only invest in things you fully understand
- Always diversify appropriately for your age/situation
- Have the patience of a saint and trust in your decisions over many years
- Don't over diversify
- KISS
- Don't ever follow the market or listen to generic advice
- Don't ever delude yourself into thinking that you can "totally pick wining individual companies" long term
- Don't ever delude yourself into thinking that you are "better than average" or that loosing money totally "won't happen to you"

reverend

  • Stubble
  • **
  • Posts: 177
    • RobDiesel
Re: Ask Someone Older
« Reply #4 on: May 18, 2012, 07:25:56 AM »
Read up a little here; http://www.fool.com/how-to-invest/thirteen-steps/index.aspx

Particularly step 5, which is my main thing.  I don't have time to sit and watch stocks, so I invest in things that I can buy and hold practically forever.  If something happens (like Netflix dropping $15 in a day) then I buy more shares.

The point is, like you mentioned, buy and hold. Let dividends and time work for you.

What I've found is that Motley Fool likes to email out teasers and the articles they post on the main page - the free ones, are more like ideas, but sometimes go counter to the advice offered to their paid customers.


Anyway, they were the only investors that aligned with my "buy and hold because I don't have enough time to track it all" strategy, so I subscribed to their Stock Adviser newsletter and it's paid for itself hundreds of times over.

arebelspy

  • Administrator
  • Senior Mustachian
  • *****
  • Posts: 28115
  • Age: -999
  • Location: Seattle, WA
Re: Ask Someone Older
« Reply #5 on: May 18, 2012, 07:45:58 AM »
Are you completely dead set on wanting to * around and make mistakes?  Or would you be okay picking a solid investment strategy, going with that long term, and ignoring daily fluctuations and trying to beat the market?

If the latter, I'd look into solid Index/Bond funds (Wellington, anyone?) or something like the permanent portfolio.

Set it, forget it (other than adding more).
We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with three kids.
If you want to know more about us, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.

James

  • Handlebar Stache
  • *****
  • Posts: 1680
  • Age: 47
  • Location: Rice Lake, WI
Re: Ask Someone Older
« Reply #6 on: May 18, 2012, 09:56:03 AM »
I have a balanced portfolio, mostly stock at this point but extremely diversified. (I'd guess 85/15 stock/bond mix, but just guessing because it would take a lot of math to figure out)  Main thing is to re-balance once a year and add more every month.  I could care less if they are up or down, I don't plan on using them for a long time.  (OK, to be honest I love it when they drop since it's a buying opportunity, and I love it when it goes up because my portfolio value looks good.)  If you have a positive outlook every move in the market is a good one.  Be an optimist, develop a nice balanced and diversified portfolio, and don't spend time * around with it...  :D

Having said all that, at some point I might take $5-10k and * around with it.  I wanted to buy apple at $120 but didn't have "playing around" money set aside.  It's not a bad idea to do that and that is where you need the practice and experience, but I would get your first couple hundred thousand set aside in a balanced portfolio first.

arebelspy

  • Administrator
  • Senior Mustachian
  • *****
  • Posts: 28115
  • Age: -999
  • Location: Seattle, WA
Re: Ask Someone Older
« Reply #7 on: May 18, 2012, 10:01:40 AM »
I have a balanced portfolio, mostly stock at this point but extremely diversified. (I'd guess 85/15 stock/bond mix, but just guessing because it would take a lot of math to figure out)  Main thing is to re-balance once a year and add more every month.  I could care less if they are up or down, I don't plan on using them for a long time.  (OK, to be honest I love it when they drop since it's a buying opportunity, and I love it when it goes up because my portfolio value looks good.)  If you have a positive outlook every move in the market is a good one.  Be an optimist, develop a nice balanced and diversified portfolio, and don't spend time * around with it...  :D

Having said all that, at some point I might take $5-10k and * around with it.  I wanted to buy apple at $120 but didn't have "playing around" money set aside.  It's not a bad idea to do that and that is where you need the practice and experience, but I would get your first couple hundred thousand set aside in a balanced portfolio first.

Agree with all of this.  Keep the "playing around" money at maybe 5% of your portfolio.  No more than 10 for sure.

And the rebalancing will mostly be done by what you purchase, rather than selling, until your portfolio gets really big.
We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with three kids.
If you want to know more about us, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.

Trebek

  • 5 O'Clock Shadow
  • *
  • Posts: 34
Re: Ask Someone Older
« Reply #8 on: May 28, 2012, 07:48:09 AM »
OK so I have been doing a lot more reading and one thing keeps bugging me.

There seems to be many... MANY "fads" or whatever you'd like to call them out there. Growth stocks, tulip bulbs, dividend investing, diversified portfolio theory, value investing and... index funds. Now I'm all up to picking one (or a few) of these, doing really detailed and specific research, fully understanding them until I'm convinced (or convince myself) and then taking the plunge however there is a big catch.

When investing you must "have the patience of a nesting hen" and "not squander long-term returns by incurring frequent trading commissions or excessive management fees". So I'm also happy to pick something, and let it grow over 10-20+ years making sure I don't waiver (which is apparently the hardest thing to do).

Now riddle me this: If all previous methods of making money seem to be "fads" in hindsight... and you have to be patient and wait 10-20+ years to get proper results... how can you tell (with enough time to save your money) that ANY current investment strategy will work?

Further more, the "talking up" that Index Funds get make them sound very "fad like" to me. Could any senior investors weigh in on this comment please?

Even IF (say for arguments sake) Index Funds are the best thing to invest in right now... it demands a very long term tenure. Even IF "Idea XYZ Investing" comes along 10 years from now and it is wayyyy better than Index Funds... I can't switch over as I might not have been "in the game" for long enough for the index funds to do it's thing!

I get the feeling that investing (even the buy and hold ones) is an evolutionary thing. Yes Index Funds might be perfect "now"... but in 10 years who knows? The core principle of them is that "the market always goes up" which, whilst true, there are 2 things:
1. Thou shalt know that past performance is no guarantee of future results - how do we all say this and then just ignore it???
2. The last 100+ years performance was built on fossil fuels. That growth is very suspect to me (although if there's no 0 growth then there should be 0 inflation too right?)

I imagine there is no solid answer to my troubles as otherwise, investing would be a science and easy to do, but it's still frustrating. I'm also thinking that although there are many "fads"... Index Funds seem to have proven themselves for the longest period of time (about 35+ years?). I think some more deep investigation is needed with them...

P.S. @James - I like your take on ups and downs cheers.

Sunflower

  • Stubble
  • **
  • Posts: 200
  • Location: US
Re: Ask Someone Older
« Reply #9 on: May 28, 2012, 10:04:20 AM »
Trebek, you sound a lot like I did about six months ago! There's so much information out there and it's overwhelming but as you continue to digest it all, you'll come up with a strategy that works for you. Also, be happy you're in a good situation money wise! It's going to take me almost a year to save up enough funds to open a Vanguard index fund and I'll be adding a measly $100 to that account each month until I graduate and get a real job in a couple years!

For me, the thing that makes the most sense about index funds is that as companies fail (which they inevitably will) they will be taken out of the stock market and no longer affecting your index fund. As new companies with great business models, innovative technologies, etc. are created and go public, they'll be added into the stock market. So even if, as you say "The last 100+ years performance was built on fossil fuels", the next 100+ might be based on solar energy and new ways to connect people globally and the companies that figure that out are going to be earning you money. The major caveat here is that you have hope these companies are in the US if you want to get them in the US stock exchanges.

Have you gotten to the Intelligent Asset Allocator on your reading list yet? I really liked the way Bernstein approaches the past/future performance conundrum as well as the way he treats balancing your portfolio by thinking about the different areas you can diversify into (bonds, foreign things, commodities, etc.). In my opinion, he also makes a pretty good case for the fact that no matter what you do, as long as you stick with it you'll likely be ahead of those who panic all the time and change strategies every few years.

Another resource you might check out is the blog from the most recent guest poster on the MMM site: http://jlcollinsnh.wordpress.com/ He's recently done a series of posts on investing and in early posts he details what his family owns. I really like that his approach to investing is to keep things as simple as possible.

 Keep reading and thinking and eventually you'll figure out what you feel comfortable with!

arebelspy

  • Administrator
  • Senior Mustachian
  • *****
  • Posts: 28115
  • Age: -999
  • Location: Seattle, WA
Re: Ask Someone Older
« Reply #10 on: May 28, 2012, 10:24:34 AM »
Another resource you might check out is the blog from the most recent guest poster on the MMM site: http://jlcollinsnh.wordpress.com/ He's recently done a series of posts on investing and in early posts he details what his family owns. I really like that his approach to investing is to keep things as simple as possible.

I've subscribed to that blog for awhile, and I give a big +1 to that recommendation.  That series of posts on investing in particular was very good.
We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with three kids.
If you want to know more about us, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.

astadt

  • 5 O'Clock Shadow
  • *
  • Posts: 68
Re: Ask Someone Older
« Reply #11 on: May 29, 2012, 12:59:06 AM »
Another resource you might check out is the blog from the most recent guest poster on the MMM site: http://jlcollinsnh.wordpress.com/ He's recently done a series of posts on investing and in early posts he details what his family owns. I really like that his approach to investing is to keep things as simple as possible.

I've subscribed to that blog for awhile, and I give a big +1 to that recommendation.  That series of posts on investing in particular was very good.

Seconded.

Again, The thing about Indexing is that if your account is going south, the ENTIRE planets going south and you will have a lot of help getting your ship righted.

Also and probably a bigger point is that Diversification is key. You get that with indexing, you dont get that with picking and choosing (without spending a shit ton on Commissions) and who the frick as the time for all of that (note, I keep a VERY small amount of my portfolio in individual stocks, maybe .5%, I enjoy that fund a lot more than my index funds, but i realize its a risk/gamble to keep them) ?

Diversification is really important. When you index you own thousands of companies...if one fails, your retire is still safe. If you own 30 stocks and one fails, you had better hope for returns to make up for the loss. I would suggest that most of us here would encourage Real assets as well as part of proper diversification. Rental property correlates  completely differently than the stock market.

Trebek

  • 5 O'Clock Shadow
  • *
  • Posts: 34
Re: Ask Someone Older
« Reply #12 on: May 29, 2012, 03:30:03 AM »
Another resource you might check out is the blog from the most recent guest poster on the MMM site: http://jlcollinsnh.wordpress.com/ He's recently done a series of posts on investing and in early posts he details what his family owns. I really like that his approach to investing is to keep things as simple as possible.

lol I've already read his entire blog :P Like I said... I've read a fair bit however I haven't been able to get a copy of the Intelligent Asset Allocator which is indeed on my list. I don't plan on doing any actual investing for a number of more months so I want to continue reading and reading and reading until I feel I've reached that apex where more books just don't seem to add any new information.

You all make excellent points about index funds and they ARE logical and correct. However it is still a strategy. Who's to say that it will work for another 40 years? No one can no matter how logical a plan is. The other thing is that I've noticed (not by "doing" thank god) that the most disastrous things are often the ones that make perfect logical sense. Maybe an analogy will get my point across.

The Titanic. It was a BIG god-damn ship. Leading tech. Logically it looks infallible. Unbeatable. Built on years of solid research and development. Then shit happened and down it went. No one saw it coming. No one could ever have predicted it. Just because something makes sense, doesn't mean shit won't rip it's ass apart.

I do like the point that if Index Funds do go down then "the ENTIRE planets going south" as well.. kind of like a "well if I'm getting killed I'm just going to blow up the planet and all you pricks with me" kind of mentality (not that I normally do that).

Index Funds (or ETFs) are definitely coming out as the winner (and I'll be going World ETFs cause the US isn't what she used to be) so far of all the investment strategies but it just seems wrong when so many books/people say:

1. Thou shalt know that past performance is no guarantee of future results

and then turn around and go:

2. This strategy makes 100% sense and look! - it's worked in the past so use it and you'll be rich!

grantmeaname

  • Magnum Stache
  • ******
  • Posts: 4835
  • Age: 27
  • Location: NYC
  • Cast me away from yesterday's things
Re: Ask Someone Older
« Reply #13 on: May 29, 2012, 08:01:01 AM »
There seems to be many... MANY "fads" or whatever you'd like to call them out there. Growth stocks, tulip bulbs, dividend investing, diversified portfolio theory, value investing and... index funds.
Some of these things are not like the others. Let's take them apart and look at what they mean.
Growth stocks are stocks of companies expected to grow faster than their economic sector will in aggregate. Investors looking at growth stocks are interesting in the price-to-earnings ratio of the stock (P/E, which is calculated just like it's written). Because the stocks are expected to grow faster than their sectors, investors think the stocks hold a lot of future value relative to the companies' current earnings and are willing to pay a lot more for the stock relative to its earnings. Facebook, for example, is expected to have a lot of future growth by investors, so it's currently trading at a P/E of 102.3. In other words, investors are so sure that Facebook is going to grow faster than most stocks that they are willing to buy $102.3 of stock for every $1 of earnings.

Value investing is the opposite of that. Value investors seek stocks with low expectations of growth, and therefore low P/E ratios. Cisco, which makes the networking equipment that runs datacenters, office complexes, and much of the internet, is currently trading at a P/E of 12.06. To get $1 of Cisco's earnings, investors are only willing to buy $12.06 of the company because they believe it is well established in the market and its prospects for future growth are much worse than Facebook's. (I don't know where the P/E cut-off is for value investors, but in general you'll see long-established companies like Cisco that aren't expected to grow extremely quickly).

To beat the market growth investing, your company's earnings would have to grow even faster than the market expects it to, so the real value of the stock when you purchased it was actually higher than the price you paid for it. To beat the market by value investing, your company's earnings would have to grow less slowly than the market expected it to when you purchased it, so the real value of the stock at the time of purchase was actually higher than the price you paid for it. In both cases, the same thing would have to happen: the market would have to have set too low a P/E ratio at the time of your purchase, and expected too little earnings for your company. Whether or not they know it, people who say they can beat the market with either technique are really saying that they are smarter than the market at predicting the future earnings of companies.

I am not extremely familiar with Dividend investing, but from what I can tell the way to make money in dividend investing is to buy shares cheaply and sit on them for such a long time that the ratio of the dividends far into the future to price now is better than the yield that would have been received investing by another technique. To follow the article's example, if you bought Coke in 1988, your dividend in 2011 was a 33% yield on your 1988 money. After you discount that based on getting the dividend in 2011 and having bought the stock in 1988, as a dividend investor you would be hoping that you could still beat the return you'd get by investing that same $5.69 with another method in 1988. Again, you'd be hoping that the stock was somehow undervalued when you purchased it and that the market didn't know how valuable it would be to own Coke stock. Otherwise, you wouldn't make any money.

Tulip bulbs are used by Burton Malkiel's readers among others to illustrate market irrationality and bubbles. Seeing something less recent makes the economic behaviors more obvious, because you don't start bringing in non-economic values as easily as you would if we were talking about the subprime bust (Americans deserve single-family detached homes, it's the American Dream) or the dotcom boom (but at the time, it looked like the internet had limitless potential). Don't buy tulip bulbs at inflated prices. ;)

Modern portfolio theory holds that the optimal ratio of risk to reward is earned by holding assets in several different asset classes. You will get a greater reward for a given amount of risk by holding stocks, bonds, and real estate than you would by holding stocks alone, for example.

Finally, index fund investing holds that the market is efficient. (If you want to be technical, it really only requires that there are no inefficiencies in the market that can be exploited for less than the cost of making the trades to do so. As you note, the trading costs themselves are significant.) Index fund investors believe that they are not smarter than the highly intelligent, highly trained financial analysts that work for institutional investors. These analysts and institutional investors drive the price changes in the stock market because they do almost all of the trading by volume. If you don't have any reason to believe that you are smarter than they are, then you don't have any reason to believe that you can know which stocks are undervalued, and thus your best option is to hold funds tracking entire sectors of portions of the market. You mitigate your risk drastically by only holding individual stocks, and you do as well as the market as a whole, instead of haphazardly selected portions of the market.

The other bonus of index funds is that their expense ratios are extraordinarily low. If you look at what it would cost you in trading fees to diversify your portfolio that thoroughly, we're taking way, way more than the .1-.3% typical of index funds (see VTSMX, Vanguard's total stock market index, for one example of this low expense ratio). Remember how big institutional investors do most of the volume in the stock market? That means that most of the change in the stock market is due to them, and that the market's performance is very similar to the average performance of funds managed by these big institutional investors. So if your typical mutual fund or other investment instrument will perform about like the market does, minus a .8% expense ratio, why wouldn't you just take market performance minus a .1-.3% expense ratio? And remember, just like picking stocks, you have no way of knowing which mutual funds will outperform the market and which will underperform the market. If it were possible for you to know how mutual funds can make themselves succeed, wouldn't it be possible for financial analysts to know how to make mutual funds succeed? If the market gives us 4% next year, wouldn't you rather have 3.85% returns than one of the returns falling on a bell curve from the negatives to 5%, centered at 3.2%? Most people choosing the second option lose.

Quote
there is a big catch... When investing you must "have the patience of a nesting hen" and "not squander long-term returns by incurring frequent trading commissions or excessive management fees". So I'm also happy to pick something, and let it grow over 10-20+ years making sure I don't waiver (which is apparently the hardest thing to do).

Now riddle me this: If all previous methods of making money seem to be "fads" in hindsight... and you have to be patient and wait 10-20+ years to get proper results... how can you tell (with enough time to save your money) that ANY current investment strategy will work?
Every time you change your asset allocation, there are three things you have to consider. First, there are the trading costs themselves, which can be significant. Second there are the tax implications, which can be to your advantage or disadvantage. Finally, there's the fact that individual investors tend to get out of the market when it's low and get into the market when it's high, timing the market in reverse to guarantee that they'll do poorly. If you're buying more stock because prices are up or selling your stock because it's gone down, you're doing it wrong. The advice to stay patient like a nesting hen aims to prevent people from incurring these three costs.

Quote
Even IF (say for arguments sake) Index Funds are the best thing to invest in right now... it demands a very long term tenure. Even IF "Idea XYZ Investing" comes along 10 years from now and it is wayyyy better than Index Funds... I can't switch over as I might not have been "in the game" for long enough for the index funds to do it's thing!
There is nothing magical about being in the game for a long time with one strategy. Your total investment return over a period is simply each day's investment return multiplied together (we want to express a 4% gain as 1.04 here and not 4% for this to work), times your original principal (Bad Money Advice explains this better than I can)... after 9 years and 364 days, your overall investment performance is only going to be different by one day from your performance at 10 years, and only two days different from your performance at 10 years and 1 day. The only thing that's important about sitting on your investments is that you avoid the costs I detailed above when they're unnecessary, because they can seriously eat your performance.

Quote
I get the feeling that investing (even the buy and hold ones) is an evolutionary thing. Yes Index Funds might be perfect "now"... but in 10 years who knows? The core principle of them is that "the market always goes up" which, whilst true, there are 2 things:
1. Thou shalt know that past performance is no guarantee of future results - how do we all say this and then just ignore it???
2. The last 100+ years performance was built on fossil fuels. That growth is very suspect to me (although if there's no 0 growth then there should be 0 inflation too right?)
Let's get philosophical. Money is an exchange medium for value. The stock market's job is to take capital from capital holders and put it to work producing things of economic value-- things worth money to consumers or other businesses. The last 100 years' performance was built on this, not on fossil fuels. In the last 100 years, we've had countless innovations in agriculture, medicine, warfare, finance and governance, philanthropy, electronics, academia, entertainment and every other part of the economy imaginable. If you bought into the market in 1912, you'd be profiting from all of that innovation because your capital would have helped the innovators produce value. In 2112, your capital will have been a part of all of the innovation that has happened in the century since, producing value for consumers and businesses. That's no different and not dependent on fossil fuels (which we're not running out of just yet).

And as a side note, inflation also depends on liquidity, which is how easily money can get around. If there's a lot of money to borrow, there's more 'supply' of money even if the same (see the Khan academy episode on fractional reserve banking for a crystal-clear explanation of this.)
« Last Edit: May 29, 2012, 09:17:45 AM by grantmeaname »

Trebek

  • 5 O'Clock Shadow
  • *
  • Posts: 34
Re: Ask Someone Older
« Reply #14 on: May 29, 2012, 06:40:27 PM »
@grantmeaname - Holy crap dude you write a lot! lol If your age listed (19) is correct, you're doing pretty well to understand all that I'd say. When I listed all those things though I did know what they are, my point was more that whilst we brush off something like tulip bulbs (or housing and tech more recently) as bubbles or fads in hindsight... how can we safely say that something like Index Funds aren't the same thing?

Sure they might look great now... but in hindsight who knows? Index Funds probably have a better chance though seeing as it's proven itself over a much longer time period but it's just a niggling feeling I've got about it all that I wanted to probe others about.

P.S. - I've watched every one of the Finance video's on Khan Academy (yup.. all 196 and more), including that one you suggested. It's a brilliant site :-)

arebelspy

  • Administrator
  • Senior Mustachian
  • *****
  • Posts: 28115
  • Age: -999
  • Location: Seattle, WA
Re: Ask Someone Older
« Reply #15 on: May 29, 2012, 06:53:20 PM »
When I listed all those things though I did know what they are, my point was more that whilst we brush off something like tulip bulbs (or housing and tech more recently) as bubbles or fads in hindsight... how can we safely say that something like Index Funds aren't the same thing?

Sure they might look great now... but in hindsight who knows?
Index Funds probably have a better chance though seeing as it's proven itself over a much longer time period but it's just a niggling feeling I've got about it all that I wanted to probe others about.

Because Index Funds aren't one particular thing, they're every company listed in the stock market.  Unless you think all of those companies won't be productive, it will go up.

It's a completely different type of investment than comparing it to investing in one asset class like housing or tech stocks.  It's having part ownership of EVERY U.S. company (many of which have significant international holdings/sales).

I think when you actually understand index funds and the diversification it provides, it'd be hard to say with a straight face that they're a "bubble."
We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with three kids.
If you want to know more about us, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.

Trebek

  • 5 O'Clock Shadow
  • *
  • Posts: 34
Re: Ask Someone Older
« Reply #16 on: May 29, 2012, 07:15:42 PM »
Because Index Funds aren't one particular thing, they're every company listed in the stock market.  Unless you think all of those companies won't be productive, it will go up.

It's a completely different type of investment than comparing it to investing in one asset class like housing or tech stocks.  It's having part ownership of EVERY U.S. company (many of which have significant international holdings/sales).

I think when you actually understand index funds and the diversification it provides, it'd be hard to say with a straight face that they're a "bubble."

Oh I know exactly what they are. I'm yet to go REALLY deep into investigating them but I understand the logic and basic principles behind them. It's just that everyone I see is talking them up. About how great they are and how little effort is needed to "win" if you just use them. Which is exactly what is normally said when everyone is getting on the back of an investment fad you know?

"Oh you should invest in X cause it's awesome for logical reasons A, B and C! Look at it's history it's gone up for ages how could it ever go wrong??? Come, validate my investment decision by doing the same thing I've done!"

I know Index Funds aren't really a "boom and bust" type of fad as they represent ALL the market, but I guess it makes me a little uneasy to believe that you can just totally own 80%+ of everyone else out there in the investing market by buying 1 Index Fund and then never touching it for 60+ years. Sounds "too good to be true" and you know what they say about things that sound too good to be true...

arebelspy

  • Administrator
  • Senior Mustachian
  • *****
  • Posts: 28115
  • Age: -999
  • Location: Seattle, WA
Re: Ask Someone Older
« Reply #17 on: May 29, 2012, 08:03:48 PM »
Sounds "too good to be true" and you know what they say about things that sound too good to be true...

See, and I don't think they sound too good to be true, but maybe that's just me.

Sure, you have some ridiculous people (*cough* Dave Ramsey *cough*) claiming stuff like 12%, but a solid 6-8% real return that most index fund fans claim just isn't as overhyped, simply because it's based on something solid - the growth of the companies in that index (versus, say, housing or tulip bulbs, which inflated past what they were actually based on).

Naturally you may have stagnant growth (see: Japan), and if you actually think we're going to go through a period like what they have been experiencing, I can't fault you for not wanting to invest in those companies via index funds.  I think we aren't, but if you think we are, that's a valid reason not to invest in them.

But that wouldn't be not investing because of a bubble.

If suddenly so much money was poured in that P/E's shot up so it was 10X what the historical norm was, that would be a bubble.  If people were claiming 50% growth in a year, not based on the company's earnings, but based on the stock prices getting higher despite earnings (i.e. a growing P/E ratio), that would be a bubble.

I just don't see that happening currently.
We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with three kids.
If you want to know more about us, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.

Jamesqf

  • Magnum Stache
  • ******
  • Posts: 4047
Re: Ask Someone Older
« Reply #18 on: June 02, 2012, 11:47:51 AM »
...my point was more that whilst we brush off something like tulip bulbs (or housing and tech more recently) as bubbles or fads in hindsight... how can we safely say that something like Index Funds aren't the same thing?

There is a fairly easy way: look at how the investors are planning to make their money.  Are they depending on the "greater fool" theory?  In other words "I bought this expensive tulip bulb, but someone will come along soon and buy it off me for even more guilders" or "Sure, the mortgage on this house is expensive, but I can flip it in a couple of years for even more dollars". 

You can get some of this effect in an index fund, if you only buy in while they're in a strong bull market (and everybody's yelling "buy, buy!", and sell after they start dropping.  You do need the sense & patience not to get caught up in the crowd.

ShavinItForLater

  • Stubble
  • **
  • Posts: 149
Re: Ask Someone Older
« Reply #19 on: June 14, 2012, 01:30:47 PM »
I'll turn 41 this year, and I've been investing since I graduated college at age 21, so I've got 20 years of learning under my belt.  I've also been pretty serious (obsessed?) with learning how to invest over that time.  According to pretty detailed tracking in Quicken covering most of that time, my wife and I have had investment returns over those years of around 11.6% per year (internal rate of return). 

I'm excluding one type of investment in that figure (shares in a startup I was part of)--if you included those our returns would be significantly higher (15.9%), but I consider the value of those shares highly variable (could end up way higher or lower if/when the IPO comes), plus it's not an investment available to the average joe.

Some points I'll offer:

1) Avoid single company risk.  New investors will often think they should just buy one company's stock, then add another company, etc.  This is a bad idea, ESPECIALLY when you are first starting out, and ESPECIALLY when you're starting with a small amount of money.  Sure you might find the next Apple, but NO YOU WON'T FIND THE NEXT APPLE.  PUNCH YOURSELF IN THE FACE.  Keep no more than 4% of your investment portfolio in any one company.  Mutual funds exist for this purpose.  Index funds solve this problem in spades.  You are taking WAY too much risk when starting out if you buy individual stocks.

I am violating my own advice with my startup shares.  I wish every day that I could find a way to sell them for a fair value.  Not because I don't believe in the company--I do.  If I were to place a bet, they will do very well in an IPO or some other type of sale someday.  But it's still a huge risk, much higher than I'd ever choose to take if I were just deciding how to invest our money.  There's no way to predict if any company might have a huge setback or go out of business completely.  If I could change one thing about our current investments it would be that.

2) Avoid single asset class risk.  This is the modern portfolio / asset allocation stuff mentioned above.  I didn't learn/ignored this stuff until a couple of years ago.  We happily invested for 18 years thinking we should be 100% in stocks.  My logic was well they are they highest returning asset class, and our time horizon is uber long, no reason to look any further. 

While we've done pretty well, I do now understand and believe the theory that we probably would have done better if we had put a percentage into real estate, another percentage into commodities, split my stock holdings sooner into international vs. domestic, etc.  The big AHA moment for me was the evidence that I wouldn't lose any return for doing so.  I had seen asset allocation stuff and brushed it off thinking those guys are idiots, why buy asset classes that earn less than stocks?  Reading an in depth book on the subject made me realize that when you don't have down years, or your down years are not as bad as they would be with 100% stocks, and you rebalance your percentages periodically, you will end up with a GREATER overall return over the years.  Less risk with better return = WINNER.

My wife and I now have a significant chunk in REIT funds and stocks are split between international and domestic.  I still haven't been able to stomach buying bonds even though I know the traditional advice would tell me to, because I think they are likely to lose value in the medium term when interest rates rise.  I would like to move a percentage to a broad index of commodities, but I can't find any good low cost options for that available to me.  I don't want to invest in just gold or oil, which I also think are overvalued, what I'd really want would be an index of ALL commodities.  I might be wrong staying clear of bonds and commodities for now, perhaps in 10 years I'll add that to my list of points...

3) Stay away from any kind of short term trading.  I did this back in 1999/2000.  Got hooked by the huge movements tech stocks were making, and with some of the more volatile ones going up at a rate of about 600% per year, it SEEMED easy.  I wasn't risking my whole portfolio, we could afford to lose the money if it came to that, but I still took really stupid risks.  I used margin, did shorts, all sorts of really boneheaded things.  End result, I made a ton of investment returns and then lost everything I had gained from it.  Very quickly.  I never felt more PHYSICALLY SICK from my investing choices than when the stock I had shorted was going up and up and up, even though I just *knew* it had to crash (which it did, eventually--but not until well after I was forced to sell to avoid a margin call).  Boy, I'll never do that again.  I feel lucky that I didn't lose more learning that lesson.

4) Index funds a fad?  I think not.  The "magic" of index funds to me are that they give you broad diversification and they don't have a huge annual expense ratio.  A lot of "actively managed" mutual funds will charge more than 1% each and every year.  Some might even charge more than 2% per year.  You might not see it if you're not paying attention, because they will just deduct it from your return, it's not like there will be something on your statement saying "Annual Management Fee: $XXX.XX".  When you have one fund charging 1.5% per year, and an index fund charging .05% per year, that's a big advantage.  When you couple that with the fact that the vast majority of actively managed funds DO NOT OUTPERFORM the indexes over the long term, well, what exactly are you paying for?  They also don't often buy or sell their holdings, so from a tax standpoint they cost a lot less there too.

By definition though, these indexes define the market.  So to say it's a fad, well how would it go out of style?  For indexes to lose money, the whole market has to lose.  It is simply impossible for the market index to underperform...the market index.  You might counter well if I focus on some other strategy maybe I'd do better.  In my opinion, you won't.  See above for what happened when I thought I could beat the market.

5) Overall, I think your original point about learning more from doing than reading is true, but I'd clarify that.  By doing, you learn more about YOURSELF.  You'll learn how much risk you're willing to take.  You'll learn how comfortable you feel when the market goes way down and you see your investment value drop over 20% in a quarter or a month or a week.  Reading is good, very valuable, and for technical investing knowledge it does the job.  But no book is going to teach you how you'll react when your real hard earned money is on the line.

Hope that helps.