Author Topic: How you invest is less important...  (Read 5236 times)

AdrianC

  • Handlebar Stache
  • *****
  • Posts: 1134
  • Location: Cincinnati
How you invest is less important...
« on: October 02, 2019, 07:37:59 AM »
...than your savings rate.

https://humbledollar.com/2019/09/show-me-the-money/

HERE’S A SOBERING thought: Much—and perhaps most—of the money you’ll accumulate for retirement will reflect the raw dollars you sock away and not the investment returns you earn.

Even more so for early retirees. According to Quicken, 60% of our liquid net worth is what we put in, 40% is from investment returns, at a 7% IRR. Not complaining.

blue_green_sparks

  • Stubble
  • **
  • Posts: 143
Re: How you invest is less important...
« Reply #1 on: October 02, 2019, 01:49:14 PM »
Interesting Article Thanks. I am proof. I never paid much attention to my allocations but always put max allowable in the 401K. A divorce set me back, yet I still retired with about a buck and a half at 58. When you are young and we have a recession you do get to buy stocks at bargain rates ;)

Being retired, my current portfolio is very conservative now; mostly fixed income assets and I do see cloudy skies on the horizon. I will go back to growth as soon as it makes sense.

vand

  • Handlebar Stache
  • *****
  • Posts: 1098
  • Location: UK
Re: How you invest is less important...
« Reply #2 on: October 02, 2019, 02:58:34 PM »

AdrianC

  • Handlebar Stache
  • *****
  • Posts: 1134
  • Location: Cincinnati
Re: How you invest is less important...
« Reply #3 on: October 03, 2019, 07:16:52 AM »
Indeed..
https://www.youtube.com/watch?v=Y0cibIa1N38

He (Dave Ramsey) is right - you have to save - but there's no need to take his very subpar investment advice.

OurTown

  • Handlebar Stache
  • *****
  • Posts: 1250
  • Age: 51
  • Location: Tennessee
Re: How you invest is less important...
« Reply #4 on: October 03, 2019, 08:07:48 AM »
That is a good, solid article, thanks for posting. 

vand

  • Handlebar Stache
  • *****
  • Posts: 1098
  • Location: UK
Re: How you invest is less important...
« Reply #5 on: October 03, 2019, 08:36:12 AM »
Indeed..
https://www.youtube.com/watch?v=Y0cibIa1N38

He (Dave Ramsey) is right - you have to save - but there's no need to take his very subpar investment advice.

Agree.. I am not a Ramsey basher, I think he does a lot of good for people who are bad with money, but my advice is to become an expert yourself in money management and investing.

IRR is typically not the most important thing - which is why I find it laughable that so many people think Vanguard expense ratios are the secret sauce to wealth. In fact, it may not even be the 2nd most important thing:

https://supplychenmanagement.com/2017/08/11/savings-rate-crash-course/



Malcat

  • Magnum Stache
  • ******
  • Posts: 3732
Re: How you invest is less important...
« Reply #6 on: October 03, 2019, 09:15:27 AM »
Indeed..
https://www.youtube.com/watch?v=Y0cibIa1N38

He (Dave Ramsey) is right - you have to save - but there's no need to take his very subpar investment advice.

Agree.. I am not a Ramsey basher, I think he does a lot of good for people who are bad with money, but my advice is to become an expert yourself in money management and investing.

IRR is typically not the most important thing - which is why I find it laughable that so many people think Vanguard expense ratios are the secret sauce to wealth. In fact, it may not even be the 2nd most important thing:

https://supplychenmanagement.com/2017/08/11/savings-rate-crash-course/



Do any Mustachians think that savings level isn't the most important factor?

I was never under the impression that people thought that Vanguard's low expense ratio was a secret to wealth, just that management fees don't improve performance, so why bother paying for drag?

Am I off base? Is anyone here actually under a different impression? Genuine question.

DadJokes

  • Handlebar Stache
  • *****
  • Posts: 1731
Re: How you invest is less important...
« Reply #7 on: October 03, 2019, 09:50:25 AM »
...than your savings rate.

https://humbledollar.com/2019/09/show-me-the-money/

HERE’S A SOBERING thought: Much—and perhaps most—of the money you’ll accumulate for retirement will reflect the raw dollars you sock away and not the investment returns you earn.

Even more so for early retirees. According to Quicken, 60% of our liquid net worth is what we put in, 40% is from investment returns, at a 7% IRR. Not complaining.

Considering the shorter accumulation period for early retirees, that's a pretty impressive amount of gains.

Buffaloski Boris

  • Handlebar Stache
  • *****
  • Posts: 2162
Re: How you invest is less important...
« Reply #8 on: October 03, 2019, 03:25:24 PM »
Indeed..
https://www.youtube.com/watch?v=Y0cibIa1N38

He (Dave Ramsey) is right - you have to save - but there's no need to take his very subpar investment advice.

Agree.. I am not a Ramsey basher, I think he does a lot of good for people who are bad with money, but my advice is to become an expert yourself in money management and investing.

IRR is typically not the most important thing - which is why I find it laughable that so many people think Vanguard expense ratios are the secret sauce to wealth. In fact, it may not even be the 2nd most important thing:

https://supplychenmanagement.com/2017/08/11/savings-rate-crash-course/



Do any Mustachians think that savings level isn't the most important factor?

I was never under the impression that people thought that Vanguard's low expense ratio was a secret to wealth, just that management fees don't improve performance, so why bother paying for drag?

Am I off base? Is anyone here actually under a different impression? Genuine question.

I agree that over time, saving is most important. With a close second being “don’t make incredibly bad investments or life choices that eat up those savings.”  Third is diversification/ asset allocation.

As to how Mustachian I am, well that’s very much up for debate. 😁

vand

  • Handlebar Stache
  • *****
  • Posts: 1098
  • Location: UK
Re: How you invest is less important...
« Reply #9 on: October 04, 2019, 04:01:54 AM »
Just to be fair.. accumulation is only looking at half of the whole picture, and I think importance of the return should also not be underplayed if you consider your money is still very much invested throughout the whole decumulation phase.  Accumulation/Decumulation are two sides of the same coin.

vand

  • Handlebar Stache
  • *****
  • Posts: 1098
  • Location: UK
Re: How you invest is less important...
« Reply #10 on: October 04, 2019, 04:11:53 AM »
Consistency is everything in the wealth accumulation game.

I don't know if this story has been debunked, but it is somewhat revered and worth telling anyway:

From:
https://www.innovativewealth.com/wall-street-wisdom/individual-investors-bad-investing/

"Fidelity Investments conducted a study on their Magellan fund from 1977-1990, during Peter Lynch’s tenure.2 His average annual return during this period was 29%. This is a remarkable return over the 13 year period. He was easily one of the best performing fund managers for his asset class. It should be noted that this was not a secret. Fidelity’s Magellan fund became one of the largest mutual funds due to its success under Peter Lynch, so it is clear that investors were aware of its performance. Whether the investors in the fund were chasing performance or investing due to his expertise is unclear. What is clear is that investors learned that Peter Lynch was investing in a method that worked.

Given all that, you would expect that the investors in his fund made substantial returns over that period. However, what Fidelity Investments found in their study was shocking. The average investor in the fund actually lost money. You read that correctly… The average investor lost money in the Fidelity Magellan fund under Peter Lynch’s tenure during a period of time when the fund returned around 29% annually."


The message is that you can have the greatest investment vehicle in the world right in front of you, but without understanding your own human frailties and applying consistency and discipline to your investing, the chances are slim that you will be able to best take advantage of it. I don't care if you are a die hard indexer or have all your net work in bitcoin, this holds true for all types of investors.

Travis

  • Magnum Stache
  • ******
  • Posts: 3282
  • Location: South Korea
Re: How you invest is less important...
« Reply #11 on: October 04, 2019, 05:19:18 AM »
You need the raw materials before you can build anything.

Davnasty

  • Magnum Stache
  • ******
  • Posts: 2622
Re: How you invest is less important...
« Reply #12 on: October 04, 2019, 09:13:56 AM »
Indeed..
https://www.youtube.com/watch?v=Y0cibIa1N38

He (Dave Ramsey) is right - you have to save - but there's no need to take his very subpar investment advice.

Agree.. I am not a Ramsey basher, I think he does a lot of good for people who are bad with money, but my advice is to become an expert yourself in money management and investing.

IRR is typically not the most important thing - which is why I find it laughable that so many people think Vanguard expense ratios are the secret sauce to wealth. In fact, it may not even be the 2nd most important thing:

https://supplychenmanagement.com/2017/08/11/savings-rate-crash-course/



Do any Mustachians think that savings level isn't the most important factor?

I was never under the impression that people thought that Vanguard's low expense ratio was a secret to wealth, just that management fees don't improve performance, so why bother paying for drag?

Am I off base? Is anyone here actually under a different impression? Genuine question.

Ya, I've never gotten the impression from MMM or the forums that low fees or index funds were the most important factor. They can make a big difference with almost no additional effort and people really like getting a lot for a little so it gets talked about a lot.

Maybe that's where the misconception comes from?

Telecaster

  • Handlebar Stache
  • *****
  • Posts: 2326
  • Location: Seattle, WA
Re: How you invest is less important...
« Reply #13 on: October 04, 2019, 10:22:09 AM »

IRR is typically not the most important thing - which is why I find it laughable that so many people think Vanguard expense ratios are the secret sauce to wealth. In fact, it may not even be the 2nd most important thing:


Vanguard expense ratios are the secret sauce to keeping your wealth.   If your SWR is 4% and 1% of that goes to fees, obviously you have to either have a greatly reduced lifestyle in retirement or accept a higher and more risky WR.   

rudged

  • Stubble
  • **
  • Posts: 104
Re: How you invest is less important...
« Reply #14 on: October 04, 2019, 08:31:51 PM »

The message is that you can have the greatest investment vehicle in the world right in front of you, but without understanding your own human frailties and applying consistency and discipline to your investing, the chances are slim that you will be able to best take advantage of it. I don't care if you are a die hard indexer or have all your net work in bitcoin, this holds true for all types of investors.

I'm not sure I follow the logic of this claim when it comes to someone who puts everything in an index fund. Surely the reason why most lose money in managed funds is because they mistakenly believe they can time the market. This is true for managed funds as much as attempts by individuals on their own to pick stocks. The die hard indexer pursues a simple strategy characterized by humility (during the accumulation phase) of consistently making regular contributions to an index fund, ignoring the daily noise of the stock market. The index investor wins out in the long run not merely because of low fees, but also because he or she is not dancing in and out of the market. Maybe this is your point, but if so, I don't know what it would mean to be an index investor if you are suggesting he or she might nevertheless foolishly undermine their strategy by attempting to time the market.

Malcat

  • Magnum Stache
  • ******
  • Posts: 3732
Re: How you invest is less important...
« Reply #15 on: October 05, 2019, 06:04:15 AM »

The message is that you can have the greatest investment vehicle in the world right in front of you, but without understanding your own human frailties and applying consistency and discipline to your investing, the chances are slim that you will be able to best take advantage of it. I don't care if you are a die hard indexer or have all your net work in bitcoin, this holds true for all types of investors.

I'm not sure I follow the logic of this claim when it comes to someone who puts everything in an index fund. Surely the reason why most lose money in managed funds is because they mistakenly believe they can time the market. This is true for managed funds as much as attempts by individuals on their own to pick stocks. The die hard indexer pursues a simple strategy characterized by humility (during the accumulation phase) of consistently making regular contributions to an index fund, ignoring the daily noise of the stock market. The index investor wins out in the long run not merely because of low fees, but also because he or she is not dancing in and out of the market. Maybe this is your point, but if so, I don't know what it would mean to be an index investor if you are suggesting he or she might nevertheless foolishly undermine their strategy by attempting to time the market.

I would absolutely not assume that indexers are less likely to try and time the market compared to those whose funds are managed.

Tons and tons of antsy index investors here post constantly either about market timing or needing to be talked off the ledge of market timing. Meanwhile, people who have to go through their financial advisor can't do anything rash on impulse because they have a line of defense in the way between them and cashing everything out because they read a scary news story about Trump.

I work for a finance firm, the FAs I know spend A LOT of time and energy preventing people from being reactive.

There are also the wonderfully clueless people who dump their money into mutual funds with an advisor because they know nothing about investing, I think they're actually the most likely to just leave it alone because they literally don't even know that market timing is an option.

Perhaps you could posit that of the self directed investors, the indexers are less likely to market time than the individual stock pickers, but I don't know that that's true since the value investors tend to have a buy-and-hold approach as well.

All in all, I actually suspect that it's the very novice indexers who read just enough to start indexing, but not enough to feel confident, who check their investment numbers 100 times a day, and are constantly freaked out by even small drops; I suspect they're the ones who jump in and out the most.

The benefit of indexing is the lower fee drag, not that the person is less likely to market time.
« Last Edit: October 05, 2019, 06:13:30 AM by Malkynn »

steevven1

  • Stubble
  • **
  • Posts: 145
  • Location: Florida
Re: How you invest is less important...
« Reply #16 on: October 05, 2019, 01:44:24 PM »
So basically, the less time you spend in Investor Alley, the more money you'll make to invest ;-)

rudged

  • Stubble
  • **
  • Posts: 104
Re: How you invest is less important...
« Reply #17 on: October 05, 2019, 03:14:11 PM »

Tons and tons of antsy index investors here post constantly either about market timing or needing to be talked off the ledge of market timing. Meanwhile, people who have to go through their financial advisor can't do anything rash on impulse because they have a line of defense in the way between them and cashing everything out because they read a scary news story about Trump.


I consider myself a novice, but have gone the route of a single index fund (VTSAX within Vanguard, and VINIX at work in my retirement plans) and have never been tempted to do anything other than increase my contributions when possible. But I agree with your point that some who post here do engage in market timing, e.g. posts from individuals debating how much to allocate among different index funds representing different sectors.

TomTX

  • Magnum Stache
  • ******
  • Posts: 4343
  • Location: Texas
Re: How you invest is less important...
« Reply #18 on: October 05, 2019, 05:29:28 PM »

IRR is typically not the most important thing - which is why I find it laughable that so many people think Vanguard expense ratios are the secret sauce to wealth. In fact, it may not even be the 2nd most important thing:


Vanguard expense ratios are the secret sauce to keeping your wealth.   If your SWR is 4% and 1% of that goes to fees, obviously you have to either have a greatly reduced lifestyle in retirement or accept a higher and more risky WR.

Fees should be considered part of your WR. Taxes too. Anything you're spending money on, whether it's an automatic drag (fees) or a burrito.

TomTX

  • Magnum Stache
  • ******
  • Posts: 4343
  • Location: Texas
Re: How you invest is less important...
« Reply #19 on: October 05, 2019, 05:36:19 PM »

Tons and tons of antsy index investors here post constantly either about market timing or needing to be talked off the ledge of market timing. Meanwhile, people who have to go through their financial advisor can't do anything rash on impulse because they have a line of defense in the way between them and cashing everything out because they read a scary news story about Trump.


I consider myself a novice, but have gone the route of a single index fund (VTSAX within Vanguard, and VINIX at work in my retirement plans) and have never been tempted to do anything other than increase my contributions when possible. But I agree with your point that some who post here do engage in market timing, e.g. posts from individuals debating how much to allocate among different index funds representing different sectors.

right, that's the way to do it - and the way most of us do it, all the time.

It's just not that exciting to talk about.

Market timer: "Hey, market today is blah blah, I'm thinking analysis blah blah, so I'm putting 42% in SPY futures blah blah"
Followed by some new fancy the next day. Or that afternoon.

Buy and hold: Nada. Because they're not even looking at the market.

It took me literally years after pretty much deciding I should get an international fund to update my IPS and move beyond "put everything in VTI". Admittedly I also shifted to ESG funds at the same time. Deciding I really don't want fossil fuel investments (for a variety of reasons, that's a separate thread) - that was the final motivator.

Old: 100% VTI

New: 50% VSGX, 50% ESGV. Rebalance on my birthday, unless I notice it's more than 5% off that ratio.

But it's boring. Nothing to discuss day-to-day or week-to-week or month-to-month.

js82

  • Bristles
  • ***
  • Posts: 469
Re: How you invest is less important...
« Reply #20 on: October 05, 2019, 09:29:59 PM »
IRR is typically not the most important thing - which is why I find it laughable that so many people think Vanguard expense ratios are the secret sauce to wealth. In fact, it may not even be the 2nd most important thing:

I'd put it more in the category of things you can definitely screw up, but most of the benefit comes from avoiding the blatantly horrible choices in favor of reasonable ones, as opposed to optimizing to the nth degree.

That is to say, there are active funds out there with 2% expense ratios that can absolutely cause major harm to your financial prospects over the long run - but I 100% agree that quibbling over a 0.08% vs. a 0.05% expense ratio is getting down into the noise.

The rest is largely an exercise in discipline - maintaining sufficient savings rates, and staying invested as opposed to attempting to time the market or chasing a stock tip.

TomTX

  • Magnum Stache
  • ******
  • Posts: 4343
  • Location: Texas
Re: How you invest is less important...
« Reply #21 on: October 06, 2019, 08:27:46 AM »
IRR is typically not the most important thing - which is why I find it laughable that so many people think Vanguard expense ratios are the secret sauce to wealth. In fact, it may not even be the 2nd most important thing:

I'd put it more in the category of things you can definitely screw up, but most of the benefit comes from avoiding the blatantly horrible choices in favor of reasonable ones, as opposed to optimizing to the nth degree.

That is to say, there are active funds out there with 2% expense ratios that can absolutely cause major harm to your financial prospects over the long run - but I 100% agree that quibbling over a 0.08% vs. a 0.05% expense ratio is getting down into the noise.

The rest is largely an exercise in discipline - maintaining sufficient savings rates, and staying invested as opposed to attempting to time the market or chasing a stock tip.

I put together a list awhile back of the top mistakes individual investors make, and and IIRC expenses was at best 3rd on the list. I should try and hunt that up and keep it handy - the topic comes up again and again.

Attempt at a recreation:

Top Mistakes Individual Investors Make, from worst to least:

1) Not investing. Whether "analysis paralysis", ignorance or just overspending.

2) Trying to time the market/stock pick - this is gambling, not investing.

3) Not being cost efficient. Professionally managed fund on average return worse than low cost indexing. Load, high expenses and fees eat returns.

4) Not being tax efficient. Use that 401k (especially any match!) and IRA, especially for bonds.

ChpBstrd

  • Handlebar Stache
  • *****
  • Posts: 2397
Re: How you invest is less important...
« Reply #22 on: October 06, 2019, 09:47:48 AM »
I have observed this as well in my own spreadsheet maths. It makes me wonder if most investors would be better served in a portfolio that is more conservative than is ideal long-term, for the following reasons:

1) "Don't lose money." If portfolio size is the most important thing - more important than ROI, we can encompass this in our circle of control by not taking too much risk. Underperforming a 100% stock portfolio by 1-2% a year for a decade hurts, but skipping the correction makes up for it and then some.

2) Countercyclical ability. If one is 100% stocks and stocks go down, they have NO ability to take advantage of the situation by rebalancing. If anything, they will sell near the bottom because they wish they had a more conservative portfolio in hindsight (see #1). The 60/40 investor, on the other hand, ratchets up their number of shares as the price falls and ratchets up their number of bonds as yields rise. 

If portfolio size matters more than ROI, then it makes no sense to risk portfolio collapse (which will matter) to chase an extra, what, 2% expected return (which won't matter). Perhaps it would be more wise to accept underperforming the bull markets so we can preserve capital and be ready to rebalance when the corrections come.

If I had an ideal market/portfolio outcome for the year 2020, it would be a sudden 40% market crash while I am in my current bond-heavy and option-hedged bond tent position. I could quickly switch to an unhedged 90/10 portfolio and retire that year with a 5-6% WR (because historically, very high WRs succeed if started after a major correction). This outcome would shave 4 years off my career. If that doesn't happen, I'll just underperform the bull market by a little and it won't matter as much as the risk I avoided.

Travis

  • Magnum Stache
  • ******
  • Posts: 3282
  • Location: South Korea
Re: How you invest is less important...
« Reply #23 on: October 06, 2019, 03:26:02 PM »
IRR is typically not the most important thing - which is why I find it laughable that so many people think Vanguard expense ratios are the secret sauce to wealth. In fact, it may not even be the 2nd most important thing:

I'd put it more in the category of things you can definitely screw up, but most of the benefit comes from avoiding the blatantly horrible choices in favor of reasonable ones, as opposed to optimizing to the nth degree.

That is to say, there are active funds out there with 2% expense ratios that can absolutely cause major harm to your financial prospects over the long run - but I 100% agree that quibbling over a 0.08% vs. a 0.05% expense ratio is getting down into the noise.

The rest is largely an exercise in discipline - maintaining sufficient savings rates, and staying invested as opposed to attempting to time the market or chasing a stock tip.

I put together a list awhile back of the top mistakes individual investors make, and and IIRC expenses was at best 3rd on the list. I should try and hunt that up and keep it handy - the topic comes up again and again.

Attempt at a recreation:

Top Mistakes Individual Investors Make, from worst to least:

1) Not investing. Whether "analysis paralysis", ignorance or just overspending.

2) Trying to time the market/stock pick - this is gambling, not investing.

3) Not being cost efficient. Professionally managed fund on average return worse than low cost indexing. Load, high expenses and fees eat returns.

4) Not being tax efficient. Use that 401k (especially any match!) and IRA, especially for bonds.

The latest edition of Random Walk Down Wall Street quotes a study that concluded 90% of your investment success is your asset allocation. 10% was how the market actually performed.  I'd have to find the actual study to see if those were the only things looked at or if expenses and taxes were considered.

TomTX

  • Magnum Stache
  • ******
  • Posts: 4343
  • Location: Texas
Re: How you invest is less important...
« Reply #24 on: October 06, 2019, 07:34:36 PM »
If we're taking it broadly: #1 and #2 fall under 'asset allocation'.

vand

  • Handlebar Stache
  • *****
  • Posts: 1098
  • Location: UK
Re: How you invest is less important...
« Reply #25 on: October 07, 2019, 03:28:37 AM »
Diversification and Asset Allocation is crucial. Unfortunately most people will never really understand how powerful it can be because they automatically and mistakenly associate "Defensive" with "low performance".

I've used the example of the Rothschilds' RIT Capital fund as an example of how a diversified approach with smart approach to asset allocation can beat a TSM portfolio over the long run:

https://www.ritcap.com/sites/default/files/RIT%20Capital%20Partners%20-%20April%202019%20Factsheet.pdf

It's not about being a good stock picker. It's about identifying undervalued sectors and allocating your capital appropriately, while still maintaining good all-round exposure to a wide basket of assets.

Personally, I like having a diversified wealth base across multiple assets and accounts.. it means it takes me a good 10 minutes to work out my net worth on any given day. This is a valueable first line of defense against trying to time the market. Compare that with someone who holds a 100% TSM (or 100%anything) portfolio.. they are effectively broadcast their net worth every time they log onto a financial website or CNBC market update plays on TV and their mood can swing just depending on what the market has done that day. I know this because that used to be me..

« Last Edit: October 07, 2019, 03:34:28 AM by vand »

TomTX

  • Magnum Stache
  • ******
  • Posts: 4343
  • Location: Texas
Re: How you invest is less important...
« Reply #26 on: October 07, 2019, 03:39:31 AM »
Diversification and Asset Allocation is crucial. Unfortunately most people will never really understand how powerful it can be because they automatically and mistakenly associate "Defensive" with "low performance".

I've used the example of the Rothschilds' RIT Capital fund as an example of how a diversified approach with smart approach to asset allocation can beat a TSM portfolio over the long run:

https://www.ritcap.com/sites/default/files/RIT%20Capital%20Partners%20-%20April%202019%20Factsheet.pdf

It's not about being a good stock picker. It's about identifying undervalued sectors and allocating your capital appropriately, while still maintaining good all-round exposure to a wide basket of assets.

Personally, I like having a diversified wealth base across multiple assets and accounts.. it means it takes me a good 10 minutes to work out my net worth on any given day. This is a valueable first line of defense against trying to time the market. Compare that with someone who holds a 100% TSM (or 100%anything) portfolio.. they are effectively broadcast their net worth every time they log onto a financial website or CNBC market update plays on TV and their mood can swing just depending on what the market has done that day. I know this because that used to be me..

Except that link doesn't support your claim. Looking at 10 year total returns:

Your linked investment returned 160%
The listed MSCI All Country World Index returned 212%
What it beat was UK inflation + 3% (RPI +3%)

vand

  • Handlebar Stache
  • *****
  • Posts: 1098
  • Location: UK
Re: How you invest is less important...
« Reply #27 on: October 07, 2019, 03:41:53 AM »
The latest edition of Random Walk Down Wall Street quotes a study that concluded 90% of your investment success is your asset allocation. 10% was how the market actually performed.  I'd have to find the actual study to see if those were the only things looked at or if expenses and taxes were considered.

right, but I wonder if that is a just roundabout way of saying that most people f**k up because they underestimate their tolerance for risk. We know that the "average" investor makes way less than the market average (something like 2% vs 7%), mainly because they are inclined to buy based on FOMO and then panic sell... which is just another roundabout way of saying that they haven't respected AA and are overexposed to stocks rather than "trying to time the market."

vand

  • Handlebar Stache
  • *****
  • Posts: 1098
  • Location: UK
Re: How you invest is less important...
« Reply #28 on: October 07, 2019, 03:45:28 AM »
Diversification and Asset Allocation is crucial. Unfortunately most people will never really understand how powerful it can be because they automatically and mistakenly associate "Defensive" with "low performance".

I've used the example of the Rothschilds' RIT Capital fund as an example of how a diversified approach with smart approach to asset allocation can beat a TSM portfolio over the long run:

https://www.ritcap.com/sites/default/files/RIT%20Capital%20Partners%20-%20April%202019%20Factsheet.pdf

It's not about being a good stock picker. It's about identifying undervalued sectors and allocating your capital appropriately, while still maintaining good all-round exposure to a wide basket of assets.

Personally, I like having a diversified wealth base across multiple assets and accounts.. it means it takes me a good 10 minutes to work out my net worth on any given day. This is a valueable first line of defense against trying to time the market. Compare that with someone who holds a 100% TSM (or 100%anything) portfolio.. they are effectively broadcast their net worth every time they log onto a financial website or CNBC market update plays on TV and their mood can swing just depending on what the market has done that day. I know this because that used to be me..

Except that link doesn't support your claim. Looking at 10 year total returns:

Your linked investment returned 160%
The listed MSCI All Country World Index returned 212%
What it beat was UK inflation + 3% (RPI +3%)

Absolutely correct, it has underperformed over 10 years, but still outperformed over a longer timeframe.
As the saying goes you can win virtually any argument based upon selecting the right timeframe..

As a "defensive" fund it will have naturally failed to keep up with more aggressive portfolios through a raging bull market. The real proof will be its performance over a timeframe that has ideally seen a couple of full bull/bear cycles.

des999

  • Stubble
  • **
  • Posts: 249
Re: How you invest is less important...
« Reply #29 on: October 07, 2019, 06:47:08 AM »
I have observed this as well in my own spreadsheet maths. It makes me wonder if most investors would be better served in a portfolio that is more conservative than is ideal long-term, for the following reasons:

1) "Don't lose money." If portfolio size is the most important thing - more important than ROI, we can encompass this in our circle of control by not taking too much risk. Underperforming a 100% stock portfolio by 1-2% a year for a decade hurts, but skipping the correction makes up for it and then some.

2) Countercyclical ability. If one is 100% stocks and stocks go down, they have NO ability to take advantage of the situation by rebalancing. If anything, they will sell near the bottom because they wish they had a more conservative portfolio in hindsight (see #1). The 60/40 investor, on the other hand, ratchets up their number of shares as the price falls and ratchets up their number of bonds as yields rise. 

If portfolio size matters more than ROI, then it makes no sense to risk portfolio collapse (which will matter) to chase an extra, what, 2% expected return (which won't matter). Perhaps it would be more wise to accept underperforming the bull markets so we can preserve capital and be ready to rebalance when the corrections come.

If I had an ideal market/portfolio outcome for the year 2020, it would be a sudden 40% market crash while I am in my current bond-heavy and option-hedged bond tent position. I could quickly switch to an unhedged 90/10 portfolio and retire that year with a 5-6% WR (because historically, very high WRs succeed if started after a major correction). This outcome would shave 4 years off my career. If that doesn't happen, I'll just underperform the bull market by a little and it won't matter as much as the risk I avoided.

wow, I've been thinking exactly like this the last few months   :)

talltexan

  • Magnum Stache
  • ******
  • Posts: 3979
Re: How you invest is less important...
« Reply #30 on: October 07, 2019, 08:20:22 AM »
Indeed..
https://www.youtube.com/watch?v=Y0cibIa1N38

He (Dave Ramsey) is right - you have to save - but there's no need to take his very subpar investment advice.

Can you be more specific about where his investment advice is sub-par?

fattest_foot

  • Pencil Stache
  • ****
  • Posts: 848
Re: How you invest is less important...
« Reply #31 on: October 07, 2019, 11:41:45 AM »
...than your savings rate.

https://humbledollar.com/2019/09/show-me-the-money/

HERE’S A SOBERING thought: Much—and perhaps most—of the money you’ll accumulate for retirement will reflect the raw dollars you sock away and not the investment returns you earn.

Even more so for early retirees. According to Quicken, 60% of our liquid net worth is what we put in, 40% is from investment returns, at a 7% IRR. Not complaining.

Considering the shorter accumulation period for early retirees, that's a pretty impressive amount of gains.

And unless I'm mistaken, it's heavily tilted towards returns at the "tail" of your investing lifetime. The longer your timeframe, the more it should lean towards returns.

Meaning savings rate is the most important factor until you hit a certain amount, at which point your returns should almost always outpace your savings.

Someone smarter than me should be able to put together a pretty straightforward equation of savings dollar amount to expenses to figure out when the break even point is.

vand

  • Handlebar Stache
  • *****
  • Posts: 1098
  • Location: UK
Re: How you invest is less important...
« Reply #32 on: October 07, 2019, 01:43:10 PM »
Get Rich Slowly has a good article on precisely this:

https://www.getrichslowly.org/building-wealth/

TomTX

  • Magnum Stache
  • ******
  • Posts: 4343
  • Location: Texas
Re: How you invest is less important...
« Reply #33 on: October 07, 2019, 05:23:08 PM »
Diversification and Asset Allocation is crucial. Unfortunately most people will never really understand how powerful it can be because they automatically and mistakenly associate "Defensive" with "low performance".

I've used the example of the Rothschilds' RIT Capital fund as an example of how a diversified approach with smart approach to asset allocation can beat a TSM portfolio over the long run:

https://www.ritcap.com/sites/default/files/RIT%20Capital%20Partners%20-%20April%202019%20Factsheet.pdf

It's not about being a good stock picker. It's about identifying undervalued sectors and allocating your capital appropriately, while still maintaining good all-round exposure to a wide basket of assets.

Personally, I like having a diversified wealth base across multiple assets and accounts.. it means it takes me a good 10 minutes to work out my net worth on any given day. This is a valueable first line of defense against trying to time the market. Compare that with someone who holds a 100% TSM (or 100%anything) portfolio.. they are effectively broadcast their net worth every time they log onto a financial website or CNBC market update plays on TV and their mood can swing just depending on what the market has done that day. I know this because that used to be me..

Except that link doesn't support your claim. Looking at 10 year total returns:

Your linked investment returned 160%
The listed MSCI All Country World Index returned 212%
What it beat was UK inflation + 3% (RPI +3%)

Absolutely correct, it has underperformed over 10 years, but still outperformed over a longer timeframe.
As the saying goes you can win virtually any argument based upon selecting the right timeframe..

As a "defensive" fund it will have naturally failed to keep up with more aggressive portfolios through a raging bull market. The real proof will be its performance over a timeframe that has ideally seen a couple of full bull/bear cycles.

Mmmkay. Unless you can produce documentation showing that I will be considering your original documentation authoritative, showing underperformance.

AdrianC

  • Handlebar Stache
  • *****
  • Posts: 1134
  • Location: Cincinnati
Re: How you invest is less important...
« Reply #34 on: October 07, 2019, 08:02:44 PM »
Indeed..
https://www.youtube.com/watch?v=Y0cibIa1N38

He (Dave Ramsey) is right - you have to save - but there's no need to take his very subpar investment advice.

Can you be more specific about where his investment advice is sub-par?

He pushes front end loaded actively managed mutual funds through his approved advisors. He talks about 12% returns, setting up unrealistic expectations.

Travis

  • Magnum Stache
  • ******
  • Posts: 3282
  • Location: South Korea
Re: How you invest is less important...
« Reply #35 on: October 07, 2019, 08:54:12 PM »
Indeed..
https://www.youtube.com/watch?v=Y0cibIa1N38

He (Dave Ramsey) is right - you have to save - but there's no need to take his very subpar investment advice.

Can you be more specific about where his investment advice is sub-par?

He pushes front end loaded actively managed mutual funds through his approved advisors. He talks about 12% returns, setting up unrealistic expectations.

"approved advisors" : they paid him a fee to get on the list.

vand

  • Handlebar Stache
  • *****
  • Posts: 1098
  • Location: UK
Re: How you invest is less important...
« Reply #36 on: October 08, 2019, 02:18:41 AM »
Diversification and Asset Allocation is crucial. Unfortunately most people will never really understand how powerful it can be because they automatically and mistakenly associate "Defensive" with "low performance".

I've used the example of the Rothschilds' RIT Capital fund as an example of how a diversified approach with smart approach to asset allocation can beat a TSM portfolio over the long run:

https://www.ritcap.com/sites/default/files/RIT%20Capital%20Partners%20-%20April%202019%20Factsheet.pdf

It's not about being a good stock picker. It's about identifying undervalued sectors and allocating your capital appropriately, while still maintaining good all-round exposure to a wide basket of assets.

Personally, I like having a diversified wealth base across multiple assets and accounts.. it means it takes me a good 10 minutes to work out my net worth on any given day. This is a valueable first line of defense against trying to time the market. Compare that with someone who holds a 100% TSM (or 100%anything) portfolio.. they are effectively broadcast their net worth every time they log onto a financial website or CNBC market update plays on TV and their mood can swing just depending on what the market has done that day. I know this because that used to be me..

Except that link doesn't support your claim. Looking at 10 year total returns:

Your linked investment returned 160%
The listed MSCI All Country World Index returned 212%
What it beat was UK inflation + 3% (RPI +3%)

Absolutely correct, it has underperformed over 10 years, but still outperformed over a longer timeframe.
As the saying goes you can win virtually any argument based upon selecting the right timeframe..

As a "defensive" fund it will have naturally failed to keep up with more aggressive portfolios through a raging bull market. The real proof will be its performance over a timeframe that has ideally seen a couple of full bull/bear cycles.

Mmmkay. Unless you can produce documentation showing that I will be considering your original documentation authoritative, showing underperformance.

Here's my documentation:

http://bigcharts.marketwatch.com/kaavio.Webhost/charts/big.chart?nosettings=1&symb=UK%3aRCP&uf=0&type=128&size=3&sid=122423&style=320&freq=1&entitlementtoken=0c33378313484ba9b46b8e24ded87dd6&startdate=6/1/2001&enddate=10/8/2019&rand=263277276&compidx=aaaaa%3a0&comp=VTI%2c+UK%3aCUKX&ma=2&maval=55,233&lf=4&lf2=2&lf3=0&height=665&width=720&mocktick=1

vand

  • Handlebar Stache
  • *****
  • Posts: 1098
  • Location: UK
Re: How you invest is less important...
« Reply #37 on: October 08, 2019, 04:27:25 AM »
Indeed..
https://www.youtube.com/watch?v=Y0cibIa1N38

He (Dave Ramsey) is right - you have to save - but there's no need to take his very subpar investment advice.

Can you be more specific about where his investment advice is sub-par?

Firstly, he's not a qualified Investment Adviser, although I'm not saying that alone makes his advice not worth listening.. nor am I saying that all Investment Advisors dish out universally excellent advice.. but they should at least know what they're talking about.

Most of the criticism seems to stem from claims that "his" Mutual Funds can reliably deliver 12% returns, which in turn can sustain an 8% withdrawal rate. Both parts of this claim are just so far removed from what is both expected and safe that it positions they discredit him rather than just mark him as optimistic. I reckon if you asked him today then his answers might be somewhat different.

I've also heard him talking about how he puts his money into the S&P500 "treating it as a cash pot" before he switches it into a real estate investment. Stocks are stocks, not cash, Dave. Duh!



AdrianC

  • Handlebar Stache
  • *****
  • Posts: 1134
  • Location: Cincinnati
Re: How you invest is less important...
« Reply #38 on: October 08, 2019, 09:38:08 AM »
According to Quicken, 60% of our liquid net worth is what we put in, 40% is from investment returns, at a 7% IRR. Not complaining.

A correction is in order.  Quicken does some double counting on it's investment report, I've found. It treats realized investment income as if it were a new investment.

I tried the Investing Activity report, which I think is more accurate. It gives:
Net Deposits 43%
Net Investing Income 18% (Interest + Dividends + Realized Gains)
Change in Market Value (Unrealized) 39%

I expect that is closer to the truth. We've done better at investing than I thought. Conversely, we've saved less than I thought...not complaining.

I started in 1998. Someone starting in 2009 would have done better on the investing side, obviously.

AdrianC

  • Handlebar Stache
  • *****
  • Posts: 1134
  • Location: Cincinnati
Re: How you invest is less important...
« Reply #39 on: October 08, 2019, 10:02:42 AM »
I started in 1998. Someone starting in 2009 would have done better on the investing side, obviously.

How much better?

The best plan is to invest when you have it. Sure, if we had built up cash from 1998-2009 and then thrown it all in we would be doing somewhat better, depending on when exactly it was invested. It wouldn't be *that much* better, though. And I'm sure most of us realize that market timing is a fool's errand.

Let's see, 100% in SPY (S&P500 ETF):
https://www.portfoliovisualizer.com/backtest-portfolio
A. Sept 1998 to Sept 2019 Start with $50K, add $50k/year. Total invested $1.1M. Final balance $3,099,673
B. Sept 2009 to Sept 2019 Start with $600K, add $50k/year. Total invested $1.1M. Final balance $3,128,973
C. Feb 2009 to Sept 2019 Start with $600K, add $50k/year. Total invested $1.1M. Final balance $3,669,011 (catching the market bottom).

Surprising (to me). No regrets.
« Last Edit: October 09, 2019, 06:22:01 AM by AdrianC »


talltexan

  • Magnum Stache
  • ******
  • Posts: 3979
Re: How you invest is less important...
« Reply #41 on: October 16, 2019, 01:30:35 PM »
Indeed..
https://www.youtube.com/watch?v=Y0cibIa1N38

He (Dave Ramsey) is right - you have to save - but there's no need to take his very subpar investment advice.

Can you be more specific about where his investment advice is sub-par?

Firstly, he's not a qualified Investment Adviser, although I'm not saying that alone makes his advice not worth listening.. nor am I saying that all Investment Advisors dish out universally excellent advice.. but they should at least know what they're talking about.

Most of the criticism seems to stem from claims that "his" Mutual Funds can reliably deliver 12% returns, which in turn can sustain an 8% withdrawal rate. Both parts of this claim are just so far removed from what is both expected and safe that it positions they discredit him rather than just mark him as optimistic. I reckon if you asked him today then his answers might be somewhat different.

I've also heard him talking about how he puts his money into the S&P500 "treating it as a cash pot" before he switches it into a real estate investment. Stocks are stocks, not cash, Dave. Duh!

I agree with 12% being unrealistic. I also think you and I would agree that the SP500 index "cash pot" thing wouldn't be good for accumulating money over 2-3 years to use for real estate purchases. Too risky for that time frame.

But there are other comments on this thread indicating that savings rate is more predictive of eventual net worth than fees paid. That would seem to undercut the loaded fund criticism somewhat.

Why did you not mention his position that no investor should ever own bonds, or his claim that interest rates will inevitably go back up?

vand

  • Handlebar Stache
  • *****
  • Posts: 1098
  • Location: UK
Re: How you invest is less important...
« Reply #42 on: October 21, 2019, 08:00:29 AM »
Indeed..
https://www.youtube.com/watch?v=Y0cibIa1N38

He (Dave Ramsey) is right - you have to save - but there's no need to take his very subpar investment advice.

Can you be more specific about where his investment advice is sub-par?

Firstly, he's not a qualified Investment Adviser, although I'm not saying that alone makes his advice not worth listening.. nor am I saying that all Investment Advisors dish out universally excellent advice.. but they should at least know what they're talking about.

Most of the criticism seems to stem from claims that "his" Mutual Funds can reliably deliver 12% returns, which in turn can sustain an 8% withdrawal rate. Both parts of this claim are just so far removed from what is both expected and safe that it positions they discredit him rather than just mark him as optimistic. I reckon if you asked him today then his answers might be somewhat different.

I've also heard him talking about how he puts his money into the S&P500 "treating it as a cash pot" before he switches it into a real estate investment. Stocks are stocks, not cash, Dave. Duh!

I agree with 12% being unrealistic. I also think you and I would agree that the SP500 index "cash pot" thing wouldn't be good for accumulating money over 2-3 years to use for real estate purchases. Too risky for that time frame.

But there are other comments on this thread indicating that savings rate is more predictive of eventual net worth than fees paid. That would seem to undercut the loaded fund criticism somewhat.

Why did you not mention his position that no investor should ever own bonds, or his claim that interest rates will inevitably go back up?

Well frankly, I wasn't going to attempt to pick apart everything he's ever said, and his view on interest rates is in fitting with his wider opinions on avoiding debt so I don't really have a problem with it. If you have a problem with spending for consumption on credit as a large portion of his audience does then no interest rate is low enough.

talltexan

  • Magnum Stache
  • ******
  • Posts: 3979
Re: How you invest is less important...
« Reply #43 on: October 21, 2019, 10:02:28 AM »
Suppose you accept 10.2% as the long-term historical return of the SP500.

Suppose you grant Dave Ramsey his 12% annual rate of return on the risky stock-based investments he owns through mutual funds.

Paying 125 basis points in management fees/loads looks like a win, as you're still lapping a near-free SP500 index.