Author Topic: My SO says investing is gambling. Help  (Read 20498 times)

StockBeard

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Re: My SO says investing is gambling. Help
« Reply #50 on: September 03, 2015, 04:06:41 PM »
Has any one article really stood out as an "ah ha" moment?
When a friend my SO trusted told her "this is how I became rich". She would only trust people she knew, so random blog articles on the web didn't help much.
Maybe getting her a book such as "Your Money or your life", which to some extent feels less spammy than (what SO might consider to be ) random websites?

Melody

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Re: My SO says investing is gambling. Help
« Reply #51 on: September 03, 2015, 05:34:14 PM »
There is a mmm article where he likens investing in an index fund to be an "investment in the ingenuity of mankind" I'd try rehashing that concept. Also the $1 invested in an index in 1870 argument (worth $900k today).

k9

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Re: My SO says investing is gambling. Help
« Reply #52 on: September 04, 2015, 04:45:10 AM »
Survivorship bias and recency bias spotted.

How could you invest 1$ in indexes in 1870 ? Not only index funds did not exist, but even the very concept of stock market index was not invented yet.

Not only that, bu investing in the US economy in 1870 was very speculative. At this time, the US was just an emerging country that just  went through a civil war and a sovereign default.

poorboyrichman

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Re: My SO says investing is gambling. Help
« Reply #53 on: September 04, 2015, 07:18:50 AM »
@NoraLenderbee, you are picking at one part of the portfolio (gold) during an unprecedented period of western prosperity which has been fuelled by cheap energy and debt expansion. All parts of the portfolio cannot be winners at the same time. That is the reason it works. You then go on to imply that strategy is flawed on the basis of one component. Did you even bother to look into it in more detail before you shunned it in favour of your own ideology? Your returns are safe now matter what happens.

It doesn't matter what withdrawal rate you choose, 4% is based on returns was safe in the good old days of cheap energy and debt expansion, but those were both one way tickets to the good times. In period of economic distress or even just a bit of stagnation, in order to retire you'll need a safer withdrawal rate whichever strategy you follow, 3%, 2% or even 1%, regardless your capital is still safer with the PP in the long run.

I appreciate I haven't quite distilled the intricacies of the strategy down into a handy bite sized paragraph, further reading on your part is required. Hence the link to the book, it does a better job at explaining why it works in all economic climates better than I can.

Yes, the strategy assumes that society isn't about to be up-heaved and the west will not succumb to socialism, communism, technocrat-ism, authoritarianism or any other political model that aims to seize your assets. Though it will do a good job of weathering any storms capitalism throws at us.

It's a low risk portfolio compared with a 100% equities, or say 60% stocks and 40% bonds index funds and the reason I shared it is that OP's SO might feel more comfortable knowing that their capital is less exposed to volatile markets and safer than purely index funds or RE strategies in the long run.

This chart below speaks for itself, play close attention to the periods of bubble bursting 2002, 2008:

« Last Edit: September 04, 2015, 07:34:40 AM by poorboyrichman »

thd7t

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Re: My SO says investing is gambling. Help
« Reply #54 on: September 04, 2015, 08:42:55 AM »
@NoraLenderbee, you are picking at one part of the portfolio (gold) during an unprecedented period of western prosperity which has been fuelled by cheap energy and debt expansion. All parts of the portfolio cannot be winners at the same time. That is the reason it works. You then go on to imply that strategy is flawed on the basis of one component. Did you even bother to look into it in more detail before you shunned it in favour of your own ideology? Your returns are safe now matter what happens.

It doesn't matter what withdrawal rate you choose, 4% is based on returns was safe in the good old days of cheap energy and debt expansion, but those were both one way tickets to the good times. In period of economic distress or even just a bit of stagnation, in order to retire you'll need a safer withdrawal rate whichever strategy you follow, 3%, 2% or even 1%, regardless your capital is still safer with the PP in the long run.

I appreciate I haven't quite distilled the intricacies of the strategy down into a handy bite sized paragraph, further reading on your part is required. Hence the link to the book, it does a better job at explaining why it works in all economic climates better than I can.

Yes, the strategy assumes that society isn't about to be up-heaved and the west will not succumb to socialism, communism, technocrat-ism, authoritarianism or any other political model that aims to seize your assets. Though it will do a good job of weathering any storms capitalism throws at us.

It's a low risk portfolio compared with a 100% equities, or say 60% stocks and 40% bonds index funds and the reason I shared it is that OP's SO might feel more comfortable knowing that their capital is less exposed to volatile markets and safer than purely index funds or RE strategies in the long run.

This chart below speaks for itself, play close attention to the periods of bubble bursting 2002, 2008:


Speaking of bubbles bursting, I notice that your gold chart stops in 2011, which makes it look really good.  In fact, it looks great if you stop in 2011.  If you add in the last four years, the 33% drop without recovery makes it look pretty rough, particularly matched with the 33% gains in the DJIA or the 50% gains in the S&P500 during the same time (including the recent correction).

poorboyrichman

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Re: My SO says investing is gambling. Help
« Reply #55 on: September 04, 2015, 08:46:07 AM »
Speaking of bubbles bursting, I notice that your gold chart stops in 2011, which makes it look really good.  In fact, it looks great if you stop in 2011.  If you add in the last four years, the 33% drop without recovery makes it look pretty rough, particularly matched with the 33% gains in the DJIA or the 50% gains in the S&P500 during the same time (including the recent correction).

It's not my chart and it is a bit aged now so I won't speculate on recent performance but my best guess is that this didn't effect the overall value of the portfolio, as when one part falls, another is sure to have risen. That's why you see the nice smooth blue line for the PP.

If all four markets are corrected simultaneously, you've experienced a massive event of wealth destruction which is unavoidable in any circumstance.
« Last Edit: September 04, 2015, 08:48:35 AM by poorboyrichman »

thd7t

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Re: My SO says investing is gambling. Help
« Reply #56 on: September 04, 2015, 08:52:47 AM »
Speaking of bubbles bursting, I notice that your gold chart stops in 2011, which makes it look really good.  In fact, it looks great if you stop in 2011.  If you add in the last four years, the 33% drop without recovery makes it look pretty rough, particularly matched with the 33% gains in the DJIA or the 50% gains in the S&P500 during the same time (including the recent correction).

It's not my chart and it is a bit aged now so I won't speculate on recent performance but my best guess is that this didn't effect the overall value of the portfolio, as when one part falls, another is sure to have risen. That's why you see the nice smooth blue line for the PP.
Sorry about that.  I do think that the diversified portfolio has value, but because you appeared to be responding to a critique of gold as a part of the portfolio, I thought that it was important to show the data that included its bubble bursting.  I apologize for misinterpreting that.  However the chart also demonstrates that, with a brief exeption during 2008, stocks outperformed the PP.  I know that many people find the reduced volatility comforting, but I'd be interested to see how a stock/bond mix performs on the same chart (you reference this).

poorboyrichman

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Re: My SO says investing is gambling. Help
« Reply #57 on: September 04, 2015, 09:03:45 AM »
Over the short term you probably find some years an index portfolio might be valued higher, but as you can see in the chart eventually the markets become more rational (reflects actual value) and the PP catches up.

Or to put it in other words, if you're into swing/day trading you can make more using 100% index in stocks by buying and selling at the right time, but that's active investing, not passive.

Morning star has a good example here which you can manipulate to your heart's content. I'm not sure who manages that fund, how well they adhere to the stratergy though. I can see the allocations are currently out of whack, but as I say you only need to rebalance annually unless there have been huge swings.

http://www.morningstar.com/funds/XNAS/PRPFX/quote.html

Edit: Oh and I wouldn't pay a fund manager to manage this for you, they are eating at your gains so manage it yourself. That means there's slightly more effort required than an index fund, but were talking a hour a year or something daft.
« Last Edit: September 04, 2015, 09:07:10 AM by poorboyrichman »

Jacob F

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Re: My SO says investing is gambling. Help
« Reply #58 on: September 04, 2015, 10:08:26 AM »
How do you store the physical gold and are the substantial purchasing / selling costs included into this PP? Also, how does this portfolio fare in currency revolutions? Coming from Europe, I know that stocks outperformed Bonds, Cash and Gold for centuries while cash and bonds even went to complete zero during currency regime changes. How can your portfolio remain competitive under these circumstances (since it's not impossible that the dollar will eventually break - you have significant survivorship bias in your chart computation if it's only focussing on USD denominated assets)? This also doesn't necessarily trigger a SHTF scenario since companies will continue to exist through these rough times, as numerous very old companies in Europe, Japan etc. show us.

I would also like to have a look into the computation of this chart, since the portfolio seems to be constantly outperforming 3 of his composites, which means it's constantly faring way better than 75% of what it's made up from. This seems odd even when rebalancing effects / lucky market timing is taken into account. This would actually show extreme risk-adjusted outperformance toward several major asset classes. At the same time many scientific studies over the course of time on portfolio management / efficient market hypothesis etc. haven't shown major economic (cost adjusted) inefficiencies in financial markets in the recent past (starting 1970ies at least)

Jacob F

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Re: My SO says investing is gambling. Help
« Reply #59 on: September 04, 2015, 10:25:20 AM »
Over the short term you probably find some years an index portfolio might be valued higher, but as you can see in the chart eventually the markets become more rational (reflects actual value) and the PP catches up.

Or to put it in other words, if you're into swing/day trading you can make more using 100% index in stocks by buying and selling at the right time, but that's active investing, not passive.

Morning star has a good example here which you can manipulate to your heart's content. I'm not sure who manages that fund, how well they adhere to the stratergy though. I can see the allocations are currently out of whack, but as I say you only need to rebalance annually unless there have been huge swings.

http://www.morningstar.com/funds/XNAS/PRPFX/quote.html

Edit: Oh and I wouldn't pay a fund manager to manage this for you, they are eating at your gains so manage it yourself. That means there's slightly more effort required than an index fund, but were talking a hour a year or something daft.

Okay this looks more realistic. Coming from 1986 (Maximum Data time frame - 10.000 USD investment) and benchmarking this fund to the S&P 500 you'd have 68.035 USD in the Permanent Portfolio and 140.834 USD in the S&P500.
That's 6.8 % p.a. for the fund and 9.5% for the S&P. Looks like a reasonable trade-off for the way lower Volatility of the Fund, but I would still opt for way more Stocks at a younger age than the PP would go with. For a retirement Portfolio however, it does quite well I'd say.

TheOldestYoungMan

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Re: My SO says investing is gambling. Help
« Reply #60 on: September 04, 2015, 10:41:47 AM »
25% of your portfolio is in just one thing.  That's madness anyway you slice it.  If you want to hold precious metals, probably pick more than one.

In 1855 Aluminum was more expensive than gold or platinum.

http://sam.davyson.com/as/physics/aluminium/siteus/history.html

Today it is...not.

If tomorrow someone comes up with a way to mine/produce/extract a million pounds of gold per year out of...I don't know...seawater...or the aether, then your portfolio takes a 25% hit.  It may not be very likely, but everything was impossible until someone figured out how to do it.

I can watch youtube on my phone.

NoraLenderbee

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Re: My SO says investing is gambling. Help
« Reply #61 on: September 04, 2015, 11:02:59 AM »
@NoraLenderbee, you are picking at one part of the portfolio (gold) during an unprecedented period of western prosperity which has been fuelled by cheap energy and debt expansion. All parts of the portfolio cannot be winners at the same time. That is the reason it works. You then go on to imply that strategy is flawed on the basis of one component. Did you even bother to look into it in more detail before you shunned it in favour of your own ideology? Your returns are safe now matter what happens.

I don't think the strategy is flawed, particularly. I think your argument is tendentious and specious. You criticized the Trinity study for being based on the past. On what is the PP based, if not the past? You can't know the future.

As for gold, you are claiming that the past 35 years of gold prices are anomalous and won't be repeated. Cheap energy and debt expansion are still with us and may be for a long time to come. Meanwhile, anyone who invested in gold at the last peak would still be behind, despite several major recessions since then (1981-82, 1991, 2001, 2008).

Quote
It doesn't matter what withdrawal rate you choose, 4% is based on returns was safe in the good old days of cheap energy and debt expansion, but those were both one way tickets to the good times. In period of economic distress or even just a bit of stagnation, in order to retire you'll need a safer withdrawal rate whichever strategy you follow, 3%, 2% or even 1%, regardless your capital is still safer with the PP in the long run.

On what do you base the claim that the PP is safer? That gold has been a good hedge in the past? Didn't you just say that relying on the past is bad?

Quote
Yes, the strategy assumes that society isn't about to be up-heaved and the west will not succumb to socialism, communism, technocrat-ism, authoritarianism or any other political model that aims to seize your assets.

Exactly as the Trinity study assumes.

I don't think the PP is a bad portfolio. It is one of several decent alternatives (like indexing, etc.). However, you are claiming it is far safer. I pointed out that it's based on the same basic data as the strategies you decry, and that one-fourth of it has proven to be the opposite for the past two generations. Who's being ideological here?

Dicey

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Re: My SO says investing is gambling. Help
« Reply #62 on: September 04, 2015, 11:53:00 AM »
I think your argument is tendentious and specious.
I think this phrase is sublime. May I borrow it, please?

NoraLenderbee

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Re: My SO says investing is gambling. Help
« Reply #63 on: September 04, 2015, 12:43:24 PM »
I think your argument is tendentious and specious.
I think this phrase is sublime. May I borrow it, please?

But of course! (Wait, please sign this royalties contract . . .)

k9

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Re: My SO says investing is gambling. Help
« Reply #64 on: September 04, 2015, 12:45:49 PM »
25% of your portfolio is in just one thing.  That's madness anyway you slice it.  If you want to hold precious metals, probably pick more than one.

25% is scaring you ? You would be astonished to know how many people gave more than 2/3 (sometimes close to 100%) of their wealth to Vanguard (or any other single financial institution), especially in the MMM community.

Lots of small RE investors have more than 1/4 of the wealth in one rental property, too, for obvious reasons.

Having less than 25% of your wealth in one asset is more an exception than a rule, AFAIK.

TheOldestYoungMan

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Re: My SO says investing is gambling. Help
« Reply #65 on: September 04, 2015, 01:11:40 PM »
25% of your portfolio is in just one thing.  That's madness anyway you slice it.  If you want to hold precious metals, probably pick more than one.

25% is scaring you ? You would be astonished to know how many people gave more than 2/3 (sometimes close to 100%) of their wealth to Vanguard (or any other single financial institution), especially in the MMM community.

Lots of small RE investors have more than 1/4 of the wealth in one rental property, too, for obvious reasons.

Having less than 25% of your wealth in one asset is more an exception than a rule, AFAIK.

Even if 100% of your wealth is in the hands of Vanguard, it isn't really in the hands of Vanguard.  Vanguard isn't structured that way.

They aren't taking your money and offering you a piece of paper, little vanguard vouchers.  It's a reasonable question to ask, and you should, "why is Vanguard different from Bernie Madoff."  This question has an answer and you need to understand it if you do business with Vanguard.

There are other financial institutions where this might be a valid objection, but it reveals a profound failure to understand how Vanguard in particular is organized.

And if a small RE investor planned to have 100% of their portfolio tied up in less than 6-10 properties I would absolutely raise a similar objection.  I know many on their way to their goal end up with over 25% in one property at some point, but the biggest point of failure in RE investment is exactly that, you end up with large percentages in one place.  This risk is somewhat mitigated by the fact that while you could take losses, you have insurance and are unlikely to take a 100% loss at any one property.

As far as a general rule, what I've heard is that you don't want to have any more than FOUR percent of your portfolio tied up in any one asset, if possible.  So I have to make an exception to that rule for almost any RE investor, but to have 25% in one particular precious metal, that is unconscionably irresponsible advice.  Particularly when there are dozens of ways to diversify that gold holding to achieve the objective.

TomTX

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Re: My SO says investing is gambling. Help
« Reply #66 on: September 04, 2015, 01:33:24 PM »
25% of your portfolio is in just one thing.  That's madness anyway you slice it.  If you want to hold precious metals, probably pick more than one.

25% is scaring you ? You would be astonished to know how many people gave more than 2/3 (sometimes close to 100%) of their wealth to Vanguard (or any other single financial institution), especially in the MMM community.

Lots of small RE investors have more than 1/4 of the wealth in one rental property, too, for obvious reasons.

Having less than 25% of your wealth in one asset is more an exception than a rule, AFAIK.

You have a fundamental misunderstanding of how investing in a Vanguard index fund works.

It's not uncommon - I see lots of folks trying to scatter a couple thousand bucks each across dozens of funds. Fundamentally wrong.

NorCal

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Re: My SO says investing is gambling. Help
« Reply #67 on: September 04, 2015, 02:42:19 PM »
In trying to solve the original problem (instead of esoteric debates on investment philosophies), I'm going to take a contrary view here.

Your SO doesn't believe in the risk/reward profile of stocks.  You know what?  That's okay.  Everyone has different perceptions of risk vs. reward, and there isn't much sense forcing someone into something they're not comfortable with.  As two examples from my own life:

-During my time in the Army, I spent a portion of my life getting shot at by Iraqis and jumping out of airplanes.  I was completely okay with the risk/reward profile of my career.  However, I will never, ever, ride a motorcycle.  That's just too risky for me.  Everyone's comfort zone for risk is different, and that's okay.

-My dad recently retired from being a community college teacher.  His net worth is probably around $2M, and he's never owned a share of stock in his life.  He's dabbled in RE in a few instances, but never long term.  Stocks are only part of the picture.  How you save and live is more important.

My recommendation is finding things your SO IS comfortable in investing in.  Keep diversified no matter what.  But there are options out there that might fit his risk/reward profile that aren't intuitive.  Real Estate can be a great option, particularly if he's willing to do the work himself.  You can look into bond funds.  Heck, even look into those guaranteed-principal annuities.  You're guaranteed not to lose money, and you share in a small part of the market upside.  I wouldn't normally recommend these, but they might be great options for your case.

k9

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Re: My SO says investing is gambling. Help
« Reply #68 on: September 05, 2015, 05:06:09 AM »
Even if 100% of your wealth is in the hands of Vanguard, it isn't really in the hands of Vanguard.  Vanguard isn't structured that way.

They aren't taking your money and offering you a piece of paper, little vanguard vouchers.  It's a reasonable question to ask, and you should, "why is Vanguard different from Bernie Madoff."  This question has an answer and you need to understand it if you do business with Vanguard.

There are other financial institutions where this might be a valid objection, but it reveals a profound failure to understand how Vanguard in particular is organized.
Well, I have to admit I don't know how Vanguard actually works. I don't even know if you can buy shares without going through a broker of some kind. But as long as the shares Vanguard manages for you aren't bought under your name, and as long as those Vanguard shares aren't stored under your name rather than your broker's, you don't really own them.

I have to take your words about Vanguard, but people often aren't aware that more of their money than they think is tied to a single (or a pair of) financial institution.

Quote
As far as a general rule, what I've heard is that you don't want to have any more than FOUR percent of your portfolio tied up in any one asset, if possible.  So I have to make an exception to that rule for almost any RE investor, but to have 25% in one particular precious metal, that is unconscionably irresponsible advice.  Particularly when there are dozens of ways to diversify that gold holding to achieve the objective.

I can understand that idea, although I think it is too extreme. Would an investor having, say, 5% of his wealth in TBills be in Jeopardy ?
Regarding gold, it is as much an asset class by itself as a single asset. Having 25% in a single gold ETF, or 25% as a single physical gold bar by be very dangerous, I have to agree, but sharing those 25% between different physical coins, stored at different places, and one or more ETF, seems a little safer. If owing only gold for these 25% seems too unsafe anyway, you can mitigate the risk bu investing in silver or swiss francs, too (the original PP had them, with gold), although they don't have exactly the same characteristics as gold.

Jags4186

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Re: My SO says investing is gambling. Help
« Reply #69 on: September 05, 2015, 06:05:56 AM »
25% of your portfolio is in just one thing.  That's madness anyway you slice it.  If you want to hold precious metals, probably pick more than one.

In 1855 Aluminum was more expensive than gold or platinum.

http://sam.davyson.com/as/physics/aluminium/siteus/history.html

Today it is...not.

If tomorrow someone comes up with a way to mine/produce/extract a million pounds of gold per year out of...I don't know...seawater...or the aether, then your portfolio takes a 25% hit.  It may not be very likely, but everything was impossible until someone figured out how to do it.

I can watch youtube on my phone.

Gold is intrinsicly valued by humans across all civilizations over thousands of years.  This is why it is more valuable--in our minds, not neccesarily in spot metal prices--than other precious metals.  If someone tomorrow figured out a way to mine gold much more efficiently, it wouldn't matter in the long term because humans have an insatiable thirst for it. 

Besides, if you have 75% or 100% of your portfolio in stock index funds, say VTSAX, don't kid yourself.  You're investing in 1 thing, the US Economy.  The 3000 stocks in VTSAX still overall declined 40% in 2008.  And they declined 20% 3 years running back in 2000.

protostache

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Re: My SO says investing is gambling. Help
« Reply #70 on: September 06, 2015, 11:32:21 AM »
Even if 100% of your wealth is in the hands of Vanguard, it isn't really in the hands of Vanguard.  Vanguard isn't structured that way.

They aren't taking your money and offering you a piece of paper, little vanguard vouchers.  It's a reasonable question to ask, and you should, "why is Vanguard different from Bernie Madoff."  This question has an answer and you need to understand it if you do business with Vanguard.

There are other financial institutions where this might be a valid objection, but it reveals a profound failure to understand how Vanguard in particular is organized.
Well, I have to admit I don't know how Vanguard actually works. I don't even know if you can buy shares without going through a broker of some kind. But as long as the shares Vanguard manages for you aren't bought under your name, and as long as those Vanguard shares aren't stored under your name rather than your broker's, you don't really own them.

I have to take your words about Vanguard, but people often aren't aware that more of their money than they think is tied to a single (or a pair of) financial institution.


(replying just to this section)

You can and probably should invest in Vanguard funds directly through Vanguard, and when you do the shares of those mutual funds are held in your name.

Vanguard's structure is different than most other mutual fund families. Investors put money into a Vanguard mutual fund company (this part is typical) which is managed by the Vanguard management company (also typical). What's not typical is that the management company is owned by the fund companies. That is to say, there's no outside group profiting from management of Vanguard funds. Any profits flow back into the fund companies. This structure ensures management will be for the benefit of the fund companies and thus the fund investors.

https://about.vanguard.com/what-sets-vanguard-apart/why-ownership-matters/

k9

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Re: My SO says investing is gambling. Help
« Reply #71 on: September 09, 2015, 08:14:57 AM »
Well, thanks a lot for all these information. I didn't know that, for sure, and it makes my original message about Vanguard look like crap now ;)

DoubleDown

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Re: My SO says investing is gambling. Help
« Reply #72 on: September 09, 2015, 10:35:51 AM »
The term "investing" is loaded. It can mean anything from highly speculative bets on individual stocks, to rock solid guaranteed (albeit small) returns in a CD. The former is gambling, the latter is not.

My advice to the OP would be to choose a very conservative asset allocation, with the majority (maybe 80%) in can't-lose investments like CD ladders, US treasuries, etc. Then she can truthfully tell her SO they are not gambling at all with the lion's share of their invested money, not in the least. Put a smaller portion (20%) into riskier ventures like a broad stock index. Over time, once the SO becomes comfortable with the idea that their investments are growing, they can tweak the allocation to a more reasonable level like 50-60, then 60-40 and so on.

Obviously this is less than optimal in terms of building wealth, but there will be no risk in losing and certainly beats stuffing the money in a mattress or a bank account earning 0.1%.

DoubleDown

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Re: My SO says investing is gambling. Help
« Reply #73 on: September 09, 2015, 10:41:25 AM »
Also, I'd recommend the OP tell her SO there is really only one proven way to lose in the long run: Inflation eroding your accumulated wealth. It is a non-negotiable fact he needs to be aware of. You will guaranteed lose to inflation if you do not invest in assets that bring a higher return than inflation, and it's likely the most common investing mistake people make (at least prior generations, maybe not as much with millennials, who knows).

Wolf359

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Re: My SO says investing is gambling. Help
« Reply #74 on: September 09, 2015, 02:04:09 PM »
With all the doom and gloom in the market, your timing is bad when you're talking about using your SO's or joint funds.  However, your timing is great if you're just starting out yourself and want to demonstrate the benefits of investing.

When the market is tanking is the best time to buy.  If you're chunking your own money into the market while it's down, you can have your SO look at how well you did when the market is making new highs again. 

When your SO's money is involved, s/he will pay attention and feel the pain when it's down.  It takes baby steps to demonstrate that it is possible to make money in the market by going through a full market cycle.