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[snacknuts]

My wife works for a small business, and the owner announced at the end of the year that she was going to be making SEP IRA contributions for her employees for 2014. My wife is getting a little over $8K. Since there's a $5,500 contribution limit for IRAs in a calendar year, I am not sure what I can do with the rest of that money. Any thoughts?

 

[Easystride]

My wife works for a small business, and the owner announced at the end of the year that she was going to be making SEP IRA contributions for her employees for 2014. My wife is getting a little over $8K. Since there's a $5,500 contribution limit for IRAs in a calendar year, I am not sure what I can do with the rest of that money. Any thoughts?

The employer limit is separate.

 

[GhaleonEB]

Just looking at that chart, I'm guessing they asked which of the four things people were most worried about. So it's not that people are more worried about running out of principal as their income increases, but that they're less worried about having debt or not being able to afford daily expenses. Which makes perfect sense.

Ah, ranking. I didn't realize the chart was reflecting that kind of question. Makes sense.

 

[Swig_]

Hey guys, couple of questions about my retirement funds.

I worked for the government for a while, so I have a couple of state retirement accounts. I think there are two 401Ks and a 457.

Anyway, I want to move these out and into my own private IRA funds. I currently have a roth IRA at T Rowe Price, invested in TRRKX, as well as some non-retirement funds.

I've thought about getting a Vanguard account for a few years. My main question is whether or not there are pros or cons of having retirement funds split up between T Rowe and Vanguard. I like that my TRP fund is a little more volatile than Vanguard, however Vangurad has slightly lower fees, comparing target retirement funds. It would also be nice to transfer a large amount of money over to Vanguard and possibly open an Admiral account (if I can qualify), since that probably wouldn't happen again for a while, unless I move all my funds from TRP to Vanguard.

I would probably like to eventually expand out and buy some Vanguard funds that aren't for retirement, like a lazy index portfolio and then do some more active investing with TRP.

Any advice would be appreciated!

 

[Darren870]

Hey guys, couple of questions about my retirement funds.

I worked for the government for a while, so I have a couple of state retirement accounts. I think there are two 401Ks and a 457.

Anyway, I want to move these out and into my own private IRA funds. I currently have a roth IRA at T Rowe Price, invested in TRRKX, as well as some non-retirement funds.

I've thought about getting a Vanguard account for a few years. My main question is whether or not there are pros or cons of having retirement funds split up between T Rowe and Vanguard. I like that my TRP fund is a little more volatile than Vanguard, however Vangurad has slightly lower fees, comparing target retirement funds. It would also be nice to transfer a large amount of money over to Vanguard and possibly open an Admiral account (if I can qualify), since that probably wouldn't happen again for a while, unless I move all my funds from TRP to Vanguard.

I would probably like to eventually expand out and buy some Vanguard funds that aren't for retirement, like a lazy index portfolio and then do some more active investing with TRP.

Any advice would be appreciated!

For me its peace of mind knowing everything is in one place. Once its in Vanguard you can buy and sell whatever you want, you don't have to put into a target retirement fund. Find a fund that suits your needs and goals. Read this thread as there is a lot of fund talk.

In the end the lower the fees the more money in your pocket. Having everything in one place makes things less stressful and something you won't easily forget about. This is coming from someone that had 10 diff retirement accounts have has gotten them down to 5. Soon to be 4.

 

[yggdrasill]

Sorry, I forgot to say that there would be no fees, since it's in my 401K.

The two things to consider are the fees (primarily the expense ratio) on your current funds, and, if the funds are outside of retirement, the cost of selling them and moving into index funds due to the realization of capital gains. If they're in retirement accounts you don't have to worry about that.

The higher expense ratio in most non-index funds will absolutely eat into a large proportion of your returns over the long haul. I'd advise moving out of them sooner rather than later. If they are in a retirement account, there's nothing to lose with doing so quickly.

I transitioned our retirement funds to all index funds in 2013, and split shifting our funds that were outside retirement accounts across 2013 and 2014 to soften the capital gains hits.

 

[Swig_]

For me its peace of mind knowing everything is in one place. Once its in Vanguard you can buy and sell whatever you want, you don't have to put into a target retirement fund. Find a fund that suits your needs and goals. Read this thread as there is a lot of fund talk.

In the end the lower the fees the more money in your pocket. Having everything in one place makes things less stressful and something you won't easily forget about. This is coming from someone that had 10 diff retirement accounts have has gotten them down to 5. Soon to be 4.

Well, I can manage funds outside of a target fund in my TRP IRA. I just chose that because I like the idea of "set it and forget it" for very long term goals. I eventually may want to buy non-target funds for my IRAs, but for now, I'm happy just putting the money in there. It has done fairly well, so I'm content for now.

I'm mostly just wondering if there are any major reasons I wouldn't want to do that, outside of fee differences. Either expenses when I take money out, or issues that may cause a significant difference in my returns over the next 30 years. I may end up just moving my retirement stuff to Vanguard, but it'd be nice to know if there would be a major difference between the two avenues that I can take with my accounts.

I appreciate your input, and I think that I'm likely to move all my retirement money to Vanguard and keep TRP for my non-retirement investing.

 

[Wellington]

Interesting that the more money people have, the more they worry that it will run out. I wonder if that trend continues up through the income brackets. I've read that the wealthy, rather than worry less about their money, actually worry more about it the wealthier they get. That chart seems to point in that direction.

Lifestyle inflation can be very pronounced. I have a friend who suddenly got a pay cut at his job and it's been really affecting him. In order to avoid going further into debt and outspending his income he has just stopped doing anything in general. It's been a very jarring change for him and it's probably a couple of hundred dollars a month.

On the other hand another friend has been doing really well with his business. He went from a guy that was super frugal to absolutely terrible with his money. He now buys all his flights in first class (domestic/Caribbean at least), big steak dinners 3-4 times a week, spending all kinds of money on going out for drinks. He works like an animal and deserves it but if he hits a slow point I am worried he won't be able to stop spending.

 

[Lucky Forward]

White House Wants To Crack Down On 401(K) Fees

Over the objections of Wall Street and some financial regulators, the White House announced Monday that it plans to move ahead with a new rule that will hold investment brokers to a higher standard, requiring by law that they act in the best interests of their clients.

The so-called fiduciary duty rule would prevent certain brokers from considering their own profits when they steer clients into particular investments, likely cutting into the fees those brokers receive when they advise clients on 401(k)s and other retirement accounts. White House officials said on a conference call with reporters that in the coming months, the Labor Department will release a proposed rule that lays out the full details of the plan.

As pensions vanish from the U.S. economy, the typical worker is relying more and more on a 401(k) plan for retirement. Those who support applying a fiduciary standard to retirement accounts argue that the change would prevent brokers from advocating for plans based on the fees going to their firms. Any money that goes toward such fees, these supporters note, is money not growing in the retirement account through compound interest over the years.

The White House said its research shows that, on average, hidden fees lead to one percentage point less in annual returns on a retirement plan.

My 401k is with the federal employees TSP which has incredibly low fees, but this is something that is long overdue for everyone else.

 

[TangoAlphaLima]

America Wants to Save More. It Just Needs More Money to Do It

Shocking news. Poor people want to save for retirement and other things, but simply don't make enough money to do it.

I really think our system is rather screwy. the jobs that poor people have are usually jobs that do not have a 401k, so they do not get the benefits of an employer match. Moreover, because they earn more throughout their life they earn less in social security. They will also be in jobs more likely to result in them retiring early due to physical problems and not have the retirement savings to push off taking social security until they are 65-70, meaning they cannot increase their social security benefit by holding off on taking it.

I mean, what kind of retirement system deliberately hurts the population that needs the most help in accumulating retirement savings or having retirement security? A pretty stupid one if you ask me.

I definitely agree that wage stagnation is a big problem in this country. However, if you listen to Dave Ramsey, it's clear that so many people are just stupid with their money. Callers frequently tell him how they bought a $30k car loan while making $40k a year. The $40k a year is a problem, no question, but so is thinking that your $40k a year wages are sufficient to support that $30k car loan.

Another huge factor in today's world is student loan debt. Kids these days are racking up waaaay too much student loan debt while pursuing degrees that aren't going to help them pay the debt off. It's extremely difficult to save for retirement under those circumstances.

 

[Darren870]

Well, I can manage funds outside of a target fund in my TRP IRA. I just chose that because I like the idea of "set it and forget it" for very long term goals. I eventually may want to buy non-target funds for my IRAs, but for now, I'm happy just putting the money in there. It has done fairly well, so I'm content for now.

I'm mostly just wondering if there are any major reasons I wouldn't want to do that, outside of fee differences. Either expenses when I take money out, or issues that may cause a significant difference in my returns over the next 30 years. I may end up just moving my retirement stuff to Vanguard, but it'd be nice to know if there would be a major difference between the two avenues that I can take with my accounts.

I appreciate your input, and I think that I'm likely to move all my retirement money to Vanguard and keep TRP for my non-retirement investing.

There isn't any major difference. In the end its all about the costs you pay. Eg the amount you pay per trade, the upkeep fee, expense ratios, any account fees etc.

Otherwise, all the gains are payable based on the type of account. Retirement is tax deferred, non-retirement you pay based on when you buy/sell. That will be the same no matter whom you go through.

Its the first lot of fees that you want to keep at a minimum though, as they eat away at your gains. I remember reading an article about one muni funds fees were ~3.5% and for the year it was up 8%. Meanwhile a vanguard fund with sub 1% fees was up 6.5%. Obviously the Vanguard fund would have been the better choice, but not at first glance.You need to factor in everything, its the hidden stuff that eats away at your gains.
(Numbers are made up but plenty of these type of articles exist).

---

On my own note, once I combine my last two retirement accounts (if I can) I will start looking at re balancing my portfolio and what I can contribute. Tax time is coming so I need to get on top of this again. My portfolio is a bit of a mess but its got about $100,000 in it and I'd like to see higher gains.

 

[Icelandic_Jazz]

Last year I quit my job and ended up with around $800 I contributed to the company's 401k. Since the amount was under $1k, the company would not hold on to the money so I opted to roll over the 401k to Vanguard. But since many of the investments on Vanguard have a $1-3k minimum they placed the money in a Prime Money Market Fund until I was ready to rollover the account into an actual IRA.

I have a new job now and I'm in a much better situation financially (thank goodness). So now that I have the ability to actually invest this $800 that's been practically doing nothing for a few months, what should I move it into? I'm thinking of rolling it into a Roth IRA if possible. It's a traditional 401k so I will have to pay taxes if I convert it to a Roth, right? Is that worth it or should I move it to a traditional IRA?

I have about $4000 invested into VTSMX in a non-retirement investment but I'd like to start saving towards retirement now that I'm feeling more secure financially (though still relatively new to investing in general). Should I invest in Total Stock Market Index funds for an IRA as well or broaden my portfolio a bit more?

I hope I explained myself decently! Investing can be pretty brain-racking.

 

[chaosblade]

ETFs should have been an option for that $800, there is no minimum for those beyond the face value. I don't really understand the advantages/disadvantages of an ETF versus the equivalent index fund though. With Vanguard's funds they seem the same as the admiral shares, other than the lack of a minimum investment and need to buy full shares.

Starting off with the Total Stock Market seems like the general recommendation. You can opt to stick with that or diversify more as your account grows.

 

[TangoAlphaLima]

Last year I quit my job and ended up with around $800 I contributed to the company's 401k. Since the amount was under $1k, the company would not hold on to the money so I opted to roll over the 401k to Vanguard. But since many of the investments on Vanguard have a $1-3k minimum they placed the money in a Prime Money Market Fund until I was ready to rollover the account into an actual IRA.

I have a new job now and I'm in a much better situation financially (thank goodness). So now that I have the ability to actually invest this $800 that's been practically doing nothing for a few months, what should I move it into? I'm thinking of rolling it into a Roth IRA if possible. It's a traditional 401k so I will have to pay taxes if I convert it to a Roth, right? Is that worth it or should I move it to a traditional IRA?

I have about $4000 invested into VTSMX in a non-retirement investment but I'd like to start saving towards retirement now that I'm feeling more secure financially (though still relatively new to investing in general). Should I invest in Total Stock Market Index funds for an IRA as well or broaden my portfolio a bit more?

I hope I explained myself decently! Investing can be pretty brain-racking.

How old are you, and what rate are you being taxed at?

 

[RumblingRosco]

-

 

[TangoAlphaLima]

Is there any website I could read up on that would help me decide if I should sell stocks/mutual funds I have invested in a non-retirement fund (just a plain old brokerage) and transfer those funds into my yearly Roth IRA contribution, re-buying the same fund? Basically, is it worth it to take the capital gains tax now in order to not have to take it closer to when I retire? I suppose the beat case situation is that I invest other non-invested funds into my IRA, but I'm not sure I have enough to do that right now without dipping below my emergency funds.

I believe we're at relatively historically low capital gains tax, so to me, it seems sensible to consider taking that hit now. What else should I take into consideration here besides selling/buying fees (which will be <$10 since it is all through Vanguard)?

If you aren't fully funding your Roth through other means, then yes, you should sell other investments to do so. The capital gains hit now will be far less than it will be in 20, 30, or 40 years after those investments have doubled many times over.

 

[Icelandic_Jazz]

How old are you, and what rate are you being taxed at?

25, and in 2014 I was in the 15% tax bracket. 2015 I'll be in the 25% bracket I'm pretty sure.

 

[TangoAlphaLima]

25, and in 2014 I was in the 15% tax bracket. 2015 I'll be in the 25% bracket I'm pretty sure.

Hmmm. I'm not sure if you can rollover now and still apply it to your 2014 tax year or not. If so, that's the best option, given your lower tax rate that year.

Regardless whether it is 2014 or 2015, I think it's probably best to take the tax hit and roll into a Roth. At the age of 25, you've got so much time for your money to accrue tax-free in a Roth it will be well worth the difference by retirement age.

 

[Piecake]

NEVER ask your barber if you need a haircut, Warren Buffett has quipped. But even supposed dispassionate advisers turn out to have conflicts of interest. A new report from the US Department of Labor focuses on the financial advice given to American workers with pension plans and concludes on the basis of examining the academic research, that it may cost $17 billion a year.

The report focuses on individual retirement accounts or IRAs. Workers are often persuaded to roll their 401(k) plans into IRAs when they switch jobs or retire. This is not always a bad deal. But it may well be a bad deal if the IRA imposes much higher fees than the workers' original portfolio. How do these costs add up? The biggest impact comes from the tendency to recommend higher-charging mutual funds with higher trading costs. This seems to happen a lot; one study sent "mystery shoppers" who already had portfolios to visit advisers who received conflicted payments. Some of those shoppers had a diversified pool of low-cost index funds, as academics would recommend; incredibly 85% of such people were advised to switch into higher-charging funds. Another study found that a 50 basis point increase in fund fees led to a 17.2 percentage point increase in portfolio allocations by advisers.

Perhaps the advisers are recommending better funds? Alas, the evidence does not suggest they can; largecap funds, for example, have outperformed the market on only five years out of the last 20; the average underperformance has been 1.6% a year. Picking the "best" funds is not easy either; top quintile funds are more likely to be bottom quintile in future than they are to repeat their success. Studies have estimated that the funds chosen by conflicted advisers underperform by more than a percentage point a year. The studies also show that such advisers encourage clients to trade more frequently, another drag on returns.

http://www.economist.com/blogs/buttonwood/2015/02/financial-planning

pretty crazy how much fees are costing the American public, and this is only for IRAs.

 

[anonymous_abc]

http://www.economist.com/blogs/buttonwood/2015/02/financial-planning

pretty crazy how much fees are costing the American public, and this is only for IRAs.

Passive index investing 4tw.

 

[GhaleonEB]

Some of those shoppers had a diversified pool of low-cost index funds, as academics would recommend; incredibly 85% of such people were advised to switch into higher-charging funds.

This is rage-inducing, but hopefully most people who are in index funds are there for reasons they understand. And for those who are not, the industry is working like hell to keep them out. It's somewhat heartening to see indexing continue to grow.

 

[Smiley90]

This is rage-inducing, but hopefully most people who are in index funds are there for reasons they understand. And for those who are not, the industry is working like hell to keep them out. It's somewhat heartening to see indexing continue to grow.

higher fees aren't always bad...

First Trust NYSE Arca Biotech ETF

%Total Return 2014 47.55
%Total Return YTD 14.04


feels good man, feels real good

Spoiler

Only 3.8% of my portfolio, sadly/for the better, but still pretty to look at. especially for an ETF.

with those returns I feel validated for going after an ETF witih a high expense ratio :lol (0.6%)

 

[anonymous_abc]

higher fees aren't always bad...

First Trust NYSE Arca Biotech ETF

%Total Return 2014 47.55
%Total Return YTD 14.04


feels good man, feels real good

Spoiler

Only 3.8% of my portfolio, sadly/for the better, but still pretty to look at. especially for an ETF.

with those returns I feel validated for going after an ETF witih a high expense ratio :lol (0.6%)

That's very much cherry picking, one good year (or even decade) tells us nothing about the long term future performance or viability.
And sure some things will be better than the index some years, picking this is a lottery though. Be glad you didn't buy an oil ETF last year.
Diversification is the key - Why diversify?


Also love this

 

[PflargBlarg]

http://www.economist.com/blogs/buttonwood/2015/02/financial-planning

pretty crazy how much fees are costing the American public, and this is only for IRAs.

Well these guys know that their job is completely pointless so they've got to keep the illusion going. They'd all be out of work if people just followed the simple advice.

 

[AntoneM]

Just focusing on this part of your question; whatever your decision is, the bolded doesn't matter and should have no bearing on your choice.

The Roth vs. Traditional is something you'll have to research and decide.

The main points are:

• Do you imagine you'll be in a higher tax bracket at retirement? If so, Roth is generally a better option.
• If you stick with a Traditional plan, would you invest the extra money you save from taxes on your own? If so, sticking with Traditional will outperform your Roth investments alone, including having to pay taxes when taking distributions.

It seems, if the match % stays the same, that the Roth 401k is better than a Roth IRA in the sense that a chunk of that money making you tax-free gains isn't even your money.

Sorry about the late reply.

The last paragraph confuses me. The traditional TSP is like a 401k, pre-tax income is invested and taxed when withdrawn; and I understand that it will depend on whether I will be in a higher bracket at retirement. However the comment about tax-free gains makes me think you're saying the Roth plan which is post tax income, and therefore tax-free gains, would be better anyway... but you say the 401k would be better.

 

[AntoneM]

White House Wants To Crack Down On 401(K) Fees




My 401k is with the federal employees TSP which has incredibly low fees, but this is something that is long overdue for everyone else.

$0.29 per $1000 invested.

 

[Husker86]

Sorry about the late reply.

The last paragraph confuses me. The traditional TSP is like a 401k, pre-tax income is invested and taxed when withdrawn; and I understand that it will depend on whether I will be in a higher bracket at retirement. However the comment about tax-free gains makes me think you're saying the Roth plan which is post tax income, and therefore tax-free gains, would be better anyway... but you say the 401k would be better.

EDIT
Disregard everything below this paragraph. I did some research and I now see that employer match does not qualify for the tax-free gains. So Roth 401k plans are technically split. Now I have no idea what you should do I would still lean towards the Roth, but it's not as clear cut as I first thought.
EDIT


There is a such things as a Roth 401k, which I thought you said you had the option of. Roth 401k and normal (traditional) 401k have the same differences as their respective IRA counterparts. I was saying if you could get match contributions into a Roth 401k, that seems like a really good deal since those contributions, that weren't your own money, will grow tax free.

I'm on my phone and busy at the moment so I'll look back on your original post and see what point I was trying to make later tonight.

edit: Okay, I see. You were asking if you should switch from your Traditional 401k to a Roth 401k and said that it had the same matching. My response was that I believe the Roth is a better value because, assuming you keep the same percentage of contributions, you will be putting slightly less in per paycheck (I'm assuming a Roth 401k takes percentage after tax, versus the Traditional 401k taking percentage before tax, but I'm just guessing), but you will be getting a match from your company which will also grow tax-free along with your contributions.

Sorry, I can't seem to make this a short, one sentence response to get out what is going through my head. Here's my attempt: Roth 401k better than Traditional 401k because of tax-free growth of not only your contributions, but your company match as well. To me it just seems like a no brainer, but I'm no expert. The downside is that you obviously won't be able to have the reduced taxable income come tax time since Roth contributions are not deductible.

 

[Piecake]

Well, I mentioned a while ago that my employer is changing 401k providers.

Good news! It is actually going to be better than my old one (I am surprised as well). The investment options will stay the same, but the vestment period will shorten and the fees will be reduced. my employer is a subsidiary of a parent company, so they were able to get a better deal by putting all of the subsidiaries on the same plan.

 

[Wellington]

http://www.wsj.com/video/jack-bogle...ing/A12A870B-7B21-42F5-BCA6-69329DDF5CA0.html

Interview with Bogle in 2011. Good listen

 

[Makai]

http://www.wsj.com/video/jack-bogle...ing/A12A870B-7B21-42F5-BCA6-69329DDF5CA0.html

Interview with Bogle in 2011. Good listen

I can't believe the interviewer asked him how long he had left to live at the end. XD

 

[GhaleonEB]

I can't believe the interviewer asked him how long he had left to live at the end. XD

It was a pretty good interview overall, but yeah that was a heck of a tactless closing question. Oof.

I liked how he characterized bonds early in the interview - something to moderate swings so as to protect you from your own emotions. One of the things I like about Bogel's philosophy is to acknowledge that we can make bad decisions when acting emotionally, and to plan accordingly with the portfolio allocations.

 

[Cyan]

I've made a lot of money ignoring this advice.

I've made a lot of money following this advice.

 

[Any Questions]

Sell your grandchildren. this is my plan. Gonna breed like a horny rabbit and sell them all.

 

[Cyan]

You only make money following an index when the market moves in one of three directions: up. There is still money to make when the markets move sideways and downward. You made money, sure. You also missed out on opportunities.

If you're able to predict the market to the point that you're making money no matter what direction it moves in, I hope you're working at a hedge fund or endowment.

An index fund is a product, not a strategy.

Right. Index funds are the product, "just follow the market" is the strategy.

 

[Husker86]

I've made a lot of money ignoring this advice.

More have lost.

It's the same thing as people who came out rich from Vegas saying that gambling is a good idea (this was mentioned in the interview posted).

That said, I do want to take a chunk of my personal investment account and play with it. I will do so fully understanding that it is similar to traditional gambling, though at least you can research your choices beforehand, and I certainly would never recommend it to anyone I didn't know if I were to come out ahead. And by ahead, I don't only mean positive return, I mean beating the market at large.

This has nothing to do with predicting when the market will go up, sideways, or down. We know it does, so having a triggering event in place in prep for either scenario to reap some nice rewards that costs pennies on the dollar is not as far fetched as you would imagine (and quite fun too imo).

but, yes, I am a partner in a firm

If you make money at every turn of the market, why isn't there a fund for people to jump in? Hell, I'd pay a 3% fee for you to make my money make money every year without fail!

 

[Cyan]

This has nothing to do with predicting when the market will go up, sideways, or down. We know it does, so having a triggering event in place in prep for either scenario to reap some nice rewards that costs pennies on the dollar is not as far fetched as you would imagine (and quite fun too imo).

Of course it does. Beating the average expected return using derivatives, options, etc still requires outguessing the markets. Any kind of guaranteed profit is going to be arbitraged away. "Pennies on the dollar" is not cheap when you're talking about a lot of dollars.

I would expect that making frequent use of these products levels out your return somewhat, while also lowering it commensurately such that you're not getting an outsized Sharpe ratio.

 

[Piecake]

I like this quote from Thinking, Fast and Slow by Daniel Kahneman

Although professionals are able to extract a considerable amount of wealth from amateurs, few stock pickers, if any, have the skill needed to beat the market consistently, year after year. Professional investors, including fund managers, fail a basic test of skill: persistent achievement. The diagnostic for the existence of any skill is the consistency of individual differences in achievement. The logic is simple: if individual differences in any one year are due entirely to luck, the ranking of investors and funds will vary erratically and the year-to-year correlation will be zero. Where there is skill, however, the rankings will be more stable. The persistence of individual differences is the measure by which we confirm the existence of skill among golfers, car salespeople, orthodontists, or speedy toll collectors on the turnpike.

Mutual funds are run by highly experienced and hardworking professionals who buy and sell stocks to achieve the best possible results for their clients. Nevertheless, the evidence from more than fifty years of research is conclusive: for a large majority of fund managers, the selection of stocks is more like rolling dice than like playing poker. Typically at least two out of every three mutual funds underperform the overall market in any given year.

More important, the year-to-year correlation between the outcomes of mutual funds is very small, barely higher than zero. The successful funds in any given year are mostly lucky; they have a good roll of the dice. There is general agreement among researchers that nearly all stock pickers, whether they know it or not—and few of them do—are playing a game of chance. The subjective experience of traders is that they are making sensible educated guesses in a situation of great uncertainty. In highly efficient markets, however, educated guesses are no more accurate than blind guesses.

Some years ago I had an unusual opportunity to examine the illusion of financial skill up close. I had been invited to speak to a group of investment advisers in a firm that provided financial advice and other services to very wealthy clients. I asked for some data to prepare my presentation and was granted a small treasure: a spreadsheet summarizing the investment outcomes of some twenty-five anonymous wealth advisers, for each of eight consecutive years. Each adviser’s score for each year was his (most of them were men) main determinant of his year-end bonus. It was a simple matter to rank the advisers by their performance in each year and to determine whether there were persistent differences in skill among them and whether the same advisers consistently achieved better returns for their clients year after year.

To answer the question, I computed correlation coefficients between the rankings in each pair of years: year 1 with year 2, year 1 with year 3, and so on up through year 7 with year 8. That yielded 28 correlation coefficients, one for each pair of years. I knew the theory and was prepared to find weak evidence of persistence of skill. Still, I was surprised to find that the average of the 28 correlations was .01. In other words, zero. The consistent correlations that would indicate differences in skill were not to be found. The results resembled what you would expect from a dice-rolling contest, not a game of skill.

No one in the firm seemed to be aware of the nature of the game that its stock pickers were playing. The advisers themselves felt they were competent professionals doing a serious job, and their superiors agreed. On the evening before the seminar, Richard Thaler and I had dinner with some of the top executives of the firm, the people who decide on the size of bonuses. We asked them to guess the year-to-year correlation in the rankings of individual advisers. They thought they knew what was coming and smiled as they said “not very high” or “performance certainly fluctuates.” It quickly became clear, however, that no one expected the average correlation to be zero.

Our message to the executives was that, at least when it came to building portfolios, the firm was rewarding luck as if it were skill. This should have been shocking news to them, but it was not. There was no sign that they disbelieved us. How could they? After all, we had analyzed their own results, and they were sophisticated enough to see the implications, which we politely refrained from spelling out. We all went on calmly with our dinner, and I have no doubt that both our findings and their implications were quickly swept under the rug and that life in the firm went on just as before. The illusion of skill is not only an individual aberration; it is deeply ingrained in the culture of the industry. Facts that challenge such basic assumptions—and thereby threaten people’s livelihood and self-esteem—are simply not absorbed. The mind does not digest them. This is particularly true of statistical studies of performance, which provide base-rate information that people generally ignore when it clashes with their personal impressions from experience.

The next morning, we reported the findings to the advisers, and their response was equally bland. Their own experience of exercising careful judgment on complex problems was far more compelling to them than an obscure statistical fact. When we were done, one of the executives I had dined with the previous evening drove me to the airport. He told me, with a trace of defensiveness, “I have done very well for the firm and no one can take that away from me.” I smiled and said nothing. But I thought, “Well, I took it away from you this morning. If your success was due mostly to chance, how much credit are you entitled to take for it?”

What Supports the Illusions of Skill and Validity? Cognitive illusions can be more stubborn than visual illusions...

The most potent psychological cause of the illusion is certainly that the people who pick stocks are exercising high-level skills. They consult economic data and forecasts, they examine income statements and balance sheets, they evaluate the quality of top management, and they assess the competition. All this is serious work that requires extensive training, and the people who do it have the immediate (and valid) experience of using these skills. Unfortunately, skill in evaluating the business prospects of a firm is not sufficient for successful stock trading, where the key question is whether the information about the firm is already incorporated in the price of its stock. Traders apparently lack the skill to answer this crucial question, but they appear to be ignorant of their ignorance. As I had discovered from watching cadets on the obstacle field, subjective confidence of traders is a feeling, not a judgment. Our understanding of cognitive ease and associative coherence locates subjective confidence firmly in System 1.

Finally, the illusions of validity and skill are supported by a powerful professional culture. We know that people can maintain an unshakable faith in any proposition, however absurd, when they are sustained by a community of like-minded believers. Given the professional culture of the financial community, it is not surprising that large numbers of individuals in that world believe themselves to be among the chosen few who can do what they believe others cannot.

 

[Piecake]

Sounds like a dude burned by a portfolio of 8 American Funds mutual funds. I do not know the specifics of his study and whether or not he was measuring the correlation of funds within the same fund family. His findings are typical of funds that are. However, this is conflating the topic of mutual fund investing with overall investment principles when they are their own beast, for better or worst (mostly worst imo), in the grand scheme of things.

I will say though that, rightly or wrongly, people generally adhere to their advisor's mutual fund recommendations not for any fundamental or sound reasons but because they are, in their mind, paying a fee for the services and the relationship that advisor brings to the table.

He is basically the founder of behavioral economics and is a leading researcher on cognitive biases and heuristics. Basically, he researches how our mind plays tricks on us.

 

[Cyan]

I like this quote from Thinking, Fast and Slow by Daniel Kahneman

Worth noting that this isn't at all surprising, and it's not about a lack of skill. It's about the market being skill-resistant. The stock market is anti-pattern, anti-inductive. Any time a pattern is detected, it can only be exploited for a brief time before it disappears. Any successful effort to untangle the stock market automatically causes it to tangle itself again, in a new and different way.

The only way to consistently beat the market is to have a meta-skill that allows you to reliably detect new patterns as they arise and exploit them while they last, or to have a more general high-level skill that most investors in the market won't have, e.g. Buffett's ability to find value.

 

[RumblingRosco]

-

 

[Piecake]

Sounds like a dude burned by a portfolio of 8 American Funds mutual funds. I do not know the specifics of his study and whether or not he was measuring the correlation of funds within the same fund family. His findings are typical of funds that are. However, this is conflating the topic of mutual fund investing with overall investment principles when they are their own beast, for better or worst (mostly worst imo), in the grand scheme of things.

I will say though that, rightly or wrongly, people generally adhere to their advisor's mutual fund recommendations not for any fundamental or sound reasons but because they are, in their mind, paying a fee for the services and the relationship that advisor brings to the table.

edit: sounds like he was referencing the correlation of the funds to the markets and not amongst one another. Also not a surprising find. Additionally, I ignore surveys regarding professionals and firm output.

I am curious, are there well-researched studies that show individual investors or mutual funds who employ some sort of 'correct way' or systematic way of investing can beat the market? (Well-researched meaning a study backed up by data that doesnt succumb to selection and ad hoc-ness)

I mean, there is a whole bunch of papers that show that it is impossible, but I haven't seen hardly any that say it can be done.

 

[vpance]

The stock market is anti-pattern, anti-inductive. Any time a pattern is detected, it can only be exploited for a brief time before it disappears. Any successful effort to untangle the stock market automatically causes it to tangle itself again, in a new and different way.

Not true at all, the markets are not completely random, just like nature isn't completely random. There are patterns that can be exploited reliably, to varying degrees. If it were true then things like trend lines or fibonacci retracements would rarely work but they do and have since forever. The basis of automated and algorithmic trading (HFT) by hedge funds are built on these kinds of concepts.

All the best traders I know and follow trade completely on a technical basis to a great degree of accuracy and success. It's not even super complicated stuff.

 

[Wellington]

Does anyone read Mr Money Mustache? I do from time to time but his writing style becomes unbearable after a while.

I subscribe to the Listen Money Matters podcast and they interviewed him. I have listened to it probably 10 times by now. Dude's a nut, but he has a great philosophy. It's a terrific episode, below is a link for those that want to listen:

http://www.listenmoneymatters.com/early-retirement-with-mr-money-mustache/

I want to get to the point that he is at. Dude socked away 25x the money he used yearly and was able to live off of it and the earnings the money generates. More than anything I need to cut back my expenses, especially housing. My current savings rate is around 28%

 

[Piecake]

Does anyone read Mr Money Mustache? I do from time to time but his writing style becomes unbearable after a while.

I subscribe to the Listen Money Matters podcast and they interviewed him. I have listened to it probably 10 times by now. Dude's a nut, but he has a great philosophy. It's a terrific episode, below is a link for those that want to listen:

http://www.listenmoneymatters.com/early-retirement-with-mr-money-mustache/

I want to get to the point that he is at. Dude socked away 25x the money he used yearly and was able to live off of it and the earnings the money generates. More than anything I need to cut back my expenses, especially housing. My current savings rate is around 28%

I'll check it out. I mentioned him in the OP. Basically, my thinking is that even if you think he is insane and his early retirement philosophy stupid or impossible, that does not mean that he doesn't have a bunch of good ideas for saving money. He certainly does.

 

[Chris R]

Did you guys not read the first post? You have amazing options since you're in the states.
Do a good mix of like 60/40 VTI/VXUS and you're set for a while. As you get older you'll want to add in a low percentage of bonds like BLV or BND.

The above is the super lazy way to go and your returns will be great with minimal interaction.

I'll look into this, I just figured that ANY fund was better than no fund. I can always move stuff around later if I need to.

 

[Piecake]

I'll look into this, I just figured that ANY fund was better than no fund. I can always move stuff around later if I need to.

I should note that that ratio is a personal preference on my part. I basically chose it because it closely aligns with how the world stock market is aligned.

Vanguard has done some research on it and they've come to the conclusion that anywhere between 20-40% international holdings is ideal. So I am definitely on the high end.

I know others have made the case for holding even less than that due to American companies being international companies, so you are already getting world exposure just by investing in those companies.

 

[Makai]

Does anyone read Mr Money Mustache? I do from time to time but his writing style becomes unbearable after a while.

I subscribe to the Listen Money Matters podcast and they interviewed him. I have listened to it probably 10 times by now. Dude's a nut, but he has a great philosophy. It's a terrific episode, below is a link for those that want to listen:

http://www.listenmoneymatters.com/early-retirement-with-mr-money-mustache/

I want to get to the point that he is at. Dude socked away 25x the money he used yearly and was able to live off of it and the earnings the money generates. More than anything I need to cut back my expenses, especially housing. My current savings rate is around 28%

I think the primary source of his success is getting $10k raises back-to-back for years.

 

[Piecake]

I think the primary source of his success is getting $10k raises back-to-back for years.

For the vast majority of people though, like 99%, that doesnt translate into more savings. It translates into more spending. He certainly made enough money for this to be possible, but the main reason why it was possible was because of his mindset to save an absurd amount of money relative to his paycheck.

 

[AppleBlade]

I've made a lot of money ignoring this advice.

How long have you been investing for?

Every single person I know who has tried to beat the market has failed so I am very skeptical of this approach. My cousin who works in finance basically lived and breathed the stock market had started day trading right after the financial crisis. Despite a few early victories (which he boasted about proudly) he managed to do very mediocre and pulled out . . . and this was during the incredible bull run that we've had the past few years.

 

[Wellington]

I think the primary source of his success is getting $10k raises back-to-back for years.

I think that the strongest point that can be gleaned from what you linked is what I tell my friends all of the time. Once you have a partner that is like minded to you financially and is willing to do whatever it takes to hit financial goals, you will reach them in faster than half the time.

From year 3 to 4 he goes from a personal income of $77k to a household income of $127k AND they both contribute to 401ks that have 5% company match. That's really when they started really gaining momentum. Year 4 to 5 they added $100k to their net worth.