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[this_guy]

Well, I guess we will disagree because I think your investment objectives are totally wrong. You also apparently disagree with Warren buffett, Jack Bogle, and david Swenson!

There is no reason to beat the market because the chance of beating the market is not worth the risk. If you invest Its simply not necessary. I mean, hell, youd have a million dollars if you invested 10k at 25 and then 6k every year afterwards by the time you hit 65, and that is a pretty conservative 6% return. Your chance of losing to the market is too great, not to mention all that time you wasted picking that fund.

And different asset classes and types? I invest in everything. Total US stock, Total International stock, and total us bond (though bond is not exactly total). If you want to slice and dice and focus on specific sectors for indexes, well, you can do that if you want.

Chasing returns is stupid. Seriously. Past success is not an indicator of future success and you have no idea which fund is going to do well. Riskier investment? Who the fuck knows if that is actually going to pan out and it simply isnt worth the higher fees and risk that entails.

But hey, to each their own. I am going to stop discussing this since we clearly disagree.



Oh, i forgot, everyone thinks that they are the next great investor, lol.

Do you think Warren Buffet only invests in index funds?

 

[Enron]

Do you think Warren Buffet only invests in index funds?

Apparently. Seriously, my head hurts trying to wrap my head around this dude. It's like he believes that investing is either A or B - and nothing else.

 

[Epsilon-delta]

Oh, i forgot, everyone thinks that they are the next great investor, lol.

Yes, invest in mutual funds and in 30 years you might have something. By that time though, you'll be on death's doorstep or close to it.

My portfolio is over $700k at my age of 32 and it's not because of mutual funds. I guess when I invested in McDonalds in 2009 and it's almost doubled, I was lucky?

Or how I turned my $10k in trading the emini S&P futures to over $100k in six years? Yea bud, it's all luck. Some people don't want to do the rat race until retirement age. Have fun playing that game.

 

[Piecake]

Everyone reads a goddamned article and thinks they are an expert.

The fact that (given your list above) you think investing is all stocks (and stock indexes) and bonds just gives it away.

Well, its the only sane and worthwhile investment over the long term. Real estate, gold, peanuts? or whatever the hell else you invest in? Its simply not worth the risk and the hassle because that stuff is not diversified and not liquid. You should realize that that stuff would definitely be off the table if I am perfectly fine getting a 5-6% return in 30 years with absolutely no hassle of effort.

Are you willing to share what things besides stocks and bonds you invest in? I am honestly curious. And yes, i know. I failed. It is quite hard bowing out of an argument

Yes, invest in mutual funds and in 30 years you might have something. By that time though, you'll be on death's doorstep or close to it.

My portfolio is over $700k at my age of 32 and it's not because of mutual funds. I guess when I invested in McDonalds in 2009 and it's almost doubled, I was lucky?

Or how I turned my $10k in trading the emini S&P futures to over $100k in six years? Yea bud, it's all luck. Some people don't want to do the rat race until retirement age. Have fun playing that game.

Mostly yea. Not to mention you invested your money in the stock market after a HUGE crash.

 

[Epsilon-delta]

Apparently. Seriously, my head hurts trying to wrap my head around this dude. It's like he believes that investing is either A or B - and nothing else.

He sounds like a Boglehead from the Boglehead forums.

'Invest in the Vanguard Total Market Index fund and you're set' lol.

 

[Drensch]

Sounds like a RICO case in the making.

 

[Epsilon-delta]

Mostly yea. Not to mention you invested your money in the stock market after a HUGE crash.

That's not luck, it's called smart investing. Opportunity knocks once in a lifetime and you answer when it does.

 

[this_guy]

Well, its the only sane and worthwhile investment over the long term. Real estate, gold, peanuts? or whatever the hell else you invest in? Its simply not worth the risk and the hassle because that stuff is not diversified and not liquid. You should realize that that stuff would definitely be off the table if I am perfectly fine getting a 5-6% return in 30 years with absolutely no hassle of effort.

Are you willing to share what things besides stocks and bonds you invest in? I am honestly curious. And yes, i know. I failed. It is quite hard bowing out of an argument



Mostly yea. Not to mention you invested your money in the stock market after a HUGE crash.

How has the S&P performed over the last 15 years? Based on that answer, how can you be so sure you are going to get a guaranteed 5-6% annualized return over the next 30 years?

 

[Piecake]

He sounds like a Boglehead from the Boglehead forums.

'Invest in the Vanguard Total Market Index fund and you're set' lol.

Well, I think that is the only sane way to invest. Sure, you might hit it big like you did, but you might not. I simply don't understand why anyone would take that risk because you can seriuosly screw yourself over that way. Seems idiotic to me when you can retire well by consistently investing money over time. Retire early? Well, just invest a lot more

But hey, everyone wants to believe they are special and talented and are better than the average investor (the average investor being professional fund managers and traders since they are the ones doing most of the trades)

How has the S&P performed over the last 15 years? Based on that answer, how can you be so sure you are going to get a guaranteed 5-6% annualized return over the next 30 years?

Like I said before, if that happens we are all fucked so this discussion becomes pretty pointless

 

[Chichikov]

That is my whole point. This is why Pensions suck - you don't have control of YOUR money. You have to trust that your management makes the right decision for you (lol).

But trying to save for your own retirement on your own don't make a lick of sense economically.
The problem is that you can't possibly know how much money you're going to need in retirement, even if you had the knowledge and time to calculate probability of your monetary needs during retirement, and even you could know with 100% certainty the returns you'll get on your investment, such model still force you to save enough money for the worst (or close to worst) case.
It's like running an insurance program for one person.
If you have many people sharing the risk (like in a pension fund) then everyone just need to set aside the average amount of money needed in retirement. On the aggregate, this is much much less money than everyone putting aside enough to have less than 10% probability of running out of money.
That's good for you (as you have more money to spend) that's good for the economy (as that disposable income will go back to the economy as spending) but it's bad for wall street, since they'll have much less money to manage that way, which is exactly why they pushed the 401k model and why they try to undermine pension funds.

 

[James Sawyer Ford]

This is a really great thread, and a topic that has been on my mind for a while. The entire retirement/pension system is one gigantic conflict of interest.

Here you have those that oversee the pension funds, and their ultimate goal is to show great returns "above and beyond the market". If they are getting "average returns" they are looked upon as not doing their job. So they continually shift money from one fund to another in order to beat the market and essentially justify their position.

And of course the snake oil salesman (hedge funds, private equity funds) are MORE THAN HAPPY to oblige and charge 2% annual fees and 20% of profits to these massive pension funds.

Yet, there's been decades of data showing definitively that these alternate investments do WORSE than average returns net of fees. Hedge Funds in particular have done worse than some low risk bond funds (net of fees) over the past decade and yet the investor is incurring much higher risk.

It's sickening how Wall Street has somehow managed to convince pension managers that they're somehow fortune tellers. Hedge Funds don't need to beat the market at all; they just need to convince somebody that they can, and regardless of what the market does, they have a few employees that will collect a massive amount of money from fees doing work that isn't valuable whatsoever.

It's one gigantic scam. They should simply invest in low-cost index funds and tailor the risks (stock/bond mix) to their particular situation. That would cut out massive fund losses that go towards the managers of these hedge/private equity funds that do not provide value to their clients.

 

[Enron]

This is a really great thread, and a topic that has been on my mind for a while. The entire retirement/pension system is one gigantic conflict of interest.

Here you have those that oversee the pension funds, and their ultimate goal is to show great returns "above and beyond the market". If they are getting "average returns" they are looked upon as not doing their job. So they continually shift money from one fund to another in order to beat the market and essentially justify their position.

And of course the snake oil salesman (hedge funds, private equity funds) are MORE THAN HAPPY to oblige and charge 2% annual fees and 20% of profits to these massive pension funds.

Yet, there's been decades of data showing definitively that these alternate investments do WORSE than average returns net of fees. Hedge Funds in particular have done worse than some low risk bond funds (net of fees) over the past decade and yet the investor is incurring much higher risk.

It's sickening how Wall Street has somehow managed to convince pension managers that they're somehow fortune tellers. Hedge Funds don't need to beat the market at all; they just need to convince somebody that they can, and regardless of what the market does, they have a few employees that will collect a massive amount of money from fees doing work that isn't valuable whatsoever.

It's one gigantic scam. They should simply invest in low-cost index funds and tailor the risks (stock/bond mix) to their particular situation. That would cut out massive fund losses that go towards the managers of these hedge/private equity funds that do not provide value to their clients.

I just want to point out that Hedge Funds and Index Funds are not the only types of Investment Funds out there. And Hedge Funds are extremely uncommon in 401k retirement plans. I assume they are fairly uncommon in Pension plans as well.

 

[ucdawg12]

I guess when I invested in McDonalds in 2009 and it's almost doubled, I was lucky?

just wondering, how did an s&p index do over the same time?

 

[Zaraki_Kenpachi]

Piecake, I don't think you know what risk is or what it means in a financial sense because the way you keep throwing around risk isn't how it's used in finance. You don't take on more risk my having a lower ß to the market...

Also, there is a lot more strategies to investing money than guy stocks or buy bonds and nothing else. Also, you keep glossing over the fact that the "experts" you use don't say to exclusively use index funds.

This combined with your continued lack of ability to realize you want to preserve capital later in life since you can't wait the 80 years or whatever average you're using to gain your 6% return is beyond frustrating for the most part. You seem to not understand a couple of basic things about finance but instead of talking about it you decide to yell and scream over everyone else and post "half truths" (at best) to support your arguments all while ignoring people's counterpoints. No one here hates or is against index funds, but many people also aren't naive enough to think that they are the best investment for every person ever, under every circumstance. Until you get a better understanding of finance, there's not really anymore discussion that can be had.

Edit: One final point, since you seem to think the S&P rules all, it's not the only index so it doesn't matter if it craps out and it doesn't all hang on that since you can invest in other countries, other markets, etc.. Again, you don't see to understand the world of finance if you think it's all over anyhow if the s&p doesn't give the same returns it has in the past.

 

[James Sawyer Ford]

I just want to point out that Hedge Funds and Index Funds are not the only types of Investment Funds out there. And Hedge Funds are extremely uncommon in 401k retirement plans. I assume they are fairly uncommon in Pension plans as well.

Hedge Funds aren't all that uncommon for pension plans because Hedge Funds only deal with huge pools of money, generally. Currently I've never even heard of 401K plans offering Hedge Funds because as mentioned previously they're normally reserved for ultra-wealthy.

But Goldman is trying to change that, and create a mutual fund that has hedge funds and wants to sell it to 401K plans:

http://www.dailyfinance.com/2013/05/24/hedge-funds-ordinary-investors-401k/

Yeah, Goldman, I'll get right on that....

And I never said that Index Funds and Hedge Funds were the only types of investment funds out there. But those that manage pension funds should look to minimize fees as one of their largest priorities -- pensions, unlike many individual investors, have the benefit of investing large amounts of money over long periods of time -- spanning decades and beyond (as long as the pension is solvent). And over long periods of time, it has been proven that active management is a loser's game. You basically trail the market by whatever fees your paying compared to whatever basic asset class you're investing in.

 

[Zaraki_Kenpachi]

Hedge Funds aren't all that uncommon for pension plans because Hedge Funds only deal with huge pools of money, generally. Currently I've never even heard of 401K plans offering Hedge Funds because as mentioned previously they're normally reserved for ultra-wealthy.

But Goldman is trying to change that, and create a mutual fund that has hedge funds and wants to sell it to 401K plans:

http://www.dailyfinance.com/2013/05/24/hedge-funds-ordinary-investors-401k/

Yeah, Goldman, I'll get right on that....

And I never said that Index Funds and Hedge Funds were the only types of investment funds out there. But those that manage pension funds should look to minimize fees as one of their largest priorities -- pensions, unlike many individual investors, have the benefit of investing large amounts of money over long periods of time -- spanning decades and beyond (as long as the pension is solvent). And over long periods of time, it has been proven that active management is a loser's game. You basically trail the market by whatever fees your paying compared to whatever basic asset class you're investing in.

Eh, it's doomed to fail anyhow. I can't see the laws really allowing it since you need to be an "experienced" investor and most of the "funds of funds" that they've had for years which is just mutual funds buying shares of hedge funds, never really took off. You can't take a product that gets it's returns from being illiquid and make it a security that you can take your money and go home at the drop of a hat. Even if it becomes legal to be created, it will never perform more than abysmal since it's fighting itself.

 

[Enron]

The only way i can see those things showing up in 401ks is via Self Directed Brokerages

 

[Piecake]

Piecake, I don't think you know what risk is or what it means in a financial sense because the way you keep throwing around risk isn't how it's used in finance. You don't take on more risk my having a lower ß to the market...

Also, there is a lot more strategies to investing money than guy stocks or buy bonds and nothing else. Also, you keep glossing over the fact that the "experts" you use don't say to exclusively use index funds.

This combined with your continued lack of ability to realize you want to preserve capital later in life since you can't wait the 80 years or whatever average you're using to gain your 6% return is beyond frustrating for the most part. You seem to not understand a couple of basic things about finance but instead of talking about it you decide to yell and scream over everyone else and post "half truths" (at best) to support your arguments all while ignoring people's counterpoints. No one here hates or is against index funds, but many people also aren't naive enough to think that they are the best investment for every person ever, under every circumstance. Until you get a better understanding of finance, there's not really anymore discussion that can be had.

Edit: One final point, since you seem to think the S&P rules all, it's not the only index so it doesn't matter if it craps out and it doesn't all hang on that since you can invest in other countries, other markets, etc.. Again, you don't see to understand the world of finance if you think it's all over anyhow if the s&p doesn't give the same returns it has in the past.

Ive stated before in this thread that I am invested in Total US, Total International and Total Bond. As for the rest, well, I guess we will see who ends up with a greater return in the end.

http://money.usnews.com/money/blogs/On-Retirement/2012/02/09/david-swensen-advises-index-funds

Swensen is credited with changing the way endowments invest by using private equity and hedge funds to boost returns. Given these views, it is particularly noteworthy that, at recent session of the John C. Bogle Legacy Forum, Swensen is quoted saying that unless an investor has access to “incredibly high-qualified professionals,” they “should be 100 percent passive—that includes almost all individual investors and most institutional investors”. In an NPR interview, he affirms these views, stating: “When you look at the results on an after-fee, after-tax basis, over reasonably long periods of time, there’s almost no chance that you end up beating the index fund.”

Kinda ironic that he is the one who started the whole endowment investing in hedge fund craze. But hey, he probably just doesnt understand finance.

 

[James Sawyer Ford]

Yes, invest in mutual funds and in 30 years you might have something. By that time though, you'll be on death's doorstep or close to it.

My portfolio is over $700k at my age of 32 and it's not because of mutual funds. I guess when I invested in McDonalds in 2009 and it's almost doubled, I was lucky?

Or how I turned my $10k in trading the emini S&P futures to over $100k in six years? Yea bud, it's all luck. Some people don't want to do the rat race until retirement age. Have fun playing that game.

Well, considering the S&P 500 is up 100% since 2009 and McD is up 73%, did you really do anything special or skillfull? No, in fact, you had less returns with much more idiosyncratic risk.

Congrats on 700k, but that was gained by luck, not skill (not knowing how much you invested/inherited yourself vs. actual investment gains...). See if you can keep at it and perform better than average market returns (all trading costs included) for the next 30 years.

You can save early in index funds and exit the "rat race" with a much higher percentage chance of achieving those retirement goals than investing in a single stock or some risky futures pick.

 

[Zaraki_Kenpachi]

Ive stated before in this thread that I am invested in Total US, Total International and Total Bond. As for the rest, well, I guess we will see who ends up with a greater return in the end.

http://money.usnews.com/money/blogs/On-Retirement/2012/02/09/david-swensen-advises-index-funds



Kinda ironic that he is the one who started the whole endowment investing in hedge fund craze. But hey, he probably just doesnt understand finance.

Can you selective quote a little more? That's why as Yale's Chief Investment Officer he still invests a lot of money into hedge funds? Does he want to sabotage Yale? Why doesn't he say all instead of most when making the recommendation? Again, no one is saying index funds can't be or aren't awesome many times. I'm glad you think one person is infallible and you randomly chose him. What if Buffet says the opposite? Is the third wealthiest man in the world just too stupid for his own good? You're still acting like hedge funds and index funds are the only two investments that exist, they still aren't. Again, you yell and scream that everyone else is stupid instead of trying to have a conversation.

 

[James Sawyer Ford]

Can you selective quote a little more? That's why as Yale's Chief Investment Officer he still invests a lot of money into hedge funds? Does he want to sabotage Yale? Why doesn't he say all instead of most when making the recommendation? Again, no one is saying index funds can't be or aren't awesome many times. I'm glad you think one person is infallible and you randomly chose him. What if Buffet says the opposite? Is the third wealthiest man in the world just too stupid for his own good? You're still acting like hedge funds and index funds are the only two investments that exist, they still aren't. Again, you yell and scream that everyone else is stupid instead of trying to have a conversation.

Warren doesn't say the opposite though. He's really just suggesting that to the average institutional or retailer investor, choosing to minimize your fees and diversify your risk it the way to go.

Warren Buffet does this as well, but instead of buying index funds he just outright invests directly in companies. And he tends to think about the long term, so his expenses are quite low. He invests in a very diverse range of companies. If you have the time to directly buy a broad basket of stocks and stick to them for the long term, there's nothing wrong with that either.

Warren has the benefit of buying companies and managing them himself, more directly influencing their performance than some typical mutual fund manager picking and choosing stocks.. So his costs are low, and also has the added benefit of his insurance business which further aids his investments.

Note that many alternative investments DO actually generate some slight performance advantage to the market...but it is not enough to cover the fees they charge, so this additional performance lines the pockets of the fund managers and doesn't benefit their clients.

For the rank & file investor (whether retail or institutional), one of their best options is to go for a variety of funds that minimize fees (particularly index funds, of which there's a ton to choose from).

 

[Epsilon-delta]

Well, considering the S&P 500 is up 100% since 2009 and McD is up 73%, did you really do anything special or skillfull? No, in fact, you had less returns with much more idiosyncratic risk.

Congrats on 700k, but that was gained by luck, not skill (not knowing how much you invested/inherited yourself vs. actual investment gains...). See if you can keep at it and perform better than average market returns (all trading costs included) for the next 30 years.

You can save early in index funds and exit the "rat race" with a much higher percentage chance of achieving those retirement goals than investing in a single stock or some risky futures pick.

Not luck buddy, skill but keep on hating. And who's dumb enough to invest all their eggs in one basket in just one stock? Risky futures pick? If I risk 0.5% of $100,000 per trade, am I really being risky? I can make more money in one day trading the emini S&P futures than most people make in a month. As long as you have a solid trading plan in trading futures, as in entry and exit points, trade size, keeping your emotions in check, not over trading, etc, you can do it. You need to know your technical analysis when it comes to trading futures but the average investor would rather set it and forget with index funds and that's not my style.

I'm willing to take the risk and so far I'm doing fine. By the way, I don't expect to trade for the next 30 years because I'm going to retire before 50. Also, I didn't inherit anything, I'm a self-made man.

 

[Piecake]

Can you selective quote a little more? That's why as Yale's Chief Investment Officer he still invests a lot of money into hedge funds? Does he want to sabotage Yale? Why doesn't he say all instead of most when making the recommendation? Again, no one is saying index funds can't be or aren't awesome many times. I'm glad you think one person is infallible and you randomly chose him. What if Buffet says the opposite? Is the third wealthiest man in the world just too stupid for his own good? You're still acting like hedge funds and index funds are the only two investments that exist, they still aren't. Again, you yell and scream that everyone else is stupid instead of trying to have a conversation.

Well, if you would have actually read the quote you would have realized that he stated that only people with a team of incredibly talented professionals to do the research, etc whatever should invest in anything else besides passive. Obviously, he thinks he has a team of professional investors who can do that work.

Why doesnt he say all? Well, I guess he assumes that there are some individuals out there who spend all their time researching who have the expertise to hold more interesting portfolios. This is only a few people because most everyone else has a job, family, friends that take up most of their time and concentration.

And where am i stating that there are only two investment methods? David Swenson's whole deal is investing in a bunch of weird crap, including hedge funds and a bunch of other things like lumber even. I pointed out the hedge fund because it is relevant to the original article

Personally, I don't really care what these guys say. I am just using them since you say I don't understand finance, and admittedly, i dont, nor do i think i need to. These guys obviously do understand finance. At least, I would hope you'd admit that David Swenson understands finance.

Why don't I think i need to understand finance? Well, over the long term, the data is pretty clear that index mutual funds beat actively managed funds. But wait, what about other investments? Well, I like those even less.

Individual stocks? I neither the time nor the patience to research an individual company and think its extremely difficult to predict the value of that company over the long term, and short term, well, I think thats mostly pure luck (warren buffett agrees with me, yay!).

What else is there? sector indexes? (eh) Futures, options? (thats pure luck) real estate? (i honestly like the idea of a rental property, but I can't repair or build things for shit). Lumber? (lol) Gold? Peanuts? Annuities? (bleh) Whole life? (shoot me)

Am i missing anything here?

 

[GaimeGuy]

Yes, invest in mutual funds and in 30 years you might have something. By that time though, you'll be on death's doorstep or close to it.

My portfolio is over $700k at my age of 32 and it's not because of mutual funds. I guess when I invested in McDonalds in 2009 and it's almost doubled, I was lucky?

Or how I turned my $10k in trading the emini S&P futures to over $100k in six years? Yea bud, it's all luck. Some people don't want to do the rat race until retirement age. Have fun playing that game.

It was smart of you to get into the market in 2009, but it was luck that you had the resources to invest.

I don't know how much money you've invested vs what your returns are, or how diversified your portfolio is, but from the suonds of it, the bulk of your $700k portfolio is in McDonalds, and you invested several hundred grand in 2009. That's just not an option to most people.

I've been working for about 40 months now, and for about half that time, I've been aggressively contributing 15% of my paycheck (pre-taxes) to my 401k. my portfolio breakdown is:

28% Company Stock Funds
23% Large Cap Stock Funds
14% Target Date Funds
14% International Stock Funds
12% Small/Mid-Cap Stock Funds
5% Bond Funds
4% Other
0% Short Term Investment Funds

(Now, the reason why my company stock funds are so high is because the company match automatically goes into the Employee Stock Option program. The company match is 50% of the employee contributions, capped at 4%. I definitely need to transfer about 3/4ths of my company stock balance to other funds, but anyways...)

Over the last 24 months, my performance gains are 51.52%. Unfortunately the savings plan website doesn't give performance gains going further back than 2 years, but as you can see, it doesn't take "skill" to earn high returns over the last few years. From the sound of it, you're not diversified, and are playing with fire.

 

[James Sawyer Ford]

Not luck buddy, skill but keep on hating. And who's dumb enough to invest all their eggs in one basket in just one stock? Risky futures pick? If I risk 0.5% of $100,000 per trade, am I really being risky? I can make more money in one day trading the emini S&P futures than most people make in a month. As long as you have a solid trading plan in trading futures, as in entry and exit points, trade size, keeping your emotions in check, not over trading, etc, you can do it. You need to know your technical analysis when it comes to trading futures but the average investor would rather set it and forget with index funds and that's not my style.

I'm willing to take the risk and so far I'm doing fine. By the way, I don't expect to trade for the next 30 years because I'm going to retire before 50. Also, I didn't inherit anything, I'm a self-made man.

I'm not hating, just pointing out the fact that it's not skill no matter how much you delude yourself into believing it is. Your McDonalds example just proved that. You underperformed while taking on much more risk. It's not something to gloat about.

Also, if you can replicate your success, you should do what the pro snake oil salesman do and invest OTHER PEOPLE'S money rather than your own, and take fees off the top. You'll make far more money that way. Also, you don't even need to outperform the underlying asset class you're investing in.

Technical analysis is also 100% pure bullshit. Just because a financial asset is trending in one direction over a given period of time will tell you absolutely nothing about what it's going to do in the future.

 

[empty vessel]

"Pensions don't suck because you don't have control over your money! They suck because of <insert bad thing that is possible precisely BECAUSE you don't have control over your investments>! "

In the end - would you rather have your company's HR department determine what the right place for YOUR money is, or would YOU rather determine the right place for YOUR money?

I think the answer here is obvious.

That isn't how pensions work, at least defined benefit pensions. In the end, I would rather somebody owe me what I successfully bargained for and what they promised to pay me.

 

[Zaraki_Kenpachi]

Well, if you would have actually read the quote you would have realized that he stated that only people with a team of incredibly talented professionals to do the research, etc whatever should invest in anything else besides passive. Obviously, he thinks he has a team of professional investors who can do that work.

Why doesnt he say all? Well, I guess he assumes that there are some individuals out there who spend all their time researching who have the expertise to hold more interesting portfolios. This is only a few people because most everyone else has a job, family, friends that take up most of their time and concentration.

And where am i stating that there are only two investment methods? David Swenson's whole deal is investing in a bunch of weird crap, including hedge funds and a bunch of other things like lumber even. I pointed out the hedge fund because it is relevant to the original article

Personally, I don't really care what these guys say. I am just using them since you say I don't understand finance, and admittedly, i dont, nor do i think i need to. These guys obviously do understand finance. At least, I would hope you'd admit that David Swenson understands finance.

Why don't I think i need to understand finance? Well, over the long term, the data is pretty clear that index mutual funds beat actively managed funds. But wait, what about other investments? Well, I like those even less.

Individual stocks? I neither the time nor the patience to research an individual company and think its extremely difficult to predict the value of that company over the long term, and short term, well, I think thats mostly pure luck (warren buffett agrees with me, yay!).

What else is there? sector indexes? (eh) Futures, options? (thats pure luck) real estate? (i honestly like the idea of a rental property, but I can't repair or build things for shit). Lumber? (lol) Gold? Peanuts? Annuities? (bleh) Whole life? (shoot me)

Am i missing anything here?

So everyone should do it but him? And according to you hedge funds just make you lose money so what could he possibly see in them? If they're such a money sink then even with a team of advisors, what could they possibly benefit from?

You still haven't addressed the need to change your risk as you age. So if the market plummets like in '08 again, what do you do? You lose a lot of money and what?

Warren doesn't say the opposite though. He's really just suggesting that to the average institutional or retailer investor, choosing to minimize your fees and diversify your risk it the way to go.

Warren Buffet does this as well, but instead of buying index funds he just outright invests directly in companies. And he tends to think about the long term, so his expenses are quite low. He invests in a very diverse range of companies. If you have the time to directly buy a broad basket of stocks and stick to them for the long term, there's nothing wrong with that either.

Warren has the benefit of buying companies and managing them himself, more directly influencing their performance than some typical mutual fund manager picking and choosing stocks.. So his costs are low, and also has the added benefit of his insurance business which further aids his investments.

Note that many alternative investments DO actually generate some slight performance advantage to the market...but it is not enough to cover the fees they charge, so this additional performance lines the pockets of the fund managers and doesn't benefit their clients.

For the rank & file investor (whether retail or institutional), one of their best options is to go for a variety of funds that minimize fees (particularly index funds, of which there's a ton to choose from).

I know, I was using it as an example. He's pretty much just making an appeal to authority since he's selectively choosing who to follow since they don't all agree and buffet and them don't agree to the degree he does anyhow. Buffet is different anyhow because the terms he gets when buying major stakes in a company are very much different than anything you could see from a simple index fund. Buffet does more than just invest in index funds.

 

[GhaleonEB]

A few thoughts.

Pensions, and retirement funds in general, are long-term investments and it's well demonstrated that over the long term, index funds outperform the vast majority of actively manged funds, hedge funds and otherwise. We're talking 20-30+ year horizons, not a five year check. And those that do beat, do not do so regularly. You have to chase funds and get very lucky in doing so to beat the relevant market index over those kind of horizons.

Given that an employer is managing the funds in a pension rather than at least offering some degree of self-direction by the employer (ala 401k type of options), there should be a strong bias for preserving the returns on the investments. And to me, that by definition means avoiding high cost investments. Any fund with expenses over 1% should be highly objectionable. (My own threshold is much lower, but over 1% should be a red flag.)

That said, index funds are not the only viable option, though they are my preferred. My own company invests our retirement fund in a hybrid fund that invests in international and domestic index funds, actively managed international and US bond funds, hedge funds and cash, with a goal of 1) stable principle and 2) a growth rate of several points above inflation (IIRC, 3%). I think that's a reasonable approach too; the fees are not too high and the goal is stability and steady growth. (I should note, that's not a pension, but different retirement plan not dissimilar from a 401k.)

Investing in very high cost funds with spotty returns is an unsound investment strategy for the long term. I haven't found any research that convincingly argues otherwise.

 

[Zaraki_Kenpachi]

A few thoughts.

Pensions, and retirement funds in general, are long-term investments and it's well demonstrated that over the long term, index funds outperform the vast majority of actively manged funds, hedge funds and otherwise. We're talking 20-30+ year horizons, not a five year check. And those that do beat, do not do so regularly. You have to chase funds and get very lucky in doing so to beat the relevant market index over those kind of horizons.

Given that an employer is managing the funds in a pension rather than at least offering some degree of self-direction by the employer (ala 401k type of options), there should be a strong bias for preserving the returns on the investments. And to me, that by definition means avoiding high cost investments. Any fund with expenses over 1% should be highly objectionable. (My own threshold is much lower, but over 1% should be a red flag.)

That said, index funds are not the only viable option, though they are my preferred. My own company invests our retirement fund in a hybrid fund that invests in international and domestic index funds, actively managed international and US bond funds, hedge funds and cash, with a goal of 1) stable principle and 2) a growth rate of several points above inflation (IIRC, 3%). I think that's a reasonable approach too; the fees are not too high and the goal is stability and steady growth. (I should note, that's not a pension, but different retirement plan not dissimilar from a 401k.)

Investing in very high cost funds with spotty returns is an unsound investment strategy for the long term. I haven't found any research that convincingly argues otherwise.

Of course, I don't think anyone is arguing otherwise.

 

[Piecake]

So everyone should do it but him? And according to you hedge funds just make you lose money so what could he possibly see in them? If they're such a money sink then even with a team of advisors, what could they possibly benefit from?

You still haven't addressed the need to change your risk as you age. So if the market plummets like in '08 again, what do you do? You lose a lot of money and what?

Well, he apparently thinks so. And I never said all Hedge funds lose money, just that most are simply not worth it compared to the index. He thinks he can pick winners, you think you can pick winners, I dont think I can pick winners. Thats the difference right there.

I honestly didn't think I needed to go into my investing strategy as I age. Personally, I am going to stay pretty heavy on stocks until about 10-15 years before retirement and then I am going to make a dramatic shift towards bonds. Maybe like 60% bonds 40% stocks about 10 years out, and adjusting that to a higher percentage depending on if I need more return or If I already have enough money to support me

What bonds? Well, I'd probably do a 50/50 Total Bond, TIPS fund split. I like the inflation coverage of the TIPS and think that could work quite well with me fleeing stocks.

I know, I was using it as an example. He's pretty much just making an appeal to authority since he's selectively choosing who to follow since they don't all agree and buffet and them don't agree to the degree he does anyhow. Buffet is different anyhow because the terms he gets when buying major stakes in a company are very much different than anything you could see from a simple index fund. Buffet does more than just invest in index funds.

I am appealing to authority, but I am not following his advice because he said so. hell, I never even heard of him until like a month ago, lol. I am following the index strategy because I don't think I can pick winners and index funds beat actively managed funds over 30 years. Hard data shows this. I don't want to bother with other methods of investing, because again, I dont think i can pick winners.

 

[Epsilon-delta]

It was smart of you to get into the market in 2009, but it was luck that you had the resources to invest.

I don't know how much money you've invested vs what your returns are, or how diversified your portfolio is, but from the suonds of it, the bulk of your $700k portfolio is in McDonalds, and you invested several hundred grand in 2009. That's just not an option to most people.

I've been working for about 40 months now, and for about half that time, I've been aggressively contributing 15% of my paycheck (pre-taxes) to my 401k. my portfolio breakdown is:

28% Company Stock Funds
23% Large Cap Stock Funds
14% Target Date Funds
14% International Stock Funds
12% Small/Mid-Cap Stock Funds
5% Bond Funds
4% Other
0% Short Term Investment Funds

(Now, the reason why my company stock funds are so high is because the company match automatically goes into the Employee Stock Option program. The company match is 50% of the employee contributions, capped at 4%. I definitely need to transfer about 3/4ths of my company stock balance to other funds, but anyways...)

Over the last 24 months, my performance gains are 51.52%. Unfortunately the savings plan website doesn't give performance gains going further back than 2 years, but as you can see, it doesn't take "skill" to earn high returns over the last few years. From the sound of it, you're not diversified, and are playing with fire.

It wasn't luck that I had the resources to invest. When you make $85k per year and live frugally, you can save a lot and invest in the market. I busted my butt through school and it paid off.

How did it all started? I joined the military when I was young and saved every penny for 6 six years including deployment money and invested every penny save 3 months pay for emergencies. During my time in active duty, I was in Rota, Spain for two years and was netting $2200 every paycheck while the Navy paid for everything else. You know how much money you can save in just two years with that kind of pay? What I saved pales in comparison to some officers that I knew that were saving.

Got out and used the GI Bill to pay for my school, then used a VA loan to buy my house. The rest is history. Don't worry about me I'm fine.

 

[GhaleonEB]

Of course, I don't think anyone is arguing otherwise.

That is why I did not quote anyone. I was more responding to the article itself (or rather, the quotes in the OP, which are what I've read), than to a specific person, even though I touched on some of the topics being discussed. It is my opinion that investing pensions in hedge funds is a bad idea for the reasons I explained.

 

[Epsilon-delta]

I'm not hating, just pointing out the fact that it's not skill no matter how much you delude yourself into believing it is. Your McDonalds example just proved that. You underperformed while taking on much more risk. It's not something to gloat about.

Also, if you can replicate your success, you should do what the pro snake oil salesman do and invest OTHER PEOPLE'S money rather than your own, and take fees off the top. You'll make far more money that way. Also, you don't even need to outperform the underlying asset class you're investing in.

Technical analysis is also 100% pure bullshit. Just because a financial asset is trending in one direction over a given period of time will tell you absolutely nothing about what it's going to do in the future.

We have to agree to disagree on technical analysis. If technical analysis was pure bullshit than you're saying every day trader that has made money was pure luck.

I rather be lucky than good anyways.

 

[James Sawyer Ford]

It wasn't luck that I had the resources to invest. When you make $85k per year and live frugally, you can save a lot and invest in the market. I busted my butt through school and it paid off.

How did it all started? I joined the military when I was young and saved every penny for 6 six years including deployment money and invested every penny save 3 months pay for emergencies. During my my time in active duty, I was in Rota, Spain for two years and was netting $2200 every paycheck while the Navy paid for everything else. You know how much money you can save in just two years with that kind of pay? What I saved pales in comparison to some officers that I knew that were saving.

Got out and used the GI Bill to pay for my school, then used a VA loan to buy my house. The rest is history. Don't worry about me I'm fine.

It sounds like you have a really solid financial plan when it comes to saving; it's just a shame that your investment advice is so misguided in comparison.

A lot of what you have is through saving, and you would have done just as well investing in index funds vs. whatever else you've decided to go with (if not much better, given your McD example).

And that's how you win at the rat race, honestly; save, save, save. Save a LOT. Invest your money in low-cost, diverse funds. Suddenly 7-10% gains annually on a near seven figure portfolio becomes a LOT of money compounded over the next 30 years. This is sound advice -- not "invest in one stock or futures play expecting it to double"...and "keep researching trying to find the next best stock to buy that's just some speculative play that could end very badly".

Which is why I appreciate the Boglehead approach -- I know what I'm getting into, I don't have unrealistic expectations, and over the long time I'll be consistently hitting singles and winning the game rather than swinging for the fence with a much higher chance of striking out.

We have to agree to disagree on technical analysis. If technical analysis was pure bullshit than you're saying every day trader that has made money was pure luck.

I rather be lucky than good anyways.

Some day traders have insider information, which is illegal, and that's how they win.

As for the rest of day traders? If they make it big, yeah, it's luck. And increasingly day trading is a loser's game due to high frequency trading. You can't act on news anymore because you're going to be outmaneuvered by those that can act MUCH quicker.

 

[Sanky Panky]

In regards to the OP,

Defined Benefit Plans pensions are not individuals, so nobody can or should expect them to put all the money in index funds. Their investment committee (the ones that allow hedge funds under the asset classes allowed for the fund), are concerned with mainly two things: be able to pay their liabilities (pension benefits), and maintain a "funded" status (assets equal present value of all present and future liabilities).

They can achieve this via matching liability payments with assets (usually fixed income assets) or a focus on a target return that will achieve both. From there, hedge funds, just like equities/bonds/real estate/derivatives/etc, have their own set of expected return (after fees) and risk that either help or don't the overall portfolio. Maybe they just want exposure in the myriad of different hedge fund strategies (macro-global, market-neutral, arbitrage, etc etc) at the time. There are definitely biases in determining the actual risk of hedge fund returns, but mathematical formulas usually dictate if a pension funds buys into them or not.

 

[TomServo]

I rather be lucky than good anyways.

I admire your guts. It's easy to look back in hindsight and say you were lucky, but back in 2009 no one knew the market would double over four years.

For me (just turned 35) the market crash coincided with a divorce and two rounds of layoffs at works. I survived the layoffs and the divorce, but I was left *extremely* fiscally conservative. I missed out on a large portion of the run up after the crash. I wish I had had the same kind of testicular fortitude back then to go all in on the market.

 

[RumblingRosco]

I love investment threads, because Piecake comes in and consistently drops truth, logic, and researched methods of investing on people who freak out and argue how their anecdotal experience totally trumps Piecake's well-discussed philosophy of investing in low-cost, index-matching mutual funds. Then people come in here and go "bu-bu-bu-bu-but Warren Buffet made billions without using index funds!"

Guess what investment-bros? You're not Warren Buffet. If it were so easy and so common we'd all be mega-billionaires like him. At the end of the day, whether it's luck or skill, Warren Buffet's investment success is abnormal and an outlier.

 

[SapientWolf]

It sounds like you have a really solid financial plan when it comes to saving; it's just a shame that your investment advice is so misguided in comparison.

A lot of what you have is through saving, and you would have done just as well investing in index funds vs. whatever else you've decided to go with (if not much better, given your McD example).

And that's how you win at the rat race, honestly; save, save, save. Save a LOT. Invest your money in low-cost, diverse funds. Suddenly 7-10% gains annually on a near seven figure portfolio becomes a LOT of money compounded over the next 30 years. This is sound advice -- not "invest in one stock or futures play expecting it to double"...and "keep researching trying to find the next best stock to buy that's just some speculative play that could end very badly".

Which is why I appreciate the Boglehead approach -- I know what I'm getting into, I don't have unrealistic expectations, and over the long time I'll be consistently hitting singles and winning the game rather than swinging for the fence with a much higher chance of striking out.



Some day traders have insider information, which is illegal, and that's how they win.

As for the rest of day traders? If they make it big, yeah, it's luck. And increasingly day trading is a loser's game due to high frequency trading. You can't act on news anymore because you're going to be outmaneuvered by those that can act MUCH quicker.

Some of those trades are done by machines running on algorithms, which act faster than any human being is capable of.

 

[Piecake]

Some of those trades are done by machines running on algorithms, which act faster than any human being is capable of.

I think most trades are done by machines now.

84% of All Stock Trades Are By High-Frequency Computers &#8230; Only 16% Are Done By Human Traders

The average time a U.S. stock is held increased last year ... from 20 seconds to 22 seconds,...


The majority of stock trading right now is not investing, its gambling. Even if technical analysis works (as you can imagine, I am a skeptic. I am not a skeptic that fundamental can work over the long term though. I just think its super hard), I am not sure how any individual investor can compete with professional traders with super computers. Compete meaning 'skill', not luck.

 

[Piecake]

Interesting, it looks like California's pension plan is going to invest the majority of its money in index funds (didnt give specifics as to how much)

http://www.marketwatch.com/story/pensions-calpers-embraces-indexing-2013-10-03?dist=beforebell