Passive strategies so far has done better than active strategies. It's the most recommended system.
I've tried trading before. I studied all the technical analysis, the fundamental analysis, etc. I know my candle sticks, trend lines, chart patterns etc. I've done it with stock markets, FOREX, and BTC.
Maybe I sucked. Or maybe I deluded myself thinking I can beat the market. But buying shares and forgetting about them got the best results. This is the strategy most advisors advise. It saves time, stress, and it works.
Technical analysis is, for a lack of better words, utter bullshit. There are so many patterns that fit a given chart that you have free choice between any conclusion you want. That property makes technical analysis very similar to astrology, in that any horoscope more or less fits anyone in some way or another.
Basically, any analysis – technical or fundamental – which can be automated and which works reliably, has already been automated by Quant funds with a lot more resources than a single person could ever muster. This is doubly true after the advances in machine learning in recent years.
> It doesn't matter if it's bullshit, it matters if people that can move the markets will trade on it.
Since anyone can reach any conclusion depending on which indicators and which parameters they use, technical analysis can't and won't tell you how "people that can move the markets" will decide.
Vanguard owes it's success as much to John Neff, who ran the Vanguard Windsor Fund and consistently out performed the S&P500 by ~3% a year for almost thirty years, as it does to John Bogle, who founded Vanguard and popularized index investing.
However, there are very few people who can do this over a long period of time, which (fees and taxes aside) is one of the main reasons for going with index funds.
It's also really hard to pick 'can beat the market' (predictive of future behavior), from 'have beat the market' (retrospective analysis of results - what all it's associated survivorship biases and bias towards success in a past which will never repeat itself exactly.
Someone WILL always beat the market. A small set of people WILL beat the market consistently - until they don't. That set gets smaller every year, until over a long enough timeframe it goes to zero.
History has shown predicting who will be able to win over a specific timeframe is essentially impossible, and more random chance than skill - with temporary counter examples that always revert to the mean over time.
History has not shown that. It is easy to say that people beat the market by chance, but you should actually try calculating how many standard deviations from the mean some of these track records are. There haven't been anywhere nearly enough hedge funds to justify the most consistent track records being due to chance alone.
For illustration: assume any given fund has returns which simply approximate a normal distribution; i.e. their returns are theoretically just noise. Then the chance of the fund achieving a 2 sigma return in any given year is about 2%. We can model the odds of such a firm consistently exhibiting a 2 sigma return for 20 years in a row using a binomial distribution with n = 20 trials, k = 20 successes and success probability p = 0.02. Then we have
binom(20, 20) * 0.02^20 * 0.8^0 = 1x10^-34
There are firms which have consistently beaten the market by a significant margin for that long. Even if you relax the constraint to 10 years, you still get "only" 1x10^-17. At a certain point this becomes similar to saying that Steph Curry isn't actually good at basketball, all of his 3 point throws are just the expected outcome of lots of mediocre players existing who didn't make it to the NBA.
I do agree that retail investors should just invest in index funds though. And I agree it's extremely difficult to determine who has the genuine skill to beat the market before they've beaten it for so long that they're no longer accepting money.
If you include their costs and fees, that is not the case though is it? Or at least the data I've been able to find doesn't support that.
You're also talking about rearward looking data, not forward looking predictability, often only including hedge funds for instance that still exist today. For any given hedgefund who outperformed in the past, how likely is it that, if you made a judgement today on their ability to perform, and then waited 1, 5, 10 years in the future, it would match that judgement? What are the odds they'll exist then, or be merged or renamed or whatever?
If you today made a bet for 10 years from now as to Steph Curry's 3 point average then, how likely would it be to win?
There is a reason anything to do with the markets is almost always followed with 'past performance is no guarantee of future results'.
There are also confounding effects like the Bernie Madoff's and Enron's of the world, and major issues with visibility into most hedge funds that make it difficult to actually compared performance on a level playing field. If someone is 'loading the die' using insider trading, tips from the CIA or whatever, it would be really difficult to call them anything but incredibly skilled/lucky - and you couldn't tell the difference unless it blew up publicly.
Like I said, I agree that it's extremely hard to judge if someone has genuine ability before they exhibit the track record. I'm simply saying that once the track record is established, attributing it to chance alone doesn't really make sense mathematically speaking.
It would be fun to really really look into this. Run some controlled experiments (alas no multi universe engine to do that correctly), deep dive into what each fund actually does to find positive or negative correlations, etc.
It would be interesting for instance to do back testing on many of these things - if someone is declared a ‘winner’, vs not declared a winner (but doing the same things), is the likelyhood the winning streak holds up greater or lesser?
Does a large amount under investment change odds of success? (Big pockets make it easier to win?) Does a change in amount under investment change odds of success? (People flock to perceived winners, both investors and opportunities, increasing their odds of success)
You can find letters to investors from a lot of hedge funds with a bit of searching (e.g. [0]). My favorite was Baupost [1], but they can be a bit litigous with taking their content down from sites. Perhaps not the raw data you're looking for, but its a different perspective than the news outlets have.
It depends on what your definition of beating the market is, and how much you are investing. It’s probably much easier for me with my tiny net worth to beat it consistently than the funds of the two John’s you mentioned. If your definition is SP500, a retail investor could have just bought a Nasdaq100 basket and crushed “the market” over almost all of the last 5 years.
Technical analysis is a joke, it's financial astrology. Traders fool themselves into seeing patterns in random noise.
The stock market is an information market. If you want to generate above market risk-adjusted returns as an active investor then you need more accurate and current information than other investors. In other words you have to do proprietary research and keep the results secret until you've executed your trade. This takes time and effort; you're not going to do it just by reading the same public information on the Internet as everyone else. For example you could spend a few days visiting GameStop stores in person to estimate their current revenue trend.
For me fundamental analysis was working so far. If you understand tech better than most investors, you can get some edge in the long term performance of stocks.
Now though as ARK is doing a great job in fundamental analysis, it became much harder to find undervalued stocks.
> If you understand tech better than most investors, you can get some edge in the long term performance of stock
Yes, but, the number of opportunities to trade based on a deep understanding of a certain industry are limited. I've picked individual stocks a few times when I was certain they were undervalued and poised to do well. These few times I turned out right. But years go by without these opportunities presenting themselves.
I've been realizing that just spending a lot of time on the Internet gives you an edge against old school investors and analysts. Wealth is transferring to those who know their way around finding correct information.
> But buying shares and forgetting about them got the best results. This is the strategy most advisors advise. It saves time, stress, and it works.
I chose my very boring and traditional local bank to trade stocks. Their online trading platform is sluggish, dated and ugly. This basically encourages a buy + forget strategy. I follow it just to avoid the horrible user experience of that site.
I find that the only 'drawback' is that it is not sexy. When people have talks about what they are going to buy or how much they have made buying and selling bitcoins last week you can't really take part of the conversation.
I dunno. It depends on your view. I wasted so much time looking at charts, studying, and stressing out over the market. The passive strategy gave a lot of free time to do other stuff. And I have on fewer thing to worry about.
Also, even with my passive strategy, I still have fun talks of my investments with friends. It's more talks about general trends and what companies I'm looking to hold for a long time.
Globally, the unsexyness of passive index investing is the best thing about it. A huge percentage of the angel / seed / FFF capital in the world comes from bored people who don't want to talk about their Vanguard Target Retirement 2050 investment and so put 10% of their portfolio into crazy startups that will sound impressive to their friends.
Consequently, for the posters on this site, the boringness of passive investing is a huge creator of jobs and opportunities for us!
Going outside my current views and reading other viewpoints, especially "A Random Walk Down Wall Street." Also, after taxes and fees, my returns (if I made money) weren't that great. So I decided to try long term strategy and found it to be a lot better for my well being.
is there been an analysis on choosing ETFs vs SPY? For example I believe cannabis will definitely explode as it's eventually legalized in the rest of the states, as will biotech with the introduction of mrna vaccines and what not.
I wonder if a basket of ETFs based on "trendy" things outperforms SPY.
>I wonder if a basket of ETFs based on "trendy" things outperforms SPY.
over the long term or the short term? eg. during the dot-com bubble an etf of internet companies would have performed better returns than SPY, but you'd get slaughtered once the bubble poped.
The problem I think is that there are asymmetric outcomes and the quality of life changes are exponential.
Let's say you have $1000 and there's a 1% chance you can 100X your money in a year by buying $AMAZING. Someone will look at this and say, well, if I 100X my money then I'll have 100,000 and I can buy a house. If it goes to zero I'll be broke, but I was already broke anyway so nothing changed.
A rational person will say, yeah but if you took your $1000 and invested at a regular rate of return of 10% and waited 50 years I'd have $17,000! An excellent return on investment, except now your entire life has gone by.
edit: I actually meant to say 30 years instead of 50 but will leave the error up for transparency's sake! At 50 years it's more like $120K or so.
That's true - the real shape is probably S-shaped where as you go from poverty to just above the poverty line the gains are exponential and as you go from above the poverty line to upper middle class it's maybe linear and then upper class to "rich" it's logarithmic.
Yeah, is the thing that catches people up about compound interest. The original poster's argument (and math) makes sense if they wait 30 years (17K return), which is still a long time. However, waiting another ten years gives them ~40K, and waiting another ten years after that leaves them with ~117K.
meanwhile deliberate inflation is stealing the value of that money over 50 years. For reference, today's dollar has half the purchasing power it had in 1970. So for your example, 50 years of savings = $25,000.
That barely covers the cost one year of health insurance for someone 70 years old.
And that is all based on the premise of living to age 70.
One of the arguments in favor of having sustained, moderate inflation is that it forces people to invest for precisely this reason.
Anyway, assuming a 3% inflation rate, the original $1K still turns into $30K after fifty years.
It's also worth pointing out that most people in the states qualify for Medicare Part A after they turn 65. Even if they don't, the average monthly health insurance premium for someone who is 70 is around $550.
So going off of your example, the original $1K purchases around four-five years of health insurance after inflation. This is a good deal.
Yes, if you'd invested 1000 at 10% over 50 years you'd have 117,000. But let's stick with what OP said.
>if _you_ took _your_ $1000 and invested at a regular rate of return of 10% and waited 50 years _I'd_ have $17,000! An excellent return on your investment except your entire life has gone by
If we took this at face value, it means the 17k must have been some sort of consulting fee or something. I guess he's saying don't wait 50 years for a 17k consulting fee which you can't really argue with. Either that or OP should check his math
haha, sorry I actually meant to say 30 years (I had the formula more or less memorized for mortgages which were 30 years, but 20 years more makes a huge difference, as it tursn out!).
Just an aside: the first scenario you suggest, in which you have a 1% chance to 1000x your money and a 99% chance to lose it all, has an expected value of 10. It is absolutely rational to make that bet if you have enough capital to withstand a drawdown of let's say, 5x your initial bet.
For example, suppose you model this as a game with the following rules:
- you start with $1,000,000
- each turn you may bet $10,000
- if you bet, you roll a d100
- if you roll a 1, you earn 1000x your bet, if you roll anything else you lose your entire bet
- the game ends after 1000 turns or you lose all your money, whichever happens first
If you bet every turn, on average you'll end the game with approximately $60,000,000.
EDIT: Did you edit your comment to be 100x or did I misread? Oh well, leaving this here for posterity. If the win outcome is 100x, the EV is still 1.
For the defense of passive investing, I liked "A Random Walk Down Wall Street"[1]. There are like 7 editions of this book because it was true when it was published nearly 50 years ago and still true today. Maybe someday it won't be true, but that hasn't come.
But why not also put money into hot stocks that you like? Did $Company change your life? Buy their stock. Or have fun speculating with a little money.
Your math is wrong by almost an order of magnitude.
The rule of 72 is handy for thinking about growth rates. Divide 72 by the rate to get the doubling time.
At 10%, it will double approximately every 72/10 = 7.2 years. So about 7 doublings in 50 years = 2^7 = 128. So you can estimate in your head that the answer is roughly $128,000 and $17,000 is completely wrong.
Ah, yes I meant to say 30 years, not 50. Thanks for the correction. the rule of 72 is a good one, and is what I actually used, the problem is that I did the math on 30 years but 50 years was a better number to use to make my comment, but I didn't update the number :(
Buy S&P500 ETF. It's guaranteed to go up. Why? Because if it goes down, Federal Reserve and the Treasury will always find a way to pump it back up. Historical examples are not relevant, it's a new thing - started around year 2000. This game will never stop - even if pumping leads to the debasement of currency, it will continue anyway.
And if that stops being true, it probably won’t happen suddenly. Sp500 with a trailing stop seems like easy mode, until ww3 or some other sudden drop but there are circuit breakers for that. What could do more damage than global sars pandemic?
Tina. Real estate, bonds, cash. Buying companies while state run capitalism in the east cold wars against American mega corporations like apple, with a neoliberal pro-trade administration, it should be easy to see why equities are a popular choice.
I think one problem with this advice is that not everyone can be a passive investor. There has been an absolute explosion in passive investing in the past 10-20 years, so there is actually a bigger battle going on to lead the giant sums of that passive money. Mike Green has commented a lot on this new phenomenon, some very good info: https://hiddenforces.io/podcasts/mike-green-passive-investin...
this sort of vague concern about passive investing from folks who profit off of active investing reads like wolves complaining about how the sheep aren't venturing out to eat the tastiest grass at the edge of the fields.
it also paints "passive investors" with a rather broad brush, as though every one is out buying exactly ^SPTMI in lock step. when really folks are buying all sorts of subtly different blends of the market, and usually topping it off with a couple of small personal choices.
Even the staunchest Efficient Markets Hypothesis advocates accept that you need a robust amount of active investors, who are the ones who actually keep the markets efficient. We really are in a new world where there has never been so much money in the market that follows other money and is essentially price-insensitive.
Speaking from personal experience, this worked for me. Buy the market, using mutual funds and ETF on Vanguard, and just wait patiently; ignore all the noise, not easy to do sometimes, but you will be rewarded if you just leave it alone.
> If you had invested in the German or Russian markets decades ago, you wouldn't have made much gains at all.
Is that actually true? I just tried to find out what would have happened if you invested in the German DAX 30 years ago and apparently you would have had an 800% return on investment, approximately 7.5% annualized. Seems pretty good to me.
> But the reality is that the stock market has also offered a path for ordinary people to build wealth — and more so in the last generation than ever before. You haven’t needed to burn down the system. All you’ve had to do is take the laziest, simplest approach to stock investing imaginable, and have a little patience.
> Any schlub on the street can put money to work harvesting a small share of the earnings of hundreds of leading companies, led by some of the sharpest corporate executives on earth and their millions of employees.
This is leaving out a very important detail, which is that you first have to be living comfortably and holding excess savings (that you're willing to risk, or at least leave alone!) to be able to even take the safe road in the market. That's not something "any schlub" can do; it excludes something like half of Americans. The "40% don't have $400 for an emergency" statistic is tired at this point, but it's telling here. You shouldn't be investing, even in an index fund, if you don't have enough cash to cover an unexpected emergency. It's not a question of patience.
The really predatory thing about Robinhood and the like isn't that they prey on "impatience", it's that they prey on desperation. A person who can't afford to put $1000 in an index fund and leave it alone for ten years can maybe scrape together $100 to bet on the small chance of striking it rich and pulling themselves out of borderline-poverty. It may still be bad advice, but when people don't have other options, the calculus starts to make sense from their perspective. Robinhood's commercials even emphasize this specific angle.
This article is great advice for the shrinking middle-class, but it comes off as tone-deaf for a growing majority of Americans.
>> The "40% don't have $400 for an emergency" statistic is tired at this point, but it's telling here
The survey didn't indicate that 40% didn't have $400 for an emergency, it indicated that if they had a $400 emergency, 61% of people would use short term cash to pay for it. 27% would use some other means to pay for it - for example put it on a credit card and worry about it later. That didn't necessarily mean they didn't have $400 in cash, it just meant they would use some other way to deal with the emergency.
12% said they wouldn't be able to come up with the money.
>> This article is great advice for the shrinking middle-class, but it comes off as tone-deaf for a growing majority of Americans.
The majority of people leaving the shrinking middle-class are leaving it to join the upper class. Not that the lower class isn't growing also, it is, the middle class is indeed hollowing out, but more middle class people are getting richer than getting poorer.
From a personal perspective, I invested money in a 401K when I was working class, with the goal of letting it compound for many decades. I'm guessing that people with that mindset are less likely to stay working class, and I have no idea where I got that mindset. Certainly not from my parents or siblings, they were all the normal get the paycheck, spend the whole paycheck type.
The main argument (passive investing) has issues when inflation is high, pulling this from a newsletter I read recently:
"Bianco further notes that, for an investor who bought the S&P 500 in 1966, it would not have been until 1993 — 27 years later — that the holding would have delivered real, inflation-adjusted gains."
Real inflation adjusted gains are one thing, protection against inflation is another. Stocks deliver both, though with significant risk. But if you are passively investing, the inflation protection you get is essentially free.
You will still have to fade the risk though. If your portfolio is large and consists of 100% stocks, you need to diversify out. The mostly common alternative asset classes are real estate, commodities, and cash.
The adage that "the stock market always goes up" has been true for decades but there's nothing inherently true about that. A Ponzi scheme can also go up for decades as long as there's growth. It's when there are contractions that it pops.
Anytime someone invests in "the stock market" they're doing this: creating growth without underlying value. And it might work out -- and it has for decades so far -- but that doesn't mean it makes sense or will continue that way forever.
There is something inherently true. The stock market goes up because the world becomes more efficient. What the world was able to do last year, it's able to do again and then some because we are better at doing it.
No, a company's ability to be more efficient (as well as general increasing efficiencies) is priced into its value. That's where P/E ratios come into play.
Currently the entire stock market doesn't reflect value, it reflects growth. Shiller P/E (CAPE) is normally between 10 and 15 depending on that efficiency that you're talking about. It's at 35 right now. (https://www.multpl.com/shiller-pe) That's higher than Black Tuesday and any other time in this market's history outside of the 2000 crash.
I think some people can beat ETFs by pick and choose stocks, assuming they know what they are doing and get lucky. For me the biggest problem with this approach is that it becomes a job. Maybe not a full time job, but you end up spending non-trivial amount on this. If you really enjoy it then it's OK. But for many people it takes over other important hings in their life (their job, family, etc). You need to decide if it's worth it.
I think the thing it's talking about is building wealth, which is easiest to do passively. But if you want to get rich, I feel like now days you either have to play the stock market or start a successful business. You can work your whole life and get enough to maybe retire comfortably, but if you ever want to be actually rich, I don't think you can just passively invest anymore.
For some it's a hobby/entertainment. My 401k is up 10% a year or whatever. My personal account is up 400% since March, but with a smaller starting value. It could go to zero and I'd be fine.
Yes. A 5-10 year investing strategy can make a down payment on a house realistic. That kind of stuff is laughed at by the put your money in a bunker until 65 crowd.
I will not buy a house at 65, I’m sorry I won’t. You don’t have a plan for me. So I will look to other strategies.
Option wheeling strategies with modest amounts of capital (50-100k) to generate 1-4K a month.
Wheeling is considered the most primitive strategy. There are others, along with your standard buying of leaps or general growth minded investments. There seems to be more to this than dumping it all in a 401k until you die.
Or in other words, the problem is lack of patience. I certainly have it, which is why I occasionally swing trade options.
But the numbers clearly show the long hold strategy as in the article is the smart, reliable play, one that can be done simply by contributing small amounts each month.
I think there’s a balance between accruing and exploiting in terms of converting delayed value into realized value [0]. The utility of a dollar goes down as your able to do less with it or have less likelihood of being able to spend it [1]. For example, a family member took a trip right after retirement to Machu Picchu and passed away, not much good his pension and 401k did at that point.
The numbers in the bank account work out, but I’m less convinced that it remains as simple when you add the existential variable into the question.
[0] Spending money
[1] Things like focusing on your kids and inheritance help subvert this a bit.
Part of it is that other players in the market have short term investment strategies, yet retail is told to sit on the sidelines and hold for 50 years.
Why can't we all try to play with money the same way these people do?
>> Why can't we all try to play with money the same way these people do?
You absolutely can. You can also try to play chess against Stockfish after reading a few Reddit forums about chess and practicing in your spare time a few days a week.
Zoomers aren’t old enough to be tired of stuff yet...
Kidding, but there’s a real value in letting other people explain their mistakes to you in a way that helps you skip those mistakes, and I see a lot of that here.
the difference is that boomers have lived through more than one market cycle and we know an inevitable "correction/crash" is coming. The wise will take action in advance (e.g. move to cash positions) to lock in gains, then repurchase at what feels like the worst point of doom & gloom. A 50% loss needs a 100% gain to recover... Plus inflation. Factor in opportunity cost and it might be closer to 120%.
The first and last lesson in investing is DON'T LOSE MONEY.
Sadly, many have to learn firsthand that markets don't grow to the sky forever.
Also, don't put all your eggs in one basket. It sounds cliche, but diversification is important. When the entire market crashes and you're down 30%, it will come back... in time. When your crazy YOLO stock crashes 90%, it may be done for good.
When ex-zoomer boomers tell zoomers to act more like ex-zoomer boomers, and not zoomer boomers, there's probably a good reason for it (at least when it comes to money).
More and more people get into (day)trading on RH and friends during the latest bubbly craze and then stick to it... some because they managed to get a decent chunk of cash to play with (u/DFV should be set for life!), some because they find trading interesting, some because they follow the sunk cost fallacy or worse, try to gamble back their six figures of debt.
And now that the bubble has popped, they're searching for new avenues of investment... and until the next bubble arrives, a decent ETF is a good way to park money.
(for disclosure: holding a couple dozen AMC, NOK and DAX/MSCI World ETFs)
As a civilization it is better for 95% of the people to think that holding stocks for long term is better. We leave the milking to the top 5%, and we enjoy peace of mind.
Folks seem to be fighting about which way is "best" to play the stock market. Boomer ETFs and Index funds with regular deposits vs buying individual stocks vs day trading vs WSB YOLO plays.
I think there's a place for all of them. I've been okay dumping money into index funds, but my best "play" ever was buying 5 shares of AAPL a few years ago. That ~$500 is now up over $2k. If you have the capital, there's room for all 3. Boomer investing to stay safe and have an EF and build your retirement nest egg. Buying individual stocks that you like with a smaller percentage. Maybe a small amount of "fun money" for day trading/YOLO.
Everything in moderation, including moderation and all that.
I do all three, as well. I shy away from YOLOs but occasionally gamble on puts or calls. Basically, I have a Vanguard account for index funds / ETFs: long term investing. I have an Etrade for individual stocks: shorter term. My best stocks have been AMD, MU, FB, HUBS, PYPL. All are 4 to 5x+. HUBS is a 10x. You won't get those returns with index funds.
Hell yeah, boomer strats FTW. Hedge against inflation and by appreciating assets and forget about it. If you want to get rich quick you're probably better off starting a software company or something, or getting lucky with startup RSUs.
I've tried trading before. I studied all the technical analysis, the fundamental analysis, etc. I know my candle sticks, trend lines, chart patterns etc. I've done it with stock markets, FOREX, and BTC.
Maybe I sucked. Or maybe I deluded myself thinking I can beat the market. But buying shares and forgetting about them got the best results. This is the strategy most advisors advise. It saves time, stress, and it works.