It was Richard Thaler's Misbehaving: The Making of Behavioral Economics book that finally broke through my thick, anxiety ridden skull and convinced me to stop reading economic news everyday and just forget the the retirement accounts existed. If I'd read that book earlier, I'd be up 3X on my positions.
I haven't touched my 401(K) in over 30 years. It's done 9-20% per year. It's not super aggressive, but will take a hit, on really bad markets (the only year it actually lost money, was 2020 -and it has completely made up for that. It even made some money in 2008).
I ignore the Fidelity calls. Every time a new broker rotates in, they try to get me to move my money around.
Most people just look at the balance and forget (in the self-preservation, "I want to be right" kind of forgetting) that they contribution $20k+ that year so unless you've got a multi-million dollar 401(k) or the market was down 10%+ across the board you're very likely to see more on December 31st than was there January 1st regardless.
I'm not sure that's quite fair. Unless it were 2001 or 2008 people look at their balances and see they're generally up unless they made some big gamble and at least unconsciously conclude they probably did as well as they reasonably could. But that may be what you're saying. Worrying about a percent here or there probably isn't worth it for most people.
We're saying the same things, I just meant you could actually lose a lot of money but see your balance go up, especially with smaller portfolios. As your portfolio gets bigger it's less likely to happen because eventually a single-digit loss over the course of a year might be enough to wipe out more than the max contribution.
Yes. Even if your overall balance is going up, it makes sense to keep your eye on doggy investments. I really cleaned shop a couple years ago and I'm glad I did.
I don't work for Interactive Brokers, but I do periodically shill for them here on HN! Their market access diversity and rock bottom fees are very hard to beat. It should be possible to transfer a 401k in-whole with zero tax consequences nor booked trades.
Yeah... At times I just take funds I like, read what they re actually made of, and replicate their holdings in IBKR. This way I dodge the fund's 0.5% annual fees and performance fees.
39 cents per transaction is hard to beat.
The lump sum of cash on the sideline gets you 4.83% on IBKR (as long you have $100K+ on he sidelines). Cash secured puts you sell bring you yield on the USDs securing the put.
Financial reports they make are top Noth and entirely configurable.
Bond funds are weird to me because you cannot hold to maturity to realize yield-to-maturity. The only point to them is to get coupon payments. Is your bond fund total return or, if not, what do you do with the coupon payments? To me, it just seems better to buy outright mix of 2yr and 10yr US treasuries and always hold to maturity.
which is fine, but you're just adding administrative burden on yourself.
The bond fund is doing exactly what you're trying to achieve, except that they reinvest the bond capital back into new bonds when they mature. You get the coupon payment as income, and you sell the bond fund when you want capital back.
The price of the bond fund is a reflection of the value of the bond at market prices - exactly as if you would yourself, if you held the bond directly, and wanted to sell before maturity.
You might eek out a tiny bit of efficiency due to lack of fund fees you pay, if you held bonds yourself - but then the administrative burden you have to do yourself is going to cost just the same imho (via time taken for example).
Everything you mention is correct, I just wanted to add that holding bonds directly makes sense in the case when you have a date in mind for when you will need the invested money. So for instance if you plan to buy a car in 2 years buying bonds that mature in 2 years has the nice property of being worth a guaranteed amount of money exactly at the point you need those savings. There are etf equivalents known as “bullet shares” but these have an expense ratio that isn’t incurred with owning bonds directly.
It's silly to quibble with your great results (good job!) but its a good idea to re balance your portfolio between stocks and bonds every quarter or every year at a fixed percentage. (60/ 40, 70 / 30, 80/ 20 ratio is risk)
Portfolio re balancing, like ETFs is one of those things that has been shown to work over time in many studies. ETFs re balance. The stock / bond ratio was an early form of "automatic" investing.
> I contributed 50% to a bond fund, as well, but that is like, 10% of the total, nowadays.
That's one of the ridiculous aspects of fixed-percentage allocations: by constructions those allocations tell you that you should get rid of the things that are making you the most money, and put it into the things which are underperforming instead. (I get that you didn't do that, I'm just got reminded of it.)
You are thinking about it backwards. Humans have a tendency to buy high and sell low. It seems to be a psychological benefit of some sort that holds us back in abstract market scenarios.
By having a fixed percentage portfolio you are forcing yourself to sell high and buy low.
This was also the only basic strategy that mathematically beats the market based on papers I read during undergraduate (there may be others now). Basically, by splitting investments among higher and lower investments that are out of phase you can make sure that you are moving money out of an investment before it falls and into it before it rises.
What I find interesting is that the advantage only works with discrete periods of rebalancing. Instantaneous rebalancing doesn’t provide any advantage. I do not understand why but I saw a paper that showed that being able to take advantage of phase shifts in nearly correlated signals goes to zero as delta t goes to zero.
> By having a fixed percentage portfolio you are forcing yourself to sell high and buy low.
Yes, and the things you sell high are the ones that performed well in the past, so you'll have less of those in the future, which is what I said. I'm not thinking about anything backwards.
If you can time the market, then by all means, do that. The reason periodic rebalancing works, is because stocks and bonds don’t exclusively go up (or down). By rebalancing you can take advantage of a racheting effects as a result of signal variance. By rebalancing at set times, you can overcome the psychological effects of waiting just one more day to get gains that then evaporate while you watch.
I’m having a hard time finding the paper around instantaneous rebalancing eroding the effects (or any good papers atm). But you can model this very easily. You can take 2 signals that randomly walk up or down. One at a “high apr” and one with a “low apr”. I’m not sure if it matters, but typically I’d expect the lower apr to have lower variance of the 2. Most of the literature around rebalancing assumes lower volatility of at least one asset class, but I’m not convinced it’s necessary from some of the math I’ve seen. You may need to add an assumption of correlation between the 2. Be sure to include code that if a signal reaches 0 it stays there. Be sure to backtest as well. Few strategies work in a bear market, but rebalancing is expected to still outperform when markets go down.
Kelly criterion is another thing to look up. It’s a mathematical look at betting stategies and what’s the biggest bet you can afford to make in the long term given that no bet is 100% gauranteed.
You're making this sound more complicated that it is. Correlations, random walks, backtesting, strategies, rebalancing, kelly criterion, have nothing to do with this.
Bonds give you cash later. Cash loses value over time.
Stocks give you a participation in the best companies in the world.
Bonds versus S&P I know which one I'm holding. Good luck with your thing.
The question is whether "thing that did well in the past" is more or less likely to do well in the future than "thing that did less well in the past." This seems to vary somewhat by "thing."
The tradeoff is you lock some of those gains down in safer assets. Probably the wrong choice for retirement earlier on, but if you need money during an economic crisis, say you got laid off, then that might change how it's viewed.
That’s very true, but he’s had the account for 30 years and assuming that means he started it young, 50% in bonds is borderline insane. It’s a lot more likely to cost you a large amount in retirement than bail you out in your 30’s.
Applying optimal portfolio theory to the long history of market returns suggests that the most risk-efficient allocation is something like 60% stocks and 40% bonds. The diversification reduces volatility faster than it reduces the overall return, so equity-like returns can be regained by using leverage on the portfolio.
Following this advice today is tricky thanks to the persistent yield inversion: you obviously can't improve returns by using short-term borrowing at 5% to invest in long-term bonds at 4%.
Wouldn’t the most risk-efficient strategy both depend on a large number of factors and also, in any case, start off with a higher allocation of equities and move over time to a higher allocation of bonds?
The stock market has never not outperformed bonds over a 45 year period, maybe even half that, so if you’re 20 and putting 40% of your savings in an account you can’t touch until your 65, you’re kind of just chucking money down a well right?
> Wouldn’t the most risk-efficient strategy both depend on a large number of factors and also, in any case, start off with a higher allocation of equities and move over time to a higher allocation of bonds?
Not really. The most risk-efficient strategy optimizes the ratio between expected return (less the risk-free rate) and volatility (standard deviation), regardless of the absolute value of those parameters.
If that optimal allocation has too much risk, such as for the near-retiree, then the investor can keep a fraction of their portfolio in the mix and the other half in cash (money market, paying the risk-free rate). If the allocation has too little risk, then the inverse applies: borrow on margin (at approximately the risk-free rate) to invest more than 100% of net assets into the mix.
Right but a 25 yr old’s retirement account has practically zero risk. If you functionally can’t withdraw the money for decades anyway, there’s approximately zero chance a dollar invested in bonds will outperform a dollar invested in equities.
Ending up at 60/40 might be a good plan, but starting there seems a waste of money.
That's where leverage comes in. Under more ordinary conditions, the 22 year-old would have something like 80% in equities and 50% in bonds, using leverage to have a net 130% invested.
Under current conditions, that allocation is more questionable. The yield inversion means that the expected value of a leveraged bond investment is about zero (borrowing at a higher short-term rate to lend at a lower long-term rate), so any portfolio gains come from anti-correlation of bond and stock prices. However, the current market worry is more about stagflation than a traditional recession, such that inflation leads to both higher interest rates and lower equity returns (through equity de-leverage).
Where do you get the leverage and what does it cost? To be clear: Leverage isn't free. It is borrowed money -- financing -- for your positions. For most retail people, they will struggle to pay less than 5% per year, and usually much more. Here is a list of margin rates from Interactive Brokers: https://www.interactivebrokers.com/en/trading/margin-rates.p...
A never once, did I am read any sensible long-term retail strategy that recommended the use of leverage, let alone persistent leverage. This is a strange post.
Isn't the point to change as you get closer to retirement? When your investments have a decade plus to recover, leave them in aggressive investments. There is a risk that a decade+ recession might mean delaying retirement, but in that situation delaying retirement is likely the best option even if your money was in s safe investment.
Once you are close to needing some amount of money, say X a year, then you don't have time for that X to recover, so the idea is to move X into a safer investment so it won't go up or down. Any money you don't need is still in aggressive options that have time to recover. Now you need X money every year, so you decide how many years you want to sacrifice growth for safety. Maybe 5 years, maybe 10 years. Call it Y years. Simulations show the historic optimal Y, though I don't recall the exact number and some people might want to gamble depending upon how much freedom they have to change X if needed. So X*Y is roughly the amount of money that needs to be in safer investments.
This all ends up being too complicated a math equation to optimize for the average person, so percentages are given that are much easier to follow which roughly work as a solution to this equation.
Individuals should be able to come up with their own plans based on what they want. For example, if I'm heading towards an early retirement, I might leave all my money in aggressive investments because if a market downturn hits, I'm okay with working a few more years before retiring. I'm also aiming for a retirement with big X spend a year, but have plans on how to live life if I have to move down to medium X or small X. Others might be aiming for a retirement of X and won't be able to make finances work with les than X, so they have to take a much safer approach to guarantee a retirement that doesn't lead to running out of money.
It really depends upon your age, your financial situation, what you want to do in terms of passing down money--and, as you suggest--if retirement means opening the money funnel on extravagant vacations... If you're comfortable with your ongoing situation with very conservative investments, that's probably what you should do. If you want to play the typical equity numbers over a reasonable timeframe, that may be a better bet. I've certainly been ratcheting down my equity, especially individual stocks, over time even if the expected value is probably lower.
I think that this holding stocks and bonds and then re-balancing every year or so is advice from back in the 1980's when historically bonds got under valued when stocks boomed and vice versa, so this made sense. I don't think that works so well now, especially when we had zero or negative interest rates for such a long time. If you can tolerate the risk (have a large amount of assets relative to your spending), investing in close to 100% stocks for retirement makes more sense.
Interest rates haven't been near zero for a while. I am not sure the logic of being 100% in stocks still makes sense right now, especially since you can get 4-5% interest in cash accounts and bonds are also starting to pay higher rates. Stocks are high right now too, and it's hard to see that stocks will deliver high returns from this point. Looking ahead, there are plenty of risks of inflation returning, especially in the US, and so I suspect rates are unlikely to fall back as fast as a lot of people are assuming.
The volatility of stocks is much higher than that of bonds or some other asset classes. If your time horizon is shorter than, say, five years, or if you are the sort of person who checks your portfolio daily, keeping a portion of your portfolio in bonds will drastically reduce your personal volatility.
I have an inherited IRA that I am required to take mandatory withdrawals from; I keep part of it in bonds so that I don't have to sell my stock funds when they're down.
Not underperforming but with less risk. If something goes to the moon there is high chances it will drop back to the ground. So you want to put some of that growth into something that will keep on flying.
Not sure, it was supposed to grow until I turned 67, at which point it was to be converted to a fixed annuity until my death. But I liquidated it early.
What about the book made the difference? I'm 100% convinced that it's better to do as you say, and forget about the accounts, and also unable to resist the temptation to check them every day. I'm constantly tempted to make changes.
The full analysis is too long to go on here, but on the chapter "Narrow Framing on the Upper East Side has this conclusion: "The implication of our analysis is that the equity premium - or the required rate of return on stocks - is so high because investors look at their portfolios too often. Whenever anyone asks me for investment advice, I tell them to buy a diversified portfolio heavily tilted toward stocks, especially if they are young, and then scrupulously avoid reading anything in the newspaper aside from the sports section. Crossword puzzles are acceptable, but watching cable financial news networks is strictly forbidden."
Of course there's the usual caveat about rebalancing as you approach retirement, basically the target date strategy. Really, the book gives great context into just how irrational we humans are. It has lots of studies, examples and anecdotes on behavioral economics. It was the book that actually helped me make sense of sunken cost fallacy.
I've done well (39% annual returns) investing in 2-3 individual stocks in addition to index funds for the rest of my investments. More than that would be IMO too much to pay attention to.
Admittedly my choices for stocks are a bit on the high-risk side, but it's worked out well so far. Picking up lots of AMD in 2017, and Rivian 6 weeks ago, seems to have been decent calls.
Sorry but I never believe these online claims given with no evidence about ridiculously high returns. It’s not to say you are lying but it’s easy to miscalculate these things.
Anecdotally I can confirm there's been a few 40% years in the past decade, but it really is a gamble, and because of survivorship bias it's easy to only hear about the ones that gained and not the ones that lost.
I started my investing journey about 5 years ago, started with stock picking, and my average yearly return is... 4.5% p.a.
I would've 100% been better of investing in a low fee index fund, like S&P500 (VOO), or even just a world ETF like VT.
I picked some winners, like Microsoft / Google, both up 150%, but they're tiny fraction of my total portfolio, so hardly returned anything all counted up. I did 170% at one point with Tesla too, but didn't sell at the peak. So ended up with 4.4%p.a. over 5 years.
Save to say I don't stock pick anymore and just buy VTI (kinda like VOO) and some VT.
Lore has it that SP500 doubles your money every 7 years. If someone is 60 and just started, well, it's not going too high.
But for someone who is 20something and begins placing $€200 per month in SP500 (preferably somewhere with the lowest possible fees), and does so every month for all the years he/she works, then there is a very nice surprise waiting for them (and their kids) later in life.
Keep in mind, investment funds don't die like our pensions, they are transferred 'down'. So even if someone has e.g. 200k when they have kids, by the time those kids turn 21, that 200k would have turned to 0-7yo 200k->400k, 7-14yo 400k->800k, 14-21yo 800k->1600k. It needs discipline and consistency though.
Can’t argue with the math but there are still risks (inflation, the government that issues your currency, etc). I’ve seen people sell all investments to buy all the supplies they need to live out their lives, and I used to think it was insane. But it is just a different sort of hedge.
I hope you don't think that type of return is normal. Anything, sustained, over 1% should make use suspicious. Really, that would be 12% per year. That is excellent return over the long run. We are in a mini-bubble, thanks to the Magical Six.
Oh yeah, I'm well aware these are very high returns, and chances are high that we'll soon get a year of -30% or the like, as the average p.a. return over 25 years is usually ~7-10%, depending what timeframe you mesure. (ex fees and tax)
I'm under no illusion that this will continue going forward.
I bought into AMD stock when it was $10 per share, it's now $180, yes it's a bit lucky but I'm not bullshitting.
It seemed quite logical to me at the time that they would do well. This was right as Intel was being savaged by Meltdown and the performance hits of the mitigations and Zen 1 was successful.
But will you sell in time for all that growth to not be eroded away?
Tech has been doing really well last few years, but it won't last forever looking at history. So when do you sell, and what do you buy when you sell.
This is why people opt for low fee index funds, like a total stock market fund. It'll always be in the right companies.
As noted in my original comment, a large portion of my savings / retirement IS in index funds. My individual stock investments represent such a large percentage of my account only because they've done very well, not because I dumped all my money into them.
I did something similar albeit more recently - I saw Nvidia was doing _extremely_ well, and figured it would pull AMD up as one of the few genuine competitors. I was right.
So I use the Freetrade app for my "fun" investments. I've got about £2k in there, and I've had it for about 4 years now.
There's a section where you can check the "Time-weighted rate of return", basically removing the effects of deposits and withdrawals. Their wiki says this is usually the best figure to compare portfolio performance.
Over that time, my performance has been 337%. The performance of the FTSE All-World Acc has been 67%.
Apparently I'm _massively_ outperforming the world market, which I'm a little suspicous of. I'm mostly invested in tech since I'm a software engineer - I got real lucky with both ARM and AMD, investing days before they skyrocketed, but also got good returns from TSMC (took ages though), Coinbase, and Games Workshop.
I only bought about a month ago, and I'm up 10% already, plus a round of dividends. I'm not trying to time the market, I just think GW is a great company with a lucrative future.
You could have doubled your money on Nvidia since January?? Look at the charts for all the evidence you need. There's survivorship bias in all the claims but it's easily done for the survivors.
Anecdotally, the prior decade had a few years that returned >40% for many people that weren’t indexing, and averaged well above the S&P500 over that period. The market conditions were nearly ideal for making those kinds of bets in the 2010s. We are no longer in that market and ZIRP is a fading memory. Part of being a more active investor is recognizing periods of years when certain strategies are likely to be profitable and robust and when they are not, and adjusting your investments appropriately.
Yeah, I've done quite well with a few specific (tech) stocks that were reasonable picks (and some modest bets that were simply wrong). (Which I mostly funneled into a charitable trust that pays an annuity.) But I certainly wouldn't put all my money or even most of it on such a bet. Even if I think I have a better insight than John Q. Public into something, there are so many variables.
