The problem with buy and hold and pretty much every current strategy is that its distorted by the huge 40 year bull market we've seen in the USA. Every American asset has gone up big time - of course "time in the market" is a good thing.
If you look at Japanese or European stock markets they tell a very different story. Similarly the next 40 years in the USA could be a miserable time for investors. I can't believe how much people take for granted that stock markets "usually go up 7% a year" or whatever.
No one really knows but it wont be as good as the last few decades.
> No one really knows but it wont be as good as the last few decades.
Such confidence! The first part is of course true, but you’ll make money teaching the market that you are smarter if the latter is true.
Perfectly possible that AI kicks the economy into overdrive in the next few years and growth increases. I wouldn’t bet my house on it, but also wouldn’t bet my house against it either.
Absolutely no chance that AI is able to do that. Investing decisions are too subjective for the current state of AI. A good value investor knows this… and also knows that you don’t need a bull market to make decent returns.
Or, fewer and fewer people are needed for approximately the same amount of production. This may lead to a further bifurcated society.
I do think that a service-oriented economy has many, many more nooks and crannies to hide non-productive jobs, though, and that could perpetuate the “bullshit job economy” hypothesis.
Fewer people are needed to perform a specific job as we do it today. But there will always be room to improve the products and services we produce and to make them cheaper.
Consider the steam-locomotive. It was a great invention but we didn't stop there now we have bullet-trains and hyperloops.
There is also plenty of room at the bottom as famously noted by Feynman I think. We can make products smaller to make them easier to carry around. New cheaper price points create new demand and new markets.
Also as economies improve, people will have fewer children, because they don't need them to take care of themselves at old age. So it's not like we will have too many people having nothing to do.
On the contrary I think AI can be the great equalizer: Rather than having fewer people who know how to do things, we will have more people who are able to do things with the help of AI.
The technology by itself will not produce a great society however. We need democracy to accomplish that. As people will have more free time they will have time to study and more and more people will demand democracy because they will understand it's the only way to avoid wars.
Yes, exactly. And agreed, it’s not clear. (Hopefully I conveyed wide error bars, my whole point is that certainty seems unjustified at this point in time.)
It's not even that, the way markets work is inherently unpredictable, in a self fixing way.
If someone finds a way to actually predict the market, then in taking advantage of that they will add unpredictability into it again. This is part of the entire basis of how markets work!
The number of people on planet earth who deeply understand the current state of the art in LLMs, the available information in a format an LLM can "reason about", good ways to condense information so that X v Y decisions can be made across a lot of Xs and Ys, and deeply understand how to do value investing in a practical way and enough about a set of industries to pull it off, is about zero.
Regardless, I'd happily take a bet at even money up to a reasonable sum that we'll wake up in 20 years to find that a system using LLMs has just destroyed the market doing fundamental analysis, for 15 years.
How is that trivial? Even one task done a few times a week taking half an hour less is at least a 2% increase in productivity (assuming these tasks are work related and a 40 hour work week). "A lot" of such tasks would easily add up to 10%+.
Half an hour of time recovered using a system not specialized to the work at hand. With better tooling and integrations that could scale to several hours a day spent doing more valuable work.
Of course predicting the future is impossible. But there’s a lot more than 40 years of data to support the buy-and-hold idea. The updated Trinity Study spans from 1925 to 2009, so includes the worst economic calamity in US history. It concludes an inflation-adjusted 4% withdrawal rate is safe for 30 years in 95% of historical 30 year periods. An inflation-adjusted 3% withdrawal rate succeeded in every 30-year period.
Why? Retirement is a very recent phenomena. The idea of someone earning enough during their working life to then fund several decades of non-working life is a very modern thing, maybe only the last sixty years or so. Only a very rarified few were ever wealthy enough to actively stop working prior to becoming physically unable to work. And then, for most all of human history, those too old to work lived out their remaining few years being taken care of by their children. I'm would not casually assume any "right" to the modern concept of retirement.
You could apply this argument to so many modern workforce changes, for example, the 40-hour 5-day workweek. Throughout history, most workers have not had the kind of rights that they do today.
I think we all deserve to make progress on things like retirement instead of making arguments like this. Sure, retirement hasn’t always been a guarantee, but can we agree that this isn’t a good thing?
We never question the desire to innovate in how to make money, but we’re often very quick to dismiss the idea that we can also dream to innovate society in a way that’s decoupled from profit, which is sad.
While I agree that most of society should be the beneficiary of productivity gains, I’m not sure retirement is still a net positive. It seems like a lot of health and well-being is related to being a valuable member of society and fortunately or unfortunately, for many, work provides that function.
Ugh, I hate this way of thinking. Perhaps we've all been brainwashed to believe this by capitalism?
I'm perfectly happy pursuing my own interests, at my own pace, without having some overlord making sure I'm maximizing value for some corporation. Sure, I don't want to just sit around doing nothing, but there's a wide gulf of possibilities between that and full-time employment.
I think you missed some of the nuance in the statement. It is not advocating for staying in the grind forever.
But for many retirees, they have never developed the mechanisms to continue being a productive member of society without structured work. The net result is a general drop in well being and health in their “golden” years.
Also, i made a comment where I think our relationship to work needs to change. I think that speaks to your point. I don’t think a false dichotomy between “working for the capitalist overlord” and “doing whatever I want” is what I was after.
> and fortunately or unfortunately, for many, work provides that function.
I agree with this, but the problem is that there is no guarantee of work being available to everyone. With the rise of AI and hyper-specialization of work, that problem is only going to get worse.
> I agree with this, but the problem is that there is no guarantee of work being available to everyone. With the rise of AI and hyper-specialization of work, that problem is only going to get worse.
The key here is to make sure that automation and cost efficiencies make it through to the production of necessities, and we don't prop up artificial scarcity.
There are an effectively unlimited number of jobs that employers would pay someone $0.01/hour to do. Not as many that employers would pay $100/hour to do. So if you need to make $100/hour to afford housing and medicine, that's a problem. But if we reduce the artificial scarcity and regulatory overhead in these industries, so you only have to make $5/hour to afford them, we're in a much better place. And all the better if lower costs allow someone to make a living at $2/hour.
AI and automation can help to reduce those costs. As long as they're in the right places (i.e. production of necessities) and we don't have regulatory capture preventing it from happening there.
How do you see automation helping housing? I work in an org interested in 3D printed structures and it still seems a long way off. Or are you looking at improvements in logistics that make it easier to live in less expensive areas?
It can be more than one thing. But one of the interesting possibilities for housing is modular construction. You mass produce homes on an assembly line as walls prefitted with plumbing and electrical, put them on a truck and snap them together at the site. Now you can produce them wherever labor costs are low and assemble them in a matter of days or weeks rather than months or years.
This doesn't get you out of zoning restrictions but could allow you to recover from their historical effects more quickly after zoning reform is achieved.
People keep saying this, and it keeps not happening in a significant way as described. Trucking assembled parts is harder than trucking the parts, which tends to limit the distances assemblies are trucked. It becomes cost efficient to truck construction workers (even if it's not great for the workers).
That said, some assemblies have become pretty common, I think preassembled roofing trusses are frequently used in favor of framing on site.
> It becomes cost efficient to truck construction workers (even if it's not great for the workers).
This gives me a different idea and I wonder if it's worthwhile.
There are industrial robots that e.g. mass produce cars. Suppose you make one to mass produce housing, but instead of putting it in the factory you put it on the truck. Put it on the construction site. It takes a pile of lumber, cuts it to length and turns it into walls, puts the pipes and wires through the walls etc. This is the kind of thing that existing industrial robots can actually do if you program them appropriately.
Then you send it across the street to put together another building. Assembly line, but the products are big so instead of moving the products to the next station you move the robots.
I’ve worked on those robots that mass produce cars. The idea that you can ship them from site to site doesn’t really work. They require a lot of support infrastructure. The use a lot of large parts (dies in the case of cars) that are heavy and must be constantly swapped out. They require a lot of constant tuning that would likely be made worse when subjected to the vibrations of transit. They require whole specialized teams just to maintain.
Those sound like things that are actually specific to cars, which operate on metal with tight tolerances because it e.g. has to hold compression in a cylinder.
Houses are made out of wood and tolerances are measured in centimeters if not inches.
This sounds like conjecture from someone who hasn’t worked in construction or automation. I’ve worked in both. Problems generally seem much simpler when we don’t have much experience with the nuances and details of execution. Some tolerances are forgiving (like framing, which can be corrected by a finish carpenter) and other systems are much more difficult. Both take some level of AGI to problem solve that comes in the form of a human. That's why there are "design" drawings and "as-built" drawings that (in my experience, at least) never match.
I'm not saying its impossible, but I think the marginal costs are too high to replace what we already have. In addition, society has been moving towards individualization since the 1980s. We aren't in the Henry Ford days where people are ok with "any color of car as long as its black." People want individualization when it comes to their homes as well, and that lack of standardization makes automation more difficult than building a modern Levittown with robots.
I see the problem but have a hard time squaring it with history. Decades ago I had an old professor who spoke about how he was tasked, as a student decades prior yet, to write a report on what people will do with all their free time due to automation.
And yet, here we are with people still working many hours on average and many jobs going unfulfilled. I personally think it’s a problem with our relationship to work, rather than limited opportunity for work. Humans seem to have an insatiable apple for more, which requires continued amounts of work to be done. I think the bigger problem is getting people to have the skills to do the jobs that will still need to be done.
Retired people can provide a lot of value in ways that can't be expressed in money. A lot of parents will be fscked if they don't have grandparents to help out with kids.
Too many people here use the drive-by "downvote" as a means of expressing their disagreement. This comment is a perfectly rational and polite contribution to an on-topic intellectual discussion of retirement, yet has received a large number of downvotes.
People, if you disagree, that's fine, but make some kind of a (polite, rational) counterargument rather than abusing "downvote" to express your visceral disgust at becoming aware of an opinion that differs from your own.
Also, to tag in, I believe downvoting is best to mark something that goes against the HN guidelines rather than just a sentiment you may disagree with.
Why not? Why is working all (or nearly all) of your life the default?
I forgot which, but one of the more popular economists of the last century believed that, with productivity gains, people would be working much, much shorter work-weeks by now.
He was only sorta wrong: the productivity gains did actually happen, but we decided to use the extra time to do more work, not do the same amount of work and take the rest in leisure.
There's nothing that says that we as a civilization couldn't decide to slow down and relax more. I know that this won't happen; capitalists run the world, and they'll never accept this sort of arrangement. But it's not like this is some sort of inherent natural must-do state of existence.
Several decades? In Netherlands retirement age is 67. Will probably be 70 by the time I retire. Males live 75 on average so that's less than a decade of retirement.
I'm unsure if you're being facetious so I'll take your comment at face value.
Government isn't a static thing - especially one that is elected by the people (for the people). Sooner or later members within said government will also consider retirement. So even if you can elect a government that disagrees with #1, you won't be able to hold it for too long.
"People ought to be able to retire" ... I assume that you mean the idea that people who have worked most of their lives should be able to stop working something in the age range of 60-70, and then enjoy at least a moderately comfortable life until death.
If that assumption is correct, this is a relatively new idea, at least in the sense that government has any active responsibility for it.
I can absolutely guarantee you that there are currently elected members of the US Republican Party, and similar political parties in other countries, who do not agree with the concept that government has any role to play in this. Don't work hard enough during your life? Your problem. Don't save/invest appropriately ? Your problem.
100 or 150 years ago, the idea that there would ever be a US government that would take notable steps to try to ensure a moderately comfortable life during retirement would have seemed like a pipe dream. It remains something upon that some political ideologies do not agree with.
With the excessive debt (which is not slowing down) the government is planting the seeds for high inflation in the long term. This historically has been very bad for equities (in real terms).
No, I mean societally it's unaffordable. The government will eventually need to raise taxes significantly or begin means testing it. The current system is mathematically unsustainable
The current system is mathematically unsustainable pretty much by the design of a certain political faction interested in demonstrating the incompetence of government. Removing the income cap—currently around $160k—on the social security tax would do a great deal to make social security sustainable (and more equitable).
> The current system is mathematically unsustainable pretty much by the design of a certain political faction interested in demonstrating the incompetence of government.
The current system is mathematically unsustainable as a result of politics.
If you're going to untie benefits from payments then the first sensible thing to do is to make the same payments to everyone instead of giving more to people who made more money, but this would result in large numbers of affluent retirees voting against you.
If you're going to untie benefits from payments then the second sensible thing to do is to eliminate social security tax whatsoever and fund the program from general revenues, which would remove the need for the farce of a "social security trust fund" (the government owes itself money: it's a debit and a credit in equal amounts and nets to zero). But then people would condemn you for "bankrupting social security" or "stealing the trust fund" or similar nonsense, funded by the people the tax burden would be shifted onto.
Removing the cap while leaving the program as it is not only is worse than either of these things, it doesn't even solve the problem, because the program as-designed would then be making higher payments to all of those people when they retire which would consume more than all of the money they paid in because people who made more money tend to live longer.
The government has a fund that is used to pay for SS. The fund is an asset they’ve committed to using to pay the liability of their pensioner promises.
That fund is an asset full of assets. Those assets are government debt. Owning your debt basically nets to 0.
I agree for a snapshot in time. I think the distinction is that if the liability includes future payments to current citizens posting into the system, the liability may outpace the asset.
The amount of expected social security payments is independent. They don't have enough "money" in the "trust fund" for that regardless.
The point is that the "trust fund" is a NOP. It's like writing a check to yourself. When you go to deposit it into your account, your account balance doesn't change.
Every penny the Social Security Administration withdraws from the "trust fund" is either coming out of that year's general revenues or is causing the US government to sell more treasuries into the bond market. It's the same thing that would happen if the "trust fund" was empty and the money the Social Security Administration pays out in excess of what it collected that year came out of general revenues or deficit spending.
Worrying about what happens if it "runs out" is ridiculous. It's like worrying about what happens if you run out of checks you wrote to yourself. What you need to worry about is where you're actually going to get the money.
Which you can go ahead and do already because both "social security tax" and "deficit spending" aren't particularly ideal, but that's what's happening today. Social Security tax is one of the most regressive taxes we have.
>The amount of expected social security payments is independent.
This is the kind of economic theory that loses people. It’s like what economists say deficit spending doesn’t matter because a govt isn’t like a person. It certainly matters if confidence in the system matters.
The fact that you acknowledge the money comes from side other source implies there’s a tradeoff. There’s no free lunch here, regardless how creative the accounting gets.
The Social Security Administration charges tax to Bob and then uses the money to make payments to Alice. For some years it was taking in more than it was paying out, so it used the rest to buy US government bonds, which is really just giving the money to Congress to spend on something else. Then Congress spent it on something else. It's all gone. All you're left with is a piece of paper that says the government owes itself money -- and not even as much of it as Bob was promised.
Now Bob is retired and expects his money back. But most of the money went to Alice and the rest went to Congress in 1994. There's no money. If you want money to pay Bob then you need to collect more taxes or sell more government bonds into the market.
So which of those things do you want to do? And if you want to use tax revenue, do you want it to be the regressive inefficiently duplicative social security tax or general taxes that don't charge higher effective tax rates to people who make less money?
I’m aware of the system, but all you’ve done is explain how the tradeoff works. It’s also how governments raid pension coffers to pay for something else like infrastructure (see Illinois). I’m not claiming I receive “my” money in SSI, but I am saying there is a point beyond which the system becomes untenable. At some there is a tradeoff because the money is gone. You could raise taxes or pay interest on a new loan, but again, that only works when there’s still confidence in the system. What happens when there is no longer confidence? Interest rates become untenable or the citizenry will not continue to support additional taxation.
Now I will agree that this is a contrived problem because SSI is a contrived system. We could just change the rules and make it continue to work, but that will come with tradeoffs.
If they remove the cap on retirement contributions they should also remove the cap on retirement payouts. I would love to see social security pay former CEOs millions of dollars per year:)
No, they shouldn't. SS is meant to prevent destitution, not enable luxury. Wealthy Americans owe the working and consumption classes whose sacrifices make their riches possible; there is no such obligation to ensure those elite earners get back even what they paid into that particular channel, at the expense of people who are much less well off, when they have other resources to draw from.
You might not think that's fair. I do. Even under this hypothetical regime, I know who I'd choose to be: rich and paying a ton in taxes, in a heartbeat.
Devils advocate: by subsidizing the “consumption class” you enable more consumption. I get that’s how our current economy works but there are probably a lot of negative externalities associated with increasing consumption.
That's fine. Sure, there are downsides that increase as consumption increases, meaning that overconsumption (however that's defined) is undesirable. However, consumption enables cultural expression that otherwise would be economically untenable. Art, design, music, etc. benefit from economic incentives to overproduce beyond subsistence. That people go above and beyond in their productive capacity in order to enable creators to create freely and contribute to the corpus of human expression is something that should be recognized as the sacrifice for the collective soul that it is.
That's a good point, and I'm in favor of those 'cultural expressions'. But I think we're fooling ourselves if we think somebody is buying a gas-guzzling SUV, or the next iPhone, so they will have the ability to write the next great American novel. I'd venture that most consumption is a status game.
I think my larger point is we have to zoom out for a systems level analysis. We shouldn't assume that the production is de-coupled from the consumption, and production can come with a host of negative externalities. I'm not convinced that wonton consumption (especially for the sake of itself) is a net positive, given human nature's tendency to be insatiable with regard to consumption.
>I'd venture that most consumption is a status game.
I would include the debasement of one's moral soul for social-climbing purposes in the set of aforementioned sacrifices. :)
In any case, I did mention the dangers of overconsumption. There is something in between that and subsistence that is a net-positive for society (in this epoch, at least).
I don't understand why the mental model for SS is any different than any other service the government provides. People don't expect their tax payments to proportionally determine: their access to roads, law enforcement services, fire protection, access to GPS or weather data, etc. Government's purpose is to facilitate the common good. Some fortunate individuals are able to contribute more, some less fortunate individuals are able to contribute less.
I'm relatively lucky in that I do hit the SS income cap every year. And I think it's extremely stupid that my paycheck suddenly grows 6.2% well before the end of the year every year. I can absolutely afford to continue paying my 6.2% tax, just like everyone else, and not need special treatment when withdrawal time comes in retirement.
Social security was sold as an insurance program and would have to be completely redesigned to operate like other programs -- you'd essentially want it to be a UBI for everyone over a particular age funded out of general revenues, and might be better off to make it a real UBI for just everyone.
But it's "the third rail" because there is so much money on the table. It's a program that makes transfer payments, which is zero sum, so any change will be fought hard by whoever ends up worse off than they are under the status quo.
How is it like insurance? At least from one perspective, insurance is hedging risks - you put in a little and if something happens, you get a lot back.
Social Security is compulsory savings, and you get out pretty much what you put in.
(Maybe I'm focusing too much on one word.)
> it's "the third rail" because there is so much money on the table.
Also, I think because people feel an existential threat - some people rely on that money to survive.
And because, after seeing that deduction every two weeks for their entire lives, they want their payout.
Really, it's not like insurance, because no insurer would structure their program the way that social security is structured.
But it is like insurance in that the program is named Old-Age, Survivors, and Disability Insurance (OASDI) Program.
It's also like insurance in that the payout is related to the premium / taxes. If you pay your premiums and experience the covered risks, you (or your survivors) get paid.
It's not like savings, because if you don't experience disability, or old age, you don't get paid. Your survivors might still get something though, I don't know much about survivor benefits.
Disability insurance is available from private insurers, but with different terms. Old-age insurance is more or less an anuity, again available from private insurers, with different terms.
The biggest difference with social security is that smaller incomes (and thus, smaller payments into oasdi) get a larger payment per dollar income if they experience a covered event. Another major difference is that if one has multiple former spouses of marriages that lasted at least 10-years, they're all potentially eligible for spousal benefits and they don't have to share it: no private insurer would sign up for that. Also, the actuarial tables are rarely updated and rather out of date at this point.
It pays until you die instead of paying until you run out of savings. The risk it's insuring against is that you live longer than the average person and outlive your savings.
The private insurance companies that offer this type of insurance call it an annuity.
> Also, I think because people feel an existential threat - some people rely on that money to survive.
Nah, the more sensible of the reform proposals are the ones that convert it into a fixed payment for everyone. Those proposals are still every hard to pass because some people would get more than they do now and some would get less, and the people who would get less are the more affluent people with no existential risk, but they would still fight it.
> And because, after seeing that deduction every two weeks for their entire lives, they want their payout.
The program started by making payouts to people who never paid in. Their money is already gone, given to their own parents.
Think how many problems could be solved by removing (democratically) that faction: Social security, climate change, immigration (to a significant extent), education, et al
This is a common and fundamentally incorrect misconception about Social Security. Many subsequent policy debates are then misinformed.
Your money is not ever saved for you. Your retirement is NOT funded by your own past taxes. Your retirement is funded by those younger people who are then working and paying taxes.
Payments to retirees are made out of _currently incoming funds_. That is, the money paid in taxes by people currently working is immediately distributed to retired people who are receiving Social Security payments.
It is, in other words, NOT a savings plan. Full stop.
This scheme sort of worked in the 1930s when life expectancies were much lower and only a few people survived to retirement age relative to the much larger number of working people paying taxes.
Since 2009, Social Security has operated at an annual loss: the amount paid out has begun to exceed the incoming taxes. The deficit is expected to increase a lot in the coming years. (See https://www.cbo.gov/sites/default/files/cbofiles/attachments...)
Whatever you may think about whether Social Security is a good idea or whether the goverment ought to provide for retirement, it's clear that the current structure is not going to do that for much longer. A large-scale reform of some kind is coming.
Isn’t the implication that solvency can be maintained by increasing the age of claimants? It doesn’t have to be a drastic step function, it could be slowly phased in.
That would be theoretically possible, yes; but all proposals along those lines so far have been met with staunch and bipartisan political opposition. Attempting to alter the retirement age seems to be political toxic waste.
Social Security in the US is very much a wealth redistribution scheme, and more and more so as time goes on. See adjustments to retirement age and bend points in the benefit formula.
I believe human ingenuity and power over the elements goes up 7% a year, of which, the stock market is a proxy for. We are a networked organism and good at leveraging innovation at a global scale through supply chains. I see no reason to be pessimistic, we have AI, we have better space flight, we constantly improving energy sources.
Then why didn't the markets go up in Japan and Europe (per the GP)? Also, why do the US (and maybe other) securities markets increase when the underlying economy is performing poorly?
The US is highly dependant on massive amount of immigration to maintain demand. Couple that with a few other things, such as the petrodollar, and you have the US behaving in an odd manner that I don't believe will last forever.
Differences between countries, cultures and people do exist. These differences will manifest themselves as variations in productivity, ultimately leading to unequal growth rates.
One thing to consider though is that our nation has taken a lot of debt -in many philosophical forms- to fuel that growth.
Government deficit spending of course helping the economy. But we eventually have to pay taxes to cover that.
Citizens debt fueled spending on homes and goods. Corporate debt similarly. Student loans of course. Individuals and companies can only tolerate so much debt.
Our oil dependence never accounted for the cost of global warming and pollution, but we’re about to pay for that soon. This applies to many materials we consume, oil being the most prominent.
Corporations have systematically slowed pay growth while increasing prices, eventually consumers will be unable to afford enough goods to keep the machine spinning at full (growing 7%) capacity.
Our shrinking population from historic highs means each working person will need to contribute a bigger share to reach that 7%, while having more people to support.
I agree that the American stock market has been an outlier, and most Americans don't realize the extent to which that is true; it's good that you do. But compared to buying and holding a widely diversified and low cost portfolio, what was the better strategy for investors in other markets? What would be the better strategy for Americans over the next 40 years (not knowing if it will be a miserable time or not)?
I think this is a case of "time in the market" being the least worst option. The market may reward it, or it may not, but hard times are hard times and I don't see any obvious way to avoid them without exposing yourself to a lot more risk in other ways.
People keep talking down the US but the only advanced economy reliably innovating at scale. Especially in the post-COVID era, as China faces growth collapse.
You don't have to look far to see that all the major tech developments of our species are coming out of the US: Generative AI, Reusable Rockets, self-driving cars, mRNA, Genetic Engineering, NIF Fusion, VR, etc. The US could strike it out on any single item and spark another industrial revolution.
Plus we're still king of the hill in so many other categories (World's largest producer of energy, world's largest agriculture producer, world's largest military, etc.) If you're an investor, the idea that you'd bet against the US economy is a hilariously bad take.
Good investing has never been about X will make a lot of money, buy X. It's about what price are you buying the money that X will make. Right now, a lot of future money US will make is baked into the price of those US companies. You'll pay $100 for $4 of US earnings or $8 of UK/Japan/Netherlands/Canada/Sweden/etc. earnings. People already expect US earnings growth to be almost double. The question is do you think it will outpace even that? Even if you think US earnings growth will be somewhat better than the rest of developed economies, it's a worse investment.
For example, developed economies index, VEA, outperformed US, VTI, last year.
This is what I think too. Now obviously we're possibly on the verge of another massive change in tech with AI but there's still nothing that guarantees that the market has to go up.
The market is composed of companies, each of these companies are composed of people trying to better their own lives by working hard. When you buy an index fund you are essentially betting on all these people collectively working hard to improve their lives and if incentives are correctly aligned this should also mean the value of these businesses growing.
> The market is composed of companies, each of these companies are composed of people trying to better their own lives by working hard.
They are composed of people doing that, people rigidly protecting their incomes and/or status, people cheating others, and especially these days, people trying to squeeze every drop of blood out of every other stakeholder (investors, customers, employees).
It could be a massive nft style boom, but if it is an nft style boom, expect a massive nearly worldwide economic collapse due to growth constraints around population issues.
Correct. Imagine if you bought and hold in Japan in the 1980's. Buy 2023, maybe you would have broken even [1]
There are 2 problems:
1. Market timing works:
a. With inside information e.g. US congress
b. Take an outsised risk e.g. Nasem Taleb keep buying/selling deep out of the money options. Lose money every day to make an outsised gain
2. You are Warren Buffet. Which is basically buy stocks like you are buying a company. Have the option of buying preferential shares. And hey 1b monkeys on typewriters...
Still totally agree with the OP. The last 40 years have been ridiculous from a macro perspective:
1. Interest rates, the most important price in the economy, the price of money, has fallen from 18% in the Paul Volker days till after covid close to 0.
2. Money has been printed like never before after the 08 collapse and covid.
It is very difficult to look at 2023, with the US fed cash rate at approx 5%, global interest rates going up, price inflation at 7%+, US national debt at $33T and growing at $1T per month exponentially, and the US paying more on Interest expense (not principal, just Interest) than they spend on the military.
I like Nassem Taleb. Invest still in index funds but invest in global infrastructure that is recession proof e..g [3]. Be anti-fragile
Part of the reason for the bull run is that people have 401ks. They have IRAs. They buy index funds. In either case the amount of americans who automatically devote a portion of their pay to buying equites has probably never been higher.
Isn't that only a problem if you are only invested in the US? There exists ETFs that are invested in multiple developed countries, such as index funds that track the MSCI World.
and the 7% is skewed towards a small % of companies that have averaged up the S&P 500, usually big tech companies. If you look at the distribution and median return its actually far less.
There are probably multiple layers of feedback loops going on, who knows how things will pan out. There's a sufficiently large enough pool of investors out there that will buy broad ETFs like SCHB, SPY, VT, VTI, etc., on any dip or just continue to DCA a little of every paycheck into those just due to its history. The US is geographically isolated from potential threats for the most part unlike Europe and Japan, is relatively self-sufficient, super diversified and lots of international exposure, and no country has as much clout on the international stage as the US for the time being so I think it makes sense the US continues to do much better. Sometimes you have trends like emerging markets, cryptos, etc., but broad US stock market seems like the default choice for high returns so long as there is capital to be allocated.
Interest rates are the thing I think could change things, but who knows. If you can get a guaranteed 5% return that's pretty nice, but it's possible we just slide into being a more corrupt/untrustworthy country for investments or baby boomers suddenly taking a disproportionate amount of money out of the market as they retire, etc.,.
> No one really knows but it wont be as good as the last few decades.
A little bit contradictory.
If you don’t think the stock market is going to appreciate then it’s not for you. Don’t invest in it at all. You can stick with savings accounts, gold, and crypto scams.
For unsophisticated investors, timing the market tends to keep money on the sidelines during growth periods, eroding long-term returns. This is part of why it's considered an investing sin - "time in the market beats timing the market." Sophisticated systematic investors can probably get good results with certain momentum-based market timing strategies, but most of us aren't sophisticated systematic investors.
To go into further detail about systemic investing:
There have been experiments like the turtle traders ^ 1 who applied "trend following", used today by many CTAs on exotic markets. For this, an investor taught some people his strategy/rules, gave them his money and they've shined for 40 years. The fundamental strategy still works today (updated). Fundamentally, it's a method to ride momentum in different ways (e.g. crossectional.) Hedge fund managers like Rzepczynski, Cem Karsan, Alan Beer... Richard Brennan is the most insightful of them who shares his methods freely. N.b. trend following doesn't work well in stock markets, but flourishes in Mexican rate swaps, orange juice futures, London sugar... combined in ensembles.
Traditional value investors, building on the Intelligent Investor, have always done well over samples above a few years. (N.b. Warren Buffet hasn't been a value investor for a long time, because he has too much to manage. He was strongly inspired by Fisher's Common Stocks and Uncommon Profits, which gave us the concept of "growth stocks".) (N.b. 2, value investing ETFs are mostly terrible, fundamentally not investing in value stocks due to their structures.)
Carisle's Acquierer's Multiple is the most recent development in systemic value investing (he also runs an ETF or two along these lines). "Magic formula investing" even holds up too!
In the mining space, you also get discretionary (not purely systematic) investors like Rick Rule openly discussing their methodologies, successful for decades and decades.
Here’s an interesting paper ^ 2 (exec summary pages 5-6). Note that 70% of underperformance is due to investors withdrawing funds during times of market crisis. Fund fees also drive the majority of underperformance. N.b. most wealth managers can't legally follow such strategies because of the prudent person rule. They are legally forced to underperform typical indices - and the majority of research has focused on them, distorting the data pool.
> Traditional value investors, building on the Intelligent Investor, have always done well over samples above a few years.
From the last published interview with Benjamin Graham, author of II ("A Conversation with Benjamin Graham", Financial Analysts Journal, September-October 1976)
> > In selecting the common stock portfolio, do you advise careful study of and selectivity among different issues?
> In general, no. I am no longer an advocate of elaborate techniques of security analysis in order to find superior value opportunities. This was a rewarding activity, say, 40 years ago, when our textbook "Graham and Dodd" was first published; but the situation has changed a great deal since then. In the old days any well-trained security analyst could do a good professional job of selecting undervalued issues through detailed studies; but in the light of the enormous amount of research now being carried on, I doubt whether in most cases such extensive efforts will generate sufficiently superior selections to justify their cost. To that very limited extent I'm on the side of the "efficient market" school of thought now generally accepted by the professors.
Fun! I'll save your comment (and upvoted it). Curious to see where this rabbit whole goes. On another point, I'd like to suggest you reference as follows [1]. I found that syntax to be more prevalent on HN than ^ [2]. It's easier to parse, since you know it's separate from the sentence. Whereas if I write that I have a reference like ^ 3 then it is harder to see that ^ 3 is apart from the sentence or part of it.
[1] This part you did do that way, haha.
[2] I haven't done a formal count, but I'm sure some regex search engine will give you many hits if you search for \[[0-9]\].
The fact that you're being downvoted for factual contributions kind of explains why it's possible to beat the markets. Most people refuse to believe it.
No public strategies are going to beat the market by a huge amount, and having the discipline to execute them manually isn't easy, but it has been clearly shown to be possible.
Many public strategies beat the market by a reasonable amount; the consistent and disciplined application of them, however, is rare.
There is also a lack of consistency about what it is to "beat the market", in the world of clickbait headlines and armchair twitter dd - the benchmark each year (with hindsight) is the highest performing asset.
The dogma that it's impossible to beat the market is frankly weird at this point.
If the markets were truly efficient, randomly picking stocks would beat SPX ~50% of the time. Since markets are not super efficient, basic exposure to performance factors (small cap, value, momentum...) puts you at a fairly high likelyhood of beating SPX.
> If the markets were truly efficient, randomly picking stocks would beat SPX ~50% of the time. Since markets are not super efficient, basic exposure to performance factors (small cap, value, momentum...) puts you at a fairly high likelyhood of beating SPX.
This assumes that the expected return of a single, randomly-picked stock is symmetrically-distributed. It is not, single stock returns are highly skewed and "lottery like". Index returns come from the fact that a small number of stocks do exceptionally well, while most of them do poorly.
This becomes even worse if we talk about timing: stock returns come from relatively short periods of doing really well, if you miss that because you are out of the market for some reason, you lose out on the vast majority of the index return.
Sorry, I don't have specific sources to cite. This comes from stuff I've picked up listening to the Rational Reminder podcast (https://rationalreminder.ca/podcast-directory), which have very well researched episodes as well as guest interviews with leading academic finance researchers. I'll try to dig up the relevant episodes, which do cite sources.
Quote from this last one: "[...] around 40% of
the time a concentrated position in a single stock experienced negative absolute returns, in which case it would have underperformed a simple position in cash. And around 2/3 of the time, a concentrated position in a single
stock would have underperformed a diversified position in the Russell 3000 Index. While the most successful
companies generated massive wealth over the long run, only around 10% of all stocks since 1980 met the
definition of “megawinners”."
I've watched all of the videos on Ben Felix's channel and generally share his worldview. But I've been having some doubts about market efficiency and active investing being extremely hard.
There were 4 moments when I thought - I should buy this stock for some reason, e.g. after ChatGPT I thought about buying NVidia. But I decided to continue being a purely passive investor. Now I regret that decision because all of those stocks overperformed.
I also correctly guessed that 3 out of 4 stocks would underperform (TSLA was the wrong call). It seemed obvious that the market was dumb about GME, AMC and TLRY.
Sure, many active investors are extremely sophisticated but what if the average invested dollar is kind of stupid?
Also, one minor nitpick about Ben Felix's content is focus on historical statistics. I think this gives you a false sense of confidence and security.
efficient markets will be a myth for as long as retail investors are allowed to trade stocks.
The stocks you are looking at are all stocks that have been popular with retail investors, and retail, as a general force, isn't out there doing equity research, incorporating all available information, estimating risk, and allocating its portfolio along the efficient frontier. Retail investors move the market, and there is money to be made if you can quantify how much of that move is driven by short-term sentiment.
That said, the market can remain irrational longer than you can remain solvent, sometimes "irrational" positive sentiment is coincidentally well-placed, and irrational sentiment is contagious and difficult to see through sometimes. Because of these factors, IMO any kind of active investing strategy should come with some kind of risk management component, where if your active bets blow up, you don't lose your life savings. Personally, I keep active bets to <20% of my portfolio, I'm extremely careful with leverage (margin, options, futures), and I put stop-losses on any particularly volatile position and any that incorporates leverage. I want to have it so if I'm dead wrong and also I fall into a coma and can't unwind my trade, my position still can't screw me.
And who is arguing that they are perfectly efficient? Markets work on information, which is not (initially) evenly distributed and because of the physics can only spread at the speed of light once it is known.
> Since markets are not super efficient, basic exposure to performance factors (small cap, value, momentum...) puts you at a fairly high likelyhood of beating SPX.
Two of the proponents efficient markets explain why (and shared a Nobel for the work):
> The dogma that it's impossible to beat the market is frankly weird at this point.
I agree.
Meta was literally priced below $90 not even a year ago (I entered at about $100 FWIW, which was my nice and round number). Now at $315. Anybody who believes the market is efficient is on some serious drugs.
The market correctly valued Meta a $380 or so before the crash (because "TINA" I'm supposed to believe), then correctly valued it a few months later at $100, then now is again correctly valuing it at $315?
Please. Just please.
I'll go much further: none of these valuation are correct. The market is highly inefficient.
Then Meta announced they were going all in on the Metaverse, had set fire to $100bn so far and were going to continue to throw ~$20bn a year into the Metaverse - the market correctly valued Meta a $100.
Meta announded they were going all in on the Ai - the market correctly valued Meta at $315.
You have picked a poor example; the moves in the stock, are primarily the fault of themselves. Those that saw the emergence of Ai and Zuckerberg as one of the leaders in the space got a nice 3x. If it didnt happen, Meta stock would probably be worth about as much as MySpace.
fwiw I said they were going to zero when they rebranded to Meta. Turns out I was wrong.
Meta had about a zero percent chance of dying like MySpace. Meta has tens of billions of dollars of annual profits (2x of Walmart, amazingly, $30 billion vs $15 billion) near total dominance of social networking, mobile advertising, etc. MySpace had none of those.
This isn't an answer to the poster above. The point is Meta talking about putting all their annual profit on fire. That makes the stock useless for investors.
You've provided zero evidence for them being incorrect, though.
There's nothing wrong with 3x changes. A lot can happen in a year to diminish or improve a company's outlook -- even a large company. And yes, by 3x -- or even much more.
The onus of proof here is on you to explain why those don't reflect largely realistic estimations of NPV of future profits, and to explain why you think you have better information, experience and judgment than the market.
Usually what's meant is that it's impossible to beat the market over time. I also saw Meta completely oversold and bought in. As someone who follows tech, it seemed obvious to me that Meta's impending death was greatly exaggerated. The problem is, can I do that over and over across the entire market? Nope.
I think the reason why "you can't beat the market" is the simple fact that you are part of the market. If you are very, very good, such that any trade you make will always win, then the market just don't want to play any more. The feedback response from the market is extremely precise; do you make money or not? If you don't, you will change your strategy until you start making money or you just stop playing. The moment you start benefiting from some exploit, the market will immediately response to their loss by changing their strategy.
This is of course assuming that we are at a level playing field. I don't believe for one second that insider trading is not prevalent.
SPX index is also weighted (I think by companies market cap), which means some of the stocks have greater effect on the returns of the index. Also companies are periodically added/removed from the index as per their market cap which I think weeds out low performers without any bias that active fund managers/humans tend to have.
It doesn't count as beating the market unless if you're doing so due to skill. It's not particularly unusual to beat the market and come out of a casino positive. On the other hand, bragging about how good you are at slots, is what will get you "weird dogmatism."
This has been my experience too, I missed out more by being sidlined during good times than I saved. Personally as an engineering mindset person I am good at identifying likely failure modes of companies (i.e. reality) but rarely anticipate how much things will go up during good times which is more of a social phenomenon (hype).
Understanding potential failure modes for companies is a much more important part of credit investing (this is what I do for a living these days, though I've done equity investing as well).
Unfortunately a very large part of the credit universe is very difficult to access if you're a non-professional investor though.
It seems like identifying failure modes could work if you could model the likelihood of the company going bankrupt in a certain amount of time because even if the enterprise is working on failure mode, public markets have been popularity contests for a really long time.
Ever since I read The Black Swan by Nassim Nicholas Taleb and Thinking, Fast and Slow by Daniel Kahneman, I can't take anything related to the stock market seriously (among other things as well, but this post is related to the stock market, so that's why I'm focusing on it.)
There's very little skill involved, which isn't to say there is no skill involved whatsoever - but at the end of the day it really is just luck
The following excerpts are from Thinking, Fast and Slow:
"The illusion of skill is not only an individual aberration; it is deeply ingrained in the culture of the industry. Facts that challenge such basic assumptions—and thereby threaten people’s livelihood and self-esteem—are simply not absorbed. The mind does not digest them. This is particularly true of statistical studies of performance, which provide base-rate information that people generally ignore when it clashes with their personal impressions from experience."
"Finally, the illusions of validity and skill are supported by a powerful professional culture. We know that people can maintain an unshakable faith in any proposition, however absurd, when they are sustained by a community of like-minded believers. Given the professional culture of the financial community, it is not surprising that large numbers of individuals in that world believe themselves to be among the chosen few who can do what they believe others cannot."
FWIW ever since Kahneman, Ariely and similar company have had some of their theories get discredited (Ariely's taint is worse because it's to do with fabricating research!) I have gone back to simply resorting to common sense and quotidian skepticism.
[1] below goes into detail on one of the topics, [2] is a less technical / more journalistic take.
Essentially Kahneman ended up being super confident ("disbelief is not an option" he said) about the findings he cited, some of which have been shown to suffer from lack of rigor.
If you're wondering "well, just some of them right?" I will ask you to ponder for a minute over the fact that this is not supposed to be some impulse aisle magazine article but a book applied epistemology ("behavioural economics" is to me just what gave this and related books some sales wheels).
This is an interview with two academic researchers into active fund managers who can indeed beat the market consistently sometimes. One factor why they exist is that they have access to better information than the average individual investor. However, (1) excess returns tend to mostly get absorbed by higher fees and (2) it's very difficult to scale it up, funds who beat the market tend to lose this edge when more funds go into them. Thus, market-beating funds, if they want to maintain their edge, have to severely limit who can invest in the fund and how much they can put into it.
The episode also goes into the effect of security selection (which stocks are picked) vs market timing, which is relevant to TFA.
Is this like "60% of the time it works every time"? The fact that there are a few individuals that have beaten the market on occasion is a strong indicator that the chances of any retail trader doing this are slim to none.
I suspect poker has more skill involved than stock trading.
If there are really just a few, it could be explained by chance. Warren Buffet is often cited in that group and yet, a blindfolded monkey would have done better than him in the past 20 years[0].
Warren Buffet also said 20 years ago that he was having trouble find any stocks that he wanted to buy, so he predicted his poor performance. He did very well for the first 30 years of his investment life.
I could be wrong but I don't believe Renaissance Technologies makes their money picking individual stocks. My understanding is that they mostly make money with (statistical) arbitrage, market making, etc.
You should also read Adaptive Markets by Andrew Lo. It talks about how behavior psychology affects the markets, as Homo Economicus does not really exist, people are not rational actors individually or even at scale in other domains (see, for example, loss aversion) so there is no reason to think we are rational when dealing with the markets either.
In the Black Swan he talks about his endeavor with the stock market and how lucky he got by chance, and not by using some pseudo scientific formulas and whatnot to "predict" how his stocks would do. He also gave some pretty good advice when it comes to the stock market
The whole book is just awesome, I'd recommend giving it a read
Are there 100 people who know finance and think carefully like Nassim taleb? What do their outcomes look like? I would bet all of them do pretty well. (I'm not even a big Taleb fan.)
This is just like the startup founder argument. Every one which succeeds ends up having a tremendously interesting background demonstrating unique interest and capability.
One of my family members is absolutely convinced that they can time the market and it kinda drives me up the wall every time it comes up. They will use all these “techniques” to draw arbitrary lines on the chart to establish a trend in the market while watching the news like a hawk everyday.
Meanwhile I just get on with my day with index funds and get better returns.
> Buffett's ultimately successful contention was that, including fees, costs and expenses, an S&P 500 index fund would outperform a hand-picked portfolio of hedge funds over 10 years. The bet pit two basic investing philosophies against each other: passive and active investing.
Isn’t a large part of the underperformance of the hedge funds due to their fee structure? Investors lose 20%+ of the profits just in fees. While I don’t think stock picking is a great idea for the layman, that fee structure isn’t generalizable to the average Joe picking stocks.
I believe there’s some evidence that low-volatility trading has been shown to beat the market over long periods of time. Although, “picking stocks for volatility” may be different than “timing stock picks”
“Buffett's ultimately successful contention was that, including fees, costs and expenses…”
Most good research that I’m aware of includes fees in the comparison because they can significantly erode returns. (Maybe somewhat less of an issue now that most brokerage now offer no-fee ETF trading). Not including fees and expenses is just a marketing tactic.
>But it's true. I could name half a dozen people that I think can compound $1 million at 50% per year -- at least they'd have that return expectation -- if they needed it. They'd have to give that $1 million their full attention. But they couldn't compound $100 million or $1 billion at anything remotely like that rate.
Yep, you also wouldn't give the same computer/software advice to your grandma as you would a peer at work. Buffet is telling us to leave trading to the pros, but he absolutely trades.
Buffet is arguably the best who’s ever done it. He can do things your layperson shouldn’t try. Just because Bruce Lee could do an impressive spin kick, it doesn’t make spin kicks a good idea for 99% of people to try in a self defense situation.
Sort of, not really? Most of BRK is invested in 100% wholly owned companies. They do have a "small"[0] public equity portfolio, that does change investments periodically, but most of those investments are also pretty long term, if you go look.
Yeah, I don't doubt that there are real people timing the market successfully. But as you said, those methods are under NDAs, not given by random gurus on YouTubes!
Every scientific endeavor is about predicting the future. Imagine your 3 closest friends wanted you to invest in your business. Could you predict which of them would likely do better than the others?
Not even close to being a single-party problem. I know it's almost Halloween but you can do better than jumping out from around the corner yelling "Nancy Pelosi!"
Timing absolutely doesn't work in my experience. This effectively makes many forms of derivative instrument worthless to me. There are only a few targeted situations where I believe something might happen within a certain window, but I absolutely wouldn't bet more than 1-2% of my portfolio on anything with time decay attached to it.
What works better for me is joining in on earnings calls and reviewing presentation materials. Getting a sense for product roadmap, markets, competition, etc. This is the space where you can actually develop meaningful hypotheses regarding what might happen. Those who are performing time series astrology likely do not have the patience to go about things this way.
If you don't have time to spend about a day per quarter reviewing your portfolio, then you probably shouldn't be playing in traffic with individual stock picks, much less options contracts. If you think this is an unreasonable amount of time to spend playing investor, then perhaps you should just buy a little bit of something like $QQQ every day and focus on those other parts of life that are clearly more important to you.
Or, just contribute max to your 401k and close that distracting Robinhood account. Most people would do better over the long haul if they followed that bit of advice. Monkey brain is much more dangerous than losing a few % APY to fund management fees and sub-par allocations.
I keep telling my friends who get really into stock investment, read some stuff, invent strategies - and end up much worse (sometimes losing money) than me just dumping everything into a few almost random indices:
1. Greed (not as a pejorative or a judgmental term, just this itchy feeling that you want more than you have even if you gain and are not satisfied) is the fastest way to lose money, whether through a poor investment or being scammed.
2. When you decide to play a game of stock investment, who are you playing it against? Being better than average (just market returns) means being better than the average (not median!) player, who in this case is some institutional investor. Do they really think that with a few online courses they can be consistently better than people who do this stuff for a living?
QQQ went like 17 years from its 2001 high till it made it back to the same price. S&P is probably less stressful for the type of investor you are talking about.
> This effectively makes many forms of derivative instrument worthless to me.
Derivatives have another, much more valuable use: They enable you to hedge your investment, essentially insurance.
For example, if you invest heavily in agriculture in Iowa, you might buy derivatives tied to the weather and to the price of whatever you grow - derivatives that pay if those things go bad. You lose a little if things go well, but that's just the cost of insurance. Similarly, if you invest heavily in electric vehicles, you might by a derivative tied to the price of key inputs, such as metals for batteries.
Isn't that expected because of the automatic re-balancing to minimize risk? I don't think anyone goes with target date funds thinking they are going to maximize returns because it's a tool to buy and forget.
But buying VTI is also a tool to buy and forget and it maximizes returns compared to target date funds. They're lower due to fees as well as investing too much into bonds when young when it's not necessary, one should invest in bonds when closer to retirement instead.
To time the market, you need visibility into it down fine intervals and tools not available to anyone without a 3 digit investment. Common tools obfuscate data. A typical movement of the market that is obvious on a detailed chart, is explained haphazardly by likely automated financial press. The jobs data was strong on Friday, leading to likelihood of higher interest rates for longer, yet the market jumped up that day? Was that a Dead cat bounce? Short-sellers exiting their positions before a long weekend? A move to drum up retail investor interest in a last ditch effort before the S&P crosses the 4200 point of no return? The beginning of the next bull market?
The retail investor software is designed to take advantage of retail investors left and right. Placing trades is error prone. The spreads can be ridiculous (0.5% at 9:30am). the market zigzags consistently so no stop loss is left un-triggered before a bounce. These conditions are currently leading to a world of take-profit trading. Timing works if you pay attention to it all the time, but most don’t have the time for that. Your retailer software won’t warn you when you are losing profits gained in the past year. That’s why long term investors become complacent after a long stretch of growth and stop paying attention. With bots trading increasingly more and interest rates remaining higher, the market will not look the same as it did since 2010 AT ALL and the data from before then is only a usable in detail to those who can pay. Once retail investors have seen the lines go down. the bounce back won’t be as linear as 2020 or this spring. Treasuries require a lot less sweat.
Most derivatives traders I know in the industry do some version of buy-and-hold for their personal portfolios, but one of the best I know does something completely different. He sticks to a philosophy of scanning multiple "small" cap companies(<50-100mm mktcap) until he finds one he generally likes, then figures out absolutely everything he can about them. Every piece of information available, down to calling whoever he can in management. Then once he decides he likes it, he commits 20-30% of his portfolio into them, often becoming a small, but notable investor in the company itself.
He's made massive amounts of money from this. He admits that it's basically a second job in terms of time and effort spent, but believes that it's replicable because no institutional investor is actually looking at these stocks, leading to hypothetical mispricings.
While I agree with the general principle of the post, I am skeptical of the fact that schwab published it. If it was done third party research, I would trust it more.
(Internet has made me skeptical)
However, the only incentive I can think of schwab is to encourage people to invest ASAP they have cash so schwab can get that money in their system so they can charge fees/still services.
Beware that such a mutual fund buy transaction closes at end of day. A sale of a stock or ETF closes 2-3 days in the future. So if you place both orders concurrently in your margin account, you may find you've borrowed from Schwab for those 2-3 days on margin, at a rate of ~10%. Schwab's order screen will not warn you of this in advance.
What happens if you make this mistake in a "cash account" i.e. no margin allowed I do not know and hope not to find out by means of usual accidental carelessness.
An alternative to SWVXX is VUSB, which trades with standard ETF timing.
They may not do so for their investors- this is before fees. But it does seem significant that they are beating the index on their own, and over a consistent period of time. 30% is not nothing. Seems like a blow to strong-form EMH to me.
As an FYI, I never want to hear a real-life fund or investor compared to a benchmark again. Benchmarks are theoretical investments with a 0.0% expense ratio- once you add in some of the real costs of running a passive fund, you start to get more real numbers
A blind monkey throwing darts will beat the S&P 500 some of the time.
The problem isn't that it's impossible to beat the S&P 500 (it's actually trivial), the problem is it's hard to predict which portfolio will outperform the S&P 500.
The point they're making is that fewer than 30% of monkeys would still be positive after so many years if it were random chance
Idk if that's true but you're not saying what percentage one would expect to see instead
I also think monkeys are the wrong example here because aren't they at even odds with the index? 50% of them, assuming they take no bananas for their service and assuming they don't get to make more trades than the index does, should have beaten the index, if my currently-half-awake brain is working correctly
Assuming a random distribution of yearly returns centered on 0 before fees, with enough fund managers you'd see plenty that would beat the market for 30 years. That past performance would also be in no way indicative of future performance given the stated process.
That warrants further investigation, but even if the data is flawless it isn't necessarily a blow to EMH.
As a very contrived example (to hopefully illustrate the "risk-adjusted" component of EMH while keeping the math simple), suppose the market consists of many equally sized firms and admits a strategy where each year 0.1% of firms will be uniformly randomly selected to have all their assets wiped out and distributed amongst the rest, and due to social pressures and incentives everyone uses the same strategy. Each year, 99.9% of firms will beat the market [0]. Forward-looking, 97% of funds starting in 1993 will have beaten the market that entire period (backward-looking is less meaningful because it depends on, among other things, how many new entrants to the market there are, not just their performance).
Despite the 97% success rate on a 30-year basis, this is still very plausibly a scheme you wouldn't want to participate in (your relative valuations of different outcomes might still make it desirable, but that's a separate question), but it doesn't violate EMH because of the high risk relative to the small returns being achieved.
Bringing the contrived example back to the real world a bit, that particular failure mode is common whenever a machine-learning person tries to tackle the market on their own. Even after getting over the hump of price -> bid/ask -> order book -> ... in correctly modeling what's happening, they're still prone to doing things like predicting the chance a security will go up or down and assuming that both branches have equal magnitudes. When they throw it at the real world, they find that despite low false positive and false negative rates for predicting when the price will increase, the times they were wrong were all the high-magnitude events, so they lose money on average.
Another way that potentially ties back to the real world, what exactly are the incentives for an active fund manager? When they fail, can they start a new fund? Can they distribute excess losses to a couple of years when the market also did poorly to be able to say something like "every year the S&P 500 went up, we went up more" and still attract new clients? It's not obvious to me that you'd expect behavior which would result in a low chance of beating the S&P 500 over a period of time, even if strong-form EMH holds.
[0] This assumes the "market" is static, but the details aren't meaningfully different when you instead benchmark against something like the S&P 500.
> For example, any competent basketball coach could tell you whether someone was skilled at shooting within the course of 10 minutes. Yes, it’s possible to get lucky and make a bunch of shots early on, but eventually they will trend toward their actual shooting percentage. The same is true in a technical field like computer programming. Within a short period of time, a good programmer would be able to tell if someone doesn’t know what they are talking about.
> But, what about stock picking? How long would it take to determine if someone is a good stock picker?
> An hour? A week? A year?
> Try multiple years, and even then you still may not know for sure. The issue is that causality is harder to determine with stock picking than with other domains. When you shoot a basketball or write a computer program, the result comes immediately after the action. The ball goes in the hoop or it doesn’t. The program runs correctly or it doesn’t. But, with stock picking, you make a decision now and have to wait for it to pay off. The feedback loop can take years.
> And the payoff you do eventually get has to be compared to the payoff of buying an index fund like the S&P 500. So, even if you make money on absolute terms, you can still lose money on relative terms.
They didn't discuss Peter Perfect's sister, Petra Perfect, who -- rather than just wait for the one bottom day for the year -- instead buys and sells repeatedly, throughout the year, at more local lows and highs.
I'll tell you the result: Petra would blow all the results out of the water with massive returns. But Peters results are theoretically somewhat more believable because he only needs to be lucky on one trade a year.
Sorry, then yes to answer your actual question, I don’t think that would commonly be called “market timing” (although of course the phrase could be an apt description of that strategy).
All the uses of that expression that I see refer to an investor whose principal aim is to buy-and-hold to capture beta, but simply wants to try and pick the right moment.
Although when the s&p dropped 20% in a few days in March 2020 — that was clearly a buy signal. And when tech stocks dropped by 70-90% in Nov 2022. Those stocks are now up 2x/3x from bottom. Sure, long term it probably doesn’t work out to time the market but sometimes it’s pretty obvious what’s happening.
I bought when it dropped 5% because I thought it was "a clear buy signal". Then it dropped even more and I couldn't spare any cash to buy more. How could you have known at the time that 20% was the bottom?
I don't believe in buy signals. You never know whether any particular level is the bottom. But that doesn't mean the opportunity is the same when the market is down 5%, 20%, 40% and 60% respectively. Of course a massive crash is a greater opportunity than a small correction regardless of how much further prices fall.
But the real question is whether it makes sense to keep cash on the side in order to wait for one of these relatively rare crashes. The answer is probably no.
Anything on the way down in a steep selloff is a good buy, so you did good. Also WRT the pandemic it was pretty clear that there was going to be panic selling, as soon as a pandemic was announced. What wasn’t clear was where the bottom was and how long the recovery would be. Some waited for a deeper bottom and missed out on the vertical recovery.
Yeah March 2020. I was not actively trading stocks back then so I watched passively. I do think market timing is bad as a general strategy but sometimes the writing is on the wall. I have timed the market successfully since then though, when seeing glaring trends or decisions whose impact I thought was obvious. But that's small amounts of money at stake, and once in a great while.
The March 2020 drop was from the pandemic lockdowns. In that moment, nobody knew that was a buy signal. Nobody knew then when economic activity would recover, if the pandemic would pass in two weeks or several months or many years.
But the problem is that if you are waiting now, is that massive buy signal going to come next year or in 10 years? And if you keep cash for 10 years and then buy at the right time, is that going to be better than having been invested for the whole ten years already?
The difficult part was knowing where to sell so you could have money on the sidelines before the market dropped. Was it right when lockdowns started? In that case, you already lost a fair amount from the top.
I do believe that markets can be beat, but by definition, you need to be "smarter" than the average capital, where more than half of the capital in the market on a given day is controlled by somewhat sophisticated investors. I don't think it's worthwhile for a retail trader to try their hand unless they are putting considerable effort into developing their alpha and either have automation skills or exceptional discipline.
> where more than half of the capital in the market on a given day is controlled by somewhat sophisticated investors.
It's worse than that! The average estimation performs on the level of superforecasters, thanks to the wisdom of the crowd.
The priced-in evaluation beats even most sophisticated investors! ("How is that mathematically possible?" About half of the investors are on the lucky side, but not consistently.)
"...Each received $2,000 at the beginning of every year for the 20 years ending in 2022 and left the money in the stock market..."
All of the experiment "participants" must have Lucky in their middle names. They managed to keep their jobs over those 20 years and kept their cool at the economy downturns.
They only Buy (the index shares), except for the one that keeps "cash" aka money market shares. I guess they plan on doing this beyond the 20y, why stop feeding cash into the account, why retire when it can contnue growing?
Lucky ones will also retire in upturn.
Yet the whole transaction needs the Sell part to realize the gains. Surprisingly, the Schwab experiment did not model this for the "participants".
> Yet the whole transaction needs the Sell part to realize the gains. Surprisingly, the Schwab experiment did not model this for the "participants".
The FIRE community did model this at great length though. And the example in TFA is just an example: saving $2K a year is basically drinking one or two beers less each day (so I wouldn't look too much into that amount). Most people in the west could save that. At the very least the people at which TFA is aimed could save $2K a year.
Try $20K a year: most working people here could save that.
Here's a nice "rich, broke or dead" FIRE calculator:
In retirement you need Money more than you need Stocks, so the Sell side of the trade could be someone who is not trying to be clever with trades, but simply needs to pay for their groceries.
Totally agree on not timing the market and staying invested. Nonetheless this analysis raises more questions than answers for me.
First, as you often see in these studies, they use the S&P500 which has returned a 9 or 10% annualized rate for decades now. How realistic is it to see someone's entire wealth invested in just this benchmark? Diversification will almost always mean returns lower than than the S&P. Ultimately this erodes at the findings of the study.
Second, there's no mention of yield which is basically the guaranteed portion of the return. This portion alone accounts for a quarter of your annual return making it another compelling reason to be invested early.
Which is why better late than never I am overpaying into pension and chucking that on a far/wide international index. My calcs say I won’t retire rich but I will still most likely have the money and beat inflation. And not spend it lol!
The real issue for the average Jo seeking alpha is you often need to pay the house (your government!) for the privilege.
In Australia you trigger capital gains tax when you sell. And if you buy and sell alot they may audit you and consider it income from professional trading!
The problem in Australia is that they still tax you if you rent your house to someone and then use the money to rent for yourself. So if you need to move or change house size you must sell and buy. However if you buy an investment house you can get tax deduction on the interest of the mortgage. They basically tax people with one house but give deductions to people with multiple houses.
Yes. I think that is silly as they should encourage freedom to move. You should just get taxed on the “profit” you make if you find somewhere cheaper to rent than what you get. The workaround is buy to rent out a property you never live in then just rent and move around as
normal. But then you lose out on the primary residence capital gains exemption. A work around to that is to never sell and use the death trust to pass that on to your kids. All this stuff takes a lot of planning and thinking about.
Another weird thing: transfer your house to your spouse and pay stamp duty! Stamp duty itself is regressive and should be replaced by a smaller annual property tax or just another form of tax (but given that property ownership tends to create wealth inequality probably good to tax ownership rather than add more income tax)
The intuition is that low information investment returns are compensation for putting capital at risk. The capital must be at risk to collect the risk premium. You’re an insurance provider as much as an investor. When you are timing the market you are trying to collect in excess of the risk premium while having your capital at risk for less time. This can only work with an information asymmetry or luck.
> Ashley Action took a simple, consistent approach: Each year, once she received her cash, she invested her $2,000 in the market on the first trading day of the year
There's nuanced market timing, somebody reads WSJ and Barrons, watches Trade brigade and Tastylive analysts on YT and decides on overall cash/stock/bond %ages, that should have kept you out of bonds and out of the Bogleheads situation in the past year. Also last January you would have been looking at bitcoin, TSLA, NVDA and thinking these are going to have some kind of recovery, V shaped or long and grinding, but some kind...
Then there's the opposite question, how many active/day traders are consistently profitable, i think the answer is less than 5% of everyboedy that tries, the ideal is that somebody realizes they're not going to make it while replay/sim / paper trading, or people get stopped out quickly on substantial positions.
One cynical side of me things you can, and on cynical side of me thinks you cannot.
Anecdata: During my banking days, any time I received an outsized bonus it did seem to occur at a local market maxima. I had noticed this, and I was like I should have worked in entertainment as their earnings and thus investment opportunities were largely uncorrelated to the price of the stock market. Of course, this did change a bit when the stock market fueled streamers started spending money like drunken sailors on "content".
I wonder if there is a fixed buy date that outperforms dollar cost averaging. Something like "around new years lots of people get money they invest, so prices tend to pop, so buy in november'
There just needs to be some kind of yearly pattern for such a strategy to exist. I even recall reading about it on money-stuff. But I can't remember the months.
There are a lot of these. Nowadays, gamma flows are discussed a lot in public spaces. Ignoring most of the topic, combining options expiry dates with typical fund rebalancing dates is simple. (Buy in the last week of the month, basically.)
Historically, April, July, November are the best, while January, June and September are the worst. "Sell in may" and go away used to be a common phrase too.
But if you are purely DCAing, such points don't make much sense. Following the interest rate cycle or business cycle is straight forward, or cycles in your own industry. Oil, shipping and microprocessor companies for example forecast years out when their profitable and unprofitable periods will be, so you can move your capital in and out for much higher performance.
I’d rather see a study where September and November are chosen for gold bullion, and other months for equities. I’ve heard this coincides with the wedding season in India —- maybe someone can confirm.
Surely if you know exactly when the market will reach a low point you can buy put options to capitalise on that? Or at least ensure that you use times where you're expecting the market to fall to spend money on non-appreciating essentials (cars, house renovations etc.)?
A decade or so ago I heard an investments prof liking it to “(…) picking pennies in front of the steam roller” which is fitting I guess. Unless you become a market maker, then by all means you are sitting on the steam roller.
The idea with any Ponzi scheme is to get in as early as possible and get out before the inevitable collapse. Though if it is your meta-governement propping up the Ponzi come hell or high water, not sure where you would get out to that would not be sucked into the collapse unless you are part of the 0.000001% that would potentially have an option to watch the world burn from a distance.
If this was true wouldn’t you have many more economists with multiple mullions just from market timing? Even if you can predict the market and you are correct it can stay irrational so i think this comment is completely incorrect
That's more of an indictment of the field of economics than anything else. The most talented leave to make better money in markets and hedge funds and the remaining academics get to set our public policy. There are plenty of consistently performing funds. Successful "applied economists" include Ray Dalio and Jim Simons.
Maybe the economists who study asset pricing in financial markets should, but that's just one subfield among many. No one is beating the S&P with their knowledge of Japanese labor market dynamics or the 19th century Spanish wool industry.
Stock market prices are based on expected future returns. Any anticipated future economic movement is more or less priced in. You can have a perfect understanding of the economy and not be able to predict future market movements as large short term movements in stocks are in response to unpredicted events.
This statement is (likely) unfalsifiable. That is, it would have to come from someone who does this successfully, and could offer up some evidence of having done it, and what system and logic they use to understand the economy and thus know when equities are high and low, when to sit on the sidelines, etc.
Few people doing so well would share such a process, but in theory, if they did, and it worked, it would likely trigger a flood of followers, and the behavior of the markets would shift alongside it.
Presumably someone making this claim is a billionaire. Or they've being doing well in stocks for a short enough time that it's yet to be proven if they are as good at timing the markets as they think they are.
If you look at Japanese or European stock markets they tell a very different story. Similarly the next 40 years in the USA could be a miserable time for investors. I can't believe how much people take for granted that stock markets "usually go up 7% a year" or whatever.
No one really knows but it wont be as good as the last few decades.