

Ask YC: How do you invest your money for long term growth? - epi0Bauqu

There have been various side investing discussions in various threads. Here is one straight on for usefulness and clarity.<p>I realize investing is very case by case, so here's a (I hope relevent) case:<p>--Assume you have a good sum of money to set aside (and not touch) for three decades.<p>--The main goal with this money is for long term growth.<p>--Assume it is enough money where dividing it up at the 1% level makes sense.<p>--Assume it is enough money where your access to desired investments is possible and makes sense.<p>--Speak in %s so it easily translates, e.g. I would put x% in commodities.<p>If I'm missing anything to make this a good question, please clarify.<p>And if your strategy involves more actively assessing things from time to time, please also include what it tells you to do right now.
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byrneseyeview
The benefits of diversification are vastly overstated. Especially over long
time periods, the benefits of buying e.g. your 5 best ideas rather than your
10 best ideas vastly outweigh the benefits of having less volatility. If you
have time to do the research, do this: find companies that are either the low-
cost provider, the most-loved brand, or have special government-protected
status in their industry. Examples would be Coca-Cola, Wal Mart, Kraft, etc.
Possibly, rule out companies whose managers make irresponsible financial
decisions (like over-leveraging at a bank, or buying back stock at high prices
like Coca-Cola). When these stocks are cheaper than the broader market, buy
them. If one of them rises enough that, after capital gains taxes, you're
getting more annual earnings per dollar invested in another company of similar
or better business characteristics, sell the expensive one and buy the cheap
one.

Basically, your goal should be to have a portfolio you don't have to follow,
of companies that will tend to grow their earnings faster than their capital
and thus throw off free cash for shareholders. If you can get these at a fair
price, your net worth should grow nicely.

However, this is difficult to articulate and extremely hard advice to follow.
Perhaps it would be better to put most of your money in an index fund, and do
this with the rest of your money long enough to see if it works for you.
Sadly, this kind of strategy should be judged over a longer time period (like
five years). So, index fund or take your chances.

~~~
epi0Bauqu
Do you follow this strategy yourself? If so, what is your portfolio right now?

~~~
byrneseyeview
I do follow this strategy, but I also invest in weird little situations that
don't fit into it (e.g. a small, post-bankrupt manufacturing company with a
hugely overfunded pension, managed by a billionaire trader). I don't like to
discuss specifics of what I invest in now. However, stuff I bought in the past
includes NDAQ and IBA; huge mistakes include buying MOVI and MGAM (I sold for
more or less unrelated reasons), and not-buying DAKT (I sold after a good
earnings report -- it's up 150% since then) and not-buying AAPL (I was
researching it, then they announced their first million songs sold through
iTunes, the stock went up about 15%, and I said "Nahhh" and decided to wait
for it to calm down. That was when it was at, uh, $9. Ouch).

I'm sure this is frustratingly vague.

If you start to pay attention to business -- not in the sense of reading the
_WSJ_ , but just looking at how consumers behave -- you'll eventually detect
some companies that are either a) able to ask for a higher price than anybody
else, or b) able to make acceptable stuff more cheaply than anybody else.
About 99% of businesses are second-best or less at one of these things, and
those businesses are fundamentally unable to grow without investing equivalent
capital. The other 1% can usually have above-average growth without having to
reinvest all of their earnings, or have steady earnings that are high compared
to invested capital but that can't be easily grown. An example of the former
would be a software company or a drug company -- it costs a lot to create a
product, but the cost of selling it to a million people is not that much more
than the cost of selling it to ten thousand. An example of the latter would be
the gravel and sand business -- nobody is going to import ten tons of the
stuff from overseas, or even across state lines, so it's basically a business
made of hundreds of tiny local monopolies. Some of these are exceedingly well-
managed; they pay dividends when their stock is high, and buy it back when
their stock is low.

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mullr
I looked into this awhile back and quickly came to the conclusion, based on
the several books I read, that it's silly to try to beat the market long term.
"The Intelligent Investor" is the one that laid it out clearly to me. The main
point is: the performance of narrow investments (specific stocks) can't be
reliably predicted, but the market as a whole tends to grow over time.
Therefore, invest in the market as a whole. (== S&P index fund)

~~~
raju
Index funds are the way to go. They are a passive instrument, so you cannot
(should not) be actively trading them. When you put money in an index fund,
you essentially buy shares of that fund (along with several others). There is
a fee attached to every trade, and that fee is consumed by all share holders
equally. So most index funds will penalize you for trading those shares
actively.

The way I look at it, an index fund (like S&P index fund) is merely a layer of
abstraction over trading stocks. But instead of putting all your money in one
stock, the index fund divies up your money across many different companies and
sectors in the same ratio as the target index. This protects you from major
fluctuations in the market, so in the long term you essentially grow at the
same rate as the index. On the flip side, if one of those companies sees
astronomical growth, you won't see the same growth.

[All: This is my understanding of index funds, so if I am wrong, please, do
correct me]

There are several good books in the market if you want to go down this route,
including the aforementioned "The Intelligent Investor" [must read] and "A
random walk down wall street"

Another book that I surprisingly found to be very good was "Mutual funds for
dummies" [<http://tinyurl.com/5ulpvw>][The other book "Personal finance for
dummies" by the same author is a good book too. There is another one
[<http://tinyurl.com/5wso5z>] that is short and sweet to read.

Good luck!

~~~
Retric
I would avoid buying a single index fund though. I go with small cap growth
funds 50% US, 25% Europe, 25% Asia and rebalance them every 6 months.

PS: Outside of a Roth IRA / 401k rebalancing stocks has some negative tax
consequences so it's better to change what your buying than sell off existing
stock.

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martythemaniak
Generally unless you're a genius in the field (ie, Warren Buffet, Peter Lynch
etc) you will not beat the market, so what you have to do is join it. Take
your money and spread it widely across sectors, indecies and geographical
regions - if you spread it well enough, your money will grow at the rate of
the global economy which is realistically the most you can hope for.

The second thing is to separate your investments from your speculations. Your
investments targeted for long-term growth should be handled as above - spread
them widely and sit on them for a long time. Your speculations should be money
you can easily afford to lose and you should do with them whatever you
instincts tell you. This can be things like buying stock in a particular
company or commodity, trading currencies etc.

Finally, you need an excellent book:
<http://en.wikipedia.org/wiki/A_Random_Walk_Down_Wall_Street>

~~~
byrneseyeview
You can expect your money to grow at more than the rate of global economic
growth if you own equities rather than fixed-income, unless you are arguing
that investors are indifferent to risk (which can't be true if they use
leverage).

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gcv
Two recommendations for reading: A Random Walk Down Wall Street (mentioned in
another post, long, detailed, and entertaining), and The Coffeehouse Investor
(short and funny). Both lay out the principles behind the theory of efficient
markets, and make a great case for it.

In a nutshell: buy the cheapest unmanaged index funds you can find. Come up
with an allocation you're comfortable with (e.g., 50% large cap, 20% mid-cap,
20% small-cap, 10% international equity). Reallocate once a year so that your
investments still follow the same rough percentages; that way you won't have
more risk exposure to any particular asset class just because it happened to
have done well or poorly in any given year. That's it. You will not outperform
the market by picking your own investments or playing hedging games with
derivatives, and, over the medium-to-long term, neither will any fund manager.
Since you're in this for the long term, have fun in life and don't bother
checking your balances except when you get your quarterly statements.

~~~
epi0Bauqu
Are those the asset allocation % you use? Also, what about commodities, real
estate, infrastructure, and other asset classes?

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adk
Here is what I do \- I keep 2 months' worth of income in a high-yield saving
account (a la ING) This amounts to about 5 months of living expenses for me,
so it is a good safety net. \- I stash away a small majority (say, 60%) of my
long-term savings into index funds and relatively safe, stable stocks \- Since
I am fairly young (27), I invest a sizeable chunk (but still a minority; say,
40%) of my savings into riskier stocks with a potential to be a home-run down
the road. I only invest into companies and technologies that interest or
excite me. This makes research a pleasure rather than a chore.

The ratios will tip towards the conservative side as I get older.

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Flemlord
Traditionally, investing in a Small Cap Value eft or index fund would have
earned you about 2% more than the market on average. It's the only asset class
that has consistently beat the market over the last 100 years. I know several
smart people in finance who use this long-term strategy.

Had you been doing this over the last three years, however, the results would
not have been pretty.

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Prrometheus
I can think of two very important principles to keep in mind:

-Diversification: Commodities, property, and bonds often do well when stocks fall. Economic shocks can happen that are localized to a single country or region. It makes sense to put your eggs in several different baskets, both by asset type and by geography.

-Long-term inexorable trends: The world's population is getting older. Well-run but less-developed economies will tend to grow faster than well-established ones. Invest in "iceberg" trends, those that are slow-moving, easy to predict, and hard to stop. I recommend medical ETFs and emerging market ETFs

Of course, throw in some traditional investments while you're at it. Don't get
cocky or daring and don't let short term variations spook you. Trading too
much can knock a significant percentage off of your returns.

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epi0Bauqu
The comments so far are espousing passive investment strategy and good asset
allocation, which I agree with, but I was looking for something a little more
concrete.

So in effort to engender some discussion with hard %s, the following is where
I am right now (excluding equity in primary residence). The accuracy (beyond
decimal point) is certainly irrelevant, but it came right off a spreadsheet
and I left it in because it sums to 100.

US Large Cap: 21.87%

US Mid Cap: 8.35%

US Small Cap: 3.03%

Commodities: 8.47%

Real Estate: 6.26%

International Equities: 7.55%

Emerging Market Equities: 4.63%

Cash: 12.71%

Bonds: 27.13%

The Bonds are in a 10 year ladder. The Cash is in FDIC insured money market
accounts. All the rest is in index vehicles.

I'm very interested in any feedback and also what your numbers are.

~~~
byrneseyeview
Depends on the stocks. Unlike many modern investors, I'm extremely
uncomfortable with the idea of trading something as an asset class rather than
as part ownership of a business. You end up doing things like investing in oil
companies _and_ investing directly in commodities, which is redundant -- the
oil companies are basically a portfolio of call options on oil, where the
strike price is the cost of extraction.

Think about it: if you told Andrew Carnegie you were putting "21.87%" of your
money into "US Large Cap," he'd laugh his ass off. He'd ask why you knew, to
four figures, what kind of stocks you were investing in, but didn't bother to
talk about what they made, who ran them, or how much money they earned. He'd
ask why you would prefer buying $100 million of cash flow for $2 billion
rather than $1 billion, as an allocation based on market cap would have you
do. Carnegie is a great example, because for a while he was purely an investor
-- he had a diversified portfolio of stocks in companies whose management he
knew personally, and he paid careful attention to their business performance
and the dividends they paid, not their market price.

Don't do anything Carnegie, Morgan, or Rockefeller wouldn't recognize as an
investment, and you should be okay.

~~~
epi0Bauqu
I said specifically _The accuracy (beyond decimal point) is certainly
irrelevant, but it came right off a spreadsheet and I left it in because it
sums to 100._

As for indexes vs individual stocks, I don't want to spend that much time
worrying about (or tweaking) my investment portfolio.

So, for you, it _depends on the stocks._ But if you work backwards, where does
that come out on an asset class basis? Are you buying no international
equities? No commodities? No REITs? What are the actual %s?

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petercooper
Some great answers here, and mine is not going to be an answer to you
specifically, but might open some minds nonetheless.

I try to invest in "myself." Rather than supporting those producing,
innovating, and providing value to the economy, I try to be a producer,
innovator, and value provider myself.

This attitude works well in your 20s, at least, but might not seem so alluring
when closer to retirement.

It is not uncommon, however, to see or hear about situations where someone has
started a business with a reasonably small amount of money (<$50k) and even if
they're not worth mega-millions, their business can grow to the point where it
provides the owner with a high income and can effectively manage itself (if
you get the right people). This technique makes you a producer rather than an
investor in the long run.

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jonp
A small proportion in cash (enough to survive for a year or two if I want to
stop being employed). The rest in equity index funds, spread between UK, US,
Europe, Japan/Pacific. Some of those equities are in retirement funds for the
tax advantages, and for the discipline of not being able to spend them any
time soon.

That seems reasonable for me now, as someone who's young and employed. My
future earnings ("human capital") are likely to be bigger than my current
financial assets (because I'm young) and fairly steady and bond-like. As I get
older, or if I become self-employed, I would move more of my financial wealth
into safer assets (eg long-dated index-linked bonds).

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misterbwong
For most of my retirement money, I follow the "Lazy Portfolio" method. Some
examples and results are tracked here:

[http://www.marketwatch.com/news/story/lazy-portfolios-
annual...](http://www.marketwatch.com/news/story/lazy-portfolios-annual-
update-
going/story.aspx?guid=%7B73F4BC3A%2DD0EF%2D4BFA%2D9698%2D01D8DA27C91A%7D&dist=hpmymw)

Basically, you buy indexes across asset classes so you have diversification
within each asset class as well as asset diversification.

It's easy, cheap, and works. It's just not "sexy"

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nikiscevak
One point about the index funds (besides from being very hard to beat the
market even working full time on it) is that the huge fees compounding on
hedge and mutual funds also take away most of your gains. 2% compounded over
30 years wipes out a lot of the alpha.

This podcast is an excellent intro to index funds and how fees decimate
returns (also a fantastic entrepreneurial story):
[http://www.venturevoice.com/2006/02/vv_show_28_john_bogle_of...](http://www.venturevoice.com/2006/02/vv_show_28_john_bogle_of_the_v.html)

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cpr
I highly recommend the Agora Financial Group and their various newsletters.

Back when I had a little money to play with, I was following a couple of them
(Penny Investor and another), and was able to gain 40% in a year (someone else
was doing the actual work for me). But that's just anecdotal evidence.

I also like their whole philosophy; they've had several NYT #1 bestsellers,
'cause it's both commonsensical and also exceedingly contrarian at the same
time. (Addison Wiggins and Bill Bonner.)

------
gcheong
I subscribe to a few newsletters put out by the Motley Fool with the general
targets being smaller, lesser known, less covered companies that have great
long-term prospects currently priced at a discount to their computed intrinsic
value. My target allocation is 100% equities. What you need more than anything
else is the willingness and discipline to apply your investment strategy when
the market is acting irrationally.

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brunnock
Invest 100% of your money in small-cap/value funds. They do best in the long
run.

Invest 100% of your money in BRICs (Brazil, Russia, India, China). They have
large, youthful populations with better prospects than America, Europe, or
China.

I'm afraid that I don't know of any small-cap/value, BRIC funds. If anyone
knows of any, I'd appreciate a pointer. Thanks.

~~~
larrykubin
Earlier this week, I put a lot of my money into two ETF's, EWZ (Brazil), and
FXI (China). They have great technical setups if you are believe in that as
well. Good time to buy.

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unknownuser
I have read on a previous comment in another story about "shorting bonds and
longing stocks" but this was given as an example of a bad idea. Why is it so?
If in the long term stocks outperform bonds wouldn't this actually be a good
strategy for a long-term investor? Obviously the risks would be higher, but
since it is over the long term it shouldn't matter, right?

~~~
epi0Bauqu
If you go back to that thread, it concludes that there is indeed a place for
equities in a balanced portfolio. Your point is exactly the one I was trying
to make!

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redorb
I know its cheesy, but I really would rather invest in myself (Education,
Business suit etc)

~~~
epi0Bauqu
The question assumes you have money set aside in a thirty year time horizon
with the goal of long term growth. Or are you saying that you put all your
retirement money into your startups?

Also, for the purposes of the question, assume you have enough money where
education expenditures don't impact this portion.

~~~
redorb
I would bet on myself (I know more about that subject)

~~~
jdroid
What do you do with the money you're not spending?

~~~
anewaccountname
He bets it on himself.

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prakash
I posted this yesterday: "The best investment advice you'll never get"

<http://news.ycombinator.com/item?id=178443>

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noodle
go to vanguard and invest your money in several different, diverse, low-cost
funds. index funds are great, but you can't buy only index funds and be
diverse. buy some REITs, some bonds, etc..

spread the money out, no more than 20% in any single fund unless the fund
itself is diverse.

sit on it for a long time.

thats it.

~~~
epi0Bauqu
What %s do you suggest in particular across the various asset classes?

~~~
noodle
well, this is how i invest, specifically. i'm young and more aggressive:

35% domestic 500 index

15% foreign developed markets

20% foreign developing markets

10% REITs

10% intermediate-term bonds

10% inflation-protected bonds

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michelson01
vanguard index fund or fidelity spartan fund (which actually is a money loser
for fidelity, but they keep the fees at .1% as a loss-leader to bring in the
chumps for the managed mutual funds)

no-load, low-fee index funds, basically.

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bumbledraven
Berkshire Hathaway.

~~~
dangoldin
I wonder what's gonna happen when Buffet retires.

~~~
azsromej
If things go downhill, it'd happen slowly. The management team at Berkshire is
good and Warren had his pick of replacements. Plus they hold so many companies
and are pretty hands-off with each of them.

~~~
dangoldin
I'm just wondering if there is going to be a big drop the second the news is
announced, even if it is unwarranted.

~~~
epi0Bauqu
Check out [http://seekingalpha.com/article/66982-berkshire-hathaway-
app...](http://seekingalpha.com/article/66982-berkshire-hathaway-appears-
undervalued)

