
The Best Investment Advice You'll Never Get (2008) - milesf
http://www.modernluxury.com/san-francisco/story/the-best-investment-advice-youll-never-get
======
j_lev
Of course, choosing stocks/index funds/mutual funds/hedge funds/asset
allocation/tilt/tax-minimization/etc all only come into play after everything
else is in order.

I refer most people who ask to Dilbert's 9-Point Plan, which Scott Adams
originally published in 2002 but has been reproduced many times all over the
Internet eg

[https://retirementplans.vanguard.com/VGApp/pe/PubVgiNews?Art...](https://retirementplans.vanguard.com/VGApp/pe/PubVgiNews?ArticleName=DilbertGuidetoPersonalFinance)

If you can't click through, here's the list:

Everything you need to know about financial planning

1\. Make a will.

2\. Pay off your credit cards.

3\. Get term life insurance if you have a family to support.

4\. Fund your 401(k) to the maximum.

5\. Fund your IRA to the maximum.

6\. Buy a house if you want to live in a house and you can afford it.

7\. Put six months’ expenses in a money market fund.

8\. Take whatever money is left over and invest 70% in a stock index fund and
30% in a bond fund through any discount broker and never touch it until
retirement.

9\. If any of this confuses you, or you have something special going on
(retirement, college planning, tax issues) hire a fee-based financial planner,
not one who charges a percentage of your portfolio.

"What to invest in" is only answered in #8, which you shouldn't even think
about until you've worked through the previous 7 steps. Yes, write that damn
will already!

~~~
dmerrick
Naive question: why is a will so important?

~~~
j_lev
If you have kids then you get to specify somewhat how you want them to be
raised.

Regardless, it is believed that you owe it to the people you leave behind to
be clear with your intentions. People dying intestate is a massive drain on
society, and it often brings out the worst in people.

Of course, the opposing argument is "yeah but I'll be dead so what do I care?"
and to be honest it's hard to argue with this.

If I may give a couple of my own personal reasons:

1) It's not that hard. My first one was written at a "Will Writing Party"
where no-one had kids, so we all just either left everything to our partner or
to be divided up among our siblings. One guy had neither so his estate was
bequeathed to his parents, and if they were no longer alive to everyone in
attendance at the party (except one poor person who was to be the witness and
therefore excluded from being recipient to the estate). For most of us the
will we wrote at that party served us until we married.

2) It forces you to think about "the end." Stephen Covey first highlighted the
importance of "beginning with the end in mind," and it's something that
everyone just puts out of their mind as long as they are able.

Also in my case, I married someone for their child-raising skills rather than
their ability to climb the corporate ladder (not that these are mutually
exclusive), and sitting down to rewrite a will forced me to think about the
added cost of term life insurance because I was taking her prime marrying
years from her, and I don't want to leave her unable to remarry and only
suited for unskilled labor with no cushion. My wife is also a basket case with
investments so you can have some say in that regard too.

3) It forms evidence if you have to show proof of your commitment to someone.
In my case our respective wills formed part of the evidence when applying for
my wife's visa.

------
jhulla
Assuming you believe the underlying assumptions (and they very well may not be
true), modern portfolio theory allows you to build a mathematically ideal
portfolio for a given amount of risk.

The math behind MPT might be hand waved as followed: goal seek a maximum
portfolio return by combining assets with minimal correlation under a fixed
risk scenario. In the end, you will have portfolio that will give you the
maximum theoretical return for your selected amount of risk.

In practice, outside of running a hedge fund, or a mutual fund with explicit
investment guidelines (e.g. we invest in emerging market energy companies), a
responsible asset manager has no choice but to follow MPT. In other words, if
you are not a specialized fund, there is no mathematical justification for
deviating from an MPT constructed portfolio. By definition, _any_ deviation
from a MPT balanced portfolio means you have either a) taken on more risk than
necessary or b) reduced your potential return or c) do not believe in the
underlying assumptions of MPT.

So what is the amateur person worth $25M to do today? As with all things, you
should seek professional advice. There are many nuances of tax efficiency,
estate efficiency, asset protection, personal needs, etc. that a professional
advisor should guide you through.

Apparently the folks at WealthFront and FutureAdvisor are selling MPT driven
portfolios to employees of SF bay area tech firms.

edit: As a couple of users point out below, there is controversy over the
effectiveness of MPT including: whether the models effectively capture the
distribution of risk vs return and whether the values desired by the models
can be calculated with proper accuracy. PMPT (post-modern portfolio theory)
builds upon MPT. Lastly there are critics such as Nassim Taleb (of Black Swan
fame) who find some of the core assumptions flawed.

~~~
hkmurakami
_> So what is the amateur person worth $25M to do today? As with all things,
you should seek professional advice. There are many nuances of tax efficiency,
estate efficiency, asset protection, personal needs, etc. that a professional
advisor should guide you through._

While this is true, the problem that most advisors that a $25MM net worth
individual has access to are mostly duds and/or salesmen.

Identifying true value add advisors is easier said than done, imo.

~~~
encoderer
Personally, i think that's more of a problem for the guy with the $500k
retirement account. You will have no shortage of white gloved managers eager
to help you invest your $25M. But anything short of $1MM you're solidly in
Edward Jones territory. At that point you're probably better off keeping it
stuffed under your mattress.

If you're not a multi millionare, IMO it's worth the time to learn how to
manage your own money. Because nobody will ever care as much about your money
as you will. A good place to start IMO is by subscribing to the TastyTrade
podcast. It's the only investing infotainment I've found that treats the
listener like an adult and an equal.

~~~
hkmurakami
IMHO, the quality of people you will find at your local retail branch of an
ibank (think BoAML, JPMChase, WF/Wachovia, etc.) is still very shoddy and
suspect. These are the channels that people have immediate access to and think
of visiting, even if you have $25MM. For these retail operations, iirc the
threshold is $50MM before you are shipped off to a proper PWM team at HQ.

>You will have no shortage of white gloved managers eager to help you invest
your $25M.

How do you know which while gloved manager is actually any good though,
assuming that the $25MM guy is quite naive about investment management? I
believe that the small time millionaire must be up to speed on investing
basics just as much as the $500k guy, in order to be able to discern the
competence of his managers.

I generally agree with jhulla's advice of going through a good estate planning
attorney or accountant to find decent people. If you have a network of rich
friends (which you can probably make in a few years after making your $25MM by
plugging yourself into the right circles), but barring this (or even if you do
manage this), I insist that even the rich guy needs to know at least the
basics.

~~~
bradleyjg
At a minimum you should get a "fee only" adviser who has a fiduciary duty to
you. You can still get bad advice, but at least you won't get corrupt advice.

~~~
hkmurakami
I have seen very corrupt fee only estate planning advisors. This is
unfortunately still not fool proof.

~~~
jrs235
Can you please explain how one of the corrupt fee only advisors situations
worked?

~~~
tome
Perhaps kickbacks?

------
MCRed
Regarding "Don't beat the market", Warren Buffet says "The game is really easy
when your opponent decides not to play".

Unfortunately, giving up has a lot of appeal: It means it's not your fault you
didn't beat the market. It lets people say the game is rigged and take
comfort.

How many times have you seen buying company stock compared to gambling? Even
though, on its face this comparison is ludicrous. (Especially here on HN where
so many of you are giving up $40k a year for 0.0004% of a company that is %98
likely to be worthless.)

It becomes like a religion, where anyone saying "Hey, it's easy to beat the
market" becomes a "bad guy" who is advising "risky strategies".

The reality is, the tools available to the individual investor are such that
you can control the level of risk you want. You can take a stock of high risk
and make it low risk with option hedges. You can take a stock of low risk and
make it high risk with different options.

"%90 of options expire worthless, the real money is in selling them!" \--
Abraham Lincoln

Of course, that's true-- if you have the ability to borrow from the Fed at the
overnight rate. Most options are bought as they are intended- as a hedge to
minimize risk. IF the underlying asset goes the expected direction, then the
option will expire worthless.

My point is really that you have to read books, and hear many points of view,
and figure out what's right for you.

Almost every professional and every ideologue is going to lead you down a bad
path for you, because there is no one-size-fits all. There is no "best"
advice.

~~~
12423gsd
The reality is that the professionals have better tools. It's not just
gambling, it's gambling against someone that can see the cards.

If there is some method to turn $1 into $2 then there is a whole sea of people
who are better and smarter than me who will keep doing it till that method no
longer works.

~~~
Mikeb85
> The reality is that the professionals have better tools. It's not just
> gambling, it's gambling against someone that can see the cards.

They may have better tools, but small investors have the advantage of being
nimble.

If you're trading say, 10K per trade on large-cap stocks, you can have your
entire trade executed within 10 seconds without moving the stock price (thanks
to HFT, but that's another story). This makes trading on swings much easier
for the small investor.

And there are plenty of tools available for the small investor, most brokers
will give you access to them when you sign up for an account. Sure, you may
not get streaming L2 quotes on a basic account, but you'll get all the company
information you need and access to basic real-time quotes. If you want to get
a little more sophisticated, you can use something like R to automate some of
the information-gathering process, run models against historic data, or simply
use it for very fancy charts (with every technical indicator known to
mankind).

And, as has been mentioned, hedge funds, mutual funds, etc..., have different
motives for trading. Sometimes they are hedging, sometimes diversifying, often
they're very long term, etc... They're not always trading. Even HFT is mostly
arbitrage. There's still plenty of room for small to medium traders to make
money.

------
sharkweek
I loved the first bit of this; that Google invested the time in their
employee's education of what was about to happen with sudden riches.

I know it's starting to happen, but professional sports needs this same
educational process. Recently watched the 30 for 30 documentary 'Broke' and it
was so heartbreaking to see what happens to these athletes who have come from
nothing, get a ton of cash all the sudden, and find themselves back where they
started after the paycheck stops.

~~~
devonkim
The NBA passed a law a bit ago with this motivation.
[http://www.bloomberg.com/news/2012-07-12/nba-players-
forced-...](http://www.bloomberg.com/news/2012-07-12/nba-players-forced-to-
save-toward-retirement-for-first-time.html)

------
dave1619
I think the key to picking individual stocks is the ability to evaluate
companies in both a financial/quantitative and qualitative manner. This is
easier said than done. But by no means impossible.

Even Warren Buffett has said multiple times that if one has the skill to
evaluate companies than they should pick individual companies and not choose
an index fund because they will do far better with picking individual stocks.
The problem is the vast majority of people are not skilled in evaluating
companies and that's why Warren Buffett suggests them to choose a low-cost
index fund.

I've chosen the path of picking individual stocks and I've done very well with
it. But I have a deep background in the many skills required to analyze
companies. And also it takes a great deal of time to keep updated on the
companies I follow.

~~~
kevinskii
I have a very bright friend who works for a hedge fund. He's a Stanford
engineering grad with an MBA from a top 10 school, and he had considerable
success in his engineering career before shifting to finance several years
ago.

He spends most of his waking life analyzing about six medtech companies.
That's right, only six. One might assume that he knows a few things about each
company.

And yet, whenever he recommends buying or selling one of their stocks, he's
wrong almost exactly 50% of the time. (I actually track his predictions.)

You might be good at picking individual stocks, but I don't think he is. And
if he isn't, I don't think most people would be either--myself included. I'll
stick to the index funds.

~~~
dave1619
I don't know your friend so I can't say why he's right/wrong 50% of the time.
But I'd say that's pretty typical with analysts in the financial industry.
It's really tough to blend quantitative and qualitative analysis together, but
IMO this is a requirement to make consistently good investment choices. I
think this is the secret behind Warren Buffett. Most of Wall Street though
tends to focus on the quantitative (and only a few quarters out) and they tend
to be highly influenced by each other, trends and sentiment.

Again, I generally agree with the advice of going with low-cost index funds
for the vast majority of people. However, I do think that there are some
people (albeit not many) with the right background, skills, training and
commitment who can consistently beat the markets (ie., this was the thesis of
Peter Lynch's book Beating the Street).

------
tunesmith
It's really hard to do MPT on your own. I got really into finding a collection
of 10-12 mutual funds that are in a collection of sectors. I also mixed it
with a strategy of selling each fund when it went below its 12-month moving
average, and buying back in when it went above. I backtested it a bit and read
some studies and it seemed reasonable. Sacrifice a little upside to protect
against more downside. It sure would have saved me had I followed those
strategies during the last two mega crashes; the dotcom bomb and the finsys
crash.

Of course, since doing that, the S&P has been on a sustained climb that I've
only partially benefitted from since I've had some bond funds, etc. The
selling/buying has worked ok - it's whipsawed me in some cases and saved me in
others, but given that I'm not spending more than a day a month on it, and
that I only have a surface level understanding of sector-balancing, and that
while it _seems_ my funds are cheap, who really knows for sure... I'm
regularly tempted to just dump the whole thing and get back into one fund,
just in time for the next crash the other part of my brain says.

Also, it's worth pointing out that a lot of the "beat the market" talk is
rubbish for entirely different reasons. People tend to get more cash to invest
when times are good, and less when times are bad. That means that the average
person is going to buy more when the market is high, and less when the market
is low. I don't ever see this accounted for in studies. Even if you were to
drop your money in an S&P-500 index fund whenever that money becomes available
to you, you're _still_ going to underperform the S&P-500 long-term by a
moderate amount.

~~~
zone411
Actually, it has been accounted for in the studies. See:
[http://www.stlouisfed.org/on-the-economy/the-cost-of-
chasing...](http://www.stlouisfed.org/on-the-economy/the-cost-of-chasing-
returns/)

------
orofino
This is great advice and what I have been doing for the last 3-4 years for our
retirement portfolio. Prior to that we were using an 'investment guy' who had
us in a bunch of high-cost funds.

I sent the guy and email and ended the relationship and took a couple months
to read and learn about this. I recommend the "investor's manifesto" by
William Bernstein for anyone interested.

------
jasonwilk
It would be hard to debate someone about paying management fees for mutual
funds vs no fees on index funds like NASDAQ. This graph should say it all (10
year graph):
[https://www.google.com/finance?cid=13756934](https://www.google.com/finance?cid=13756934)

While I do invest in index funds, I have the majority of my money invested in
Google, Apple and LinkedIn. I truly just believe in these companies and ignore
short term speculation. I am no investment expert, but these stocks combined
have by far beaten all the index funds by a significant multiple. Go for the
long term, ignore stock tips and earnings reports and you can be successful at
investing too.

------
lordnacho
Buying the index is the orthodoxy. There isn't a strategy that I've heard more
often from non-industry friends.

It's so orthodox even relatively straightforward ways of beating the index are
largely ignored. Look up Falkenblog. He's got a thesis about it.

If I didn't run a hedge fund, I don't know what I'd do differently though.
Costs are pretty high on individual accounts. One thing you can do is invest
via spread betting, which is tax free in the uk. Also the sheer a mount of
infrastructure, both in terms of financial data, modelling, and the systems
used to execute strategies, makes it a bigger job than one person can do.

------
oldspiceman
tldr If you're suddenly rich, pay $10 and buy $1 Million of Vanguard Total
Stock Market Index. Giving your money to anybody else over the last 10 years
would have yielded same or worse performance at a higher cost.

~~~
orofino
You may need to pay that $10 if you are investing through some other brokerage
account. However, do yourself a favor, open an account with Vanguard directly
and you can make that purchase without any fees.

Additionally, I'd recommend se percentage be invested in the Vanguard total
bond market fund as well. Holding se percentage there will reduce overall
portfolio volatility, and can actually increase returns slightly.

~~~
jhulla
Asset diversification is more complicated than that. To a first order, yes
stocks and bonds are inversely correlated. But it is not enough to hold just
stocks and bonds.

In order to maximize return over your preferred time frame (while minimizing
risk), you have to examine the whole universe of investable assets, examine
their volatility as well as correlations amongst themselves.

From there, your goal is to assemble an ideal basket of assets maximizes your
return for your personal level of risk. Running these filters and choosing
when to rerun/rebalance is the basis of modern portfolio theory.

Managing your money using MPT is the service that many investment houses sell.
Rolling your own is absolutely possible, but it is not as simple as stocks vs
bonds.

~~~
infinite8s
True, but for most people without 25M (ie most of us), is the arginal
improvement in return on a 500k investment worth the extra complexity over a
straight stock/bond mix?

Unrelatedly, what are you thoughts on the permanent portfolio (if you've heard
of it).

~~~
j_lev
Not sure if this was directed at jhulla (and actually I was about to ask it to
svachalek).

25% in physical PMs is hard to justify but generally speaking I think Browne's
Permanent Portfolio is a good base. Perhaps 20% each of domestic equities,
international equities, PMs, cash and long term bonds would be more realistic,
with rebalance bands at 17/23.

------
nopinsight
In my opinion, there are probably some persistent quirks and patterns in human
minds and computer programs (also written by humans) which may not be fully
exploited by most market participants in some markets (esp. Emerging and
Frontier markets). One well-known pattern is Momentum trading, which is also a
basis of Market Crash prediction model by Prof. Sornette, with a history of
several accurate predictions. [1]

> “a few funds that at any given moment outperform the indexes.” But over the
> years, he explains, their performances invariably decline..

There are a few hedge funds that, over decades, still beat the market.
Medallion Fund, according to public knowledge, consistently generates above-
market returns, never had a down year, and even returned 80% in 2008, when
stock markets all over the world crashed. Its trading model is a highly
guarded secret. It does not even let outsiders invest (with exceptions for a
few).

The fund belongs to Renaissance Technologies, founded by a renowned
Mathematical Physics professor, Jim Simons, and employs many PhDs in Physics
and Math. (This book writes about it in fair detail. [2])

[1] How we can predict the next financial crisis:
[http://www.ted.com/talks/didier_sornette_how_we_can_predict_...](http://www.ted.com/talks/didier_sornette_how_we_can_predict_the_next_financial_crisis)

[2] The Physics of Wall Street: [http://www.amazon.com/The-Physics-Wall-
Street-Unpredictable/...](http://www.amazon.com/The-Physics-Wall-Street-
Unpredictable/dp/0544112431)

~~~
pessimizer
If results were randomly distributed, you'd expect a very few funds to perform
that way.

------
mahyarm
I don't think you should try to become a 'professional full time investor' and
put everything in index funds until you reach the ratio of funds that would
significantly beat your current salary, compared to the average returns of an
index market portfolio.

Lets assume the average return is %5, so if you make $200k/yr annually in your
engineering craft, then you would need $4 million minimum to match the market
for your salary, and probably at least $6 million before you would consider
switching your career to 'managing your own money'.

~~~
falsedan
Your numbers are off:

\- average long-term return on the stock market is 8-12%

\- full-time wealth management means no more tech job, means no need to live
in the bay area, means $100k p.a. nets you a comfortable lifestyle

You're looking at $1-1.5MM before retiring to the quiet life.

~~~
marktangotango
I agree with these guys, the real return is lower, and the years that are
negative to 4% will be diminish your nest egg unless you eat raman in those
years. A millionaire eatinv raman? Maybe.

~~~
falsedan
The quiet life does not include Maseratis and penthouses. That nest egg should
support you for 40-50 years, and then you'll be dead so leaving a remainder
would be suboptimal.

------
staplo
I've been following (or, trying to follow) the index investing strategy for
years on my own, and the final culmination of that was switching to
betterment.com for my small savings and retirement accounts (no affiliation).
They use MPT and a host of other things to take the decision making control
out of the hands of the investor (except for risk tolerance) and provide a
really great modern product to do that. And the best part is that it's
probably cheaper than just setting up your own online brokerage account and
paying fees for transactions. They charge a percentage fee for assets under
management like a normal advisor might. Anyway, I just feel strongly that the
robo advisor category is major win for average people trying to invest and I
wish more people looked into it rather than getting killed in the market or
paying high fees to managers. Lets you just put your money in and just focus
on your own life and achieving your goals, which is often the point of
investing for an average person. Wealthfront is also good, but from what I
understand betterment has better returns (and I prefer their interface)

~~~
j_lev
The overwhelming opinion of the bogleheads crowd is that even these robo-
advisers are ridiculously overpriced for what you get. And the fact that
Wealthfront started as a sales portal for actively-managed (ie high-fee, high
kickback) funds has tarred their image for a lot of people.

------
pbreit
Also, pretty much guaranteed to improve outcomes for almost investor: 1) pay
off your credit cards before investing 2) max out your IRA/401(k)

~~~
sopooneo
I agree. But I think then there is still some question of which funds to
invest in of those available through your 401K.

~~~
pbreit
Index funds, broader, the better. S&P 500 is a good start.

------
mangeletti
Did anybody stop to notice the date of the article? I'm confused by the
conversation herein. I thought this was posted as a sort of mockery of the
author. After-all, if you put your money into an index right when this guy
told you to, you would have lost your shirt.

If you had a while until retirement, that wouldn't be a big deal, since it
would now be back along with more, but what about the folks moving their IRA
out of balanced bond and commodity based funds with some growth stocks, etc.
(i.e., hedged) and essentially into the S&P 500, at 60 years old... like my
parents did.

The best advice to anyone is to buy indexes after a major market crash; only
then will you reap rewards without nearly as great a risk. Here's the catch:
most of you will disagree; that's why 10% play and the other 90% pay.

~~~
MiguelVieira
The S&P 500 is up 36% since the article was written.

------
Apocryphon
General question about index funds: if a market is about to go into a steep
correction or even a recession, wouldn't it be more advantageous to invest in
specific stable stocks, rather than an index fund that tracks the entire
market?

~~~
jcdavis
Sure, if you are sure the market is about to go into a steep correction or
even a recession. But how do you know that? Why not go even further - If you
knew for sure the market was going to drop, you could make a lot of money in
options. Why aren't you doing that instead?

You shouldn't be trying to time the market. Lots of people try, they tend to
fail. Come up with an allocation plan, and stick to it.

~~~
freyr
> _Lots of people try, they tend to fail._

And with enough people constantly trying to predict the market, inevitably
some get it right. They make a lot of money, they're heralded as geniuses, and
we hear about them in the news. We don't hear about everyone else who failed,
or when the market-timing winners turn out to be repeat failures in subsequent
years.

Put a bunch of people in a room and have them start flipping coins. If there
are enough people playing the game, chances are somebody will end up tossing
many heads in a row. If they keep flipping long enough, chances are they'll
revert back to the mean. This is a pretty good model of market
prognostication.

------
zone411
The main point of the article - that most mutual funds underperform the index
funds is so widely known by now that I'm surprised to see it reposted here in
2014.

"The high failure rate should come as no surprise, given how hedge funds
operate. There’s no working model, so they vary widely, but the basic idea is
that they rely on risky, untraditional investment strategies—ranging from
arbitrage to taking over floundering companies, as Lampert did—to make big
money fast. "

No, that's not the basic idea at all. And untraditional doesn't have to mean
risky (a market-neutral strategy is an example).

------
Punoxysm
I feel like I get this advice all the time. "Invest in Indexes" is
ridiculously popular advice. I've also been exposed to portfolio theory in
lots of academic literature.

It's not obscure within finance or without.

~~~
oldspiceman
These guys didn't know about it:
[http://www.hypun.com/gallery/1298/Top_10_NBA_Players_that_we...](http://www.hypun.com/gallery/1298/Top_10_NBA_Players_that_went_Broke)

------
dd36
bogleheads.org

Also, the Frontline episode, "The Retirement Gamble"

------
prostoalex
Schwab Intelligent Portfolios are launching next year, and will offer balanced
portfolios with tax-loss harvesting for a low, low price of 0% of assets under
management.

[https://intelligent.schwab.com/](https://intelligent.schwab.com/)

------
jcdavis
Decent article, but awfully linkbait-y headline. You'll get that advice at
many places around the internet - I recommend those curious to read the wiki
at bogleheads.org

------
OliverJones
Work with an advisor who has access to DFA. Invest for the long term. Pull
funds out when you want to use them.

------
mamcx
And what if you live outside USA?

