All these robo wealth advisers that I know of are basically profiling their clients and segmenting them in broad categories that are then offered a combination of passive ETFs.
By having most of the capital in passive funds, active management gets easier, and so more valuable, so you want to pay for it.
So we might be seeing a flight towards roboadvisers, but the trend won't last forever, and the equilibrium point is in a combination of both roboadvisers and human advisers.
So, the human ones, they are not really going out of fashion. They just got a little competition, as a result of the lackluster returns of some of them. This is good news for the good ones.
It seems obvious that a roboadvisor is easier to scale while maintaining its level of performance than a human advisor. So I guess the question is, at what level do the best roboadvisors compare to the human advisors? Also almost certainly whatever that level is currently it's almost surely going to rise.
You can front-run the algotraders because you know what they're going to do. A simple example from Bloomberg View:
"Take American Airlines Group Inc., which joined the S&P 500 after markets closed on March 20. Because the addition of the carrier was announced four days earlier, nimble traders had plenty of time to get in front of the less fleet-footed."
The bigger the index funds get, the more easy money there is to be made this way.
> "Take American Airlines Group Inc., which joined the S&P 500 after markets closed on March 20. Because the addition of the carrier was announced four days earlier, nimble traders had plenty of time to get in front of the less fleet-footed."
So, just to be explicit, is the suggestion to short AA right before this happens, then re-buy once the algotraders settle?
No, the suggestion is to buy AA before all the index funds tracking the S&P 500 are obligated to buy it at the same time after it's officially added to the index.
Active trading is what makes prices efficient (passive funds just take the current price as a given, hence the name). The less money that's traded actively, the less efficient prices will be, so the more profitable it will be to trade actively.
I believe the argument is along the following lines:
The more money that is placed into passive indexes (funds that merely attempt to track the performance of something like the S&P500 by owning a proportional, market cap weighted amount of each stock in the index), the less that is being actively managed by a human being or algorithm with the affect of price discovery.
With less 'players' in the game acting on their competing investment theses, inefficiencies are expected to widen. In other words, if AAPL is at price X on any given day, that price is the sum total of all buy and sell orders being placed. One can assume that even with a large portion of passive buying today, most involved in trading AAPL are trading on their own assessment of the true value of Apple's stock. If at some future point the majority of money in the market is simply passive/buy-and-hold, the price of AAPL (or any stock/wider index) will be less "efficient" because of the distortion in supply & demand created by an increase of mindless buy orders.
Some market watchers have attributed the abnormally placid bull tear of 09-present, at least in part, to this consistent buying. Josh Brown called it the relentless bid [0] and explained how the increased popularity of dollar cost averaging, scheduled index fund purchases, etc could be a major factor.
I have tried so very hard to outsmart the market, read so much stuff and this is the result compare to S&P500: http://i.imgur.com/fEZvLod.png , for all my time & energy I could have just dumped all my savings into SPY and call it a day.
I am now solidly convinced that anyone who beats the market is either win-the-lottery lucky or has illegal insider info.
P.S., that falling blue-data in 2nd half of the graph is WholeFoods falling from about $65 to $31.... =/
I pay Betterment something like ~$180/year for over $100K in assets, and it includes tax loss harvesting on my non-retirement accounts. Could I go with Vanguard and their terrible web interface with less features? I could. I don't mind paying Betterment what I do though. I don't want to waste time on managing my stock/bond assets; I just want to fund the account and have it be managed programatically.
Don't forget to take taxes into account. Vanguard's Target funds are not at all tax-optimized, no private wealth manager would put the total/international bond market funds in your taxable account. IMO this is one feature the roboadvisors clearly have going for them.
Wealthsimple is the Canadian clone. If you're interested here's a referral link that gives us both an extra $5k investment without fees: http://wsim.co/1LcrxXW.
I came to an understanding that the real reason to start investing early has nothing to do with the compound interest theory that is usually provided. It's true but ultimately boring and doesn't really inspire.
The reason you start investing early is so that you get practice investing before you have any real money to lose. All of the dumb stuff I did trying to figure out how the market works, I did when I had a couple thousand dollars. The worst I could do (since I didn't do margin) was lose a couple thousand dollars. Now if I bet wrong on my IRA, I could lose that much for a 1% drop, but I have the confidence and experience to know that 'let it ride' is the right strategy about 90% of the time. The only time I sell is when I get tired of an underperformer, or when I see clear signs of baseless exuberance (eg, an Apple media event is tomorrow) and then I buy back in when people have calmed down.
Read what it is carefully. The green and red are not that year's return, it's the cumulative return across the represented time span. Red spaces represent spans of investing for which it did not keep up with inflation.
The "compound interest" argument comes with so many caveats that in practice, it is simply false.
While this chart is really interesting and insightful, I think it makes one flawed assumption.
(Assuming I'm reading it correctly) it suggests that one would invest all of their money in one year as one big chunk, as opposed to dollar-cost averaging over multiple years, even decades. It seems like following this approach would smooth out both the best and the worst possible returns, also depending on when and how quickly you withdraw of course.
It does serve one purpose well, though. If you knew somehow that holding onto the money has a negative rate of return right now, then you're better of spending that money on something that could make you money later.
For example, at the height of a bubble when P/E ratios are crazily out of whack, taking a class that improves your quality of life or net income potential might be your best investment.
The point of this chart, or at least, the point of me linking this chart, is to demonstrate that the model of "the market grows 6% each year, so I can just expect (input)x1.06^years output if I invest now" is wrong. There's all sorts of ways to slice and dice what's really true. I wouldn't even know how to characterize the true truth myself, even just looking at historical data. But I know that the myth of compound interest is a myth; markets can be down for extended periods of time.
And I don't think it's a "flawed assumption". I think it's a presentation choice. Are you seriously contending that the people who made this chart thinks that anybody actually invests that way? It's a way of slicing the data. If you modeled it as putting in a fixed amount per year, that would be another way of slicing and dicing the data, not a "flawed assumption" since nobody invests that way, either. If you modeled it as people putting in fixed amounts tied to inflation, you get yet another view.
> And I don't think it's a "flawed assumption"... Are you seriously contending that the people who made this chart thinks that anybody actually invests that way?
Even if you don't want to call it a flawed assumption, at best it's misleading to argue "compound interest is a myth" with the evidence of linking a chart that shows that's only true if investing in a way in which "nobody invests that way".
If you link to a chart that shows when compound interest _could_ lose, but only under conditions in which no one actually invests, then I don't consider that sufficient support to dismiss it as a "myth". Actually, if anything, it supports how true compound interest is. As long as you're willing to make the standard assumption of diversifying deposits over time to build it every year (i.e., dollar-cost averaging), which virtually every person investing does.
It doesn't matter how much you dollar-cost average your investments when there's five-ten year runs of negative returns.
What this chart shows is that the idea you can get reliable six percent returns every year is utter garbage, completely contradicted by the facts, and that there are extended periods of negative returns entirely possible. If you want to rationalize a continued belief in compound interest, go nuts, but I should warn you that this irrationality is likely to cost you, in your real life, quite dearly, vs. actually engaging with the truth of the market return rate. Your choice. Doesn't much matter to me in the end.
> It doesn't matter how much you dollar-cost average your investments when there's five-ten year runs of negative returns.
But as you can see there isn't a single example on this chart where someone could add to their portfolio over ~50 years and entirely lose money.
> there are extended periods of negative returns entirely possible
I mean, the very worst extended period is the 20-year range from 1961-1981 where -2.0% was lost year over year. I never argued against this, just that over the long run it is smoothed out by positive returns over time.
The comments you're making are much more emotional than fact-based:
- "utter garbage"
- "rationalize a continued belief in compound interest"
- "irrationality is likely to cost you, in your real life, quite dearly"
- "actually engaging with the truth of the market return rate"
The chart itself, and the way virtually every American structures their retirement accounts doesn't reflect your interpretation.
Over time I have formulated a belief system that goes something like this:
Anyone who is beating the average, is either lucky, or cheating.
The basic theory supporting this is that in any given endeavor you can assume the average participant is trying to improve their situation. This puts them in competition with everyone else, who similarly, are trying to improve their situation. The result, is a net 0 gain. We might all get stronger by going to the gym, but relative to each other, we're stagnant.
To make 'non-average' advances, you need an edge. In stocks, I think it comes in the form of insider trading, or highly advanced HFT access. The average Joe trying hard, has no more a chance at beating the average than they would in a game or coin flipping.
somebody else can probably answer this better than I can
but my understanding is that managers who beat the market don't repeat their success at a rate better than you would expect to happen simply by randomness
if you have 100 people flipping coins 20 times, a few of them are going to amass pretty impressive records (that sort of thing)
Spot on. Past under/out-performance by managers does not reliably predict future under/out-performance. (I don't have a citation handy at the moment...)
This is a common misconception. It's certainly true that if the stock market was a mere game of chance, there would be some coming up heads for many flips in a row. Where the analogy fails is that the successful coin-flippers break into two camps (at the most basic level, value based or momentum based investors) that each have a method of coin flipping.
Warren Buffett explains it much more elegantly than I ever could in his legendary The Superinvestors of Graham-and-Doddsville [0]. Buffett's argument is in response to the EMH proponents like Fama who dismissed his stellar track record as a mere statistical anomaly (this was in the late 70s and early 80s - we know now of course who was right). The gist of it is that if one held a nationwide coin flipping contest and found that all of the successful streak-flippers came from one small village and were all taught how to 'flip coins' by one individual (Ben Graham, author of the Intelligent Investor and Security Analysis) that it would be foolish to dismiss their success as mere luck. Yet that is exactly what so many EMH theorists do.
Buffett's partner, Charlie Munger, had this to say about it:
“Efficient market theory [is] a wonderful economic doctrine that had a long vogue in spite of the experience of Berkshire Hathaway. In fact one of the economists who won — he shared a Nobel Prize — and as he looked at Berkshire Hathaway year after year, which people would throw in his face as saying maybe the market isn’t quite as efficient as you think, he said, “Well, it’s a two-sigma event.” And then he said we were a three-sigma event. And then he said we were a four-sigma event. And he finally got up to six sigmas — better to add a sigma than change a theory, just because the evidence comes in differently. [Laughter] And, of course, when this share of a Nobel Prize went into money management himself, he sank like a stone.”
And the above only concerns one method of active management, the value camp. Guys like Soros and Druckenmiller averaged 30% returns for decades using a method that many other traders (Paul Tudor Jones, for one) have seen success with: a global macro, go-anywhere/trade-anything attitude paired with momentum and sentiment analysis (and a dash of technical analysis, which should garner me some fun responses).
Commodity Corporation (later bought and absorbed by Goldman Sachs) was well known for producing dozens of millionaire traders who relied almost entirely on technical analysis. The Turtle Traders were a group that used trend following TA to teach successful trading to neophytes; many of the students went on to run multi-billion dollar funds. Some have fallen by the wayside (its a tough game and only tougher as you get bigger) and some have relentlessly outperformed.
Active trading is incredibly difficult and has only gotten more so over the years as markets and traders evolve. Those in the game estimate that only 10-15% of traders (most of them pros) achieve true alpha over long periods. But that failure rate is along the same lines as opening a restaurant or founding a startup. Nobody doubts those things are possible because the results are so obvious.
I often see a lot of hand-waving dismissal of active trading on HN, Reddit and other popular forums and I can't help but wonder how much personal exposure those people really have to it. I think the average person is much better off trying their luck in a passive way but I don't like the 'noble lie' of impossibility that seems to permeate so much discussion of trading.
A mutual fund manager is not the same as a private wealth manager. Robo-advisors are replacements for private wealth managers. For example, a robo-advisor could recommend a human-managed mutual fund, or a human wealth manager could recommend a low cost index fund. You are confused about the two roles.
A mutual fund is almost always more expensive then an ETF, and rarely outperforms them. It should be criminal for mutual fund managers to charge 1% or more for their services, when they underperform broad indexes so frequently.
I don't think I was making an argument about the cost of mutual funds vs ETFs, but claiming mutual funds are more expensive than ETFs is silly. There are high cost ETFs just like there are high cost mutual funds. You have to look at the expense ratios etc, etc...
Averages hide all sorts of detail. I spend about 2 hours a week in investment activity and have never had a year where my active portfolio beat the vanguard 401k plan.
If you were the "average" 30-something index investor in 2008, you took a bath. I made a boatload of money, because I commited the cardinal sin of market timing and bought a bunch of stuff cheap with the cash position that I maintain.
People abandon human advisors because their liability issues result in bland advice that you can get for $0 from the Charles Schwab newsletter, unless you are qualified investor.
Index investors didn't take a bath because they didn't sell anything, thats' the point. The markets bounced back higher than before. The biggest losers were most definitely active traders, like you. And simply looking at one anecdote around one of the biggest market crashes without considering the magnitude of risk you took upon yourself is just naive.
Who said that risk wasn't considered? I've been doing this successfully since 1996, without any magical skills or unusual intelligence. I personally probably make 12-15 trades a year, I'm not talking about day trading.
Passive strategies have costs as well. Ask somebody with all of their money in VTI from 2001-2006.
Educating yourself and being opportunistic about seeking best value introduces risk but also unique opportunities. Personally, I like to realize gains over time and keep them liquid until a good opportunity presents itself.
Out of curiosity--if you have consistently failed to find alpha over the Vanguard 401k plan, why do you continue with this approach? Not criticizing--genuinely curious.
Unless you really enjoy the time you spend doing it, seems like the opportunity cost of that 104 hrs/yr might be a bit steep both in terms of the cost of the time itself and the lost earnings from not having it with Vanguard's plan.
I get a match in contributions, and it's not a poor performer by any means.
Also, I have a couple of different portfolios that I manage differently. I enjoy learning about companies and different industries as a hobby, so it's not lost time to me. If anything I get some knowledge that helps in other areas.
I hear you, and agree that it's silly to try to beat the market. But there's a difference between a fund manager and a financial advisor. A fund manager chooses an asset allocation for a given fund, ie "picks stocks". An advisor provides a service to clients by helping them understand the investing landscape and to plan their financial future.
In the long run, is there enough value-add delivered by an advisor to justify his presence in the investing "supply chain"? I'm not sure. But at some level of accumulated wealth, "unsophisticated" investors will likely want to pay someone to guide them through the process of investing.
As far as 401k money goes, there is no measurable difference between robo advisor investment allocations and target date maturity funds.
If you have more complex investment goals, or constraints, with your money (e.g. mix in taxes and estate planning), I can see where robo advisors would add value. Of course, increase the complexity level too much and the algorithms might not be able to handle the assignment.
I chatted with a D. Edward Jones advisor years ago, shortly after I got a full-time job.
My expected wealth accumulation % increase for a while would be eaten up by his fees(and he was selling only one line of funds, to boot). I nodded politely, then at home, I did some studying signed up for ETFs based upon my financial needs.
When I have a large sum of wealth, I will have a lawyer, wealth adviser, and accountant on retainer in order to design appropriate strategies. I suspect that this will be > 1M USD.
As the price of world class portfolio management approaches zero, the massive gap in investor sophistication between rich and poor diminishes.
Once the poor have access to this engine of wealth, the main issue becomes the paternalistic need to protect them from themselves... or put another way to declare morally acceptable risk characteristics of portfolios for those who might end up on social welfare.
So like motorcycle "helmet laws", we'll have classes of algorithms that are deemed acceptable and allow the non-rich to grow their wealth.
Our society still bows before investment oracles whose strategic investments seem to manufacture wealth... but now that human management is accurately viewed as inferior, the divide between rich and poor is less a matter of skill than a byproduct of paternalism.
Systematically allocating your assets will only go so far. People don't seek out financial advisers for asset allocation, they seek them out for the sage advice that they'll offer for big financial decisions they have in life: should I go to grad school? Should I move in with my SO? Should I buy this house when I have $X in savings? A parent died, what do I do with their estate? etc. An algorithm isn't going to give you that kind of human touch (at least not yet). Traditional financial advisers aren't going anywhere.
> People don't seek out financial advisers for asset allocation, they seek them out for the sage advice that they'll offer for big financial decisions they have in life
I've been wondering lately: When is the right time or what are the right circumstances to choose to seek out a human advisor especially with regard to tax efficiency, offshore banking, etc.?
I spoke to one advisor (a friend) who manages HNWIs; he suggested a net worth of $100k-250k is when it starts to make sense. I'm still curious to find a general answer.
Sorry, just trying to clarify _some_ of the services they advise about, and when reaching out for that advise starts to make sense -- not suggesting that they're right for every client.
I don't think financial coaches are going to go away, because of how poor financial education is in the US in traditional learning environments, but I do believe a lot of money managers are going to be eaten up by roboadvisors.
> because of how poor financial education is in the US in traditional learning environments
Financial literacy is a pretty basic combination of Grade 5 math and common sense. If you can't grasp it yourself with a tiny bit of effort, no structured learning environment is going to help you.
In those cases, one would be best served to speak with a fee-based financial advisor (http://www.napfa.org/) These advisors make money in a way that is far more transparent and typical of professional relationships: they charge you a price for their service, and you don't continue to pay them when they aren't adding value.
I would even argue that many of the cases you listed are better suited for a lawyer. Another example of a typical relationship where I pay them $X for their service instead of X% of my assets in perpetuity.
As the co-founder and CTO of Investmynd, I have strong opinions on the rise of the "robos". We are building a company based on the premise that high net worth clients are not just chasing returns, but can truly benefit from the overall financial guidance that a personal wealth advisor can provide. But in order to provide value, an advisor must truly understand their client. We offer tools to capture not only the traditional profiling data an advisor needs to collect from a client (risk tolerance, cash flow needs, long-term and short-term goals, etc.) but also behavioral finance tools to help both client and advisor understand the distinct personality traits that influence every individual's investing decisions. Are you the type of client that seeks to maintain a high degree of control over your investing decisions? Do you prefer to delegate? Are you unduly optimistic? Pessimistic? Are you a collaborator? Do you prefer to work alone? All of these behavioral tendencies influence how you invest over time, both at a micro-level (individual stock picking, buy and sell decisions, etc.) and macro-level (high level decisions such as switching advisors, moving to a robo-fund, etc.). We firmly believe that advisors can add value beyond the basic asset allocation services offered by a robo-fund, as long as they have the right tools to understand how to best serve their clients.
Curious for your thoughts on the fees assessed by robo-funds compared to something super barebones like Vanguard's index funds that you can manage your own allocations on.
Do you see fees charged by these guys as largely overpriced for what they offer since they aren't offering these other services? Would you say the majority of the value you add is from these other services?
I'll just say that when it comes to algorithmic portfolio planning, I think there will continue to be downward pressure on the fees that can be charged. Basic portfolio planning and diversification services are clearly becoming commoditized. The traditional high-touch personal wealth advisor will still provide value to their clients, and both clients and advisors will ultimately benefit from the improved technology that handles the actual portfolio management chores.
This article, published in May, is already somewhat dated, and demonstrates some fundamental misunderstandings about the market.
Human wealth advisors and robo-advisors only overlap for a limited number of services, notably asset allocation and rebalancing. Wealth advisors typically help their clients with tax and estate planning, and make introductions to other wealthy individuals of interest.
Robos apply algorithms to investments. I know, because I used to work for FutureAdvisor, a great YC startup that was bought by BlackRock a few weeks ago.
Secondly, human wealth advisers were never "in fashion" with most people, because most people do not have the $500K to $1M in net worth to meet their minimums. Human advisors earn a percentage of clients' wealth, have a limited amount of time, and have neither the incentive nor the time to accept middle-class clients. It's a tired refrain, but human experts don't scale. That's why robos exist. They are stepping into the gap left between the supply of human advisers and the demands of the so-called mass affluent.
Another fundamental flaw of the Economist piece is to talk about millennials. Outside of Silicon Valley and Wall St., millennials just don't have that much money. They are not a good demographic to base a business on, and they're not even the main customer base of many robos. Again, the middle-class, mid-career professionals who have been neglected by human advisers are...
With the recent HN headline that the bond market could follow suit with the equities market [1] I do wonder about what seems like a growing shift to what I'll summarize as "The Bogleheads" approach of simple, diversified, low-fee ETFs.
Could we be setting ourselves up for a situation where things will crash much harder than they would if people weren't using these robo-advisors because Main St. investors will be more "homogenized" in their investment choices?
Not the most educated on these matters, so please feel free to tell me where I'm totally off-base with this.
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[ 3.0 ms ] story [ 139 ms ] threadBy having most of the capital in passive funds, active management gets easier, and so more valuable, so you want to pay for it.
So we might be seeing a flight towards roboadvisers, but the trend won't last forever, and the equilibrium point is in a combination of both roboadvisers and human advisers.
So, the human ones, they are not really going out of fashion. They just got a little competition, as a result of the lackluster returns of some of them. This is good news for the good ones.
I'm not sure I follow. How does this make active management easier and more importantly how does that make it a better investment?
"Take American Airlines Group Inc., which joined the S&P 500 after markets closed on March 20. Because the addition of the carrier was announced four days earlier, nimble traders had plenty of time to get in front of the less fleet-footed."
The bigger the index funds get, the more easy money there is to be made this way.
So, just to be explicit, is the suggestion to short AA right before this happens, then re-buy once the algotraders settle?
The more money that is placed into passive indexes (funds that merely attempt to track the performance of something like the S&P500 by owning a proportional, market cap weighted amount of each stock in the index), the less that is being actively managed by a human being or algorithm with the affect of price discovery.
With less 'players' in the game acting on their competing investment theses, inefficiencies are expected to widen. In other words, if AAPL is at price X on any given day, that price is the sum total of all buy and sell orders being placed. One can assume that even with a large portion of passive buying today, most involved in trading AAPL are trading on their own assessment of the true value of Apple's stock. If at some future point the majority of money in the market is simply passive/buy-and-hold, the price of AAPL (or any stock/wider index) will be less "efficient" because of the distortion in supply & demand created by an increase of mindless buy orders.
Some market watchers have attributed the abnormally placid bull tear of 09-present, at least in part, to this consistent buying. Josh Brown called it the relentless bid [0] and explained how the increased popularity of dollar cost averaging, scheduled index fund purchases, etc could be a major factor.
[0] http://thereformedbroker.com/2014/03/05/the-relentless-bid-e...
http://www.nytimes.com/2015/03/15/your-money/how-many-mutual...
http://money.usnews.com/money/personal-finance/mutual-funds/...
http://money.cnn.com/2015/03/12/investing/investing-active-v...
EDIT: Disclaimer: I have the majority of my retirement assets in a roboadvisor (Betterment).
I am now solidly convinced that anyone who beats the market is either win-the-lottery lucky or has illegal insider info.
P.S., that falling blue-data in 2nd half of the graph is WholeFoods falling from about $65 to $31.... =/
https://i.imgur.com/IEcWuYC.png
https://personal.vanguard.com/us/funds/snapshot?FundId=0696&...
You might want to a) compare the price of betterment + those funds to the target fund and b) use that target fund as your benchmark.
https://www.betterment.com/pricing/
They're a stepping stone until you have enough capital to qualify for Admiral funds.
The reason you start investing early is so that you get practice investing before you have any real money to lose. All of the dumb stuff I did trying to figure out how the market works, I did when I had a couple thousand dollars. The worst I could do (since I didn't do margin) was lose a couple thousand dollars. Now if I bet wrong on my IRA, I could lose that much for a 1% drop, but I have the confidence and experience to know that 'let it ride' is the right strategy about 90% of the time. The only time I sell is when I get tired of an underperformer, or when I see clear signs of baseless exuberance (eg, an Apple media event is tomorrow) and then I buy back in when people have calmed down.
Truth, that was an expensive lesson for me. First bitcoin took about $3,000 USD from me in exchange for that lesson.
Then since apparently I didn't learn it enough the first time, I sold my Facebook stock at $16..... oh what could have been... c'est la vie...
It really isn't. It's true only if every year you get the promised interest rate. You don't.
This is one of my favorite charts ever: http://www.nytimes.com/interactive/2011/01/02/business/20110...
Read what it is carefully. The green and red are not that year's return, it's the cumulative return across the represented time span. Red spaces represent spans of investing for which it did not keep up with inflation.
The "compound interest" argument comes with so many caveats that in practice, it is simply false.
While this chart is really interesting and insightful, I think it makes one flawed assumption.
(Assuming I'm reading it correctly) it suggests that one would invest all of their money in one year as one big chunk, as opposed to dollar-cost averaging over multiple years, even decades. It seems like following this approach would smooth out both the best and the worst possible returns, also depending on when and how quickly you withdraw of course.
For example, at the height of a bubble when P/E ratios are crazily out of whack, taking a class that improves your quality of life or net income potential might be your best investment.
And I don't think it's a "flawed assumption". I think it's a presentation choice. Are you seriously contending that the people who made this chart thinks that anybody actually invests that way? It's a way of slicing the data. If you modeled it as putting in a fixed amount per year, that would be another way of slicing and dicing the data, not a "flawed assumption" since nobody invests that way, either. If you modeled it as people putting in fixed amounts tied to inflation, you get yet another view.
Even if you don't want to call it a flawed assumption, at best it's misleading to argue "compound interest is a myth" with the evidence of linking a chart that shows that's only true if investing in a way in which "nobody invests that way".
If you link to a chart that shows when compound interest _could_ lose, but only under conditions in which no one actually invests, then I don't consider that sufficient support to dismiss it as a "myth". Actually, if anything, it supports how true compound interest is. As long as you're willing to make the standard assumption of diversifying deposits over time to build it every year (i.e., dollar-cost averaging), which virtually every person investing does.
What this chart shows is that the idea you can get reliable six percent returns every year is utter garbage, completely contradicted by the facts, and that there are extended periods of negative returns entirely possible. If you want to rationalize a continued belief in compound interest, go nuts, but I should warn you that this irrationality is likely to cost you, in your real life, quite dearly, vs. actually engaging with the truth of the market return rate. Your choice. Doesn't much matter to me in the end.
But as you can see there isn't a single example on this chart where someone could add to their portfolio over ~50 years and entirely lose money.
> there are extended periods of negative returns entirely possible
I mean, the very worst extended period is the 20-year range from 1961-1981 where -2.0% was lost year over year. I never argued against this, just that over the long run it is smoothed out by positive returns over time.
The comments you're making are much more emotional than fact-based:
- "utter garbage"
- "rationalize a continued belief in compound interest"
- "irrationality is likely to cost you, in your real life, quite dearly"
- "actually engaging with the truth of the market return rate"
The chart itself, and the way virtually every American structures their retirement accounts doesn't reflect your interpretation.
Wow. Seems simple enough at first glance, but I would have probably fallen for that trap if I tried to math out where I might be by retirement.
That chart is neat as hell, but like sibling, I wonder what it would look like assuming you put money in each year.
Anyone who is beating the average, is either lucky, or cheating.
The basic theory supporting this is that in any given endeavor you can assume the average participant is trying to improve their situation. This puts them in competition with everyone else, who similarly, are trying to improve their situation. The result, is a net 0 gain. We might all get stronger by going to the gym, but relative to each other, we're stagnant.
To make 'non-average' advances, you need an edge. In stocks, I think it comes in the form of insider trading, or highly advanced HFT access. The average Joe trying hard, has no more a chance at beating the average than they would in a game or coin flipping.
but my understanding is that managers who beat the market don't repeat their success at a rate better than you would expect to happen simply by randomness
if you have 100 people flipping coins 20 times, a few of them are going to amass pretty impressive records (that sort of thing)
Warren Buffett explains it much more elegantly than I ever could in his legendary The Superinvestors of Graham-and-Doddsville [0]. Buffett's argument is in response to the EMH proponents like Fama who dismissed his stellar track record as a mere statistical anomaly (this was in the late 70s and early 80s - we know now of course who was right). The gist of it is that if one held a nationwide coin flipping contest and found that all of the successful streak-flippers came from one small village and were all taught how to 'flip coins' by one individual (Ben Graham, author of the Intelligent Investor and Security Analysis) that it would be foolish to dismiss their success as mere luck. Yet that is exactly what so many EMH theorists do.
Buffett's partner, Charlie Munger, had this to say about it: “Efficient market theory [is] a wonderful economic doctrine that had a long vogue in spite of the experience of Berkshire Hathaway. In fact one of the economists who won — he shared a Nobel Prize — and as he looked at Berkshire Hathaway year after year, which people would throw in his face as saying maybe the market isn’t quite as efficient as you think, he said, “Well, it’s a two-sigma event.” And then he said we were a three-sigma event. And then he said we were a four-sigma event. And he finally got up to six sigmas — better to add a sigma than change a theory, just because the evidence comes in differently. [Laughter] And, of course, when this share of a Nobel Prize went into money management himself, he sank like a stone.”
And the above only concerns one method of active management, the value camp. Guys like Soros and Druckenmiller averaged 30% returns for decades using a method that many other traders (Paul Tudor Jones, for one) have seen success with: a global macro, go-anywhere/trade-anything attitude paired with momentum and sentiment analysis (and a dash of technical analysis, which should garner me some fun responses).
Commodity Corporation (later bought and absorbed by Goldman Sachs) was well known for producing dozens of millionaire traders who relied almost entirely on technical analysis. The Turtle Traders were a group that used trend following TA to teach successful trading to neophytes; many of the students went on to run multi-billion dollar funds. Some have fallen by the wayside (its a tough game and only tougher as you get bigger) and some have relentlessly outperformed.
Active trading is incredibly difficult and has only gotten more so over the years as markets and traders evolve. Those in the game estimate that only 10-15% of traders (most of them pros) achieve true alpha over long periods. But that failure rate is along the same lines as opening a restaurant or founding a startup. Nobody doubts those things are possible because the results are so obvious.
I often see a lot of hand-waving dismissal of active trading on HN, Reddit and other popular forums and I can't help but wonder how much personal exposure those people really have to it. I think the average person is much better off trying their luck in a passive way but I don't like the 'noble lie' of impossibility that seems to permeate so much discussion of trading.
[0] http://www8.gsb.columbia.edu/rtfiles/cbs/hermes/Buffett1984....
A mutual fund manager is someone who tries to attribute luck to skill.
If you were the "average" 30-something index investor in 2008, you took a bath. I made a boatload of money, because I commited the cardinal sin of market timing and bought a bunch of stuff cheap with the cash position that I maintain.
People abandon human advisors because their liability issues result in bland advice that you can get for $0 from the Charles Schwab newsletter, unless you are qualified investor.
Passive strategies have costs as well. Ask somebody with all of their money in VTI from 2001-2006.
Educating yourself and being opportunistic about seeking best value introduces risk but also unique opportunities. Personally, I like to realize gains over time and keep them liquid until a good opportunity presents itself.
Unless you really enjoy the time you spend doing it, seems like the opportunity cost of that 104 hrs/yr might be a bit steep both in terms of the cost of the time itself and the lost earnings from not having it with Vanguard's plan.
Also, I have a couple of different portfolios that I manage differently. I enjoy learning about companies and different industries as a hobby, so it's not lost time to me. If anything I get some knowledge that helps in other areas.
In the long run, is there enough value-add delivered by an advisor to justify his presence in the investing "supply chain"? I'm not sure. But at some level of accumulated wealth, "unsophisticated" investors will likely want to pay someone to guide them through the process of investing.
If you have more complex investment goals, or constraints, with your money (e.g. mix in taxes and estate planning), I can see where robo advisors would add value. Of course, increase the complexity level too much and the algorithms might not be able to handle the assignment.
My expected wealth accumulation % increase for a while would be eaten up by his fees(and he was selling only one line of funds, to boot). I nodded politely, then at home, I did some studying signed up for ETFs based upon my financial needs.
When I have a large sum of wealth, I will have a lawyer, wealth adviser, and accountant on retainer in order to design appropriate strategies. I suspect that this will be > 1M USD.
Once the poor have access to this engine of wealth, the main issue becomes the paternalistic need to protect them from themselves... or put another way to declare morally acceptable risk characteristics of portfolios for those who might end up on social welfare.
So like motorcycle "helmet laws", we'll have classes of algorithms that are deemed acceptable and allow the non-rich to grow their wealth.
Our society still bows before investment oracles whose strategic investments seem to manufacture wealth... but now that human management is accurately viewed as inferior, the divide between rich and poor is less a matter of skill than a byproduct of paternalism.
I've been wondering lately: When is the right time or what are the right circumstances to choose to seek out a human advisor especially with regard to tax efficiency, offshore banking, etc.?
I spoke to one advisor (a friend) who manages HNWIs; he suggested a net worth of $100k-250k is when it starts to make sense. I'm still curious to find a general answer.
Financial literacy is a pretty basic combination of Grade 5 math and common sense. If you can't grasp it yourself with a tiny bit of effort, no structured learning environment is going to help you.
I would even argue that many of the cases you listed are better suited for a lawyer. Another example of a typical relationship where I pay them $X for their service instead of X% of my assets in perpetuity.
Curious for your thoughts on the fees assessed by robo-funds compared to something super barebones like Vanguard's index funds that you can manage your own allocations on.
Do you see fees charged by these guys as largely overpriced for what they offer since they aren't offering these other services? Would you say the majority of the value you add is from these other services?
Human wealth advisors and robo-advisors only overlap for a limited number of services, notably asset allocation and rebalancing. Wealth advisors typically help their clients with tax and estate planning, and make introductions to other wealthy individuals of interest.
Robos apply algorithms to investments. I know, because I used to work for FutureAdvisor, a great YC startup that was bought by BlackRock a few weeks ago.
Secondly, human wealth advisers were never "in fashion" with most people, because most people do not have the $500K to $1M in net worth to meet their minimums. Human advisors earn a percentage of clients' wealth, have a limited amount of time, and have neither the incentive nor the time to accept middle-class clients. It's a tired refrain, but human experts don't scale. That's why robos exist. They are stepping into the gap left between the supply of human advisers and the demands of the so-called mass affluent.
Another fundamental flaw of the Economist piece is to talk about millennials. Outside of Silicon Valley and Wall St., millennials just don't have that much money. They are not a good demographic to base a business on, and they're not even the main customer base of many robos. Again, the middle-class, mid-career professionals who have been neglected by human advisers are...
Could we be setting ourselves up for a situation where things will crash much harder than they would if people weren't using these robo-advisors because Main St. investors will be more "homogenized" in their investment choices?
Not the most educated on these matters, so please feel free to tell me where I'm totally off-base with this.
[1] https://news.ycombinator.com/item?id=10252166