The article mentions Wealthfront and Betterment as alternatives to traditional advisors and their heavy fees. But, honestly, the vast majority people don't even need to pay the 0.25% they charge. Just get yourself a Vanguard account and follow the advice here: https://www.reddit.com/r/personalfinance/wiki/investing
The advice there, and in the rest of that wiki, will serve you very well, at least until you have many millions of dollars.
Why use the ETFs? You're paying spread and front-runners, and have to deal with cumbersome atomic shares. Use the very excellent underlying mutual funds that are free to trade on Schwab's platform.
The problem with TLH as justification is that with assets with a positive EV (and because of inflation), after 5-10 years, you probably won't have many losses to harvest, but you'll still be paying that fee.
The main problem is that TLH is irrelevant in tax-free/deferred retirement funds, which is where you should be sticking your savings if you haven't maxed them out, which is the situation of most people who use these robo services.
Yet another problem of TLH is that you must have all your investments with Betterment to ensure you don't trigger the "wash sale" rule. (Alternatively, you can handle it yourself manually, but that negates most of the benefit of having Betterment from a TLH perspective.)
That's more or less true only if you are retired & not re-investing dividends (not regularly purchasing new, high-basis lots).
The key problem is the one that loeg mentioned: on a $500k+ account you will likely be paying >$1k in fees for a ~$1k/yr tax savings. To make matters worse, the tax savings does not increase with inflation, but the fees do.
Right, over time new purchases generally become less and less significant relative to the asset value of your account. But yeah, the reinvestment and new investments can still be TLH'd.
Wealthfront and Betterment fit the population of people that honestly don't even want to read that wiki and just want someone else to deal with it. That population is a lot larger than you think- I don't have the statistics handy, but a very large % of people just have their 401k funds sitting in cash. And even for slightly more knowledgeable people, they are happy to have a middle ground of a company that at least does an annual checkup to make sure their portfolio makes sense while avoiding a sleazy broker type.
You are right that you can just read that wiki, but a lot of people just aren't want to and are willing to pay a fee to avoid it.
Unless your principal is in the seven figures your best bet is likely an index fund. More and more people are waking up to high fees and lackluster results of these advisors. If I were to offer advice, go with vanguard. They have the lowest fees in the industry and have an ownership structure that benefits the shareholders of its funds.
Actually he could. Vanguard would easily absorb it. Vanguard has about 4 trillion dollars of assets under management. $40B corresponds to about 1% of it, about a single day's stock market wiggle.
What are you talking about? Mark Zuckerburg's net worth is around $60,000,000,000. Count the figures: there are 11.
Are you getting confused because the scientific notation would be 6 x 10^10? But that's not how people count "figures." If you have a 6 figure salary, your salary is $100,000 to $999,999, not $1,000,000 to $9,999,999.
> What changes when your principal is in the 7 figures?
Tax, liability and estate planning become more complicated. Also, at those scales, you can start taking risks someone with less capital would be imprudent to.
I am nowhere near those levels, but if you are in the low 7's you are probably still fine investing in index funds. However, there are probably a few investment options that would start making sense:
1. Real estate investments can be very attractive due to access to cheap financing and tax benefits. Obviously there is risk (avoid those bubbles), but if you play it smart and find cash flow positive rental properties, you will probably net much better returns than the stock market.
2. As you get higher on the wealth ladder, finding tax savings starts to show good ROI. So you might want to hire an advisor or an accountant to help with that.
3. The standard advice for us normal folk is to have ~6 months of rainy day funds in a savings account. If you are in the 7 figures, you might want to map out some worst case scenarios to get a sense of how much risk tolerance you have and what you would need to 'survive' those bad scenarios. If I had moderate wealth, I would probably make sure I had a few years worth of living expenses stashed away somewhere. Also, I would probably have a nice mix of bonds, gold and other safe(ish) assets. This leads into #4
4. While I might keep a higher % in safer assets than I do now, I would probably try and balance that with some more riskier assets. At higher levels of wealth you have access to a much wider array of investment opportunities (lookup 'accredited investor'). For the most part, these investment classes suffer the same issues as actively managed funds (generally perform worse than the market, after fees. Look up 'average VC, PE, and hedge fund returns'). But the one advantage here is that, unlike index funds, you also have a (small) chance of hitting astronomical returns (ex: angel investor in a unicorn). So it could make sense to allocate a small portion of your portfolio to these types of investments. As mentioned, the average expected outcome is probably worse than just investing in index funds, but an index fund will never return 1000x where as there is a small chance that an angel investment might.
So the tldr is that there is nothing wrong with index funds, especially at the low 7's (and probably even into the 8's). But most people at those levels have much more complicated financial lives (own a business, have a bunch of real estate investments, need to worry about inheritances, etc..) that the standard advice about index funds becomes less suitable. For example, Warren Buffet, the champion of index funds, probably has the vast majority of his wealth locked up in BRK.
I totally agree with the tldr here. I think the tipping point is probably somewhere around $10-12M in assets, where you should start looking further than what Vanguard has to offer. At that point, following the 4% safe withdrawal rule, you can have an income from returns that puts you at or near the top 1% of Americans. Beyond that is when you should start looking into things that the truly rich consider, like hedging for capital preservation.
So far, nothing, at least for me. Still plonking that money directly into index funds. Some of my friends swear by rental properties but it seems like an awful lot of work.
The main problem with tracker ETF's is that you have to buy the index, some of my active UK funds thought banks where over priced and got out in time a uk tracker ETF can not do this so it can never recover that loss when compared to an active strategy.
Well these are well respected uk investment trusts in the 50 year club ie increase dividends for 50 years. And these trust have very good 40 / 50 year records.
Worth pointing out that Schwab actually has lower fees than Vanguard for many of their index funds. Who knows if it will stay that way with the different ownership structure, however.
Let's say you had a successful exit and now have a bunch of stock or cash on your hands. What do you do to both protect your assets and possibly grow them without getting too aggressive because you want to retire on that lump of money?
Looks like fiduciary duty advisers cannot be trusted. Some claim that index funds such as vanguard are also not guaranteed to continue being a safe bet once everybody and their dog switches to them vs managed funds. What else is left to do?
you go to a private banker in a jurisdiction whose sole job it is to do private banking and get that shit private banked. dont pretend you dont know which country im talking about.
thats a really simple problem with a known solution. its just not advertised at all. everyone above a couple mil gets 10-15% annually and just doesnt talk about it to average randos. because instead of listening they always start shouting matches about how its so unfair that normal people dont have access to this stuff and taxes and tax evasion and all the lowlife hate thats inevitably going to happen.
Why wouldn't private bankers be as predatory of high net worth individuals as other financial professions are of normal folk? How does having a couple of mil protect you from being taken advantage of by charlatans? Don't the rich fall for dumb schemes the same was everybody else?
Private banking, in said jurisdiction, is a line of work with centuries of tradition.
And they just don't have any fucking reason to fuck over their clients.
Protection? If you are a billionaire and your banker fucks you over, I think they're more scared of you than you are of them.
I did not tell you to private bank with bank of america new york city. If you do that, kiss your money goodbye. They'll take all of it, funnel it into the next garbage scheme and yell "stakeholders".
this is actually 100% bullshit. HNW individuals do have opportunities in private equity and hedge funds not available to the general public but the risk/return curve is not really any better than what's available to joe bloggs in a brokerage account these days. possibly far worse.
The real advantage gains reaped are in things like tax avoidance and asset protection. These are vehicles that tend to be available to the really rich and only really useful to the really rich.
"Everyone above a couple mil gets 10-15% annually and just doesn't talk about it"... please. Bull. Shit. Those who do talk about it all the time. Those who lose their shirts are the quiet ones.
There have certainly been times when nominal yield of 10-12% was the norm (before inflation/taxes). Those days are not these days. And these days earning the market (domestic or global) with minimal cost is available to literally anyone with a checking account and a smart phone (in the USA at least).
Are there no quoted PE funds in the USA that normal investors can buy? I have done quite well out of Electra in the UK 3I also has had a good run recently.
and about a dozen other asset classes that you dont even take into account because youre stuck in startup land.
if you have the cash, go to switzerland and talk to the people instead of yammering on about how its not possible.
10% YoY on a 10M investment isn't something people talk about because its rather ordinary. but you wont get it at bank of america. commercial banks simply dont know how to produce those returns for their customers. or maybe they do but are more busy with sucking off their stakeholders. i honestly dont care.
Buy index funds until managed funds lower their fees. Vote with your money. If you want your portfolio to be a safer bet, put more percentage of it into bonds.
Besides, most managers have a fund that has the same companies as an index, just in slightly different proportions. If they pick things that are risky and fail, it would look bad. If they slightly underperform the gains the index has, they look fine.
tip to the uninitiated, this is called "closet indexing", and it's bad. If you want an index fund (and you should), buy a no-load, low-cost index fund.
If you have a bunch of money you should research it out and find a fiduciary. The more money you have the easier they are to find (I work for one).
EDIT: Here's a start for search terms from wikipedia.
Personal fiduciary services are often referred to as private trust, private client, private wealth management, or private banking services.
>Some claim that index funds such as vanguard are also not guaranteed to go up as everybody and their dog switches to them vs managed funds.
If the market's going up index funds are going up. Considering their relative performance think of it like this. If half of US stocks were owned by VTI and the rest were owned by, say, 20 actively managed funds then on average, before fees, they will both perform the same because they represent the same basket. The catch is that passive funds have low fees since they're easy to operate and active funds have high fees because they require more work. Also consider that in those 20 active funds there will be some winners and some losers and you'll have no way to know who they are. Setup a simple bogleheads-ish portfolio and go think about other things.
> Some claim that index funds such as vanguard are also not guaranteed to continue being a safe bet once everybody and their dog switches to them vs managed funds
Managed versus index funds works not unlike the 50% rule of bitcoin; If managed funds / individual stocks start regularly performing better, money will flow into them (overpricing) and fees will rise so that index funds are underpriced.
There are no guarantees in future performance; and your index fund is also not diversified from macro economy risk.
I started with Wealthfront and Betterment, but honestly I could just buy some mutual funds at Vanguard and pay 4 or 5 basis points in fees instead 25 (and then the same 4 or 5 basis points for what they buy).
Sure, if you buy VTI, for example. If you want to buy fractional shares, you can buy VTSAX which is a mutual fund. You can buy both of them for free from Vanguard and they both have 0.04% expense ratios.
So, I used to write on a blog called topfinancialadvisor.com (not for a couple years).
It was kind of funny, when researching for the blog, we found countless articles all copied from bloomberg.com, forbes.com, usanews, cbs, msnbc, etc. They all had the same basic story, which barely told anyone anything, and at the end had some sort of popup to "get your financial advice." It was clear the whole things was just an add from the start, just trying to get high in the google rankings.
And, that's pretty much how I feel about every financial adviser. It's a gimmick to collect fees. It doesn't take a genius to make money on the stock market, or invest in a property. The key is to diversify and invest in solid teams / products. The same things Warren Buffet looks for in a company, is literally almost the exact same thing YC looks for in a startup. It's a solid team, good management, vision, and a solid product (preferably with solid sales); and only trade what you know.
That being said, (a bit of a shameless plug here) that's part of the reason I'm writing my own financial adviser (https://projectpiglet.com/ currently being alpha tested). The idea being, use what other people know, to help trade the market.
I fully intend to just charge a flat monthly fee, and provide other services as well, for your own research. Basically, explain the whole process of why you should buy X, then let you make the decision. This (I felt) was much more honest, and although it might cost me more money initial, building trust will eventually benefit long term IMO. Plus, it has the added benefit of (if it ever takes off) optimizing investment towards solid products / teams, as opposed to shady financials as CFA do.
The CFA's I speak to about this, drive me absolutely nuts. They think I should either (a) just look at the companies financials and that's it, or (b) try to talk me down, then try to sell me their services (claiming they can do better). The best part, is when I show them my portfolio -_-
How do you use Project Piglet to inform your investing decisions? The examples don't seem very enlightening. I'm slightly confused that it's registering a positive sentiment for Uber, too.
Yeah, we are working on an improved demo (along with transitioning the stock advisor from python to our web app).
I personally use it to identify how experts feel about a given product, then compare to what the main stream media things + the stock market. One of the most interesting examples of this, was I saw a spike of positive sentiment regarding AMD in early 2016. I then invested some money because the experts felt their new architecture could compete with Intel. That sentiment just continued to build until release, at which point I held a ton of stock.
As for Uber, believe it or not, there actually is a ton of positive sentiment. Even though there is a lot of negative discussion here on HN generally, it targets "experts" i.e. people who appear to discuss uber in depth and/or have insider knowledge. Those people believe uber is doing relatively well (at least in 2016 - the demo data).
Now, it's a bit more mixed when looking at sentiment, with a solid negative net promoter score[1].
I majored in finance and interned in college one semester with a broker. I wanted to help pick stocks or analyze portfolios for risk and diversification. Instead I was in charge of a mail merge scaring all stale customers "Markets are changing, call me now to adjust your portfolio."
This is precisely why both doctors and attorneys are considered 'professions' - as they both have articulated professional obligations that are primary to their making money. They both have duties of either care, or of law to their client, even and especially when those duties conflict with them making more money. If you chose the more money of standard of care, or more money over the client's interest, you lose your professional license. In the context of a financial advisor, that duty should be fiduciary in nature, but as there is no professional obligation, no recourse for failure to keep that obligation, you have a race to the bottom.
Fee-based financial advisors are a thing, and directly solves the incentive problem. There's also the possibility of making sure most of the advisor's income comes from bonuses based on alpha.
Here's what bothers me. Ten years ago I was still in school and came across Malkiel's 'A Random Walk' book. Then I started reading Graham's 'Intelligent Investor' and was like "dude I'm not going to spend hours a day trying to potentially beat the market by 2%. lol I'm not Peter Lynch". I concluded that if I wanted to park my money somewhere, it would be all in Vanguard index funds.
Now, it's 2017, and everyone has the hots for these products. Feels like a bubble. I've always had this possibly irrational feeling that if everyone is recommending something, I should probably look into alternatives. Since I graduated and started working in 2010 all my dollars went into rental real estate, but recently I get jealous of how low-maintenance (mentally) having these shares of index funds is, and I dream about getting qualified dividend income and capital gains.
Can anyone offer a viewpoint on this? Am I being irrational? All my life I've been doing stuff differently from everyone and it's worked out pretty well. Meanwhile had I started buying up these funds I'd probably have the same exact networth as I do now. What other passive options are out there? Dividend aristocrats? I also entertained buying AAPL and Wells Fargo and 3M and putting the rest in a Vanguard small cap index. shrugs
Conventionally, when bond yields go down, stocks go up.
Interest rates (and, consequently, bond yields) have been very low for a number of years now. This has led to a lot of capital being deployed in the stock market instead. So that explains why there is a lot of money which wants to be invested in the stock market right now. This may or may not be tempered by a near-future hike in interest rates.
Vanguard started out in 1975 but it only had one fund - a mutual fund tracking the S&P 500 - for the first decade of its existence. It has added new funds since the crash of 1987. If you look at the market since that time, the dot-com bubble was for tech stocks specifically and the housing bubble didn't have much to do with stocks at all (until after it burst, anyways). There hasn't been demand for the entire stock market since Vanguard started to become popular and well-known. This is why demand for index funds is near an all-time high.
Throwing everything into Vanguard isn't a bad idea. Buying AAPL, WFC, MMM and VBR (or similar) is not a bad idea. Dividend aristocrats isn't a bad idea. You can come close to replicating market performance with a small subsection of the market.
If you have good returns from your rental real estate, keep it. Or rather, keep at least some of it for diversification. I too have a thing for contrarianism but I think that some stock strategy is worth pursuing. The people whose portfolios do best are those who forget about them[0]
You shouldn't worry about ETFs and index funds being in a bubble per se. ETFs are structured out of holdings of other stocks. There are built-in mechanisms that keep their price in line with these other stocks: specifically, if the price diverges, it becomes profitable for the big traders and the like to buy other stocks and turn them into shares of the ETF, or vice versa. Provisions exist for doing this, so for a widely-traded ETF, the market will therefore be pretty efficient and the ETF itself will be priced fairly relative to its constituent stocks. (For a thinly traded no-name ETF, this may not be as true, however, and the prices may diverge - but we're still taking a few percent rather than, like, ten percent.)
So worry about a bubble in the stocks the ETF holds, instead. Unlike ETF-to-stock drift, that isn't something that day traders can fix: only big-time active investors, hedge funds and the like with billions in assets and insane risk tolerance who are seeking market-beating returns, can actually trade enough volume to move the price on big stocks like that, and if big-time passive institutional investors (like masses of individuals armed with ETFs, or pension funds, who are not in it to beat the market) happen to be too irrationally exuberant about stocks, the hedge funds may find it too risky or not profitable enough to trade enough that it corrects the stock price back to what that price should be.
But if you believe in a bubble in those stocks in general, you'll probably have to look beyond big names like AAPL and 3M that are already in your index fund, and you'll be back spending hours a day doing that beat-the-market research.
That can only be the case if people are moving money from other assets into stocks because of index funds. Maybe that's happening (less CDs perhaps?) but the argument for indexing is much more "stop buying expensive managed stock funds and use much cheaper stock index funds". And that shouldn't create a bubble in stocks because there is no more capital invested in total.
Equity bubbles are nothing new. I do think we're in a bit of a bubble (not a huge one, but the market is overvalued right now IMO) but again, the market is cyclical and I expect we'll enter bear market territory again soon. But on the other side of every equity bubble are hedge funds looking to short sell the crap out of everything. Once those guys start making money again, we'll know the bubble has burst.
Also, 10-year T-bills still exist if you're afraid of an equity bubble. Returns are historically bad, but they've always been used as more of a safe haven to stash money during a downturn than anything else. The fed is raising rates again, which will likely end up cooling off the equity market.
Yes, that was one concern. pedrocr's reply below (in addition to all the other comments) makes sense - if the current inflow in passive funds is just active funds being sold and reallocated, doesn't seem too bubbly. Though I am an active reader in the early retirement / Financial Independence blogosphere, and the real life people I talk to (usually nerds) are like 'Vanguard or gtfo'. So it would seem like the average person, and especially Baby Boomers looking for 'safe returns', would think "well, everyone's recommending it so it's all good" and voila, hundreds of billions flowing in. On the other hand my coworkers, most of whom wont read a book to save their lives, are just happy there is employer matching on their 401Ks. I suspect that's more representative of the average population. Not sure the data on this.
Also, would the share price of these passive funds go up due to demand enough to cut significantly into returns? Like a 30% increase in share price just because everyone is jumping on the bandwagon takes a while to make up for. (Am I wrong? How much exuberance would it take to bubble up an ETF's share price significantly?)
Thanks for all the replies, though. I'm looking for both sides of the argument. The businessinsider article supporting the 'bubble view' was a quick read but too light on substance.
> Also, would the share price of these passive funds go up due to demand enough to cut significantly into returns? Like a 30% increase in share price just because everyone is jumping on the bandwagon takes a while to make up for.
Right now the price is listed as $245.48 and the NAV is $243. That's a 1% difference and honestly I wouldn't be surprised if some of that is Yahoo's NAV price estimate being stale because someone has automated the conversion of the price difference into free money using computers. Probably multiple someones.
I don't think it's a "bubble" per se, since I believe the EFT approach is very sound. That said, there's an interesting relationship between ETFs and speculation; essentially, the ETF approach relies on the market being highly or somewhat efficient. In turn, the level to which the market is efficient is dependent on people doing their homework and placing informed bets on stocks. Essentially, doing their own evaluations of the "true value" of various stocks.
If most investors move towards ETFs, the number of people performing these valuations / bets will decrease, lowering the quality of the valuations. As a result, the efficiency of the market will be lower, and ETFs will be less viable. Or, put another way, having a large part of the market blindly invested in ETFs opens gaps for speculation. The price of various stocks will be further away from their real value, allowing you to have a more reasonable shot at "beating the market" by guessing the real price better.
Retail investors are moving towards ETFs. Institutional investors can still make a little bit more money with active management. An extra 0.05% average return may not matter to a retail investor, but if you're managing a $35 billion fund, that's still an extra $1.75 million.
I do expect the "alpha" gap between active management and passive index investing to close as robotrading becomes the norm. As alpha drops in a mass-robotrading scenario, trade volume tends to increase as more and different tactics are required to get the same returns. This arms race maintains market liquidity, while index funds provide a safe "baseline" for retail investors.
Index funds, by simple math, return exactly the average of the market with less fees, so they are strictly better than the average managed money which returns the same with more fees:
And your ideas of picking 3 stocks + small cap is just that, an active bet that deviates from the market composition. Unless you've gone back on your conclusion that you're not Peter Lynch it's probably not much of a path.
The only risk of rising index fund usage is that the market will cease being efficient. The way I see it is if that starts happening strongly (and it will take a lot more indexing than currently exists) first the market will become more volatile because price discovery will be worse with less people making bets. Then at some point if there are too few active investors indexing will become less viable because it will be easier for active investors to "steal" money from indexers by trading ahead of them and using other advantages over someone that's just buying and holding. This will make the index fund deviate from the index itself and it becomes unusable.
I find these scenarios extremely unlikely because of the "Intelligent Investor" crowd you mention. There is indeed a premium paid to people that bring actual good information to the market. Buffett and others like him still make a lot of money, everyone else gets to ride along the efficient market they create. Buffett by the way recomends index funds.
I'd love a reasonable contrarian view on this though. Most I've seen are just fund managers trying to justify their unjustifiable fees that create no value.
My line of thought is this: inflation is ~3% a year (hasn't been that high in a while, but just wait), and market returns average 5% (aka beta) a year with some level of volatility. By definition, the alpha of an index fund is zero minus fees. I'm willing to trade a guaranteed-small negative alpha for the reduction in volatility in alpha that I would have across a portfolio across years. I've still got overall market volatility to contend with, but my time horizon is long so that gets pushed to the side.
Index funds are a perfect choice for retail investors like yourself. But retail investors are a small percentage of the market; institutional investors make up the bulk of the transaction volume that provides liquidity for the rest of the market. Because they trade stocks millions of times a day, you're never going to beat them at the stock picking game. But their activity does push prices up across the board -- because the assets the institutional investors are trading are the basis of the index funds the retail investors are buying.
So there's not really a bubble in an asset class if retail investors move to index funds, because the retail investor is buying a little bit of everything. If anything, there is a bubble on certain stocks that consumers are familiar with (i.e. AAPL, AMZN, GOOG, FB, etc.) But by buying the index, you're buying both the stocks that are overvalued and the ones that are undervalued.
Now, certain index funds may eventually become out of whack with respect to overall market return: the S&P500 is generally considered to model the overall economy well, but that might not always be the case. That's fine, if you feel one index is becoming overvalued, weight your portfolio into another index. Or if you feel equity in general is overvalued, shift your portfolio into T-bills.
And yeah, for me, the decrease in anxiety is totally worth it. The economy is either doing well, or it's not, but in either case my money is along for the ride.
Then you should just buy a long term bond fund along with an index. The longer term bond funds tend to have a positive alpha along with a negative beta. That means your returns will be lower than just having stocks, but your risk-adjusted returns with be better.
The more money that flows into index funds the more potential profit can be made by active managers. Vanguard themselves have research validating active managers. I'm not going to give you free advice (no two clients ever have the exact circumstances or requirements) but, as a financial adviser who has carefully weighed up the passive vs active approach for years, we advise our clients to invest in risk-targeted multi-manager multi-asset funds that we ourselves have done Due Diligence on which includes visiting their offices, talking to their management team and analysing their track record (all on a regular basis). I consider this best practice but I know of no other financial advisers that do this. I do recognise that this is most likely beyond what most private investors are capable of as we have millions worth of client money under advice which gets us in the door. I do think this, and our unique approach to delivering holistic financial advice is a core part of our unique selling proposition so there does come a point where it would be better to focus on your own way of making money and let an adviser focus on wealth preservation, tax optimisation and helping you create the life you want.
As for the article, clients need to be responsible and look for chartered advisers who have advanced qualifications. In the UK this would be a FCA recognised Level 6 qualification and Chartered membership of the CII or CISI. In the United States, the Certified Financial Planner (CFP) is broadly comparable to Chartered status in the UK.
Of course you could still get a bad adviser but the chances that someone who paid for, and studied for years, to gain Chartered status would throw their career away by not acting in a client's best interest would be extremely low.
The point of a law is two folds: (1) to act as a deterrent (2) when violated and the violator is caught, to have an avenue to prosecute them (and provide some form of justice.)
Even if you're completely right (I don't believe you are) and the law doesn't deter ANYONE from committing the crime, its second purpose still has value.
Laws against homicide, robbery etc. haven't resulted in 0 homicides and robbery; and yet, they have been used to prosecute people who have committed those crimes. If those laws didn't exist, murder and robbery would not be against the law. We can argue all day if the law has done much to deter those things but it's a fact that the law helps in delivering justice. Without the law, it would be legal to murder someone and face zero legal consequences.
That would be true if law would actually be used to prosecute anyone. But it won't.
The criteria are nebulous "must pick the best product". The advisor will just say "I believed this one was the best".
How are you going to prove that? On top of that, victims don't typically even know if the advisor was wrong!
So they'll never even take him to court.
Plus it's a civil matter, meaning it costs the clients lots of money to bring a case.
It will not have the effect you describe.
Are there are requirements for review of advisors? That their advice goes to some panel for review? That the panel would have the power to actually arrest them if they disagree? It does not. It's a pointless law.
How do you feel about a similar law for real estate agents? That is, the agent must act in the interest of the seller and cannot accept money from a buyer.
Or a law that says lawyers must act in the interest of their clients?
> Real estate agents only have the sellers interests in mind because the higher the selling price, the more they make.
Hmmm...is that always true? What if the seller is asking $1 million for a house, then I approach the agent and say, "My offer is $850,000. If the buyer accepts this offer I will give you, the agent, $50,000". Wouldn't that be a problem?
That's the hope. In practice there are many more complications.
For example: Negotiations - you would expect your buyers agent to negotiate with the seller for the best (i.e. lowest) price. They'll never do it unless you make them.
It's not all roses on the seller side either: The sellers agent is highly motivated to sell fast (i.e. less work for them). Like you said, 5% lower, 10% faster.
So the sellers agent will tell the seller to list at a lower price than they should, to get a faster sale.
This is not to the benefit of a seller who has time to wait for a good offer.
So, like I said earlier: Real Estate is the poster child for why these laws are worthless.
Just get rid of commissions, and switch to fee-for-service (possibly paid after sale). Each time they show the house they get a fixed fee, things like that.
You don't pay the agent, the seller does. So you don't have the power to offer a negotiated rate.
Your example just reinforces my point.
A real estate agent only has the seller in mind, even if it's a buyers agent. So never tell a buyers agent anything you would not want the seller to know (for example when negotiating with the seller, never tell your agent what your true upper limit is, or surprise surprise, that's exactly how much you'll pay).
Go ask a buyers agent about "for sale by owner" if you need proof. Since it's for sale by owner, you will have to pay your buyers agent, and they will make you sign all sorts of papers before ever showing you such a house.
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[ 3.3 ms ] story [ 168 ms ] threadThe advice there, and in the rest of that wiki, will serve you very well, at least until you have many millions of dollars.
The key problem is the one that loeg mentioned: on a $500k+ account you will likely be paying >$1k in fees for a ~$1k/yr tax savings. To make matters worse, the tax savings does not increase with inflation, but the fees do.
You are right that you can just read that wiki, but a lot of people just aren't want to and are willing to pay a fee to avoid it.
Are you getting confused because the scientific notation would be 6 x 10^10? But that's not how people count "figures." If you have a 6 figure salary, your salary is $100,000 to $999,999, not $1,000,000 to $9,999,999.
These allow larger trades to be done without affecting the market price.
You're just a fatter whale.
Tax, liability and estate planning become more complicated. Also, at those scales, you can start taking risks someone with less capital would be imprudent to.
1. Real estate investments can be very attractive due to access to cheap financing and tax benefits. Obviously there is risk (avoid those bubbles), but if you play it smart and find cash flow positive rental properties, you will probably net much better returns than the stock market.
2. As you get higher on the wealth ladder, finding tax savings starts to show good ROI. So you might want to hire an advisor or an accountant to help with that.
3. The standard advice for us normal folk is to have ~6 months of rainy day funds in a savings account. If you are in the 7 figures, you might want to map out some worst case scenarios to get a sense of how much risk tolerance you have and what you would need to 'survive' those bad scenarios. If I had moderate wealth, I would probably make sure I had a few years worth of living expenses stashed away somewhere. Also, I would probably have a nice mix of bonds, gold and other safe(ish) assets. This leads into #4
4. While I might keep a higher % in safer assets than I do now, I would probably try and balance that with some more riskier assets. At higher levels of wealth you have access to a much wider array of investment opportunities (lookup 'accredited investor'). For the most part, these investment classes suffer the same issues as actively managed funds (generally perform worse than the market, after fees. Look up 'average VC, PE, and hedge fund returns'). But the one advantage here is that, unlike index funds, you also have a (small) chance of hitting astronomical returns (ex: angel investor in a unicorn). So it could make sense to allocate a small portion of your portfolio to these types of investments. As mentioned, the average expected outcome is probably worse than just investing in index funds, but an index fund will never return 1000x where as there is a small chance that an angel investment might.
So the tldr is that there is nothing wrong with index funds, especially at the low 7's (and probably even into the 8's). But most people at those levels have much more complicated financial lives (own a business, have a bunch of real estate investments, need to worry about inheritances, etc..) that the standard advice about index funds becomes less suitable. For example, Warren Buffet, the champion of index funds, probably has the vast majority of his wealth locked up in BRK.
You have no idea which companies might become enron.
Looks like fiduciary duty advisers cannot be trusted. Some claim that index funds such as vanguard are also not guaranteed to continue being a safe bet once everybody and their dog switches to them vs managed funds. What else is left to do?
thats a really simple problem with a known solution. its just not advertised at all. everyone above a couple mil gets 10-15% annually and just doesnt talk about it to average randos. because instead of listening they always start shouting matches about how its so unfair that normal people dont have access to this stuff and taxes and tax evasion and all the lowlife hate thats inevitably going to happen.
And they just don't have any fucking reason to fuck over their clients.
Protection? If you are a billionaire and your banker fucks you over, I think they're more scared of you than you are of them.
I did not tell you to private bank with bank of america new york city. If you do that, kiss your money goodbye. They'll take all of it, funnel it into the next garbage scheme and yell "stakeholders".
The real advantage gains reaped are in things like tax avoidance and asset protection. These are vehicles that tend to be available to the really rich and only really useful to the really rich.
"Everyone above a couple mil gets 10-15% annually and just doesn't talk about it"... please. Bull. Shit. Those who do talk about it all the time. Those who lose their shirts are the quiet ones.
There have certainly been times when nominal yield of 10-12% was the norm (before inflation/taxes). Those days are not these days. And these days earning the market (domestic or global) with minimal cost is available to literally anyone with a checking account and a smart phone (in the USA at least).
if you have the cash, go to switzerland and talk to the people instead of yammering on about how its not possible.
10% YoY on a 10M investment isn't something people talk about because its rather ordinary. but you wont get it at bank of america. commercial banks simply dont know how to produce those returns for their customers. or maybe they do but are more busy with sucking off their stakeholders. i honestly dont care.
Besides, most managers have a fund that has the same companies as an index, just in slightly different proportions. If they pick things that are risky and fail, it would look bad. If they slightly underperform the gains the index has, they look fine.
EDIT: Here's a start for search terms from wikipedia. Personal fiduciary services are often referred to as private trust, private client, private wealth management, or private banking services.
>Some claim that index funds such as vanguard are also not guaranteed to go up as everybody and their dog switches to them vs managed funds.
If the market's going up index funds are going up. Considering their relative performance think of it like this. If half of US stocks were owned by VTI and the rest were owned by, say, 20 actively managed funds then on average, before fees, they will both perform the same because they represent the same basket. The catch is that passive funds have low fees since they're easy to operate and active funds have high fees because they require more work. Also consider that in those 20 active funds there will be some winners and some losers and you'll have no way to know who they are. Setup a simple bogleheads-ish portfolio and go think about other things.
Managed versus index funds works not unlike the 50% rule of bitcoin; If managed funds / individual stocks start regularly performing better, money will flow into them (overpricing) and fees will rise so that index funds are underpriced.
There are no guarantees in future performance; and your index fund is also not diversified from macro economy risk.
It was kind of funny, when researching for the blog, we found countless articles all copied from bloomberg.com, forbes.com, usanews, cbs, msnbc, etc. They all had the same basic story, which barely told anyone anything, and at the end had some sort of popup to "get your financial advice." It was clear the whole things was just an add from the start, just trying to get high in the google rankings.
And, that's pretty much how I feel about every financial adviser. It's a gimmick to collect fees. It doesn't take a genius to make money on the stock market, or invest in a property. The key is to diversify and invest in solid teams / products. The same things Warren Buffet looks for in a company, is literally almost the exact same thing YC looks for in a startup. It's a solid team, good management, vision, and a solid product (preferably with solid sales); and only trade what you know.
That being said, (a bit of a shameless plug here) that's part of the reason I'm writing my own financial adviser (https://projectpiglet.com/ currently being alpha tested). The idea being, use what other people know, to help trade the market.
I fully intend to just charge a flat monthly fee, and provide other services as well, for your own research. Basically, explain the whole process of why you should buy X, then let you make the decision. This (I felt) was much more honest, and although it might cost me more money initial, building trust will eventually benefit long term IMO. Plus, it has the added benefit of (if it ever takes off) optimizing investment towards solid products / teams, as opposed to shady financials as CFA do.
The CFA's I speak to about this, drive me absolutely nuts. They think I should either (a) just look at the companies financials and that's it, or (b) try to talk me down, then try to sell me their services (claiming they can do better). The best part, is when I show them my portfolio -_-
I personally use it to identify how experts feel about a given product, then compare to what the main stream media things + the stock market. One of the most interesting examples of this, was I saw a spike of positive sentiment regarding AMD in early 2016. I then invested some money because the experts felt their new architecture could compete with Intel. That sentiment just continued to build until release, at which point I held a ton of stock.
As for Uber, believe it or not, there actually is a ton of positive sentiment. Even though there is a lot of negative discussion here on HN generally, it targets "experts" i.e. people who appear to discuss uber in depth and/or have insider knowledge. Those people believe uber is doing relatively well (at least in 2016 - the demo data).
Now, it's a bit more mixed when looking at sentiment, with a solid negative net promoter score[1].
[1] http://www.medallia.com/net-promoter-score/
Financial advisers have an even more direct conflict of interest -- your loss is literally their gain.
Doctors' conflicts are probably the least direct and easiest to fix of the three. Financial advisers are hopeless, as far as I'm concerned.
Now, it's 2017, and everyone has the hots for these products. Feels like a bubble. I've always had this possibly irrational feeling that if everyone is recommending something, I should probably look into alternatives. Since I graduated and started working in 2010 all my dollars went into rental real estate, but recently I get jealous of how low-maintenance (mentally) having these shares of index funds is, and I dream about getting qualified dividend income and capital gains.
Can anyone offer a viewpoint on this? Am I being irrational? All my life I've been doing stuff differently from everyone and it's worked out pretty well. Meanwhile had I started buying up these funds I'd probably have the same exact networth as I do now. What other passive options are out there? Dividend aristocrats? I also entertained buying AAPL and Wells Fargo and 3M and putting the rest in a Vanguard small cap index. shrugs
Interest rates (and, consequently, bond yields) have been very low for a number of years now. This has led to a lot of capital being deployed in the stock market instead. So that explains why there is a lot of money which wants to be invested in the stock market right now. This may or may not be tempered by a near-future hike in interest rates.
Vanguard started out in 1975 but it only had one fund - a mutual fund tracking the S&P 500 - for the first decade of its existence. It has added new funds since the crash of 1987. If you look at the market since that time, the dot-com bubble was for tech stocks specifically and the housing bubble didn't have much to do with stocks at all (until after it burst, anyways). There hasn't been demand for the entire stock market since Vanguard started to become popular and well-known. This is why demand for index funds is near an all-time high.
Throwing everything into Vanguard isn't a bad idea. Buying AAPL, WFC, MMM and VBR (or similar) is not a bad idea. Dividend aristocrats isn't a bad idea. You can come close to replicating market performance with a small subsection of the market.
If you have good returns from your rental real estate, keep it. Or rather, keep at least some of it for diversification. I too have a thing for contrarianism but I think that some stock strategy is worth pursuing. The people whose portfolios do best are those who forget about them[0]
[0] http://www.businessinsider.com/forgetful-investors-performed...
So worry about a bubble in the stocks the ETF holds, instead. Unlike ETF-to-stock drift, that isn't something that day traders can fix: only big-time active investors, hedge funds and the like with billions in assets and insane risk tolerance who are seeking market-beating returns, can actually trade enough volume to move the price on big stocks like that, and if big-time passive institutional investors (like masses of individuals armed with ETFs, or pension funds, who are not in it to beat the market) happen to be too irrationally exuberant about stocks, the hedge funds may find it too risky or not profitable enough to trade enough that it corrects the stock price back to what that price should be.
But if you believe in a bubble in those stocks in general, you'll probably have to look beyond big names like AAPL and 3M that are already in your index fund, and you'll be back spending hours a day doing that beat-the-market research.
Also, 10-year T-bills still exist if you're afraid of an equity bubble. Returns are historically bad, but they've always been used as more of a safe haven to stash money during a downturn than anything else. The fed is raising rates again, which will likely end up cooling off the equity market.
Also, would the share price of these passive funds go up due to demand enough to cut significantly into returns? Like a 30% increase in share price just because everyone is jumping on the bandwagon takes a while to make up for. (Am I wrong? How much exuberance would it take to bubble up an ETF's share price significantly?)
Thanks for all the replies, though. I'm looking for both sides of the argument. The businessinsider article supporting the 'bubble view' was a quick read but too light on substance.
You can look up ETF-price-to-asset-price ratios. For example: https://finance.yahoo.com/quote/IVV
Right now the price is listed as $245.48 and the NAV is $243. That's a 1% difference and honestly I wouldn't be surprised if some of that is Yahoo's NAV price estimate being stale because someone has automated the conversion of the price difference into free money using computers. Probably multiple someones.
If most investors move towards ETFs, the number of people performing these valuations / bets will decrease, lowering the quality of the valuations. As a result, the efficiency of the market will be lower, and ETFs will be less viable. Or, put another way, having a large part of the market blindly invested in ETFs opens gaps for speculation. The price of various stocks will be further away from their real value, allowing you to have a more reasonable shot at "beating the market" by guessing the real price better.
I do expect the "alpha" gap between active management and passive index investing to close as robotrading becomes the norm. As alpha drops in a mass-robotrading scenario, trade volume tends to increase as more and different tactics are required to get the same returns. This arms race maintains market liquidity, while index funds provide a safe "baseline" for retail investors.
It's really not a bad system.
https://web.stanford.edu/~wfsharpe/art/active/active.htm
And your ideas of picking 3 stocks + small cap is just that, an active bet that deviates from the market composition. Unless you've gone back on your conclusion that you're not Peter Lynch it's probably not much of a path.
The only risk of rising index fund usage is that the market will cease being efficient. The way I see it is if that starts happening strongly (and it will take a lot more indexing than currently exists) first the market will become more volatile because price discovery will be worse with less people making bets. Then at some point if there are too few active investors indexing will become less viable because it will be easier for active investors to "steal" money from indexers by trading ahead of them and using other advantages over someone that's just buying and holding. This will make the index fund deviate from the index itself and it becomes unusable.
I find these scenarios extremely unlikely because of the "Intelligent Investor" crowd you mention. There is indeed a premium paid to people that bring actual good information to the market. Buffett and others like him still make a lot of money, everyone else gets to ride along the efficient market they create. Buffett by the way recomends index funds.
I'd love a reasonable contrarian view on this though. Most I've seen are just fund managers trying to justify their unjustifiable fees that create no value.
Index funds are a perfect choice for retail investors like yourself. But retail investors are a small percentage of the market; institutional investors make up the bulk of the transaction volume that provides liquidity for the rest of the market. Because they trade stocks millions of times a day, you're never going to beat them at the stock picking game. But their activity does push prices up across the board -- because the assets the institutional investors are trading are the basis of the index funds the retail investors are buying.
So there's not really a bubble in an asset class if retail investors move to index funds, because the retail investor is buying a little bit of everything. If anything, there is a bubble on certain stocks that consumers are familiar with (i.e. AAPL, AMZN, GOOG, FB, etc.) But by buying the index, you're buying both the stocks that are overvalued and the ones that are undervalued.
Now, certain index funds may eventually become out of whack with respect to overall market return: the S&P500 is generally considered to model the overall economy well, but that might not always be the case. That's fine, if you feel one index is becoming overvalued, weight your portfolio into another index. Or if you feel equity in general is overvalued, shift your portfolio into T-bills.
And yeah, for me, the decrease in anxiety is totally worth it. The economy is either doing well, or it's not, but in either case my money is along for the ride.
As for the article, clients need to be responsible and look for chartered advisers who have advanced qualifications. In the UK this would be a FCA recognised Level 6 qualification and Chartered membership of the CII or CISI. In the United States, the Certified Financial Planner (CFP) is broadly comparable to Chartered status in the UK.
Of course you could still get a bad adviser but the chances that someone who paid for, and studied for years, to gain Chartered status would throw their career away by not acting in a client's best interest would be extremely low.
It's one of those laws that make it look like you did something, while doing nothing.
The new government is right to get rid of it - it's pointless and will help nobody.
Now if you made a law that made commissions completely illegal (in finance, insurance, and other similar areas) - that would do something.
Even if you're completely right (I don't believe you are) and the law doesn't deter ANYONE from committing the crime, its second purpose still has value.
Laws against homicide, robbery etc. haven't resulted in 0 homicides and robbery; and yet, they have been used to prosecute people who have committed those crimes. If those laws didn't exist, murder and robbery would not be against the law. We can argue all day if the law has done much to deter those things but it's a fact that the law helps in delivering justice. Without the law, it would be legal to murder someone and face zero legal consequences.
The criteria are nebulous "must pick the best product". The advisor will just say "I believed this one was the best".
How are you going to prove that? On top of that, victims don't typically even know if the advisor was wrong!
So they'll never even take him to court.
Plus it's a civil matter, meaning it costs the clients lots of money to bring a case.
It will not have the effect you describe.
Are there are requirements for review of advisors? That their advice goes to some panel for review? That the panel would have the power to actually arrest them if they disagree? It does not. It's a pointless law.
Or a law that says lawyers must act in the interest of their clients?
Totally useless. Real estate agents only have the sellers interests in mind because the higher the selling price, the more they make.
Real estate is probably the poster child for pointlessness of these laws.
> Or a law that says lawyers must act in the interest of their clients?
This one seems to work fine. The interests of the lawyer are aligned with the clients anyway, so no law is necessary in the first place.
Hmmm...is that always true? What if the seller is asking $1 million for a house, then I approach the agent and say, "My offer is $850,000. If the buyer accepts this offer I will give you, the agent, $50,000". Wouldn't that be a problem?
For example: Negotiations - you would expect your buyers agent to negotiate with the seller for the best (i.e. lowest) price. They'll never do it unless you make them.
It's not all roses on the seller side either: The sellers agent is highly motivated to sell fast (i.e. less work for them). Like you said, 5% lower, 10% faster.
So the sellers agent will tell the seller to list at a lower price than they should, to get a faster sale.
This is not to the benefit of a seller who has time to wait for a good offer.
So, like I said earlier: Real Estate is the poster child for why these laws are worthless.
Just get rid of commissions, and switch to fee-for-service (possibly paid after sale). Each time they show the house they get a fixed fee, things like that.
I assume you meant the seller here.
> I will give you, the agent
You don't pay the agent, the seller does. So you don't have the power to offer a negotiated rate.
Your example just reinforces my point.
A real estate agent only has the seller in mind, even if it's a buyers agent. So never tell a buyers agent anything you would not want the seller to know (for example when negotiating with the seller, never tell your agent what your true upper limit is, or surprise surprise, that's exactly how much you'll pay).
Go ask a buyers agent about "for sale by owner" if you need proof. Since it's for sale by owner, you will have to pay your buyers agent, and they will make you sign all sorts of papers before ever showing you such a house.
Sorry yes, I meant seller
> You don't pay the agent, the seller does. So you don't have the power to offer a negotiated rate.
I don't understand this statement. If there is no law against it then I can offer anyone anything, can't I? And I can give money to anyone I choose.
Are you saying that the seller's agent would always reject my offer?