Ask YC: How do you invest your money for long term growth?
There have been various side investing discussions in various threads. Here is one straight on for usefulness and clarity.
I realize investing is very case by case, so here's a (I hope relevent) case:
--Assume you have a good sum of money to set aside (and not touch) for three decades.
--The main goal with this money is for long term growth.
--Assume it is enough money where dividing it up at the 1% level makes sense.
--Assume it is enough money where your access to desired investments is possible and makes sense.
--Speak in %s so it easily translates, e.g. I would put x% in commodities.
If I'm missing anything to make this a good question, please clarify.
And if your strategy involves more actively assessing things from time to time, please also include what it tells you to do right now.
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[ 2.8 ms ] story [ 109 ms ] threadThe Benefits of Low Correlation is a good summary: http://www.indexuniverse.com/component/content/article/6/322...
And here is a summary of the summary: http://articles.moneycentral.msn.com/RetirementandWills/Reti...
And here is the highlight of the summary of the summary:
His two-asset portfolio -- 50-50 U.S. large- and small-cap stocks -- produced an annualized internal rate of return of 10.74%. But it lost a deadly 30.8% in its worst year. His seven-asset portfolio -- equal portions of U.S. large- and small-cap stocks, international stocks, U.S. intermediate fixed-income investments, cash, REITs and commodities -- provided an 11.25% return. But the worst-year loss was only 10.2%.
I was just wondering, what does the worst one year loss matter if you are investing over 30 years? The annualized rates given were positive, and the better one happened to have a smaller worst year number, but it shouldn't really matter. If a fund returns 13% annualized but had one year where it lost 90% of value (hypothetical here), I'd still choose it for the 13%.
I can see how this would matter if you are actively drawing on the funds... then a high volatility portfolio could be stressful and possibly dangerous, but if you are looking at a 30 year timeline, it doesn't matter.
Of course, it also yields higher returns on average, so it is a win-win really.
The way I look at it, an index fund (like S&P index fund) is merely a layer of abstraction over trading stocks. But instead of putting all your money in one stock, the index fund divies up your money across many different companies and sectors in the same ratio as the target index. This protects you from major fluctuations in the market, so in the long term you essentially grow at the same rate as the index. On the flip side, if one of those companies sees astronomical growth, you won't see the same growth.
[All: This is my understanding of index funds, so if I am wrong, please, do correct me]
There are several good books in the market if you want to go down this route, including the aforementioned "The Intelligent Investor" [must read] and "A random walk down wall street"
Another book that I surprisingly found to be very good was "Mutual funds for dummies" [http://tinyurl.com/5ulpvw][The other book "Personal finance for dummies" by the same author is a good book too. There is another one [http://tinyurl.com/5wso5z] that is short and sweet to read.
Good luck!
PS: Outside of a Roth IRA / 401k rebalancing stocks has some negative tax consequences so it's better to change what your buying than sell off existing stock.
He recommends index funds too, and explains the choice.
The second thing is to separate your investments from your speculations. Your investments targeted for long-term growth should be handled as above - spread them widely and sit on them for a long time. Your speculations should be money you can easily afford to lose and you should do with them whatever you instincts tell you. This can be things like buying stock in a particular company or commodity, trading currencies etc.
Finally, you need an excellent book: http://en.wikipedia.org/wiki/A_Random_Walk_Down_Wall_Street
So in effort to engender some discussion with hard %s, the following is where I am right now (excluding equity in primary residence). The accuracy (beyond decimal point) is certainly irrelevant, but it came right off a spreadsheet and I left it in because it sums to 100.
US Large Cap: 21.87%
US Mid Cap: 8.35%
US Small Cap: 3.03%
Commodities: 8.47%
Real Estate: 6.26%
International Equities: 7.55%
Emerging Market Equities: 4.63%
Cash: 12.71%
Bonds: 27.13%
The Bonds are in a 10 year ladder. The Cash is in FDIC insured money market accounts. All the rest is in index vehicles.
I'm very interested in any feedback and also what your numbers are.
In my case, the bonds and cash are mainly for capital preservation. I set aside an amount for that, and invested the rest in the various asset classes.
The investment paradox is all about leverage. If you have 10+ million then who cares if spending 40 hours a month could give you a 1% better ROI you don't really need the money or the stress. If you have under 1/2 million then a 1% better ROI probably not worth the time it takes to get that extra return. (.01 * 500k) is only 5k which is probably not worth all that much of your time. At in the 1-3 million range your close enough to just retiring that your risk's are probably not worth it.
Note: I am getting around 12.5% ROI/year over the last 5 years and I spend about 8 hours a year looking at my investments why bother with more than that? Well sometimes you want to play with the market which can be fun. EX: After VISA’s IPO they are up 40% how cool is that. Just don't bet the farm and you will probably make some money.
Think about it: if you told Andrew Carnegie you were putting "21.87%" of your money into "US Large Cap," he'd laugh his ass off. He'd ask why you knew, to four figures, what kind of stocks you were investing in, but didn't bother to talk about what they made, who ran them, or how much money they earned. He'd ask why you would prefer buying $100 million of cash flow for $2 billion rather than $1 billion, as an allocation based on market cap would have you do. Carnegie is a great example, because for a while he was purely an investor -- he had a diversified portfolio of stocks in companies whose management he knew personally, and he paid careful attention to their business performance and the dividends they paid, not their market price.
Don't do anything Carnegie, Morgan, or Rockefeller wouldn't recognize as an investment, and you should be okay.
As for indexes vs individual stocks, I don't want to spend that much time worrying about (or tweaking) my investment portfolio.
So, for you, it depends on the stocks. But if you work backwards, where does that come out on an asset class basis? Are you buying no international equities? No commodities? No REITs? What are the actual %s?
Are you saying that you hold 100% of your assets in gold and land?
"Cash flow from the business" was specifically excluded from the question, i.e. income does not enter into it.
Also, for the purposes of the question, assume you have enough money where education expenditures don't impact this portion.
Basically, your goal should be to have a portfolio you don't have to follow, of companies that will tend to grow their earnings faster than their capital and thus throw off free cash for shareholders. If you can get these at a fair price, your net worth should grow nicely.
However, this is difficult to articulate and extremely hard advice to follow. Perhaps it would be better to put most of your money in an index fund, and do this with the rest of your money long enough to see if it works for you. Sadly, this kind of strategy should be judged over a longer time period (like five years). So, index fund or take your chances.
My top 3 picks a few months ago when I last looked at the market were GOOG, AAPL, TD.
I'm sure this is frustratingly vague.
If you start to pay attention to business -- not in the sense of reading the WSJ, but just looking at how consumers behave -- you'll eventually detect some companies that are either a) able to ask for a higher price than anybody else, or b) able to make acceptable stuff more cheaply than anybody else. About 99% of businesses are second-best or less at one of these things, and those businesses are fundamentally unable to grow without investing equivalent capital. The other 1% can usually have above-average growth without having to reinvest all of their earnings, or have steady earnings that are high compared to invested capital but that can't be easily grown. An example of the former would be a software company or a drug company -- it costs a lot to create a product, but the cost of selling it to a million people is not that much more than the cost of selling it to ten thousand. An example of the latter would be the gravel and sand business -- nobody is going to import ten tons of the stuff from overseas, or even across state lines, so it's basically a business made of hundreds of tiny local monopolies. Some of these are exceedingly well-managed; they pay dividends when their stock is high, and buy it back when their stock is low.
Had you been doing this over the last three years, however, the results would not have been pretty.
Invest 100% of your money in BRICs (Brazil, Russia, India, China). They have large, youthful populations with better prospects than America, Europe, or China.
I'm afraid that I don't know of any small-cap/value, BRIC funds. If anyone knows of any, I'd appreciate a pointer. Thanks.
http://news.ycombinator.com/item?id=178443
That seems reasonable for me now, as someone who's young and employed. My future earnings ("human capital") are likely to be bigger than my current financial assets (because I'm young) and fairly steady and bond-like. As I get older, or if I become self-employed, I would move more of my financial wealth into safer assets (eg long-dated index-linked bonds).
http://www.marketwatch.com/news/story/lazy-portfolios-annual...
Basically, you buy indexes across asset classes so you have diversification within each asset class as well as asset diversification.
It's easy, cheap, and works. It's just not "sexy"
-Diversification: Commodities, property, and bonds often do well when stocks fall. Economic shocks can happen that are localized to a single country or region. It makes sense to put your eggs in several different baskets, both by asset type and by geography.
-Long-term inexorable trends: The world's population is getting older. Well-run but less-developed economies will tend to grow faster than well-established ones. Invest in "iceberg" trends, those that are slow-moving, easy to predict, and hard to stop. I recommend medical ETFs and emerging market ETFs
Of course, throw in some traditional investments while you're at it. Don't get cocky or daring and don't let short term variations spook you. Trading too much can knock a significant percentage off of your returns.
This podcast is an excellent intro to index funds and how fees decimate returns (also a fantastic entrepreneurial story): http://www.venturevoice.com/2006/02/vv_show_28_john_bogle_of...
no-load, low-fee index funds, basically.
I try to invest in "myself." Rather than supporting those producing, innovating, and providing value to the economy, I try to be a producer, innovator, and value provider myself.
This attitude works well in your 20s, at least, but might not seem so alluring when closer to retirement.
It is not uncommon, however, to see or hear about situations where someone has started a business with a reasonably small amount of money (<$50k) and even if they're not worth mega-millions, their business can grow to the point where it provides the owner with a high income and can effectively manage itself (if you get the right people). This technique makes you a producer rather than an investor in the long run.
In a nutshell: buy the cheapest unmanaged index funds you can find. Come up with an allocation you're comfortable with (e.g., 50% large cap, 20% mid-cap, 20% small-cap, 10% international equity). Reallocate once a year so that your investments still follow the same rough percentages; that way you won't have more risk exposure to any particular asset class just because it happened to have done well or poorly in any given year. That's it. You will not outperform the market by picking your own investments or playing hedging games with derivatives, and, over the medium-to-long term, neither will any fund manager. Since you're in this for the long term, have fun in life and don't bother checking your balances except when you get your quarterly statements.
The ratios will tip towards the conservative side as I get older.
Back when I had a little money to play with, I was following a couple of them (Penny Investor and another), and was able to gain 40% in a year (someone else was doing the actual work for me). But that's just anecdotal evidence.
I also like their whole philosophy; they've had several NYT #1 bestsellers, 'cause it's both commonsensical and also exceedingly contrarian at the same time. (Addison Wiggins and Bill Bonner.)
spread the money out, no more than 20% in any single fund unless the fund itself is diverse.
sit on it for a long time.
thats it.
35% domestic 500 index
15% foreign developed markets
20% foreign developing markets
10% REITs
10% intermediate-term bonds
10% inflation-protected bonds