Ask HN: I have $450K cash, what should I do to maximize my return?
I recently came into some money and now I have $450K in cash burning a hole in my pocket.
I have about $50K in an index fund, own land worth $150K (paid off) and another $200K in industrial real estate investments.
Given this spread, what should I do with the cash? I'm not comfortable investing the entirety into an index fund, given the current socio-political climate.
I'm located in the Midwest, USA.
508 comments
[ 310 ms ] story [ 2486 ms ] threadIf you can’t get that with passive investments over the next 30 years, the banks will have bigger problems than your loan.
Despite your risk aversion, consider putting some in a robo advisor (mix of bonds, index, foreign index, etc), to hedge against a spike in inflation, or a crash of just the US economy. The dollar has been falling recently. The robo will auto rebalance as the economic climate shifts.
As for the cash holding, you can at least get 0.35% at Wealthfront in a cash account. (Does anyone know of a higher return cash account?)
Bond yields are slightly higher, but not much these days.
I’m in a similar position, and am also betting on a crash soon.
I have been putting 2-5% into a robo every few weeks (when the market flinches). It’s been a bad strategy (I should have gone all in a month or so ago), but it’s better than 100% cash. If the market hasn’t crashed in a year or so, I’ll be all in.
I bet against the market for most of the Obama administration (because the bailout / zero interest rates didn’t seem sustainable). Clearly, that was a mistake.
You can’t beat the fed, and right now, the fed is printing unlimited money to prop up ETFs and issuers of junk bonds. Also, investors are holding record amounts of cash, and are slowly putting it back into the market in seek of yields.
Good luck.
Telling people to increase their indebtedness to buy index funds right now is pretty dubious advice.
Surely, there is some percentage where it makes sense. If the loan percentage were -1%, it would obviously be a good idea, right?
Assuming 2% inflation, sitting in cash is like taking out a loan you don’t need out at ~2%, and stuffing the money in a mattress. That’s clearly a bad idea, right?
Current rates are 3%, and the market returns about 7% in the long term. (4-5% inflation-adjusted).
Historically, the only way to get burned reinvesting a loan at these rates was buying at the peak prior to the Great Depression. The market will go up or down over the next year, so averaging the purchase over that time eliminates the timing risk.
I can’t come up with a more risk averse strategy than this that also has positive real returns in expectation. Any suggestions?
(Edit: minor clarification)
As far as OP is concerned, there's not much point into cashing everything if the timescale is greater than 5+ years for needing any of it. Trying to time the market is just a fools game, consistent investments in the indexes always works out in your favor long term.
Regarding interest rates, .35% is pretty poor, just off the top of my head Marcus is over 1%.
Stock market can keep going up due to inflation even if everything is crap and politically manipulated.
Gold is a real indicator and crypto is icing on a cake
With inflation you can lose much more.
It is a form of timing the market. The idea is to buy at about the average price over some time period to avoid getting bitten by volatility.
For reasons not involving investments, I had to have a large cash position until we were well into the recovery from the last crash.
Buying index funds at all time highs during the biggest economic downturn of our lifetimes is a bit much to stomach, so I’m spreading the purchase out over time.
All of that complexity supposedly beats simple manual approaches by a percentage point or two (after tax).
Also, most robos are idiot proof.
In addition when you park your money there you can easily invest it at any time. In general going straight up Vanguard with minimal oversight is much better deal than Wealthfront.
2. Buy and hold Bitcoin for a while. (longer is better).
Edit: Unless you bought 11k+ and sold below that point, there's no chance you lost on Bitcoin.
Bitcoin peaked at 20k in December of 2017, and dropped to $3100 exactly a year later. Seems like anyone investing at the top, and there were LOTS of inexperienced mom and pops doing so, are down at minimum 50%. Without any type of dividends or stock in a real company.
https://www.tradingview.com/x/73konLcD/
It’s the risk and volatility that separate investment from gambling, not the return. Bitcoin is firmly in the latter territory.
I would never recommend someone invest in bitcoin unless they've done a lot of research, are ready to hold through drops of 50% or more, and are prepared to hold for many years. Investors who haven't done the due diligence could be tempted to sell after a huge drop, and it's probably not for most people.
That being said, to outsiders it could be argued that bitcoin is at least a decent asymmetrical bet, and worth throwing a couple percent at. But only as much as someone is willing to lose.
What are possible answers to this question you're looking for?
Also "minimize risk" is not consistent with "maximize return" so that's not even a valid answer. Someone might say "I wanna put it all on Black", and someone else might be saving for their child. Lots of really varied answers are possible.
Your goal could be to live on an island mansion in 20 years.
The expected answer is mainly about what risk you are able to tolerate, i.e. how soon you will need the money back again.
- how many years until you plan to retire?
- how much do you need in retirement? How much do you expect to receive from social security/other income sources?
- do you have/are you planning to have kids? Are you going to pay for college? If yes, how much might that cost?
- are you expecting any other big expenses in the future? e.g. wedding, down payment on a house
- are you planning to take a sabbatical at any point? If yes, for how long and how much do you expect to spend?
I firmly believe that only when you are clear on your goal and having invested in oneself and having thought of everything else should you get to the problem of whether a particular etf is better or whatever.
I am in a nearly identical situation, within a few percent of your dollar amount.
Ive been looking for a while for a partner for a lifestyle business, something along the lines of a maker space but open to a wide variety of ideas, most of them somehow variations on buying a large commercial space cash and using the free rent to build a business that creates community.
Me email is in my profile, feel free to get in touch, if you'd be interested in brainstorming.
https://www.reddit.com/r/personalfinance/wiki/windfall
Helps that the first sublink in there is bogleheads :)
Residency comes with this.
You may use both if things in USA gets from bad to worse - from political, economical, financial and social aspects.
Panamá gets stable revenue from Panama Canal plus some natural resources and operates in US dollars in eastern timezone.
As a plan B it’s not exactly that bad.
For anyone else it is a recipe for disaster (as in being taken advantage of many times over)
So I’m walking my talk.
But couple the money printing with record low interest rates (and negative interest rates), this creates a special situation where gold (and other hard currency like bitcoin) outperforms. With a negative real rate on bonds, you will lose inflation adjusted purchasing power in bonds even if you come out positive. There are not a lot of great options right now.
Maybe bear ETFs or put options against stocks that have performed well over the year if you're really looking to drop money into something, but that's pretty risky in itself.
Also, be cautious if thinking about any crypto investments in the next month or so. Short term is way over bought for BTC, but towards end of fall into winter when the price corrects a bit could be a good time to invest a conservative amount.
Just holding and waiting out the coming storm is the safest way to go at the moment imo
I would just put first everything to an index fund, then from there on try to find more interesting investing opportunities.
— Peter Lynch
The right comparison is to what would have been lost in corrections but for the preparations.
I mean, if you have x losses in preparation to achieve y losses in actual corrections, when you would otherwise have z losses in corrections for z > x+y, that's a win.
[1]https://www.fool.com/investing/2019/04/11/what-happens-when-...
Basically, between 1998 and 2018, if you were out of the market during the best 10 days, you cut your return in half. And the more days out, the worse it gets.
Of course, this is artificial in the sense that you'd be pulling out one day, then back in 2 days later and doing it again and again, but the point stands, you can miss a week in the market and it can have a huge impact on returns.
Over the the long term there is not really anything better to do with it than equities: the Great Depression, World War 2, gold standard retirement, 1980s inflation, etc. Even if you only invested in the peaks, you'd still do quite well over the decades:
* https://awealthofcommonsense.com/2014/02/worlds-worst-market...
Jumping in with a lump sum amount can be quite daunting, so what you can do instead is put in (say) 40K every month over the course of a year or so:
* https://ofdollarsanddata.com/even-god-couldnt-beat-dollar-co...
Certainly better than sitting in cash. If you're worried about volatility, then also invest in some bonds funds: 60% stocks, 40% bonds? If you want more growth, 70/30 or 80/20 maybe.
And while the S&P 500 gets a lot of the press, a total market fund is what Vanguard is steering their own employees to:
* https://www.marketwatch.com/story/bogle-explains-why-vanguar...
See also:
* https://www.pwlcapital.com/should-you-invest-in-the-sp-500-i...
Some people upvote or downvote because they agree or disagree. They view it as a "vote" for the opinion.
Others upvote or downvote because they thing the argument is strong or weak, or maybe because someone said something nice and positive to another person or someone said something mean or hostile to another person.
I strongly favor the second approach.
One of the early slurs was that index funds were communism (pretty daft, but probably effective in the US). The latest is this scaremongering "what if all investment were into index funds" (answered several times in this thread).
From the perspective of index fund advocates, unsophisticated investors are systematically getting ripped off and the daft propaganda only adds to the offense.
This is probably why you're picking up an aggressive preachy vibe from advocates.
The empirical data is however unambiguous and there is now a lot of it.
Personally, I think that as more people put their money into index funds, active funds may look more attractive as they can potentially exploit market misprices quicker than passive funds can, but that's just me.
Probably an interesting number itself knowing what the fractional amount of money flowing through Vanguard is as a proportion of the total.
You are basically investing in the idea that:
‘On average, these companies are run by people who want the company to succeed, and as long as the population of the world grows, and the middle class grows, this will make money’
Everyone could invest in index funds, and this would still be true, because if the stock price gets too low, it would be rational for the company to purchase its own stock on the cheap which would set the price floor.
A smart individual retail investor is statistically unlikely to “beat” those people, and should buy index funds.
It's not a zero sum game necessarily. A stock picker approach that you have as a retail investor that many trading shops do not have is this: time. You can make your bet, and if it fails in the short term you can hold onto the stock long term, unless the company is going bankrupt (which hasn't been a common occurrence up to now, given the overall number of stock symbols). Traders are individuals and groups with books, quarterly numbers to meet and yearly returns to care about. They'll beat you if you're a day trader, sure, but I think it's a false dichotomy to say, you're either a) a day trader or b) a boglehead.
It is, actually. William F. Sharpe laid it out in the 1991 paper "The Arithmetic of Active Management":
* https://web.stanford.edu/~wfsharpe/art/active/active.htm
* https://www.jstor.org/stable/4479386?seq=1
Sharpe won the 1990 Economics Nobel for other work:
* https://en.wikipedia.org/wiki/William_F._Sharpe
The more active a trader is, over a longer time frame, the more likely they are to underperform the market. This has been shown through SPIVA over 15+ years, at least in the US and Canada:
* https://www.tma-invest.com/spiva-data-reveals-15-years-of-ac...
* https://www.ifa.com/articles/despite_brief_reprieve_2018_spi...
As of the end of 2019, internationally active managers didn't do too well either:
* https://dividendstrategy.ca/what-is-spiva/
This has been known to varying degrees since at least the 1970s:
* https://en.wikipedia.org/wiki/A_Random_Walk_Down_Wall_Street
The question is how high the share of passive investment can go before we see misallocation.
Someone could make their own "index fund" with 10% of it allocated to FAANG, maybe 20% of it in the largest tech names overall, and then a distribution of the largest market cap names, and lo and behold, one has an s&p 500 "index fund". Tesla's about to be added to the S&P 500. There are strong opinions on both sides - it's going up, no, it's going down. You don't have much of a choice if you're a Boglehead who bought into the S&P 500, you're just in it for the ride.
There are index funds of every publicly traded company in the US:
* https://en.wikipedia.org/wiki/Russell_3000_Index
Vanguard themselves have changed things so that employees no longer have the option of choosing the S&P 500 fund in their own retirement accounts, but rather the Total Market fund:
* https://www.marketwatch.com/story/vanguard-thinks-its-own-em...
* https://www.marketwatch.com/story/bogle-explains-why-vanguar...
> You don't have much of a choice if you're a Boglehead who bought into the S&P 500, you're just in it for the ride.
Anyone investing in equities is just in it for the ride, as it is impossible to predict what will happen:
* https://en.wikipedia.org/wiki/A_Random_Walk_Down_Wall_Street
An individual's best bet, long term: buy as much of 'The Market' as you can. The greater, the better. The S&P 500 is simply a smaller portion of the market, and while not bad, may not be ideal:
* https://www.pwlcapital.com/should-you-invest-in-the-sp-500-i...
So people like Jim Simons are merely the luckiest people alive?
The average person earns the average market return, less fees; that's a tautology. Unless you have some reason to believe you aren't average, most people are better off following your advice. It's what I do, personally.
But the idea that no one is winning at this game flies in the face of a lot of evidence.
No one reasonable, not even Fama and French who came up with the Efficient Market Hypothesis, claim that the market is 100% efficient.
And given that no one knows anything about Jim Simon's Medallion Fund, we actually have no idea how successful they are. But given the quantities and/or trading volumes possibly involved, they don't have to be right very often.
In a perfectly efficient market, it's 50/50 whether you'll get the better end of the deal. Now think of a casino: for many games the house's edge is only 1.5% (e.g. blackjack, baccarat, three-card poker).
* https://www.gambling.com/ca/online-casinos/strategy/10-casin...
* https://wizardofodds.com/gambling/house-edge/
But that's still enough for a casino to make make money.
It may be the Simons et co have just an edge of a few percent points, but they make up their profit on volume.
> But the idea that no one is winning at this game flies in the face of a lot of evidence.
There are plenty of people that are winning. It's just the people that win one year rarely win a few years in a row (never mind 10+):
* https://www.tma-invest.com/spiva-data-reveals-15-years-of-ac...
* https://dividendstrategy.ca/what-is-spiva/
But of course, a properly diversified index fund portfolio contains much more than just the S&P500. Mine has some thousand global stocks, on the order of 5000.
SPY is hardly diversified. A far better and pretty easy portfolio consists of a global financial assets allocation: US stocks and bonds, developed world ex-US stocks and bonds, emerging markets stocks and bonds, real estate and commodities. 10-12 ETFs will do it.
I recommend you read up on the following (from me elsewhere on this topic):
> So what would happen if the majority of investors started to buy the market and stopped trying to beat the market?
> Mispricings would start to develop regularly, and the people that had continued to try and pick stocks would be able to profit. The profits that these people made would attract other people, and eventually everyone would return to chasing the dream of beating the market. Behavioral finance plays a huge role in market efficiency; nobody wants to accept being average by taking what the market gives them when there are hot shot managers that promise to consistently beat their benchmark. There is a lot more emotional attraction to investing with the guy, or to being the guy that can beat the market.
* https://www.pwlcapital.com/the-grosman-stiglitz-paradox/
* https://en.wikipedia.org/wiki/Grossman-Stiglitz_Paradox
The concern that passive/index investing will ruin The Market is just not something we need to worry about.
Jack Bogle made the claim that even if 90% of the market went passive, the remaining 10% would probably be enough to keep things going:
* https://www.forbes.com/sites/greatspeculations/2019/02/12/a-...
* https://www.ft.com/content/4594f554-ba1a-11e7-9bfb-4a9c83ffa...
I'm less worried about the issue of market and price efficiencies, and more about shareholder votes and company management decisions. How do passive, potentially 'non-opinionated' index funds vote on various measures?
Some of your links are for active fund managers versus passive fund managers. Again, a red herring. No, there's not JUST a choice between bogleheading and day trading, and none of us here are active fund managers? Are fund managers (who have clients) compared to the likes of you and me ?
Some individual stocks you buy for the long term, others you trade short term. And sometimes, you can long a stock but only trade a percentage of the holding. You can keep it for a day or for years.
Yes, it is the same:
* https://awealthofcommonsense.com/2020/07/the-nifty-fifty-and...
* https://theirrelevantinvestor.com/2018/11/26/the-nifty-fifty...
* https://en.wikipedia.org/wiki/Nifty_Fifty
* https://etfdb.com/history-of-the-s-and-p-500/
* https://www.qad.com/blog/2019/10/sp-500-companies-over-time
That's the definition of the S&P 500: the largest five hundred companies publicly traded companies.
> with money printing,
I do not think this actually does what you thinks it does:
* https://www.youtube.com/watch?v=K3lP3BhvnSo
* https://rationalreminder.ca/podcast/109
> […] Talk shows about stocks and news algorithms pumping stocks to the masses?
Please see the 1990s and "irrational exuberance". I live in Canada: ask anyone here above a certain age (40s) about Nortel and Bre-X.
> Are fund managers (who have clients) compared to the likes of you and me ?
Fund managers have more resources than you and me, and thus probably have better information to base decisions on. Unless, of course, you are using satellite imagery in your investing workflow:
> Currie’s prediction proved correct. As word spread that satellite images were a reliable predictor of corporate profits, a range of investment funds began buying retail-traffic data from RS Metrics. In the following years, the company expanded, tracking not just parked cars but solar-panel installations, lumber inventory at sawmills, and the mining of metals worldwide.
* https://www.theatlantic.com/magazine/archive/2019/05/stock-v...
What "index funds" are you referring to? The S&P 500? Dow Jones? NASDAQ 100?
If you purchase a Russell 3000 index fund you are purchasing a piece in every publicly traded company in the US:
* https://en.wikipedia.org/wiki/Russell_3000_Index
Any 'pricing irregularities' are discovered, then they will be pounced on any few remaining active investors. I recommend you read up on the following:
> So what would happen if the majority of investors started to buy the market and stopped trying to beat the market?
> Mispricings would start to develop regularly, and the people that had continued to try and pick stocks would be able to profit. The profits that these people made would attract other people, and eventually everyone would return to chasing the dream of beating the market. Behavioral finance plays a huge role in market efficiency; nobody wants to accept being average by taking what the market gives them when there are hot shot managers that promise to consistently beat their benchmark. There is a lot more emotional attraction to investing with the guy, or to being the guy that can beat the market.
* https://www.pwlcapital.com/the-grosman-stiglitz-paradox/
* https://en.wikipedia.org/wiki/Grossman-Stiglitz_Paradox
The reason that I'm personally an index fund skeptic is that I like to understand what I'm invested in. If you look through the S&P 500 members, there's dozens to hundreds of companies basically no one's ever heard of, and companies that I personally don't see a big future in. If index funds didn't exist, why would I take $100 of Fifth Third Bancorp or TechnipFMC when I could get $100 of Apple or Slack instead? The former is what you get when you invest in the S&P, while the latter are products I use everyday, and I feel that I understand how they make money.
If you hang around investing subreddits long enough, it starts to feel like everyone's parroting the same 5 sentences about expense ratios and diversification, with no analysis or critical thought put into what the actual investments are.
[1] https://youtu.be/x-rJciYZmi0
Because you don't know which one will become the next Apple or Slack and will invest before they are valued as the next Apple or Slack benefiting from all their growth. Some of them will die, but the effect on the overall holdings will be small given their small size.
Something is true with index funds that was less true historically, which is the concentration of a few large companies in the largest indexes - as in, the amount of percentage of capital they have. Fact, FAANG make up 10% of the s&p 500 index, tech makes up 20+ %. It's NOT at all averaged out in the way the Bogleheads might think it is. Is it a "bet on the economy," or is it a bet on the stocks of big tech?
Which brings me to something else that appears to have changed: big tech stocks are viewed as a safe haven, increasingly. With the overall economy being in a shambles combined with a virtual work world, this is even more important.
Put those two things together, and the S&P 500 index isn't diversified.
Edit: we're at the top of the cycle right now, or so it seems. We're all waiting for the other shoe to drop.
But it's worse. What happens if you stick everything in there, you need the money in 5 or 10 years and you just hit the bad part of the cycle (look what happened in March).
I'm doing the opposite of what the Bogleheads do, even though I'm extremely familiar with this extremely conservative approach. What's the fun in risking my capital with some index fund that's tied to concentrated entities like that, when I can risk a small percentage of my capital on highly volatile stocks, and make a similar return? You can repeatedly swing trade stocks like SPCE and some of the biopharma stocks and make money over and over again with a tiny percentage of your capital.
I'm more interested in understanding how the bond market will work now in this strange new reality. Are bonds not a safe haven place to park cash?
Edit: This ignores dividend reinvestment as ummonk noted. https://www.officialdata.org/us/stocks/s-p-500/1900 suggests 1929 - 1944 was probably the longest time.
We are in unprecedented times. Highest debt, lowest bond yields, crazy P/Es, historic GDP drop (worst since 1929, or since WW2 for some). We don't yet know how inflation/deflation will play out. CPI is useless. A lot "inflation" is going into real estate / land and the stock market.
I don't think past wisdom applies anymore. If you put money into most products (including most index funds) on the stock market today you are in fact stock-picking / gambling.
Also tech companies are partially up for a good reason. Small caps have lost a lot earnings power. https://twitter.com/NorthmanTrader/status/128335311697343283... Much much more than tech stocks. E.g. tech stocks were almost the only ones doing any buybacks last quarter. Stay-at-home companies, solid/value companies, and cheap stocks is where hedgefunds seem to move to. But yes, some valuations are bonkers. EV stocks, CVNA, W, ...
Personally, I've been late to the party, and needed to learn on the fly, BUT: I now own a portion of gold and royalty and streaming companies (mining exposure with less risk of badly run mining companies. They lend money to miners in return for metal. I.e. miners don't need to worry about the price of the metal.) Mind that GLD and SLV are not fully backed by gold and silver. There is significant counter-party risk (E.g. if the bank goes bankrupt you might not receive anything). They also haven't really been audited, and JP Morgan employees have been charged for price manipulation of metals.
I reduced my bond exposure, and I will probably soon move into gov bonds exclusively. I don't want to gamble on MBSs, CLOs, corporate bonds being bailed out. (The Fed and ECB's policies skew the bond market. Ratings and yields are (increasingly) not great indicators of company health). There is little room for lower yields. Real yields (bond yield - inflation) will turn negative or are already. When rates eventually will be hiked, both stocks and bonds will fall. (See 2019 / December 2019)
I started stock picking. Mainly value, but really random stuff I find on Youtube investment channels and Reddit (Of course I read up on them, listen to financial calls. Balance sheet. Cash flow. Exposure to potential problems.). I sleep better at night with a cheaper stock that has less downside, even if it isn't riding the current trend/bubble.
Other than that I'd keep a good amount of cash for potential opportunities. In the current climate, stocks could fall any week, real estate will likely be on sale (depending on how many rich people will try scoop it up at the same time), or perhaps you can buy a share in a local business.
It baffles me how this Bogleheads philosophy has taken tech people. People can't wrap their heads around the idea that gold goes up in times of trouble, or that work from home tech is likely to go up, or that oil is likely to go down, or whatever other myriad bets one can make.
My approach is to maintain almost all cash and to trade a small percentage of the cash on extremely volatile stocks, preparing to hold long-term if necessary. I rarely invest in fully scammy pump and dumps (but lately pharma has paid off, for obvious reasons).
I use the news cycle and try to anticipate what others are doing. You don't need to sell at the top and buy at the bottom to make money.
In contrast, I'm looking at my work 401K which is managed with those mathemetically unstoppable index funds. It's down 2 percent while I'm up 30.
Now what am I to do with the cash portion of my investment. I'm leaning in bond funds (because bond picking is something I have no idea about).
Because while I might be lucky enough to trounce the market right now, that doesn't mean I'll trust anyone to pick the right companies. It's safer to go for average returns than to risk the market trouncing you, especially with the vast majority of your wealth. And no, this etoro account is not my main investment account.
[0] https://www.etoro.com/people/neversell/stats
Looks like we "picked stocks" by picking the indexes here, too?
I just don't understand the insistence on indexes. We're afraid of picking stocks that go bankrupt?
We work in tech, and a lot of us are science nerds. Surely we can pick names based on how we think those technologies are likely to be successful. We have access to a lot more information than people did in the 1990's with this Boglehead stuff.
>Surely we can pick names based on how we think those technologies are likely to be successful.
Time and time again, especially now, "fundamentals" has proven to be a poor predictor, at least in the short term. You have companies with P/E ratios of 20-30 right now.
It's not just about the underlying product, perception and all kinds of human effects also matter, which makes it a perilous place to be.
Throw your money in a big bucket and over 20-30 years, you'll be up. That's the point.
I'm not that active trading, maybe I perform an action once every one to two weeks. I spend almost all my time just trying to absorb information.
Honestly, with all my questioning of index funds and contrarianism in comments above, I am slightly skeptical that the average person should have this much access to these types of tools. I could instantly blow away all my money and be left in debt (given they allow margin).
Which is to say, exactly like has been for the last several decades:
* https://awealthofcommonsense.com/2020/07/the-nifty-fifty-and...
* https://theirrelevantinvestor.com/2018/11/26/the-nifty-fifty...
* https://en.wikipedia.org/wiki/Nifty_Fifty
* https://etfdb.com/history-of-the-s-and-p-500/
* https://www.qad.com/blog/2019/10/sp-500-companies-over-time
That's the definition of the S&P 500: the largest five hundred companies publicly traded companies.
> Fact, FAANG make up 10% of the s&p 500 index, tech makes up 20+ %. It's NOT at all averaged out in the way the Bogleheads might think it is.
Why do you fixate on the S&P 500? If you want something more diversified, you can own a piece of all ~3000 publicly traded companies in the US:
* https://en.wikipedia.org/wiki/Russell_3000_Index
John Bogle and Vanguard themselves recognize(d) this:
* https://www.marketwatch.com/story/vanguard-thinks-its-own-em...
* https://www.marketwatch.com/story/bogle-explains-why-vanguar...
And many Bogleheads also examine the performance of many different types of indexes:
* https://www.bogleheads.org/wiki/US_total_market_index_return...
> Put those two things together, and the S&P 500 index isn't diversified.
You're not wrong, but trying to explain to the layman about all this technical minutiae will cause their eyes to glaze over. So for the average Joe the Plumber the easiest message to get across is "invest in 'index fund' (=S&P 500)". Once you get people to actually save on a regular/monthly basis in low-fee funds, you're >80% of the way to a somewhat successful retirement strategy.
If you want to argue about &P 500 vs 400 vs 600 vs 1500 vs Russell 3000: that's for later once people actually have something going into a retirement account.
Correct. There are smart people doing research out there right now demonstrating that "passive" isn't really passive, and that people regularly buying into indices at any price is skewing the market.
No one is clear on what the ramifications of this are, but as the old adage says, "past performance no guarantee of future success". The same goes for buying the SPY and forgetting about it.
And at what price should people be investing in the market? Sitting on the side in cash, waiting for the dips and crashes to occur, will give you mediocre results:
* https://ofdollarsanddata.com/even-god-couldnt-beat-dollar-co...
Further, trying to miss the worst days on market down turns often means missing the days with the best returns:
* https://theirrelevantinvestor.com/2019/02/08/miss-the-worst-...
For most people, most of the time, the best thing they can do is just chug along putting a little bit of money away every month. Put in what you can, but a good goal (if you can afford it) is to put away at least 5% of your income (and maybe up to 10%).
> The same goes for buying the SPY and forgetting about it.
You're not wrong, but: what's the alternative? Unless you can show something that's demonstratively better than a low-fee S&P 500 or Russell 3000 index fund (perhaps tempered with some bonds for risk/volatility management), bemoaning the situation is not very productive.
For instance, in 2020, the massive stimulus by the Fed almost certainly will create a rising stock market. It deviates of course in the short term 6-18 months, few years etc.. In short, if you go that route, buy on the 1-2 year dips.
Invest would certainly be the way to go, although if you have a certain talent.. For instance, house flipping or starting a business. You can get better than the 5% or whatever you get after inflation in stocks. If you're really good at what you do, your odds of getting a better return go up.
Ben Felix, a portfolio manager at PWL Capital in Canada, just released a video explaining why this is completely wrong:
* https://www.youtube.com/watch?v=K3lP3BhvnSo
> Quantitative easing is a monetary policy whereby a central bank buys government bonds or other financial assets in order to inject money into the economy to expand economic activity. But what exactly does that mean? In today’s episode, Benjamin and Cameron are going to address this topic, avoiding highly politicized aspects, like whether or not central banks should be involved in the economy in the first place, and focusing purely on the operational perspective of quantitative easing – what is it, how it works, and what the intended transmission mechanisms are.
* https://rationalreminder.ca/podcast/109
> For instance, house flipping or starting a business. You can get better than the 5% or whatever you get after inflation in stocks. If you're really good at what you do, your odds of getting a better return go up.
That's nice if you want a different/second career or something. But there are those of us who are happy with our careers/jobs, and simply want something to do with our retirement savings… ain't nobody got time for that.
Of course the half-life on any new business is quite abysmal, so I'm not crazy/ambitious enough to take on that kind of risk.
I'd also throw out the assumption that the Fed will reduce the balance sheet eventually. They tried and failed in 2019. It's not going to happen. They are in fact "spending" (through the Treasury and their bond-buying programs), even though Powell likes to say that the Fed doesn't have spending power, but has lending powers.
That's because COVID-19 happened. :)
The Fed is buying up bonds: at some point they will mature and the US government will have to either (a) increases taxes to come up with the money to repay them (thus taking money out of circulation via the IRS), or (b) roll the debt forward by issuing new debt to pay the old debt.
Given that a few years ago the UK rolled forward some debt from the South Sea Bubble, Napoleonic Wars, WW1, etc, rolling forward debt is not as big a deal as most people think:
* https://www.theguardian.com/business/blog/2014/oct/31/paying...
* https://www.nytimes.com/2014/12/28/world/that-debt-from-1720...
> Quantitative easing is a monetary policy whereby a central bank buys government bonds or other financial assets in order to inject money into the economy to expand economic activity
You implied this would be wrong, but it looks exactly right. Nobody is confused about how this works, which is why you response is just puzzling.
> (b) roll the debt forward by issuing new debt to pay the old debt.
There's no question as to what happens here (a) vs (b) false choice. It's printed money that is accounted for as new debt, as per the original assertion.
This is not true for a 10 years period though
https://www.vizlit.com/finance/2020/07/01/sp-performance.htm...
You might to add that even though in the past economic growth has always been the case, it doesn't mean it will always be the case, especially now that the energy consumption more or less reached a peak
That's for the S&P 500. How would have a portfolio using (say) the Russell 3000 have done? How about adding some international/EM component? What about a portfolio wish some bonds to control for volatility and allow for rebalancing?
That is to say: does diversification help?
It was true in this ten-year period (2000-2009) if you rebalanced between VFINX (S&P) and VBMFX (bonds):
* https://www.forbes.com/sites/investor/2010/12/17/the-lost-de...
$PUTW is an ETF that implements the strategy and it has not done well in recent years.
If you would have otherwise bought 100 shares of SPY on Friday, it would cost you $326.52 (x100, so $32650). If you sell 1 put option expiring 8/31 "at the money" (i.e. a $326P) you will receive a net credit of $7.20 per share today ($720).
That money is yours at the moment you sell the put option, so if SPY closes at or above $326 on 8/31 (excluding early expiry), you've made $720 on $32600, or a one-month gain of 2.2%. That is an annualized return on your staked capital of 29%. You can then keep making an annualized 29% return every month until you get assigned (assuming IV rank remains stable).
Alternatively, if SPY closes below $326, you've actually bought it for a $7.72 per share discount ($7.20 + $0.56), or $318.80 over what it's trading at right now. As you plan to buy and hold for the long run, you got a much better entry price than you would have with a market order.
If you're planning to buy and hold today, it's hard to lose with selling a put to open. You either collect a nice premium, or you buy the shares at a discount. If your goal is to own the shares long term, you're feeling good either way. Make sense?
What you could theoretically miss out on is a big run up from the moment you bought the shares in excess of the premium.
You can get more aggressive too, and sell puts you don't think you'll get assigned on, at the highest price you'd be willing to pay for SPY and play the long game. Sell $300 8/31 puts for $2. There's a 80% chance you'll keep that premium, and it's an annualized 8.2% return on staked capital. Then if you get assigned it's actually a $28/share discount -- 8.5% -- below today's price.
"The strategy is designed to receive a premium from the option buyer by selling a sequence of one-month, at-the-money, S&P 500 Index puts (SPX puts). If, however, the value of the S&P 500 Index falls below the SPX Put’s strike price, the option finishes in-the-money and the Fund pays the buyer the difference between the strike price and the value of the S&P 500 Index." [1]
They aren't selling puts to open a position, they're selling SPX puts. SPX is a cash-settled, European-style option derivative product tracking the S&P index at a notional value of $100 per index point. When they get assigned because their position closes in the money, they write a check, instead of taking delivery of shares they bought at a discount and waiting for a recovery.
So what this ETF tracks is basically the spread between realized and implied volatility. When the implied volatility is higher than the realized volatility -- which is most of the time -- it tends to be a little bit lower. When the realized volatility is higher than the implied volatility -- which tends to only happen during dramatic market moves -- it tends to be a lot higher.
If you zoom out, they basically go up nice and smooth, until a major market event hits, then they get practically wiped out. Then they start recovering again.
If you sell puts with the goal of getting assigned on the underlying, and riding it back up, you actually want to get assigned at some point. These folks instead cut a check for their losses, don't take delivery of anything they bought at a discount, and start selling premium again, hoping the premium will make up for their losses. Doesn't look like a winning strategy huh?
tl;dr: $PUTW does not use the strategy I suggest. Did that address your question?
[1] https://www.wisdomtree.com/etfs/alternative/putw
You may also find interesting to read through https://www.reddit.com/r/fatfire if you'd like this to be your starting point towards retiring.
Use this money to max out all tax advantaged accounts available to you (401k, IRA, HSA), and invest the rest in a brokerage account. When in doubt, invest the money in a target date fund at Vanguard or Fidelity that most closely matches the date you plan to start withdrawing from the account. A total world fund/ETF, like VT, is also a fine option.
Long term VTSAX or FZROX are probably good places to hold most of that. You could keep $30k in cash for emergency fund.
The other comments suggesting the bogleheads forums are also right. Most of the other comments are a total disaster I’d be cautious about following any of the advice here (it’s also surprising to me how bad it is).
I also personally do some individual stock picks of companies I know in the field I’m in, but that’s still quite risky and not advised unless you like this kind of thing (Amazon, Apple, PTON, Nvidia, previously tsla). I hold long term for capital gains.
Long term index funds are the best bet, even if the market goes down you can wait it out if you’re young. If the current conditions scare you, you can “dollar cost average” entry which just means buying $X amount each month/week until you’re fully invested. Long term this kind of thing doesn’t matter though.
Are you looking to use the cash soon? If so you may want to not invest it. Being forced to withdraw is where the problems come from.
Don’t listen to anyone on here about bitcoin. That’s gambling, if you want to do that know it’s gambling and expect to lose everything.