Buying value stocks may be better than buying an index, but identifying value stocks is hard and time consuming. Wouldn't the average investor be better off buying index funds, since the average investor does not have the time, inclination, or training to find value stocks?
I believe indexes protect me from my own lack of knowledge on market operations and analysis. I have a couple of investments in indexed funds and of course I do not expect them to be resilient to bubbles or crashes.
If what the FA says was true everyone would be doing this "value investing". It's about how you balance risk vs benefits.
Yes, agreed. This is comparing Apples and Oranges.
Also, keep in mind: If you had invested all your money into a NASDAQ ETF at the peak of the Dotcom bubble 20 years ago, you would have earned about 300% in returns by now.
I think it is easy to dismiss indices in a bear situation. When in doubt, zoom out and relax.
> Also, keep in mind: If you had invested all your money into a NASDAQ ETF at the height of the Dotcom bubble 20 years ago, you would have earned about 300% in returns by now.
It should be noted that the NASDAQ is heavily skewed to one particular sector, and so less diversified. Going for the S&P 500, US Total Market (Russell 3000), or world index would spread the risk around more.
Even investing only at market peaks, as long as you didn't panic and sell, would still give results most people would find satisfactory:
Actively managed funds with low costs and a value investment style, can be a good alternative to picking stocks.
It can be a good idea to identify actively managed funds that have performed better than the market in the past (ie. they have got alpha). Which investment style the fund has used, can be identified using number crunching (using fama french factor analysis). For example Warren Buffet uses a mixture of value and quality investement style.
I work for a Fintech startup. We are working on a tool to do quantitative fund analysis.
Actively managed funds don't tend to come with low costs as a general rule. It's more expensive to pay a bunch of interns to sit around generating reports and a rockstar to actually pick which stocks to buy or sell at each moment than it is to simply make a few trades to keep the portfolio in line with the market.
Berkshire Hathaway has under-performed the S&P 500 for >10 years now. And one of the main reasons why they're doing so well at all is probably because they have a sizeable holding of AAPL.
Note: price only comparison. S&P 500 funds generally give dividends (which can be re-invested). The (very) recent pull back has evened things out a bit:
> Over the past year, Berkshire is up 33%, double the gain in the S&P 500. The stock is now ahead of the S&P 500 over the past 10 years, 15.4% annualized versus 14.5% for the index, but still behind in the past five years, 13.3% annualized against 14.9% for the index.
The article is all about the really long overview though. It is basically arguing that the market gaining is not a given. See the Japan example starting around 1990. That was over 30 years ago. If you look at Berkshire Hathaway 20 years back, it is clearly beating out the S&P500 by a lot.
> Ten years can be a long slog to stick with a particular stock if your future retirement / financial future depends on it.
Agreed. I hope to not be very invested in the stock market when I only have 10 years of work left. Seems too risky.
How do you define volatility? How can a market weighted index of the top 500 publicly listed US companies be more volatile than a single company? Which itself is 25%+ invested in a single other company and then the rest spread out over a handful of other companies.
Edit: also, BRK’s outsize AAPL investment is the only reason BRK is even close to keeping up with SP500 index.
All completely true. The average investor should probably be using a financial advisor.
One of the biggest reasons that most of these funds work is the volume of people in the US with 401k plans that have fund-only options. Every pay period the stocks in these funds get automatically purchased without many decisions involved so you're going to continue seeing them steadily and safely increase.
Ultimately, investing boils down to finding something where you're comfortable. 401k investing makes people comfortable because of all the pre-tax benefits. Even if you make bad picks, you're still making the percentage of income tax every single time.
A lot of people invest directly in real estate or franchise businesses. Others in big, safe, dividend payers. Some people buy timber land.
IMO it's just going to be comfort level and experience.
No one should be using a financial advisory unless they are a fiduciary who gets paid based on the amount of assets under management.
Most people don’t need a financial advisor when they are in the accumulation phase. After paying off high interest debt, save 3-6 months in retirement, put as much as you can in an index fund or a target date fund in a 401K and call it a day.
Most people can’t afford to max out their retirement plans. After you do that, then a fiduciary advisor might come in handy.
Extremely few people can actually max out all of their tax-advantaged opportunities, including retirement plans. Some examples, assuming a married couple:
401(k): $61,000 (under 50 years old), $67,500 (50 and older) each
This is the 2022 tax year limit for all contributions, including effective deferral ($20,500 or $27,000 for 50+) plus employer matches and any post-tax contributions.
IRA: $6,000 each
Either Roth or traditional. Both are tax advantaged.
HSA (family): $7,300 (under 55 years old), $8,300 (50 and older)
These funds are triple tax advantaged when used for medical expenses.
Then you can get into treasury bonds, where interest is exempt from state and local taxes. For example a Series-I bond, which are protected from inflation (current rate is 7.12%): You can purchase a maximum of $10,000 worth of these a year.
So, just with a few tools, a family of two over 55 years old can invest up to $175,300 in highly tax-advantaged investments. A family of two under 50 can invest up to $161,300. How many families actually have enough money laying around to contribute even close to that?
If you've exhausted all that and still have money left over to invest, then you can start thinking about opening a taxable account at a brokerage and finding a fiduciary advisor.
You can't hit those 401k numbers without employer cooperation (e.g. being self-employed)... I don't think it's reasonable to say that someone paying the $20,500 annual max isn't maxing it out.
> For example a Series-I bond ... current rate is 7.12%
Entirely from the variable part-- their fixed rate is 0% right now, and since the interest is taxed when you close the bond, this is an investment that is guaranteed to under-perform inflation (even if you don't believe their variable rate systematically understates real inflation).
Yea, I'm not saying I-bonds are great investments, but they are good if 1. your investment goals emphasize tax deferral/avoidance and 2. you need to diversify an equity heavy portfolio. I agree with OP in that you don't really need an advisor if you're just contributing to your retirement plan, and I'd add "...or to other tax-deferred accounts that don't offer much choice in securities". The types of investments I listed don't require any thinking or research. Just buy-and-forget.
I would personally argue you shouldn't be touching regular taxable investments like buying individual stocks or ETFs until you've literally maxxed out every tax-deferred options, but that's a more controversial opinion over which reasonable people can disagree.
Series I bonds by definition only keep you level with inflation. Which doesn’t help if house prices, rent and healthcare continue to outpace inflation.
As you probably know, if you are above the normal IRA income limit, you can sidestep the limit for at least a Roth IRA via the Backdoor Roth [1] by converting post-tax IRA contributions to a tax-advantaged Roth. There are a few rules you need to keep in mind, but it's a good option.
You can also use an in-service distribution to move after-tax 401(k) contributions into your Roth IRA, the so-called Mega Backdoor Roth [2].
You need pretty high income and (for #2) a cooperating employer to make these work, but they're options for people who want to save even more tax-deferred. The proposed Build-Back-Better Act this year effectively removes [3] both 1 and 2, (so much for Biden's promise to not raise taxes for people making less than $400K) so this might be the last year to be able to do this.
The 401k funds are effectively an automated advisor.
It’s tough to draw the line in a conversation like this because I completely agree with everything you said.
An advisor only comes in at the point that a person is investing their money directly and consistently. Your average person doesn’t have the market knowledge or the time to learn it so an advisor is likely the best bet for the average person in that scenario.
Anyone willing to do some research and learn will likely find their own comfort zone without an advisor.
> average investor should probably be using a financial advisor
I've known more than one person with an advisor that shuffled them into opportunities that made money for the advisor or had complicated stories so that it sounded like the advisor was providing value-- and as a result massively underperformed the market.
The best advice for the average investor is extremely simple... and not worth paying a lot to receive since you can get it for free from bogleheads. As a result there are a lot of free or cheap advisors that make their money from customers in other ways ... and not necessarily to the customer's benefit.
A potential interesting alternative comes from the low-volatility anomaly. Stocks that demonstrate low volatility tend to over-perform over long stretches of time.
So if one was able to invest in low-volatility index funds, the article's author would theoretically be able to avoid the massive bubble swings while still potentially beating the market (albeit probably not by large margins).
The low-volatility anomaly shows that investing in low volatility (low risk) assets tend to outperform over long stretches of time. It's a counter-intuitive result (hence being an anomaly) because the CAPM says lower risk assets should provide lower rates of return. So, as I understand it, the CAPM does imply volatility should correlate with returns because the risk-premium is weighted by beta.
I.e., low volatility stocks tend to be low beta stocks. lower beta implies lower returns under CAPM. The anomaly contradicts that model
