Let's talk about investing! Stock market, ETF, etc.

[zoony]

If one doesnt have any bond funds now, wouldnt now be a bad time to purchase those funds with interest rates rising?

 

Q for @techboy

[zoony]

On 12/30/2017 at 12:11 AM, PleaseBlitz said:

Teslas, the cars, are ****ing amazing. If Musk can figure out his production issues, he’ll sell a zillion of them. The company also has a number of other income streams, such as batteries that power your house in the event of power outages. 

 

Take this for what its worth, i have a close family member who is a mechanical engineer specializing as an automation consultant for the automobile industry.  His words, tesla is the absolute worst company to deal with and its not even close.  They do not even have elementary concepts of production understood, and they simply go around to suppliers with gobs of cash and unrealistic demands.  He basically describes it as child care.  I could be a lot more specific but probably not a good idea.  The moral of the story is not to hold your breath on the production issues

[techboy]

1 minute ago, zoony said:

If one doesnt have any bond funds now, wouldnt now be a bad time to purchase those funds with interest rates rising?

 

Q for @techboy

I have been reading people saying to stay out of bonds (or to go short) because interest rates will be rising for like 10 years. Bonds have made a lot of money since then. Timing doesn't work.

 

In any case, if (when) interest rates do rise, bond funds will go down temporarily, but will benefit in the longer term as the existing bonds get replaced by ones with higher interest rates.

 

The biggest point, though, is to remember the purpose of bonds in MPT, which is not really return (although it's nice when it happens), it's ballast and safety, and it's not a good idea to give those up.

 

Vanguard has a paper about it here: https://personal.vanguard.com/pdf/s807.pdf

 

This is their conclusion:

 

The implications of this paper’s analysis are clear: (1) For a majority of diversified, long-term investors, a potential bond bear market should not be viewed with the same level of apprehension as a potential equity bear market. Indeed, even the worst 12-month period for the U.S. bond market historically saw a little more than just one-fifth the losses of the worst 12-month period for the U.S. equity market; (2) If a bond bear market were to occur, investors would be able to somewhat offset price declines with higher nominal yields and potentially higher subsequent nominal returns; (3) Accurately predicting how interest rates will change is very difficult, and greater economic uncertainty argues for more fixed income diversification, not less; (4) Diversified fixed income exposure remains a prudent complement to equities. Such a strategy may help to protect against losses similar either to the historical declines of longer duration bond portfolios when interest rates have risen, or to the level of decreases similar to those experienced by lower-quality bond portfolios when equity markets have declined; and (5) Although the potential for negative returns in the short term for high-quality bonds has never been higher, over longterm holding periods we expect bonds to continue to reduce the risk of loss for balanced investors. Even when interest rates rise, what ultimately matters most for loss-averse investors is the return of their total portfolio, not just the returns of the bond portion of their portfolio.

 

That highlights one of the biggest cognitive errors investors make: looking at a component's returns in isolation, not as a whole portfolio,

[PleaseBlitz]

11 minutes ago, zoony said:

 

Take this for what its worth, i have a close family member who is a mechanical engineer specializing as an automation consultant for the automobile industry.  His words, tesla is the absolute worst company to deal with and its not even close.  They do not even have elementary concepts of production understood, and they simply go around to suppliers with gobs of cash and unrealistic demands.  He basically describes it as child care.  I could be a lot more specific but probably not a good idea.  The moral of the story is not to hold your breath on the production issues

 

No, i agree.  My statement of "if they can figure out their production issues" is definitely a big if.  That being said, I've seen a lot of instances where gobs of cash turned unrealistic demands into reality.  It's also clear that Tesla has no interest in doing things like the rest of the industry, and that probably gives consultants who have been in the industry for a long time a bad feeling for more than one reason.  Case in point, the legal fight in Virginia about Tesla's direct-to-consumer sales model is very interesting, basically every auto dealership in Virginia is up in arms because Tesla cut them out.  I guess my point is this:  Just because a company is a pain in the ass to deal with for other industry participants does not make them a bad company.  

[zoony]

1 hour ago, PleaseBlitz said:

 

No, i agree.  My statement of "if they can figure out their production issues" is definitely a big if.  That being said, I've seen a lot of instances where gobs of cash turned unrealistic demands into reality.  It's also clear that Tesla has no interest in doing things like the rest of the industry, and that probably gives consultants who have been in the industry for a long time a bad feeling for more than one reason.  Case in point, the legal fight in Virginia about Tesla's direct-to-consumer sales model is very interesting, basically every auto dealership in Virginia is up in arms because Tesla cut them out.  I guess my point is this:  Just because a company is a pain in the ass to deal with for other industry participants does not make them a bad company.  

 

That is exactly what I told him... and there is probably some truth to it.  However he proceeded to walk me thru a few examples that made me shudder

1 hour ago, techboy said:

I have been reading people saying to stay out of bonds (or to go short) because interest rates will be rising for like 10 years. Bonds have made a lot of money since then. Timing doesn't work.

 

In any case, if (when) interest rates do rise, bond funds will go down temporarily, but will benefit in the longer term as the existing bonds get replaced by ones with higher interest rates.

 

The biggest point, though, is to remember the purpose of bonds in MPT, which is not really return (although it's nice when it happens), it's ballast and safety, and it's not a good idea to give those up.

 

Vanguard has a paper about it here: https://personal.vanguard.com/pdf/s807.pdf

 

This is their conclusion:

 

 

 

 

That highlights one of the biggest cognitive errors investors make: looking at a component's returns in isolation, not as a whole portfolio,

 

Thank you

 

My 401k is 100 percent index funds.  Guess i need to rebalance

 

That said im not entirely sure what rebalancing means.  I thought i did but maybe not in the academic sense

[ExoDus84]

9 minutes ago, zoony said:

 

That is exactly what I told him... and there is probably some truth to it.  However he proceeded to walk me thru a few examples that made me shudder

 

Thank you

 

My 401k is 100 percent index funds.  Guess i need to rebalance

 

That said im not entirely sure what rebalancing means.  I thought i did but maybe not in the academic sense

 

Rebalancing refers to the percentage of stocks and bonds in your portfolio. Standard thought says that as you get older (or as you approach retirement) your portfolio should increasingly favor bonds over riskier assets like stocks. Overall, it depends on your risk tolerance though. Index funds are a great investment, so if you're heavily invested in those, your risk is lower than if you owned individual stocks.

[zoony]

35 minutes ago, ExoDus84 said:

 

Rebalancing refers to the percentage of stocks and bonds in your portfolio. Standard thought says that as you get older (or as you approach retirement) your portfolio should increasingly favor bonds over riskier assets like stocks. Overall, it depends on your risk tolerance though. Index funds are a great investment, so if you're heavily invested in those, your risk is lower than if you owned individual stocks.

 

I understand that.  What i dont understand is all of the rebalancing bull**** in techboys last post.  

[techboy]

50 minutes ago, zoony said:

That said im not entirely sure what rebalancing means.  I thought i did but maybe not in the academic sense

 

It just means that if your allocation is too far away from what you want it to be, you sell what you have too much of and buy what you have too little of.

 

It's mostly a risk management tool, but it does have the side effect of forcing people to buy low and sell high, which is the opposite of what behavioral economics shows that many people do.

 

[zoony]

3 hours ago, techboy said:

Rebalance. I use the 5/25 rule, which says that if any of the funds get more than 25% off one way or the other, or 5% of the portfolio total, you sell/buy to put it back into alignment. This keeps you from fiddling too much. Honestly, I've never hit that, because I also aim new contributions to the one that's closest to being off, though the recent run up in foreign has gotten me close.

 

Example... 48% VTSAX mean that you would rebalance if it gets as high as 53% or as low as 43%. The 25% rule comes into play when you have smaller allocations. For example my 10% to CRE would get rebalanced at 7.5% or 12.5%.

 

[HOF44]

I've got some dough just sitting in a money market, think this has spurred me to go buy some Vanguard ETF's.  Just have to decide how much I wanna buy. 

[techboy]

Okay, let me try again, @zoony. I'll use my own portfolio as an example.

 

My wife and I have been diligent, and built up a nice nest egg already. I also plan to retire early, and have a public pension, so I don't need to take as much risk.

 

I settled on 60% stocks, 30% bonds, and 10% commercial real estate. I have to use a completion index in order to get the full US stock market, and I am anal about it, so my portfolio consists of a couple of S&P 500 funds (I'll call them fund A for simplicity), a completion index fund (B), an international fund (C), CRE (D), and a total market bond fund (E). I wanted to fall somewhere between 30 and 40% of my stocks being international, and I also wanted multiples of 10 because they look pretty (and as I said, there's no point in precision... it's an illusion). So my portfolio is allocated like this:

 

A: 30%

B: 10%

C: 20%

D. 10%

E. 30%

 

I entered my portfolio in Morningstar's free portfolio tool, and it tells me what percentage of my portfolio each fund ACTUALLY is.

 

Research shows that there actually is some momentum effect to returns, and I want to avoid trading costs and taxable events (though those don't apply with funds in tax free accounts), so I mostly try to keep this in line by adding new money to the one farthest below target. Until now, I haven't had to do anything more than that.

 

However, if for example, international stocks were to continue going crazy, eventually they'd be well more than 20% of my portfolio. That means I'd be taking more risk in that area than I planned. I need to trim them back. So, I sell some of that fund and buy some of the fund that is below what it should be.

 

I use 25/5 as a guideline. In other words, I don't do anything unless a fund is off by more than 5% of the total portfolio, or 25% of it's own allocation, whichever is lower.

 

For example, 25% of fund A is 7.5% of my total portfolio (25% of 30 is 7.5). I don't want it to drift more than 5%, so if it hits 35% I sell some of it and buy something that's too low.

 

On the other hand, 25% of B is only 2.5%, so I don't wait until it's off by 5%. I would sell some of it when it becomes 12.5% of my total portfolio,.

 

You'd do the reverse if something drops too low... sell something that's the highest and buy more.

 

This effectively forces you to buy low and sell high, but as I noted, the primary reason to do it is to keep your risks where you want them and stay the course. Otherwise, after a big run up in stocks, for example, you might end up holding way more stocks (as a percentage) than you planned on.

 

Of course, if you're 100% stocks that makes rebalancing a little harder.

Edited January 4, 2018 by techboy

[tshile]

@zoony

he's saying that if when you set up your portfolio fund A is 40% of your total holdings, and later down the road fund A because 48%, rebalance it so that it's back at 40% of your total holdings (because it's over 5% of your total portfolio)

 

 

if you set it up so fund B is 10% of your portfolio, waiting for it to change by 5% of your total portfilio is absurd (tthat's a 50% increase or loss....), so wait until it changes by 25% of itself. 25% of 10 is (wait for it) ... 2.5. So if Fund b because above 12.5% or below 7.5%, rebalance.

 

 

[The Evil Genius]

5 yrs ago today Netflix was trading at $13.71.

 

Today, it's $206.05. I guess being the big dog and possibly being bought by Apple has appeal.

 

It's **** like this that pisses me off. Opportunity loss that is so easy to see happening. Wish I wasn't a coward with $s.

Edited January 4, 2018 by The Evil Genius

[techboy]

Anyone that was reading my last post might want to look again. I had to edit it like 5 times.

[Elessar78]

37 minutes ago, zoony said:

 

I understand that.  What i dont understand is all of the rebalancing bull**** in techboys last post.  

Let me put in a homespun way we can all unnerstand

 

 

And by this I mean, invest in organic, brown cage free eggs. You see how much these suckers sell for??

Edited January 4, 2018 by Elessar78

[tshile]

4 minutes ago, The Evil Genius said:

5 yrs ago today Netflix was trading at $13.71.

 

Today, it's $206.05. I guess being the big dog and possibly being bought by Apple has appeal.

 

It's **** like this that pisses me off. Opportunity loss that is so easy to see happening. Wish I wasn't a coward with $s.

5 years ago the economy was tight...

 

and i believe that's around the time netflix was being shut out via rights fees. subscribers was down and it was questionable what was going to happen. then they started making their own content.

 

if i recall correctly?

[techboy]

33 minutes ago, zoony said:

 

I understand that.  What i dont understand is all of the rebalancing bull**** in techboys last post.  

 

I probably should have just linked this to start with:

 

https://www.bogleheads.org/wiki/Rebalancing

 

I use the 2nd, 3rd, and 5th approach in the list, and as I said, the last one means I've actually never had to use the others.

[Elessar78]

Be Fearful When Others Are Greedy and Greedy When Others Are Fearful

 

-Warren Buffett

[techboy]

8 minutes ago, Elessar78 said:

-Warren Buffett

 

Speaking of Buffett, he had some really good stuff in the 2016 letter to Berkshire shareholders. http://www.berkshirehathaway.com/letters/2016ltr.pdf

 

This is my favorite part (although maybe it shouldn't be, since my pension falls into the same trap):

 

Quote

Over the years, I’ve often been asked for investment advice, and in the process of answering I’ve learned a good deal about human behavior. My regular recommendation has been a low-cost S&P 500 index fund. To their credit, my friends who possess only modest means have usually followed my suggestion.

 

I believe, however, that none of the mega-rich individuals, institutions or pension funds has followed that same advice when I’ve given it to them. Instead, these investors politely thank me for my thoughts and depart to listen to the siren song of a high-fee manager or, in the case of many institutions, to seek out another breed of hyper-helper called a consultant.

 

That professional, however, faces a problem. Can you imagine an investment consultant telling clients, year after year, to keep adding to an index fund replicating the S&P 500? That would be career suicide. Large fees flow to these hyper-helpers, however, if they recommend small managerial shifts every year or so. That advice is often delivered in esoteric gibberish that explains why fashionable investment “styles” or current economic trends make the shift appropriate.

 The wealthy are accustomed to feeling that it is their lot in life to get the best food, schooling, entertainment, housing, plastic surgery, sports ticket, you name it. Their money, they feel, should buy them something superior compared to what the masses receive.

 

In many aspects of life, indeed, wealth does command top-grade products or services. For that reason, the financial “elites” – wealthy individuals, pension funds, college endowments and the like – have great trouble meekly signing up for a financial product or service that is available as well to people investing only a few thousand dollars. This reluctance of the rich normally prevails even though the product at issue is –on an expectancy basis – clearly the best choice. My calculation, admittedly very rough, is that the search by the elite for superior investment advice has caused it, in aggregate, to waste more than $100 billion over the past decade. Figure it out: Even a 1% fee on a few trillion dollars adds up. Of course, not every investor who put money in hedge funds ten years ago lagged S&P returns. But I believe my calculation of the aggregate shortfall is conservative.

 

Much of the financial damage befell pension funds for public employees. Many of these funds are woefully underfunded, in part because they have suffered a double whammy: poor investment performance accompanied by huge fees. The resulting shortfalls in their assets will for decades have to be made up by local taxpayers.

 

Human behavior won’t change. Wealthy individuals, pension funds, endowments and the like will continue to feel they deserve something “extra” in investment advice. Those advisors who cleverly play to this expectation will get very rich. This year the magic potion may be hedge funds, next year something else. The likely result from this parade of promises is predicted in an adage: “When a person with money meets a person with experience, the one with experience ends up with the money and the one with money leaves with experience.”

 

Edited January 4, 2018 by techboy

[Elessar78]

techboy, I think we have PMs on this same topic going back 5 years(?). No matter how much you/I/buffett bang this drum very few will believe. 

[tshile]

you guys are acting as though this stuff hasn't been said before or isn't commonly and easily available to anyone who spends a little time googling.

 

i don't mind discussing why people have picked certain funds. i find it interesting.

 

the high horse bull**** about low fee index funds and what warren buffet says every time someone mentions stocks they want to buy, as if none of us have ever read about any of it, is tiring though.

 

[ExoDus84]

47 minutes ago, The Evil Genius said:

5 yrs ago today Netflix was trading at $13.71.

 

Today, it's $206.05. I guess being the big dog and possibly being bought by Apple has appeal.

 

It's **** like this that pisses me off. Opportunity loss that is so easy to see happening. Wish I wasn't a coward with $s.

 

If people were clairvoyant, we'd all be rich (or nobody would be). No way to know for sure Netflix would have gained like that.

22 minutes ago, tshile said:

the high horse bull**** about low fee index funds and what warren buffet says every time someone mentions stocks they want to buy, as if none of us have ever read about any of it, is tiring though.

 

But did you know that low fee index funds are a solid investment vehicle?

[tshile]

 

what i said can be taken as harsh, it wasn't meant to be. i value everything @techboy has said in this thread. i've read the intelligent investor, and i enjoyed it. i think in terms of long term investment there seems to be a lot of good stuff there, and it's not arm-waving flashy big money get rich quick stuff either. it's thoroughly thought out and backed by research. 

[Burgold]

I think if you're willing to do the work it's best to both. I have my index funds, but also pick stocks. Year over year, my own picks have done better 8 out of 10 years, but I still keep the safe funds, and a couple of nearly no risk instruments because I believe in mattress money. I also know that I can never know enough to really understand what will happen, the market is not always rational, and sometimes really fluky things can happen.

 

You have to be willing to do your work though and weather some storms. There have been any number of times where I've bought something and a month later it's down ten percent, but at the end of the year it's up twenty, thirty, etc. Mind you, I've also had my share of misses though thankfully they've been fewer than my finds. Sadly though, I've never hit the gusher... or rather, I've never kept it long enough. I bought Amazon at 30 and was pretty happy when I sold it at fifty. Never found another price point where I wanted to buy in. I always felt like it was too expensive and due for a drop. Now I feel stupid, but I still think it's too darn expensive.

[techboy]

5 minutes ago, tshile said:

what i said can be taken as harsh, it wasn't meant to be. 

 

I don't take such things personally, and the reality is that as I noted, I was initially summoned, I laid out the facts, and I then left this thread to its own devices. The reader can make his or her own decisions, and if that decision is suboptimal, then I am grateful for the price discovery that allows me to prosper. 

 

However, in this case, there was an (apparently) new investor asking questions, and I am not going to apologize for presenting the optimal approach, with supporting details. That's not "high horse", it's heavily researched fact.

 

The sad truth is that because of the factors Buffett mentions in his letter, most people do NOT know this stuff... there is little incentive to advertise it, and every incentive for Wall Street to convince you otherwise, to say nothing of the cognitive biases Buffett and Kahneman (from the post on the first page) reference that make every investor believe he or she is above average, just like the children of Lake Woebegon. 

 

Having shared that with the latest questioner, though, I will resume lurking.

 

And to think I didn't even point out that anyone that owned index funds got to enjoy that ride up of Netflix.