Biz, here's what you need to know to be a successful long-term mutual fund investor.
1. Invest in mutual funds, not individuals stocks. If you think you have good odds to beat a team of full-time quants working 60-hour weeks with priority latency to trading servers, you're delusional.
2. Invest in the future of the human race. Go diverse, go broad. You're going to want to be invested long and diverse when the next breakthrough comes out, whether it be alternate energy, tech, or healthcare innovation. A good rule of thumb is to make sure you don't stray to far from global market indices. An equity allocation of 55% US, 10% emerging market, 35% non-US developed market is a good start.
3. Imagine your equity holdings will drop 50% tomorrow? If you can't handle that you aren't ready to truly be an investor. Remember you're in this for the long run. I personally only invest 40% of my portfolio in stocks, and 60% in low-yielding, low-duration bonds. In times of great duress, I can sell of my excess bond holdings to buy cheaper equity positions.
4. To be successful with tactical asset allocation, you need to plan for two positions. (a) a position to hold much more equities in a time when they are cheap, and (b) a position to revert back to your original allocation once the market has recovered. For example, I switched my allocation to 60% stocks, 40% bonds during the 2008 collapse after a 35% drop in equity value. Did I time the bottom correctly? No, but it doesn't matter. Once stocks recovered to their original levels,
I switched back to my original allocation.
5. NEVER perform tactical asset allocation in the opposite direction (e.g. switch to a more conservative allocation when you believe valuations are too high). It sounds like a smart idea, except that it's almost impossible to time high points, and you may very well exit an equity position and find yourself under-performing for many years or the rest of your life!
Guide to choosing funds.
1. Make sure the expense ratio is low (0.5% at most). Expense ratio is $ you are giving away to the fund manager. Index funds are particularly nice here, with some Vanguard offerings having a < 0.1% expense ratio.
2. Lookup the fund's turnover rate, and make sure it is lower than 50%..the lower the better. A turnover rate is the % of stocks that the manager buys/sells in a given year relative to the total. A high turnover rate indicates the fund managers do not have discipline or are only chasing short term goals. Turnover can also be a pretty big invisible tax on your fund returns, due to trading fees (which are not included in the expense ratio).
3. Don't let Vanguard bros' convince you that you can't beat the market..you certainly can..but you'll need to be willing to take more risk. A good way to do this is to invest in small companies with low valuations. In aggregate these provide higher returns over time, at the cost of much higher volatility and losses during time of duress. DFA Small Value is a great example (http://www.morningstar.com/funds/XNAS/DFSVX/quote.html). Note that you WILL need an iron stomach and be willing to wait 20+ years before the law of averages provides you with your market-beating returns.
Index funds are ideal, but there are some active funds out there with decent managers. What to look for in an active fund is the following:
1. Look up the fund management on Morningstar. Check the chief manager's..are they bouncing around from fund to fund? Bad sign, that indicates they care more about their own professional growth than their fund.
2. Check out the top 10 holdings in the fund. Are they boring? GOOD! Market typically charges a premium on "exciting" companies such as Apple, Facebook, etc. Boring companies are generally overvalued.
3. Are there female portfolio managers? This may come as a surprise, but if there aren't..run away. Women play an important balancing role in a portfolio management team, otherwise you end up with a bunch of trust fund alpha-bros that are gambling with YOUR money.
4. Again, don't forget to check the portfolio turnover!
Here's an example of a good fund: American New Perspective (if you can manage to grab the low-expense ratio R6 share class). http://portfolios.morningstar.com/fund/holdings?t=ANWPX®ion=usa&culture=en-US. This fund satisfies all the criteria above; low expense ratios, good tenured managers, some female on staff, and very very boring holdings. Even better, they are quite diversified across US and International stocks. It's no surprise they've been handily beating their benchmark since inception.
Do you think human progress has reached it's limit? Looking back the last 100 years and we have antibiotics, automation, communication advancements, etc. Over the long term, *these* are the things that make investors money (other than dividends). If you're not invested in the market, you'll lose out on equity gains due to future advances, while the richer around you continue to get richer.
Yes..this isn't a get-rich quick scheme, it's a way to make sure you get your fair share of rewards from capitalism.
Most normal people have full time jobs and don't have time for research.
Diversification is a strategy for people who invest small amounts and who get a better return on time invested into their own profession.
Berkshire Hathaway is itself a diversified fund, depending on your definition.
To be honest, I wouldn't put any more $$$ into emerging than roughly 10% of your equity position..which is roughly what their global market share is right now. Reason being is a lot of the emerging markets can be hit pretty hard by shifts in energy, commodities, or currency markets. Second, keep in mind the old adage that the rich get richer and poor get poorer..unfortunate side effect of capitalism and unlikely to change. As Africa, Asia and other developing countries start to get more purchasing power, American and European mega-corporations (that either sell there or have operations in emerging markets) will be the big winners.
The rich US mega-corporations won't allow emerging markets to beat them..they can simply buy them up once they feel they are threatened. Look at what Facebook did to WhatsApp and currently doing to take a stranglehold of Internet in India.
I'll give another simple example..let's just consider the premium coffee business. Starbucks is a mega-corportation based in the US. As China gets more purchasing power..are there opportunities for Chinese to enter the coffee space? Sure, but Starbucks has the upper hand and capital to exploit the new market opportunities. They'll stand to benefit most from increased purchasing power in emerging markets.
Good stuff, OP.
What do you look for when deciding to reallocate to a more conservative portfolio?
I completely agree you can't exactly time the peak/dip and there's no need to ride the wave all the way, assuming you're ready to sit on the sidelines for 2-3 years to avoid a 30% drop on tour whole portfolio.
Are they specific trends you keep an eye out for?
why not 100% value trades
how wrong could you go putting money into statoil soon, a company that netted well over 20 billon a year (granted, when prices were much higher) now has a market cap of 40 billion
>1) outsource decisionmaking to people with skewed incentives and conflicts of interest. what could go wrong?
>2) here's an arbitrary allocation strategy i made up, use it blindly
>3) here, have another
>4) be sure to time the market with even more arbitrary strategies
>5) disregard that, i suck cocks, you cant time the market goyim
why does the internet try to make investing so complicated?
1) pay off debt
2) save a lot
3) dont pay fees
4) dont pay taxes
I never reallocate to a more conservative portfolio..rather I move to a more aggresive one then shift back. Going forward, I can only to reallocate to be more aggresive after a -38-40% drop, then I'll sell back and return to my standard position at minus 18-20. Yes it sounds silly..I am *planning* to lose money, but that's life when you're long. I simply want to make the most out of it when the stock markets crash from time to time by taking advantage of depressed shares.
This. So many times.
I wish there were more people like you on /biz/ instead of NEETS pretending they make millions with binary options.
> more aggressive after a -38-40% drop
Drop over all portfolio? One specific index? One benchmark?
Well, I've only made such a move exactly once..it's a once-a-decade type of thing. I would do that based on my drop in my entire equity position (which itself is a combination of US, Emerging market, developed indices).
Wealthfront is an interesting advisor smart money has been using recently. I base my portfolio on theirs but don't use them as a manager. They are worth checking out just for ideas.
I fear that the 90's will be the final golden age the American economy will experience, because of the tech boom and the dot com bubble. Innovation pushed the economy into hyper drive (as well as the 80s tax cuts, which were perfect timing).
Another economic boom doesnt seem to be happening any time in the near future because innovations are creeping to a halt, but you never know.
If I could relive any time period, it would be the 90s.
First question to ask yourself is, do you have sufficient $ in case of an emergency or you lose your job? If not, just stick it in an I-Bond and in a year you'll have a nice breakable bond that's protected against inflation.
Suppose you don't need that..will you need the money anytime in the next 5-10 years (such as for a house down-payment)?..if so, I wouldn't put it in stocks but keep it in a CD up until when you expect you need it.
Ready to sit on this for 10+ years?
If so, let's move on to the next question.
Do you got balls?
If no, just split if evenly across VTSMX and VGTSX. You'll prolly lose money over the next few years so keep in mind you're in this for the long run.
If yes to big balls, then given you only have 5k honestly I'd say just throw the entire asset class into Emerging Markets (which is currently as cheap as it has been in 10 years). Vanguard Emerging Markets is a good fund. With valuations the way they are, they have the best 20 year outlook..easily your 5k can turn to anywhere from 20k-40k in that timeframe. Warning though..a third of the fund is China so expect a 30% haircut this year. That means expect to lose $1500 - you're gonna have to grow some balls and learn to handle that..it hurts to lose money but in the very long term you should be fine.
This. I back anon.
The only time VWO has been cheaper than it is was in 2008, a level it would reach following a 30% drop (32 to 21), so unless were in for a bigger correction than 2008, what anon says makes a lot of sense.