Why doesn't everyone invest in index funds?
Can someone explain to me why every non finance professional doesn't just invest in low cost index funds? how can you beat the market when there are institutional/hedge fund investors that have more info about companies than you've ever dreamed about?
The S&P has beat the majority of hedge funds, and apparently Buffet keeps his kids trust money in a low cost index as well..
If you're not an investment professional, why would you ever try to pick stocks in the market when you can have a mutual fund create an index to invest in with no effort from your side?
The average S&P mutual fund index nets like ~8% a year over 30 years, if you max out a 401k and Roth IRA every year and just throw it into indexes, itll net you around $10mm USD when you're ready to retire..
Is there something I'm missing here?
Agree on people not having the patience. I think people expect to get rich over night by "playing the market" when they really have no idea how to invest outside of the Wolf of Wall Street. I think that's why crytpos were/are so popular, people feel it's easy money.
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Not really. Most people who make some returns that think they know how to trade just get lucky. Worse, these people will start trading on margin and will experience massive losses. But most importantly, it's a huge risk if you have a family (because if you're a trader you don't have an actual job). Some family friend with a bunch of kids and a wife who doesn't work has had to ask my dad for money multiple times...lol
At the end of the day, it's almost impossible to remain consistent as a good trader, as you have to account for fees and whatnot. I've read somewhere too that if you just buy and hold vs trade daily your returns will be bigger.. just my 2c
People are idiots... Saw a forum on here yesterday about a guy asking whether or not it was a good idea to trade his mom's retirement account using cryptos and penny stocks because he watched a few YouTube videos on it.
Separately, have you gone to see a psychiatrist recently? I hope you are not suicidal now. At a minimum, you are entertaining.
semi-institutional = investing through etrade & not robinhood
I can't tell you how many 22-24 year olds I've met who ask me for investment advice where the story goes like this:
"How are you currently invested?" I'm not, but I've saved a good deal of cash - XX thousand - and want to enter the market
"Well let's talk about risk and return. It's important for someone your age to invest in equities if it is for the long term" I know, but indexes are awful - I mean, who wants to make 7-8%? It's not even worth the risk
Youth today are obsessed with immediate reward. They all want to be the next bitcoin millionaire. They don't understand that if you're making $100k at 24, and invest in index funds for 30-40 years, they'll be a healthy millionaire at retirement. They're willing to risk all that security for a 1% chance at hitting it big, with a huge potential that they earn almost nothing or lose money during their most important earning years.
Every dollar earned at 22 has 30-40 years to compound interest. This is a return of 20x at 8% if you retire in 40 years. When you think about it, your first dollar in is really your last dollar out too. At 82, that's a return of 100x before inflation. If you spend 20 years dicking around in high risk investments that return net zero, the difference you could have at 80 is the delta - 100x vs 20x.
Fuck, if you live to 100, that's almost 500x your initial inflow. It's basic math.
Just start investing, it's much more about the cash flow you put into investments when you're young, and take the 8%. When they markets crash, lever up if you really have the risk tolerance. You'll have, statistically, something like 3-5 full market cycles to pull this off in over your life.
I'm not opposed to stockpicking in a diversified portfolio, but the vast majority don't have the knowledge or discipline to pull it off and beat the market. I always suggest - if you want to stockpick, do it with 20-30% of your money, and pick good names. Don't put more than 5% into speculative shit. That way you're not risking your future to fund a gambling habit.
I don’t necessarily think you are wrong but I feel like the 8% return thing is bound to blow up sometime. What we are really saying is that because the historic return in equity markets has been 8%, it’s going to be 8% in the future. I’m not sure this is true.
Most obvious thing first - once people start assuming they’ll get an 8% return, they’ll overbuy equities, to the extent that the expected return becomes 0%. Why do we assume that there will always be a 8% return available for us?
Second - the sample size for the 8% isn’t that long. It’s about 100 years of modern markets. This really isn’t long from a historical standpoint. A lot happened in those 100 years from our perspective; but looking at it as a whole ignores that massive periods of declines that occurred - Great Depression, WWII, etc. When the clock started, there were only a few places in the world to invest in; now we can buy exposure for almost every market in the world. No one has any idea what the return will look like over the next 100 years in developing vs. developed countries or in mature industries vs. growing ones. Also had one or two events gone differently historic returns may have been 20% or 0% - it’s ludicrious that we assume everything will balance out in the future just as it has in the past.
I think when you look at it this way, it makes complete sense for people to actually evaluate investments individually under the current circumstances. I do think everyone should have some exposure to “the market”, but it isn’t some mark of human irrationality to look at other investments. Quite the contrary actually - blind indexers may be the irrational ones.
The idea that equity returns are volatile and nothing is guaranteed (100% true!) does not mean that the majority of investors should avoid a diversified portfolio and go in hard on speculative investments just because they've "analyzed" them. This is also a dangerous mindset that's prevalent with today's 20 somethings - A good friend of mine of mine bought a basket of cyptos with his entire MBA signing bonus and mentioned that "all it takes is a few hours of research" - uh, no, reading 10 peoples articles on the internet is not research for a speculative investment.
The 22-24 year old set I was discussing is almost 100% of the time not an investor with knowledge and skill greater than the market.
If returns aren't 8%, entire markets should remain, on average, upward and positive as long as economies are growing, and should outpace modest inflation; this statement doesn't hold true for individual companies; advancing technology also helps grow the general equity market
Pretty much everyone I've ever heard parrot your perspective is under the age of ~32 - i.e., has never professionally lived through an economic downturn, where speculative investments fall to dust in your hand.
Again, it's all about risk and reward - and to live an "alt-truth" where you'll throw out everything we know about risk and reward in the markets to decide that broad markets are high risk and low reward, but highly concentrated investments are going to be high reward and low risk, honestly just shows a lack of experience. Maybe you're gunning to be the next hedge fund magnate and out to prove me wrong; I don't care, I'm talking about the vast majority of the population in their 20's. By definition, we can't all beat the markets.
First off, I’m curious to know how many people commenting in this thread actually have any money in the markets.
I trade actively. I am not always beating the benchmarks, but sometimes I am. I have never lagged them by much, but sometimes I outperform them by a good amount. I have never closed a trade with less than 10% profits, and I have closed others much higher - though this sometimes means I carry losers with me until they show a gain. Still, this type of carrying happens infrequently.
The conventional wisdom not to trade actively is probably good for most people. Then again, most people are of average intelligence, and many more are below, so I think it makes sense why. Intelligence aside, very few people have the interest or motivation to pick stocks and “trade”, so of course they should play it safe.
But look - most people on this board aren’t conventional people. You go to great schools, and have outsize ambitions. Conventional wisdom says that it’s not possible to become a banker, but many of you have defied that wisdom.
Fact of the matter in my opinion is that most of the people who regurgitate index fund wisdom on this forum could probably benefit from trading more actively than they do - I certainly did.
Then again, most people regurgitating wisdom on this forum have no skin in the game, and are just trying to rack up bananas by pushing the party line on something they have no vested interest in.
For those interested in trading, recognize that you may not be the people that the conventional wisdom is aimed at. Go read books written by successful traders, and stop listening to people who’ve have never risked their capital tell you about the rewards that entails. While it is true that active trading can be ruinous, that’s similar to saying that gambling can be ruinous. Comparing a savvy trader to a blind speculator is no more fair than comparing a drunk gambler that takes his kids’ college fund to Vegas to a professional card counter with a system in place.
I wouldn't say there's a fixed amount you need in order to trade "daily", though more is certainly better for that in my opinion.
Really, you need enough money to effectively execute whatever strategy you're pursuing. The following is by no means an exhaustive list - before entering into any strategy as a beginner, you need to sit down and consider the potential outcomes and whether you have the funds for it.
For buy-and-hold, that means a lower relative threshold - you just need enough money to buy the stocks/ETF/fund outright, and pay ~$14 in commission ($7 when you enter, $7 when you exit, or thereabouts). Crucially, you also need enough time to wait for a profit to show - sometimes you get unlucky and it takes years.
If you're going to dollar cost average, you need to have "dry powder" lying around that you can pyramid your position with over time. It isn't possible to predict how long a trend will go and how many layers your pyramid will end up having, so you need a lot more capital (relatively speaking) to effectively pursue this kind of strategy.
You also need to consider as a novice that your positions need to be sized appropriately to net you profit after commission. If you buy 1 share of a $14 stock and it goes up 100%, that's phenomenal returns - but all $14 or so of your profit is going to be eaten up by commission. So rather than 1 share, you buy 2, or 100, or 1000...realize that the transactional costs go down as the size of your position increases.
I got started trading with less than half of $25,000, so you don't need to wait.
As far as what to read, here's a few I'd suggest
Philosophy/Primary Accounts of Trading These are books that in my opinion do a decent job of laying out the various types of philosophies that different traders use.
-The Intelligent Investor: The Intelligent Investor is a bible of sort for fundamental/value oriented investors, and (accurately or otherwise) is frequently cited as Warren Buffet's guiding principles.
-Reminiscences of a Stock Operator: Reminiscences is the fictionalized and highly entertaining biography of Jesse Livermore, one of the greatest traders of all time. Even though he started trading more than a hundred years ago, before the advent of modern markets and financial capitalism, I think (as do many successful traders) that this book is a great source of wisdom about how to trade in a way that would nowadays be described as "technical trading".
-Market Wizards - This book (written in 1989) interviews a lot of successful traders. I'm a big believer in primary source documents, and so this is great to me. In my opinion, trading is an art as much as a science. Each artist must develop their own style, but it can be helpful to try to get inside the minds of the "greats" if you want to be one as well.
Relevant Subject Matter These are not all books (though some are), but rather subject matter that I have found interesting to read about and study as someone who trades. Reams of paper and rivers of ink have been consumed in the study and exposition of these subjects, so unless explicitly stated there isn't necessarily one book I'd read - just find one generally considered reputable and dig in.
-Economics (understand both Keynesian economics and Chicago school/monetarist economics. Understand supply and demand and how they interface theoretically and in "the real world")
-Interest Rates - this is largely a subset of studying monetarist economics, but understand how the Fed works, how open market operations work, how interest rates are set and percolate through the economy under a central bank but also under a collaborative regime like LIBOR. Understand what fractional reserve banking is.
-Game Theory (particularly the difference between Nash equilibria and Bayesian Nash equilibria)
-The Black-Scholes option pricing model
-Mean Reversion trading (Pairs trading, for example)
-Neural Networks, Support Vector Machines and other non-parametric decision models (this will help you understand what those high frequency algorithms really do)
-How ETFs are constructed and maintained
-Financial Accounting (I think Kimmel Weygandt Kieso is a great textbook on this)
-How various types of popular securities and derivatives are constructed and operate (stocks, securitized products, insurance products like swaps and options, bonds, etc.)
-The Financial Crisis of 2008: This is a subject of great interest to me, and there are many good books. The Big Short is a decent account for a layman to engage with, and a very compelling book. For a less sensationalized treatment of the subject matter, I also recommend "Fool's Gold" by renowned financial journalist Jillian Tett, which chronicles the birth, growth, and as far as RMBS is concerned, eventual demise of securitzed financial instruments. If you're into some advanced reading, I have found that financial blogger Yves Smith has some fascinating perspectives, though not necessarily ones that I entirely agree with. She compiled her analysis into a book called "Econned", which is a decent critique of financial capitalism - I particularly like her analysis of the significance of the "Magnetar trade"
-Read about historical financial collapses generally - since time immemorial, "market cycles" have existed and impacted those who participate in them. In premodern times, issues of precious-metal currency debasement were prominent (in ancient greco-roman society, for example). In Holland, you had tulip mania which was an interesting early example of futures markets exacerbating a bubble. In the 1700s, you had the emergence of the first joint stock companies and the Mississippi Bubble which accompanied them. In the 1800s and early 1900s there were panics in America and elsewhere. Following the advent of the modern central bank, we had the Crash of 1929, the S&L Crisis, the tech bubble and of course 2008 just to name a few. I think an important part of understanding market cycles is understanding the many ways in which they have crashed in the past. Though all different, the more you study these, the more closely you will become acquainted with the animal spirits that ultimately enable and then derail most bull markets.
Read financial history - Niall Ferguson is one of my favorite "financial historians".
Philosophy of Political Economy - This is less important for knowing how to trade, but I think it is great stuff nonetheless for anyone that has a passion for trading. Hobbes, Locke, Adam Smith, Marx, the list goes on.
I will add more to this as it comes to me.