[torkins]

I'm pretty sure I replied to you last time ;) One important aspect of looking at returns is comparing different strategies, but another one is in realistic planning. There's a lot of literature and marketing out there touting, in my view, grossly unrealistic numbers like 7-8% annualized compound returns as a reasonable expectation for sticking your money in an index fun on the S&P. Considering the huge differences in the effect of small changes to the annualized returns, it's important people have a realistic idea of the volatility in that expected number when they allocate the amount of money they save for the kind of retirement they want.

This graphic is awesome primarily because it shows that it is not correct to assume that volatility in the equity markets is averaged out completely during a timespan that is comparable to the average savings portion of a career.

edit: oops, meant to reply to GP

[cairo140]

Thank you for the reply again :). I saw your comment previously and I think you make a great point. As much as I criticize the chart for being unfairly pessimistic about equity returns, there is far too much literature suggesting you can get 7-8% real returns by parking your money in X, especially in the <20 year time frame for stocks. In comparison this chart is a good factual dose.

My concern is, that while this comparison is useful for people further along in their research trying to understand the volatility of the stock market, this chart has a number of misleading (IMO) traits that can dangerously/unfairly steer people who are newer to managing their own money away from index funds altogether.

I would hope that people see this chart, my comment, yours, and FabHK's excellent comparison to bond yields. But if you have limited attention and are getting started, I would hate for the original link to be the only thing you see.

Speaking for experience with family and friends, too many good people scared by charts like this bought gold in 2011 or trusted mutual fund managers to buy into funds with 4% front-end loads and 2% AUM fees.

[torkins]

It's funny because I agree with all those statements and add "people will listen to Jeff Siegel and just jam their money into index funds and close their eyes until its time to retire". So they lose coming and going (but lose less relying on index funds than buying gold funds).

Personally I think actively managing your money is the better solution, but the active desire not to manage money from so many people (even otherwise active and engaged people like the HN crowd) has led me to being in favor of a stronger govt-backed pension system rather than tax-deferred accounts that hurt our tax base and are a windfall for trustees.

[stouset]

> Personally I think actively managing your money is the better solution...

To what degree do you believe people should actively manage their money? Are you advocating that people should be more active in choosing their distribution of assets across risk:reward categories, or are you advocating for more active trading?

[torkins]

I think the short answer to your question is "both". You need a portfolio with diversified product risk and diversified strategies. You don't need to be a quant to make a basic stab at this with the typical retail portfolio size, there are tons of tools for free on the internet to do this kind of thing. Most people who know enough to not be in managed funds still have no idea how to have anything but basically a 100% long equity market portfolio (I'm intentionally grouping together mostly meaningless 'diversification' between highly correlated segments like midcap/largecap/nasdaq/dow) except to make it long bonds. So I think there's basic product and strategy knowhow to organizing and maintaining a portfolio.

The reason I said both is because of the 'maintaining' part. Without some level of activity, its effectively impossible to be engaged with the market enough to take advantage of opportunities and manage your portfolio to keep enough diversification and reduce the internal correlations in your holdings/strategies.

It might sound complicated but it can be learned and it isn't rocket science, and there is a lot of great technology to assist anyone, not just software devs. Managing your life savings is a better investment of time than many other pursuits, in my view.

[smogcutter]

Sounds good in principle but how well does advice like this scale? Similar problem to Waze - side streets are great when you're the only one taking them, but once everyone does your advantage is gone. It's hard to expect a large population of amateur investors with no edge to outperform the market. In the general case, what's the marginal return on time and effort spent actively managing your money vs dumping it in a vanguard 50 and learning a different hobby?

[torkins]

That's possible, but it isn't currently the case. At a minimum, having a long vanguard 500 position has a roughly 50% + positive drift - fees chance of success. Part of the long vanguard 500 price bakes in the unlimited theoretical upside that comes along with it. Selling option contracts against that long position to give up that upside beyond a certain price reduces your cost basis and pushes your position's success rate over 50%. Repeated over many events creates a net positive expected value.

Even if there was no edge in the market, as in your premise, it's still the case that the upside of a long S&P 500 equity position is unlimited, and the upside of a long S&P 500 equity position with an option sold against it is limited, therefore would be priced to have a superior chance of success relatively speaking. More market participants would improve the price accuracy of risk, it wouldn't reduce the price of risk to zero.

As for whether its worth it, I think the aggregate effect is significant and, of course, is subject to the benefits of compounded returns, so it doesn't take much to severely outperform your other prospects in the long term. It's up to each of us to decide if its worth learning.

edit: typo

[shostack]

The average person likely doesn't have the time, energy or interest to go beyond the absolute basics of investing which is why simplified advice such as that on Bogleheads is popular.

For those wanting to go a step beyond but still lacking time to go deep, where would you recommend starting education wise? Any links or a syllabus with links would be super useful.

[ericd]

Any examples of less correlated assets, and tech to assist, that you could share? How would you go about learning this stuff?

[torkins]

Sure, the guys at tastytrade.com put a ton of effort into educating people and providing a platform (dough.com) that provides this information. I think it has some organizational issues, but my way to start would be to start with the 'Where Do I Start' series they have.

In short, that site largely revolves around the fundamental premises of a random-walk view of prices, and using the time-decay of selling options to reduce the cost basis of holdings over time. There's a lot of treatment and research on correlation of different assets (equities, different kinds of commodities, currencies). My advice if you follow this is to start small and stay actively engaged without getting over-confident at early success. There is a lot of getting used to the mechanics and learning the products so that you can make it a manageable part of your life, time-wise. Also you need to make sure you properly understand the relevant notional values you're dealing with so you can do proper sizing.

BTW quick answer to your first question, here's a sample basket of lesser-correlated assets that the typical index funds that all boil down to being long the market. One of the cores of having a random-walk view of things is that the choice of direction (long/short) is less important than the strategy & cost basis reduction (all of these have liquid option markets):

Long S&P (/ES or SPY) Long Gold (/GC or GLD) Short Bonds (/ZB or TLT) Short WTI Oil (/CL or USO) Long Euro/USD (/6E or FXE)