Tuesday, March 2, 2010

If You Accept

...the efficient market hypothesis, as FLG does (albeit with some caveats), then stuff like this makes no sense:
How do you decide what [stocks] to buy?

I get the question a lot, and I think it's a good one. The answer depends on things like how long I'm planning to hold a stock, whether I see it as a value or a growth play, and where the momentum is in the market.

Clever readers will note that about a year ago FLG was talking about how he was using the shoeshine rule to make money. Well, there is a big difference. Jubak is talking about long term investment here. The longer you hold assets the more likely you are not to beat the market. So, you might as well just buy the whole damn market using a low cost index fund and just let it sit (with a portfolio rebalance every year or two).

Things like momentum have no relevance to long-term investing. Frankly, Andrew Stevens was right. Personal finance columns in this country are terrible, and I don't know why I read them anymore. Actually, I do; for example, if there's some tax change that I might not find out about otherwise. But their investing advice is shit. I can't say I completely blame them. Writing "Low cost index funds are still the best long-term investment" would get a little tedious.


Andrew Stevens said...

The real question is why are they so bad? I honestly have no idea. Most of the time when I'm reading a personal finance column I am tempted to scream at it, "You do this for a living. How come you don't know what you're talking about?"

I'm sure you're right though and a lot of it really comes down to the fact that there's no real reporting to do. Good investment advice just doesn't change much with the news cycle so a good reporter would constantly be running variations on two different columns: "Don't get excited. The rules haven't changed." and "Don't panic. The rules haven't changed."

Like poker, the difference between the pros and the novices is that the pros don't put much weight on the fact that they've been really lucky (or really unlucky) lately.

FLG said...


I really do think that is the problem. After I've written...
Pay off your credit cards. Buy term life insurance. Write a will. Max out your retirement contributions. Invest them in a combination of low cost index funds. Shift more towards fixed income and cash every five years or so. Re-balance that allocation yearly...I'm pretty much tapped out forever.

Andrew Stevens said...

I could actually quibble with some of that, though I'm broadly in agreement. E.g. while term life is all 95% of people need, other forms of life insurance do have their uses for certain people for estate planning purposes given current tax laws. And fixed income and cash have more to do with risk tolerance than with age. It's true that most people should see declining risk tolerance as they get older if they've been responsible about their personal finance and are on a more and more easy path to retirement, so that advice is generally sound, but tying it to age has always struck me as an odd way of putting it. (It's also true that young people have more time to make it up if things go poorly, so they can better afford to shoot the works and hope that things go so well that they can retire much sooner than otherwise. But, if it works and you're substantially ahead of your goal, it's probably a good idea to pull your horns in and protect your gains faster than you would have if things had just gone okay.)

I could probably write a great deal on buying a home versus renting (very situation-dependent and I was pooh-poohing the "renting is throwing your money away" ideology long before it became fashionable), how to buy a car and how to pay for it (cash preferably, but I'm not religiously opposed to financing if the deal is sweet enough), and I've just been studying up for my father-in-law on when he should claim Social Security since he turns sixty-two in a year and isn't currently working.

(Surprisingly, Social Security doesn't punish taking early benefits like you'd think they would, so it's not as cut-and-dried as many personal finance reporters make it out to be. In fact, it was in investigating this issue that I really noticed just how clueless most personal finance reporters were. Many of them made really large gaping errors, like forgetting that Social Security is cost-of-living adjusted and concluding, inevitably, that you should always take it early, or ignoring markers for life expectancy and assuming that everybody should delay as long as possible because we're all going to live past the average life expectancy, right?)

I could also write on tax issues, IRAs versus Roth IRAs if your income gives you a choice, lazy rebalancing if your portfolio is small enough to make it practical, budgeting, and asset allocation for people who are interested in that stuff (if we agree on low cost index funds, and we do, you still need to decide on how much in the various bond and equity classes). Hmm, maybe this gig isn't as dull as I was making it out to be. But I find that most personal finance reporters are more interested in the reporting (and focus on what's new, new, new, which usually means the gyrations of the equity markets) and not so interested in the personal finance.

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