Wednesday, September 29, 2010

Investing Followup

I got a ton of feedback on that last post, so I figured I should write some sort of follow up. First of all I'd like to thank Justin for pointing out Fidelity's zero cost ETFs; the more I think about it, the more I realize that those really are a game changer. One of the main principals of my last post (which Coach pointed out I didn't emphasize enough) was that you have to keep costs down. Investing is like poker; you're fighting for a pretty small edge over time, and doing things the wrong way can really erode that small edge if you're not careful. I suggested using ETFs because they have lower expense ratios and if you plan to hold them for an extended period of time (several years) and buy in large enough chunks (more than $5K) those lower ratios more than offset the transaction fees you'll incur. But what if you only have $5K total, or even less? Any attempt to build a balanced portfolio will get you eaten alive by transactions fees if you use my strategy, and mutual funds tend to have a minimum initial investment. You'd be forced to do what I suggested and start off with something like IVV and add another vehicle when you had more money available. With these zero cost ETFs, that's not the case at all. You could balance a portfolio of literally only $1000 or so by buying just a few shares of each ETF all without incurring any transaction fees. That's a big deal, because it completely eliminates the barrier to entry for personal investing. A long time ago mutual funds certainly lowered that barrier, providing easy access to balanced portfolios for middle class folk. But zero cost ETFs wipe out the entire thing. With them you could literally invest your $800 Bar Mitzvah proceeds in a balanced fashion and start learning without taking the slightest hint of the worst of it. That's really cool.

Another piece of feedback I got was that I personally was very heavily invested in stocks, specifically domestic equities, and that it's possible such an allocation doesn't fit the risk profile I'm willing to deal with. I thought about that for a while, and while it's perhaps slightly true, I think I'm comfortable with my current allocation at the moment. My reasons are that if I lost 40% of my net worth (again) it wouldn't really affect my day to day life; basically I understand that I'm incurring more risk in search of a higher long term return and am OK with that. Also my current "plan" is for the vast majority of my investments to be extremely long term, which is another nod towards "heavy stocks." And finally I fundamentally believe the United States and world economies are going to recover over the next few years, and I'd hate to miss out on that growth phase. This last part is far and away the least compelling of the reasons, but it's true none the less.

Coach chimed in with a few points, one of which was that I needed to stress more that keeping costs down should be priority 2 (right behind actually getting started investing in the first place). He also introduced me to the value premium, which I'm ashamed to say I'd never heard of. As I'm doing a little more research, I'm finding that it's basically a fundamental truth (or at least belief among those who know these sorts of things, which is how a lot of the fundamental truisms of limit hold 'em are defined incidentally) that value stocks out perform growth stocks. How did I miss that memo? There are some dissenting opinions, but really they seem to be based on the argument that "yeah sure it's been true for the last 30 years but that's just a coincidence" and offer absolutely zero evidence that growth stocks could actually flip the trend. In short, nobody is saying growth stocks are better, and there are some fundamental and seemingly valid reasons that value stocks could be. Coach also chimed in with some other good points that gmail seems to have swallowed. Literally the message is completely gone; I have no clue what happened to it. I don't delete email so I'm very confused as to what's going on, but when I find a copy of it I'll probably talk some more about it.

This combined feedback has me re-thinking a couple of my very basic investing decisions. First of all, using Fidelity instead of ETrade looks like a no-brainer. And second, my decision to buy "blend" ETFs instead of just straight up value ones is questionable at best. It's hard for me to envision moving operations to Fidelity (given that I just rolled a 401K away from them) and perhaps I'll just wait for ETrade to get the memo and start offering zero cost ETFs of their own.


Danielle said...

The Bogleheads Wiki is a great resource for index-based investing:

VBCurtis said...

This is some great stuff, written at a level I attempt to achieve when trying to advise friends on what to do with longterm savings. The 2nd post even better, in a tone that shows we all have something to learn.