Timing the market and picking individual stocks (or other assets)—or even picking individuals to make choices on your behalf—requires way more skill and resources than most people acknowledge.
Interesting read. Diversification is more than it seems from a strictly investment lens. Set aside for the moment those with greater than $1 million in financial assets of any kind. Most of the economic net worth of individuals and households is tied to their human capital. In this light, the role of investment risk to economic wealth is mitigated more than it seems, at least for the masses. Just be careful about investing in your own company's shares and, of course, small businesses with most of the owners wealth tied up in the business have a risk problem to be managed.
By "Diversification is more than it seems from a strictly investment lens" you're saying to also consider other factors, such as other income (e.g. from a full-time job, which could include salary and also less reliable forms of compensation, such as stock options)?
Agreed!
E.g. It might not be ideal for 2 partners to work for the same company. And I personally count stock options as almost worthless (since they usually are).
What I hold is more complicated and is diversified geographically as well (including equities and nominal bonds from China, other Asia, Europe), so it's 18 funds instead of 5.
And I doubt I hold 7.5% in gold because (as I mentioned above) I've still never understood why Dalio or anyone likes it.
I'll probably write another article sometime if enough people are interested.
But overall, if I could start again, I might not buy as many different index funds as I have.
You can keep the Pareto principle in mind and realize that the simple approach of ~5 index funds could be quite effective without being complicated.
It's food for thought if someone who managed that much money says that index funds are the best bet of retail investors.
Timing the market and picking individual stocks (or other assets)—or even picking individuals to make choices on your behalf—requires way more skill and resources than most people acknowledge.
I wouldn't recommend it, based on what I've seen.
Interesting read. Diversification is more than it seems from a strictly investment lens. Set aside for the moment those with greater than $1 million in financial assets of any kind. Most of the economic net worth of individuals and households is tied to their human capital. In this light, the role of investment risk to economic wealth is mitigated more than it seems, at least for the masses. Just be careful about investing in your own company's shares and, of course, small businesses with most of the owners wealth tied up in the business have a risk problem to be managed.
By "Diversification is more than it seems from a strictly investment lens" you're saying to also consider other factors, such as other income (e.g. from a full-time job, which could include salary and also less reliable forms of compensation, such as stock options)?
Agreed!
E.g. It might not be ideal for 2 partners to work for the same company. And I personally count stock options as almost worthless (since they usually are).
Ryan is making good points and the research is clear that advisors cannot consistently beat the market
Even the heads of some of the largest financial institutions in the world fail to grasp this basic fact.
I know because I've met some of them.
How they had risen to hold those positions escapes me.
It blew my mind when I heard some of them defend their portfolio allocations by saying "Well, these stocks have had great performance *in the past*."
Hopefully they remember the lessons that we then taught.
Past performance does not indicate future results.
(How easy it would be if that were true!)
Great post - very informative! Would definitely like to hear more about the "All weather" strategy.
Thanks!
I did a quick search and found https://portfolioslab.com/portfolio/ray-dalio-all-weather
It says 40% TLT, 30% VTI, 15% IEF, 7.5% DBC, 7.5% GLD.
I'd double-check those against what Dalio shared in the books when interviewed by Tony Robbins:
MONEY Master the Game: 7 Simple Steps to Financial Freedom by Tony Robbins
https://amzn.to/2GL7h1X (689 pages)
Unshakeable: Your Financial Freedom Playbook by Tony Robbins
https://amzn.to/2UJ9tMB (257 pages)
What I hold is more complicated and is diversified geographically as well (including equities and nominal bonds from China, other Asia, Europe), so it's 18 funds instead of 5.
And I doubt I hold 7.5% in gold because (as I mentioned above) I've still never understood why Dalio or anyone likes it.
I'll probably write another article sometime if enough people are interested.
But overall, if I could start again, I might not buy as many different index funds as I have.
You can keep the Pareto principle in mind and realize that the simple approach of ~5 index funds could be quite effective without being complicated.
@Ryan Walsh I should commend this breakdown of Alpha and beta investors. I read from beginning to end, first time in a while I do that.
However, It seems your tone on crypto is very passive. May be that is the void my newsletter provides https://cryptofada.substack.com/
Crypto is definitely interesting. I even worked in crypto for a year.
I just think that people are likely to be overconfident with alpha. People should be careful.