{"id":3290,"date":"2018-02-07T16:24:18","date_gmt":"2018-02-07T16:24:18","guid":{"rendered":"http:\/\/astraea.net\/blog\/?p=3290"},"modified":"2018-03-20T09:53:43","modified_gmt":"2018-03-20T09:53:43","slug":"investing-how-to-make-money","status":"publish","type":"post","link":"https:\/\/www.astraea.net\/blog\/investing-how-to-make-money\/","title":{"rendered":"How to Invest in Stocks"},"content":{"rendered":"
\"The<\/a>
Optimal returns, for a given risk level, are on the efficient frontier – a statistical fact demonstrable by financial engineers. A market portfolio, or the index, is on this frontier,<\/figcaption><\/figure>\n

It has long been known by investment analysts that optimising risk and return (which is their job) is achieved by tracking the market.\u00a0 Experienced managers, analysts and data all consistently say that, if you want to invest in the stock market buy the index.\u00a0 And hold it.<\/p>\n

Young bucks, and old, would like to beat the market.\u00a0 Some might do so for a limited time period.\u00a0 But no one has consistently done so.\u00a0 Why?\u00a0 Because to beat the market you have to consistently do better than everyone else.\u00a0 That is cocky and statistically very unlikely.<\/p>\n

The opportunity to make better bets than everyone else has declined in recent years as computerised portfolio management and trading has grown and index investing has become the principal approach of behemoths which control sizeable fraction of global share trading, like BlackRock.<\/p>\n

In addition, some data suggests that taking higher risks can in fact lower your expected return, as appeared to happen in the 2000s.\u00a0 We are now 9 years into a bull market with little regulatory reform, growing political uncertainty and upward pressure on interest rates (which might attract capital from equities to debt).<\/p>\n

\"Absoulte<\/a>
The return to risk shrunk as the financial bubble of the early 2000s grew.<\/figcaption><\/figure>\n

The people who beat the market are the ones who take fees (from you) for handling money, or have inside information.<\/p>\n

There are reasons to choose a narrower portfolio of listed equities. You might want to restrict your investment to a country, region or industry, or avoid places or sectors.\u00a0 But to try to pick stocks requires a consistent focus and adaptability.\u00a0 If you are going to do it yourself, fine.\u00a0 But if you are paying someone else, they generally have an incentive to take risks with your money that they mightn’t with their own.\u00a0 And of course their fees eat in to your capital.<\/p>\n

So, simply, if you wish to diversify your savings beyond property (your home usually) or debt (bank deposits etc) by putting some in the stock market be careful not to be blinded by the attraction of “expected return” ignoring the danger of risk, and the cost of fees.\u00a0 So buy a low load (i.e. low fees), index (i.e. market tracking) fund.<\/strong><\/p>\n

(If you wish to use your capital to make a difference you might consider directly investing in small businesses.\u00a0 This has become more accessible with crowd funding opportunities.\u00a0 Or you might invest directly in a local business or a sector for which you have a passion, for example Green, Ethical, Socially Responsible businesses.\u00a0 But all of these options demand more care (“due diligence”) and should be approached with awareness that you can loose all of your investment, and sometimes more if you sign up for that. )<\/p>\n

And remember, most people make money by working, not gambling.\u00a0 Gambling is more likely to break your fortune than make it.<\/p>\n

The following article by The Economist<\/a> (11 June 2016) offers further insight.<\/p>\n

Asset management: <\/span>Index we trust<\/span><\/h1>\n

Vanguard has radically changed money management by being boring and cheap<\/p>\n

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The index-trackers account for over 70% of Vanguard\u2019s assets and over 90% of last year\u2019s growth. Investors are gradually absorbing the idea that, in the long run, beating the market consistently is impossible, Mr McNabb says. That makes being cheap more important than being astute. Last year investors in America withdrew $145 billion from active funds of different kinds and put $398 billion into passive ones.<\/p>\n

\u201cIn an industry with serious trust issues, Vanguard has proven an exception to the rule,\u201d says Ben Johnson of Morningstar. Its investors stay with it roughly twice as long as the industry average. The firm actively shuns short-term \u201chot money\u201d because it brings extra trading costs. Mr McNabb tells the tale of the CEO of a foundation who wanted to park $40m with a Vanguard fund for a few months. When the fund turned him away, he \u201cwent ballistic\u201d, complaining to the SEC, but Vanguard did not budge.<\/p>\n

Vanguard also insists on keeping things simple. It offers only 70 different ETFs, compared with 383 at BlackRock. It steers clear of voguish products, such as funds of distressed energy firms. It refused, presciently, to set up an internet fund in the late 1990s.<\/p>\n

But Vanguard\u2019s conservatism can also be a weakness. It has been slow to expand abroad: its customer base is 95% American. It was slow to get into ETFs as well, allowing BlackRock to become the biggest provider, although Vanguard is catching up. BlackRock is also a one-stop shop for all manner of investments, including alternatives such as private equity and hedge funds, whereas Vanguard caters only to the mainstream. This may be one of the reasons why it does less well with the biggest institutional investors, which want lots of investment options and the kind of bespoke service that Vanguard does not offer.<\/p>\n

There is always a chance that a clever fintech startup, or a tech giant like Apple, might create a cheaper or simpler way for individuals to invest, luring away some of Vanguard\u2019s customers. As it is, it is getting harder for Vanguard to keep cutting fees: to shave its average fee by a hundredth of a percentage point, it needs to attract an extra $560 billion in assets under management. And heavier regulation is always a risk. Last year the industry\u2019s giants won an important battle when they convinced regulators that, unlike banks, fund managers should not be subject to more onerous rules simply because they are big. But talk of rules intended to stem panic in collapsing markets has not gone away.<\/p>\n

Nonetheless, there is plenty of room for Vanguard to keep growing. Only a third of American equities are held by index-tracking funds, and a smaller share elsewhere. Regulators in America and beyond are discouraging or barring financial advisers from receiving commissions from firms whose products they recommend\u2014a move that should push even more money to Vanguard as advisers lose the incentive to offer expensive products (Vanguard refuses to pay commissions).<\/p>\n

As the move from defined-benefit to defined-contribution pensions continues, and as Asia sets up its retirement systems, there will be growing demand for the sort of \u201cDIY\u201d investing that has underpinned Vanguard\u2019s success. With interest rates and investment returns expected to be low for years to come, keeping fees down will be more important than ever. As Tim Buckley, the firm\u2019s chief investment officer, puts it: \u201cThe biggest advantage Vanguard has, aside from its structure, is the greed of our competitors.\u201d<\/p>\n<\/div>\n<\/div>\n<\/div>\n","protected":false},"excerpt":{"rendered":"

It has long been known by investment analysts that optimising risk and return (which is their job) is achieved by tracking the market.\u00a0 Experienced managers, analysts and data all consistently say that, if you want to invest in the stock market buy the index.\u00a0 And hold it. Young bucks, and old, would like to beat …
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