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The biggest trick, of course, is going to be figuring out where and what to put money in first as I stick my toe into the water.
Actually is easy.
Low-cost stock index fund. (Don't worry about ETFs as you won't be doing a lot of trading.)
Just pick one. The expense ratio should be under 0.05%.
Meanwhile the entrepreneurial way is the only way to build the aforementioned billions, but it’s dicey and unsteady, and the likelihood of success is vanishingly small. Most mom-and-pop businesses either fail outright or remain mom-and-pop, meaning copiously hard work but thin profit margins. They don’t flower into anything grand! But the few grand ones dominate the headlines. Our myths are based on survivorship bias.
OK. That's your "risk avoidance" talking
That's a decade long training & education on how to avoid failures in life. I agree with you statistically speaking. BLS data show 7 out of 10 small business fail in the first 5 years, then the remaining 70% fail in the next 5 years. So the data is "real". I do not argue that.
But since I am a "glass half full" guy, allow me to point out the positive even if the mom & pop restaurant failed or remain mom & pop. Often the mom & pop owners started out in a lower social-economic class, or recent immingrants with no viable means to get a high paying W-2 jobs, either from a lack of "right" education or a lack of english speaking ability. A restaurant allow them a decent income that provide them shelter, food, and security. A classic example is the first generation mom & pop work hard in restaurant while their children excel in school and later become doctors, accounts, and engineers. I see the real life examples of this when I worked at Boeing. Many Vietnamese engineers came from the nearby Little Saigon with their parents worked hard in the small business so they can afford to go to college and get a well-paying job. Another possibility that we don't see from the outside is mom & pop take the income from restaurant earnings and invest in real estate. In the long run, the real estate appreciated and both mom & pop can comfortably retire. Restaurant is hard work with long hours, no doubt. That's why my "poor dad" encourage me to get a degree and a good job. Working for an employer is much easier compared to working in restaurants for sure.
To start an engineering company speak more to a founder's passion than money. Statistically it maybe one in a billion to become a Rockwell or Lockheed, but it does not need to be a multi-billion corporation to achieve your dream. For every Rockwell there're tens of thousands of smaller companies that's doing very well. I know a couple of engineers who started their own company 15 years ago, while their company remain small but it still employs 50 people and doing the type of work they enjoy. Would they like to grow the company size? Sure, but it may also mean they'll loss control by handing over the day-to-day management to managers. At the end, it all depens on what makes you happy.
...Often the mom & pop owners started out in a lower social-economic class, or recent immingrants with no viable means to get a high paying W-2 jobs, either from a lack of "right" education or a lack of english speaking ability. A restaurant allow them a decent income that provide them shelter, food, and security. A classic example is the first generation mom & pop work hard in restaurant while their children excel in school and later become doctors, accounts, and engineers.
Of course. But to your own example, the second or third generation of immigrants does the doctor/lawyer/engineer thing. They’re no longer running the mom-and-pop shop. Thus the shop is more of an expedient and a necessity, rather than an engine of unbridled wealth-generation.
Ultimately, lifelong financial success is about cashflow and investment prowess. Good cashflow can come from being a medical doctor who lives modestly… or from owning a chain of laundromats. Neither the one nor the other is inherently superior. The second part is investment. Our doctor-friend can just plow her savings into the S&P 500, and call it good. The laundromat guy might buy fast-food franchises, gas stations, apartment complexes or whatnot. Again, what matters is cumulative rate of return… the ends, not the means.
Yet somehow our culture lionizes the hardscrabble business-owner, and condemns the medical doctor as being an elitist fatcat. Why is that?
Quote:
Originally Posted by HB2HSV
...I know a couple of engineers who started their own company 15 years ago, while their company remain small but it still employs 50 people and doing the type of work they enjoy. Would they like to grow the company size? Sure, but it may also mean they'll loss control by handing over the day-to-day management to managers. At the end, it all depens on what makes you happy.
Sure, but that's more of a passion-project than an ascendancy to great riches. A person who spends a lifetime as a salaried employee may regret not having risked foray into private business. But the regret is one of freedom, creative control, personal achievement.... and not, I say, one of accumulated wealth.
Simply put, being a frugal but highly compensated employee who systematically invests in the stock market, is an excellent (if unsexy) route to building wealth.
Actually is easy.
Low-cost stock index fund. (Don't worry about ETFs as you won't be doing a lot of trading.)
Just pick one. The expense ratio should be under 0.05%.
"Conventional investing wisdom says that the older you get, the less of your financial assets should be in the stock market. One frequently heard justification is that stocks rise reliably in the long run but can fluctuate a lot in the short run and that if you’re old, you don’t have time to recover from a bear market.
Both parts of that formula are problematic. For most retirees, it actually makes sense to increase their exposure to the stock market as they age and spend down their assets. That’s because more of their remaining wealth is in the form of Social Security, which is super safe, so they can afford to take a little more risk in their remaining portfolio of stocks and bonds.
...
Some of it in divergence with the established wisdom...
I'd say it's a matter of diversity in investments, and controlling risk. Nothing is without risk. Even a savings account that's FDIC insured is risky in that it's losing value in a high inflation era.
I'd say it's a matter of diversity in investments, and controlling risk. Nothing is without risk. Even a savings account that's FDIC insured is risky in that it's losing value in a high inflation era.
I believe the Kotlikoff argument here is about asset allocation.
As for risk, diversification does not really control the systematic / market risk. It reduces / eliminates unsystematic (company / industry). It does so essentially by looking at the covariances of the instruments in the portfolio (i.e., if they move in the same or opposite directions) and trying to minimize the portfolio.
One can attempt to position oneself on the optimal risk-return frontier based upon the risk tolerance but that's about it. One isn't controlling that as much as controlling where one is positioned on the risk spectrum.
why do people give links to "important" articles that are behind a paywall? Why don't you give us all a subscription to the NY Times and we'll all have a read??
I believe the Kotlikoff argument here is about asset allocation.
As for risk, diversification does not really control the systematic / market risk. It reduces / eliminates unsystematic (company / industry). It does so essentially by looking at the covariances of the instruments in the portfolio (i.e., if they move in the same or opposite directions) and trying to minimize the portfolio.
One can attempt to position oneself on the optimal risk-return frontier based upon the risk tolerance but that's about it. One isn't controlling that as much as controlling where one is positioned on the risk spectrum.
Assets correlate poorly to each other no matter what they are ..but assets do correlate well to different economic outcomes ….
Author Craig Rowland said it pretty Well.
“Strong diversification is not built by looking at asset class correlation data.
Build strong diversification by looking at the underlying causes.
Understand how different assets respond to changing economic conditions
During the 2008-2009 crisis, all stocks dropped, including many bond funds.
Strategy was designed based upon false assumptions about asset class correlations.
IT IS NOT LIKE YOU CAN ASSUME BECAUSE STOCKS WENT DOWN BONDS WILL GO UP
that is a very very important concept to understand.
You can see that despite what the correlation data shows there is no seesaw link to each other that makes one go up when the other goes down .
That is the flaw in the correlation data . It is how those assets respond to what is going on in the economy that determines when they go up or down or move together not correlation data .
Simply relying upon historical asset class correlations is dangerous because many asset class correlations do not explain why the correlations exist, and what might cause them to change in the future. E.g. the correlation between stocks and bonds in the
1970s was 0.51
1980s was 0.32
1990s was 0.54
2000 to 2009 was -0.83, and
40-year period from 1972-2011 was 0.06.
Assets move for very specific reasons having to do with what is going on in the overall economy, and not what each other is doing as asset class correlations assume.
Economic Condition – Prosperity
Condition
Rising productivity and profits, low unemployment, stable or falling interest rates.
Asset classes
Stocks – Good
Treasury Bonds – Good
Gold – Bad, other markets are doing well, inflation is low and stable, gold has no interest or dividends
Economic Condition – Deflation
Condition
Some economic shock (e.g. credit crisis, market panic) sets off a cycle of declining prices (people reduce their spending), falling interest rates (demand for loans dries up), and rising currency value.
Asset classes
Cash – Good
Treasury Bonds – Good
Stocks – Bad, corporate profits decline
Gold – Loses value same as other assets, however can do well if inflationary policies are taken and the market anticipates serious future inflation. Can do well if negative real interest rates are present. However real interest rates are often not negative during serious deflation.
Economic Condition – Recession
Condition
This is a “tight money” recession. Central bank elected to repeatedly raise interest rates to help tame high inflation in an economy that is already weak, leading to a recession.
This usually lasts 12 to 24 months, until consumers begin spending again or the economy adjusts to a lower level of overall demand.
Asset classes
Cash – Good, can purchase assets at depressed prices
Treasury Bonds – Bad, interest rates rising
Stocks – Bad, economy contracting
Gold – Bad, inflation is slowing down, stopping, or coming back down
Economic Condition –High Inflation
Condition
Too much money circulating in an economy relative to the available supply of goods and services. Prices go up, accompanied by rising interest rates because lenders demand higher returns on borrowed money to compensate for the reduced purchasing power of future dollars.
Wage-price spiral
Too much currency in circulation
Currency worth less. Business costs escalate
Prices go up to compensate
Workers can buy less, so they demand higher wages
Process repeats
Asset classes
Gold – Good, value of currency dropping
Treasury Bonds – Bad, rising interest rates
Stocks – Tread water, often match inflation growth
Cash – Bad, high inflation destroys purchasing power
Mathjack107- Portfolio optimization involves correlations of the individual securities (in fact, variance-covariance matrix) and not the high-level correlations. Correlations, of course, treat the return of each security as a random variable. What you are highlighting (obviously known to academics and professionals) is something that can be added to the modeling. Whether people have done that or not is not clear to me.
The idea that causal relationships have a huge impact in the price movement of assets is something I agree whole heartedly. To me, however, it does not diminish the principles of portfolio optimization but requires more careful / different modeling of risk. I am not close enough to the field to know whether that’s being incorporated in the models or not.
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