It's time for poker players to start putting their money to work.

[aceupthepants]

If you have 1.7 million in investments that are earning 9% a year then I am pretty confident that you could comfortably retire in many places other then Montana.

[Scorpion Man]

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Newt,
A financial advisor will almost certainly do worse than you could on your own in a few index funds. A lot of financial advisors get paid by directing you to loaded mutual funds or if they are buying individual stocks for you then they get paid by charging you a percentage (maybe 1) of your assets. These fees would put them in the hole against a low cost index fund right off the bat, and it would be very difficult to recover unless they got lucky or had some kind of real stock picking skill that Scorpion refers to. Unfortunately anyone with real stock picking skill would not be available to you unless you had a very high networth. Since they can beat the market, their only incentive to work for someone else would be to get access to larger amounts of money than they would otherwise have, increasing their returns. Basically financial planners are only out there to guide the "my mom" types of people who know they should invest, but are too scared to do it on their own and therefore are willing (or unknowingly do so) to pay someone else to do it for them.

If you invest in index funds across several different asset classes (stocks, bonds, real estate, foreign, maybe commodities) thats really all you can do, without spending a lot of time trying to pick stocks and hoping you are the one with the luck or skill who can beat the market.

Max

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Good post, Max. I agree with most of this. To answer Newt's hedge fund questions...one problem is they tend to have high minimums ($250k at least...this means you need to have at least a $1m (many would say more) portfolio to use them). They are also wildly tax inefficient much of the time. In addition, it is not clear to me that they have the opportunity to make money today they did 10 years ago because of the proliferation of funds. So...while I said all the talent has gone there (it has), it does not necessarily mean all your money should go there. I have about 15% of my assets in hedge funds...but I am long time personal friends with each of the guys I am invested with.

Max, the only addendum I would make to your post is that a good advisor does have some value to, I am guessing, more than the majority of people on these boards. I have an MBA, I worked exclusively with financial markets since 1990...and I still find it helpful to work with my guy in certain areas, for instance. And I have my muni portfolio 100% farmed out to an advisor with discretion, I don't even touch it because its a specialized area.

At the very least, I think a great advisor (and I agree that 90% of advisors meet your description) can keep people out of trouble. It also forces people to be diligent...for example I left too much in munis and it helped to have my guy bugging me to follow through and buy some indexes, which had not been part of my portfolio historically.

With all of this stuff, I just think its hard to make blanket statements. It may be true that Max does not need any help, is knowledgeable, and is diligent. I just don't feel that can be said of everyone. Also, particularly for younger people who have not seen failure, an advisor with a deep exeperience can lend some perspective to issues such as loaning money to friends and family, or investing in private companies (which is generally a disaster).

Lastly, if you get into buying individual stocks in size one day, I find it very helpful to have a broker because I am out and about and busy...I cannot sit at a terminal and keep moving limits around on ETrade to get the prints I want, particularly not in illiquid stocks. I think that is not very relevant for most folks here today...but its another example of why it's not black and white.

(I AM NOT A FINANCIAL ADVISOR)

[Scorpion Man]

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If you have 1.7 million in investments that are earning 9% a year then I am pretty confident that you could comfortably retire in many places other then Montana.

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No, you can't. You are going to want to own a house, for starters, and this won't even buy that.

You have to keep it in today's terms -- it ain't $1.7m, its less than half that. And where is that 9% coming from? If you want "safe" money that you have to live on, you will be in bonds, earning 3.5% after tax. So you now have no house, and in today's terms, are earning like $25k per year after tax to support your wife and kids. You can't earn 9%, because you would ahve to be fully in stocks to do it and you need the cash flow.

I have friends with a lot more money than $1.7m who are nowhere NEAR being able to retire.

[DesertCat]

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all of the talent has gone to the hedge fund industry.

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When I did some research on my own it wasn't difficult to come to the conclusion that generally index funds are better than mutual funds. But you've mentioned more than once how much better hedge funds are than mutual. Do you have any recommendations on where to start in choosing a good one?

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There is a ton of evidence that index funds offer better returns, in aggregate, than mutual funds. Doesn't mean there aren't mutual funds that will outperform, just that it's hard to find mutual funds that will continue to outperform.

There is also evidence that index funds offer better returns in aggregate, than hedge funds. Studies that show the hedges class offering outperformance over index funds usually ignore survivorship bias, which is very important when the hedge fund stragglers are mercilessly culled. It is true that hedge fund management incentives are much better, it's structure is much better, and that means that it's attracted some of the best managers from mutual funds. But it's also attracted thousands of so-so, or outright crappy/fraudulant managers.

Think of it this way. The mutual fund format heaps burdens on it's managers, so much so that it's difficult most to beat the index funds by more than the 2% per year in fees/costs they charge. The hedge fund format reduces some of those burdens, adds some strong incentives, but also ensures that in good years your manager makes a lot more than 2%. So they have to beat the market by more than 2% for the client to beat it as well. I think the result is often called a "wash".

In the end I think successful hedge fund selection has the same difficulties that mutual fund selection does, plus some others. First, you have to find a management team that's good, not just short term lucky. Second, by the time they have enough of a track record for you being confident it's not luck, you have to worry about the manager retiring, key employees leaving, or losing their work ethic. Third, even if the same team keeps doing well, they will get so much new money thrown at them that it's going to be much harder for them to put all that money to work in only good ideas.

Lastly, hedge funds appear to be more likely than mutual funds to be outright frauds (though this is a small risk, maybe one in a thousand). Don't get me wrong. I think your best absolute returns can be found in hedge fund land, I just think it's unlikely you'll be able to invest in one of the winners. You are more likely to invest in a fund that offers okay returns but kills you with fees. So my advice is to stick to index funds.

[maxtower]

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Buying individual stocks is too risky to be done with money crucial to your retirement. If you think you have a talent for picking stocks, you probably want to put 80% of your savings into a diversified portfolio of non-correlated assets (think domestic and foreign stocks, real estate, bonds, commodities). Dollar cost average into your positions and rebalance once a year.
Then try picking stocks with your remaining 20%. If you are good at it, you're individual stock selections' returns will quickly surpass your earnings from your safe money.

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I don't agree with this...in your 20s there is no such thing as money that is crucial to your retirement.

Now, buying stocks when you have no idea what you are doing is another matter entirely.

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Actually, you're incorrect. Because of compounding, money saved when you are 20 is worth far more than money saved when you are over 30. Think about it this way...
If you had a good job where you could save $20k/year, you would have $200,000 saved by the time you are 30. With 9% compounding (assuming diversified portfolio), you would have around $300,000. If your plan is to retire when you are 50, you wouldn't have to save another dime. Spend your whole salary and just let compounding over the next 20 years bring you to 1.7 million. Saving money from ages 30-40 in this way would not allow you to stop saving from 40-50 and still retire with the same nest egg even if you could sock away $30,000 instead of $20k. You would have $700k less.

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I have to admit that I am puzzled as to why folks are in the "you are incorrect" camp instead of the hmmmm, that seems different than what I have heard before, can you explain why you are saying that?

It is just not as simple as you are making it out to be. Of course money compounds over time. We are talking about risk and reward. More money saved earlier at higher rates is better...that is indisputable. But we are talking about trade offs. You are assuming certain rates of return...one of the reasons I ended where I did was that I took a more aggressive approach when I could afford the risk and had a much bigger stock market "BR" than others by the time I was 30. My point about age was that you can withstand the downswings MUCH better at a young age for 2 reasons...you have time to make it back up and your assets are usually small in relation to your earnings base. 9% compounding is nice. I compounded at more like 25% for a lot of years. And, as you point out, it is a HUGE difference to do that young.

Oh. And $1.7m is not within spitting distance of retiring money unless you live in montana. even then it would suck. And you are not inflation adjusting. Much of the return you are assuming is from inflation. $1.7m in 30 yrs is (off top of my head i am sure its wrong) more like $600-700k today.

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Yes, risk vs. reward is the reason for indexing. You said money made in your 20s isn't crucial. I was just defending my position that it is. Of course if you have the ability to make 25%/yr. on average, you are going to want to do that. I suspect that this cannot be done (I really don't know) without taking on a lot more risk than is involved with indexing. Therefore I offered a strategy for someone who has the potential to achieve high returns to avoid losing all their retirement money, while still gaining an advantage by trading with a portion of their net worth lowering overall risk. Clearly everyone can't make market beating returns. If everyone bought the same stocks, then they would be priced too high to make any money from them. By taking on more risk, you increase the chance that you will be farther away from the average positive or negative. The conservative investor will realize this and index the bulk of his assets. Someone with more confidence in their stock picking ability and higher risk tolerance, such as yourself, will want to go for the gold!
The average poker player reading this forum should understand these risks clearly before jumping in and trying to beat the market buying individual stocks.
Also the 1.7mil figure isn't really up for debate, that was just a compounding example I threw out. But just for fun, $600k in a 5% savings account today would earn you about what the average american makes.

[good2cu]

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Newt,
A financial advisor will almost certainly do worse than you could on your own in a few index funds. A lot of financial advisors get paid by directing you to loaded mutual funds or if they are buying individual stocks for you then they get paid by charging you a percentage (maybe 1) of your assets. These fees would put them in the hole against a low cost index fund right off the bat, and it would be very difficult to recover unless they got lucky or had some kind of real stock picking skill that Scorpion refers to. Unfortunately anyone with real stock picking skill would not be available to you unless you had a very high networth. Since they can beat the market, their only incentive to work for someone else would be to get access to larger amounts of money than they would otherwise have, increasing their returns. Basically financial planners are only out there to guide the "my mom" types of people who know they should invest, but are too scared to do it on their own and therefore are willing (or unknowingly do so) to pay someone else to do it for them.

If you invest in index funds across several different asset classes (stocks, bonds, real estate, foreign, maybe commodities) thats really all you can do, without spending a lot of time trying to pick stocks and hoping you are the one with the luck or skill who can beat the market.

Max

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Good post, Max. I agree with most of this. To answer Newt's hedge fund questions...one problem is they tend to have high minimums ($250k at least...this means you need to have at least a $1m (many would say more) portfolio to use them). They are also wildly tax inefficient much of the time. In addition, it is not clear to me that they have the opportunity to make money today they did 10 years ago because of the proliferation of funds. So...while I said all the talent has gone there (it has), it does not necessarily mean all your money should go there. I have about 15% of my assets in hedge funds...but I am long time personal friends with each of the guys I am invested with.

Max, the only addendum I would make to your post is that a good advisor does have some value to, I am guessing, more than the majority of people on these boards. I have an MBA, I worked exclusively with financial markets since 1990...and I still find it helpful to work with my guy in certain areas, for instance. And I have my muni portfolio 100% farmed out to an advisor with discretion, I don't even touch it because its a specialized area.

At the very least, I think a great advisor (and I agree that 90% of advisors meet your description) can keep people out of trouble. It also forces people to be diligent...for example I left too much in munis and it helped to have my guy bugging me to follow through and buy some indexes, which had not been part of my portfolio historically.

With all of this stuff, I just think its hard to make blanket statements. It may be true that Max does not need any help, is knowledgeable, and is diligent. I just don't feel that can be said of everyone. Also, particularly for younger people who have not seen failure, an advisor with a deep exeperience can lend some perspective to issues such as loaning money to friends and family, or investing in private companies (which is generally a disaster).

Lastly, if you get into buying individual stocks in size one day, I find it very helpful to have a broker because I am out and about and busy...I cannot sit at a terminal and keep moving limits around on ETrade to get the prints I want, particularly not in illiquid stocks. I think that is not very relevant for most folks here today...but its another example of why it's not black and white.

(I AM NOT A FINANCIAL ADVISOR)

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SM,

The main problem is finding a trustworthy finical advisor. Most young professional poker players are now making far more money then their parents and have no way to get in contact with or evaluate brokers/finical advisors/brokers etc. It is outside our social network, many of us are only one or two years outside of high school. To me it offers the same problems as buying induviail stocks, I fear not knowing what I'm doing and not having the tools necessary to evaluate the advisors/stocks, and end up being a "fish" and having my ignorance taken advantage of. I feel like all of us are better off playing poker, educate ourselves about investing and play it safe in CDs, Index funds etc. for the next few years.

[aceupthepants]

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If you have 1.7 million in investments that are earning 9% a year then I am pretty confident that you could comfortably retire in many places other then Montana.

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No, you can't. You are going to want to own a house, for starters, and this won't even buy that.

You have to keep it in today's terms -- it ain't $1.7m, its less than half that. And where is that 9% coming from? If you want "safe" money that you have to live on, you will be in bonds, earning 3.5% after tax. So you now have no house, and in today's terms, are earning like $25k per year after tax to support your wife and kids. You can't earn 9%, because you would ahve to be fully in stocks to do it and you need the cash flow.

I have friends with a lot more money than $1.7m who are nowhere NEAR being able to retire.

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Where do you live? In 2004 the average cost of a house in the United States was $264,540. To say you can't even buy a house for 1.7 million is absurd. Not to mention the vast majority of people who will have paid off a large percentage of their mortgage by the time they decide to retire. The average household earns around 45,000 dollars. If you were to deduct the average income from the 1.7 million you’d be able to live off of it for 37 years. Add that to the fact that you will be receiving interest greater then the cost of inflation and this allows for an even longer retirement. Not to mention by this time one’s kids will have moved out and no longer be an expense (hopefully), which would lower the cost of living. I guess the additional medical attention might be an equivalent trade off though.

I don’t question your investment credentials but your mind appears to be a bit warped due to the fact that you make mega money, don’t forget there are a lot of “average” people out there and they are ok with that.

[edtost]

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The average household earns around 45,000 dollars. If you were to deduct the average income from the 1.7 million you’d be able to live off of it for 37 years. Add that to the fact that you will be receiving interest greater then the cost of inflation and this allows for an even longer retirement. Not to mention by this time one’s kids will have moved out and no longer be an expense (hopefully), which would lower the cost of living. I guess the additional medical attention might be an equivalent trade off though.

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Trying to plan to die broke by retiring early and eating principal from your investments seems like a really bad idea to me, though even if you thought that was a good idea, any calculations should involve inflation.

[Scorpion Man]

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The main problem is finding a trustworthy finical advisor. ,,,,,,,. It is outside our social network, many of us are only one or two years outside of high school.

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YES. Agreed. But just because its the "main problem" does not mean its not the right answer. Not everyone needs an advisor. Hell...I did not use one for very many years. I do believe that the vast majority of young poker players could benefit from one, though, even if the purpose were only to get educated...this is not prison...you can always walk from an advisor you don't like or don't need anymore.

Your point about the social network was the WHOLE REASON I STARTED THIS THREAD IN THE FIRST PLACE. I know this is not your world, but it is mine. I was offering to help with some perspective.

There is nothing wrong with index funds and CDs, as long as you have a plan that is well executed and diligently followed. The simple fact is that most people do not follow through on even the most basic financial plans. If you are going to read all of the time, actively rebalance your portfolio when one category outperforms over time, not leave too much money in cash out of laziness, etc...then you might be fine. The simple fact is that it takes time to get educated about your financial alternatives, and one mistake that could have been avoided by dealing with people with more experience is incredibly valuable.

The financial world is always changing. This mantra that you should index and hold forever is not totally accurate or ideal. Did you know that if you bought the Dow Jones in 1968, you did not get back to even for FOURTEEN years, in 1982? Much worse than this, it was down 40% (!) in inflation adjusted terms over that time. If you happened to be buying indexes in 2000 as your main entrypoint it was a total disaster. It is not as simple or as "low risk" as people make it out to be. You can lose real money in any asset at any time.

[DesertCat]

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Did you know that if you bought the Dow Jones in 1968, you did not get back to even for FOURTEEN years, in 1982? Much worse than this, it was down 40% (!) in inflation adjusted terms over that time.

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Are you counting dividends during this time frame?