Financial Advisors

[meditate89]

I answered the 'risk capacity' questionairre thing from IFA, which seemed somewhat simplistic, and rather poorly worded in places. The site seems to suggest that beta is a good measure of risk. Also, the site seems to suggest that markets are efficient in a few places... ie in question #20, there is no option to buy more equities after the market theoretically crashes. Obviously a lot of us would pour a ton of $$$ into the market if it went down 20%... so why isn't this an option? Even if you believe in efficient markets that drop 20% in a day... it sure seems like a good time to buy... maybe they'll go back up 20% just as efficiently tomorrow?
If Price = Value, then Price*(80%) < value. Time to buy more? Those stocks are WORTH exactly the same as they were yesterday, IF you judge their worth on future cash flows.

#21 seems like a trick question... I have no problem with international exposure, but I don't want to own 99% of mutual funds out there... because the managers buy high, sell low, and are often pressured to produce short term results. Also fees + expenses will make this fund return less than even an index fund.

I answered the international question "wrong" on purpose because I truly wouldn't want to buy a mutual fund in nearly all cases... anyways the site spit out some crappy allocation-
w 45% fixed income!!

keep in mind I answered all of the risk questions @ the highest tolerance, i'm young long time horizon, etc, etc... got all the other questions right (v easy qs) I imagine my profile is very similar to the avg poker player.

Also the allocation was split up over 15 different funds...
My allocation should only take 4-5 funds.
I wonder if more IFA funds = more money lining IFA's pockets, or if it is based solely on amount of money invested? Would really like to know the answer to this.

I think I was recommended the "45" profile- which I didn't like. But the "100" profile on their site looks fairly solid... If I invested solely in index funds, it would probably look something like this.

[meditate89]

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if we are talking about strictly passive investments:

1) market timing is not optimal

2) dollar cost averaging is not optimal


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I really don't agree with this- it's just too broad of a statement. It really just depends too much on the investors skill level / objectives. If you mean solely index funds when you say 'passive investments', then I agree with you to a much much greater extent than I originally anticipated- but I see most of the equity purchases I make as passive investments- I'm going to hold them for a very very long time

I would argue that market timing is very important for anyone looking to maximize their returns... Put quite simply, the cheaper the price you pay, the higher your return will be.

Would you rather buy to hold for the next 20 yrs after a 20% increase in equity prices or a 20% decrease in equity prices?

While I'm not going to sit here and tell you I can time or predict the market with any certainty, I can certainly be very patient and wait for a good pitch. I can't really tell you if an index fund is a good pitch, but I could probably figure out if McDonald's was a good pitch.

In fact, there's tons of good buys out there at this very moment.

Make a list of companies you'd be happy to own; check up on them once in a while to see if they're on sale enough to buy- it might take you a while- but probably not in this market.

As for DCA-
I bought a company that represented about 5-10% of my portfolio. I really like the company, and I believe it was trading at a small discount to intrinsic value. This company went down about 15-20% in price. At this time I believed it to be significantly undervalued and acted accordingly; it went up to about 35-40% of my portfolio, mostly through adding new money.

For passive investments you want to DCA on the way down (A more technical approach may only want DCA on the way up!)

So while I'm not going to try to time the buying of an index fund, since they will go up in the long run and I don't want to miss one of the best performing days of the year by not being invested, nor am I going to average into an index fund for similar reasons, I think there are many passive investment opportunities in individual stocks and I think largest returns will be produced by buying troubled / out of favor / beaten down / small / undetected companies and holding them as a passive investment

[lehighguy]

Read "A Random Walk Down Wall Street"

http://www.amazon.com/Random-Walk-Down-W...6699&sr=8-1

[DcifrThs]

[ QUOTE ]
[ QUOTE ]

if we are talking about strictly passive investments:

1) market timing is not optimal

2) dollar cost averaging is not optimal


[/ QUOTE ]

I really don't agree with this- it's just too broad of a statement. It really just depends too much on the investors skill level / objectives. If you mean solely index funds when you say 'passive investments', then I agree with you to a much much greater extent than I originally anticipated- but I see most of the equity purchases I make as passive investments- I'm going to hold them for a very very long time

I would argue that market timing is very important for anyone looking to maximize their returns... Put quite simply, the cheaper the price you pay, the higher your return will be.

Would you rather buy to hold for the next 20 yrs after a 20% increase in equity prices or a 20% decrease in equity prices?

While I'm not going to sit here and tell you I can time or predict the market with any certainty, I can certainly be very patient and wait for a good pitch. I can't really tell you if an index fund is a good pitch, but I could probably figure out if McDonald's was a good pitch.

In fact, there's tons of good buys out there at this very moment.

Make a list of companies you'd be happy to own; check up on them once in a while to see if they're on sale enough to buy- it might take you a while- but probably not in this market.

As for DCA-
I bought a company that represented about 5-10% of my portfolio. I really like the company, and I believe it was trading at a small discount to intrinsic value. This company went down about 15-20% in price. At this time I believed it to be significantly undervalued and acted accordingly; it went up to about 35-40% of my portfolio, mostly through adding new money.

For passive investments you want to DCA on the way down (A more technical approach may only want DCA on the way up!)

So while I'm not going to try to time the buying of an index fund, since they will go up in the long run and I don't want to miss one of the best performing days of the year by not being invested, nor am I going to average into an index fund for similar reasons, I think there are many passive investment opportunities in individual stocks and I think largest returns will be produced by buying troubled / out of favor / beaten down / small / undetected companies and holding them as a passive investment

[/ QUOTE ]

this is precisely why i broke it up into two sections.

again, this is my opinion and others can vary, but some of the sharpest minds in finance theory out there today agree (i.e. i share their opinions not the other way around).

DCA and market timing have no place in passive investing. anytime you make a decision like "oh, this looks more valuable today than it did yesterday" or "i think i'll wait to purchase this in 2 weeks since i think i can get a better price" or "the market tumbled today, i see some good value stocks i'd like to buy and hold for al ong time that didn't look attractive yesterday" you've implicitly made an active decision and have strayed from imo strictly passive decision making. this is regardless of your investment horizon. people oftentimes (from what i've seen) mistake investment horizon for active vs. passive allocation. this is a more controversial genearl statement since portfolio efficiency can mandate different allocations based on an investment horizon and risk tolerance, but in general, if you choose one thing over another and then hold it for 50 years, you've still made the active decision to purchase it and are thus "active"ly investing imo and not "passively" investing.

to me this seems extremely logical and intuitive but i guess it has been ingrained for so long that "holding an investment for a long time" just automatically relates to "passive investing" despite the fact that the decision to hold that security vs. another one is an active decision. "

a clear example of this fallacy is when you say :

[ QUOTE ]
I think largest returns will be produced by buying troubled / out of favor / beaten down / small / undetected companies and holding them as a passive investment


[/ QUOTE ]

this is an active decision. you are choosing which companies to purchase. this requires information and a filtration of that information such that you make a decision to hold certain stocks. just because your time frame is large, doesn't mean you're investing passively. passively imo implies NOT make decisions and simply collecting risk premia from broad asset classes.

we've had this debate on this forum before and i always seem to be the lone voice saying this but again, it just seems so obvious to me that i often find myself shocked to hear people get so up-ended about it.

i dunno, i can be wrong, but i have yet to hear a convincing argument.

Barron

[DcifrThs]

[ QUOTE ]
Read "A Random Walk Down Wall Street"

http://www.amazon.com/Random-Walk-Down-W...6699&sr=8-1

[/ QUOTE ]

everybody keeps saying to read this book...it doesn't look THAT attractive to me and i'd rather work on other things.

can you guys help me decide how basic/complex boring/interesting this book is??

thanks,

Barron

[stinkypete]

[ QUOTE ]
I just ordered it based on the fact that you said other people said it was good. Reading books is +EV no? Even if you only get one good idea from it, thats a pretty sick deal for $20.

[/ QUOTE ]

if you consider that you could have instead used that time to read a book with 3-5 good ideas, it's not such a sick deal for $20 anymore is it?

[DcifrThs]

[ QUOTE ]
[ QUOTE ]
[ QUOTE ]
I just ordered it based on the fact that you said other people said it was good. Reading books is +EV no? Even if you only get one good idea from it, thats a pretty sick deal for $20.

[/ QUOTE ]

if you consider that you could have instead used that time to read a book with 3-5 good ideas, it's not such a sick deal for $20 anymore is it?

[/ QUOTE ]

read them both?

[/ QUOTE ]

i wouldn't have posted that if i would easily be able to read them both.

i'm currently reading a very intense book by mandelbrot about the mathematics behind fractals and scaling in the financial markets.

i've ordered another book about active portfolio management and the mathematics behind signal generation.

i read the economist cover to cover weekly and read the FT and WSJ throughout the day.

i'm further working again with matlab to make sure my skills are first rate so i can hit the ground running with that program at my new job when i get one (that i'll likely have to use it for).

if i could squeeze in another book i would. but the maths books are very dense and will take a while to get through.

so given all that, should i read the random walk down the street?

Thanks,
Barron

[DcifrThs]

also, does anybody want to comment on my discussion with meditate89?

am i still the only one who feels that way about the distinction between active and passive investment management?

meditate, would you care to chime in again?

Thanks,
Barron