Financial Effectiveness Repository

Gunnar_Zarncke

Follow-Up to: A Guide to Rational Investing Financial Planning Sequence (defunct) The Rational Investor

What are your recommendations and ideas about financial effectiveness?

This post is created in response to a comment on this Altruistic Effectiveness post and thus may have a slight focus on EA. But it is nonetheless meant as a general request for financial effectiveness information (effectiveness as in return on invested time mostly). I think this could accumulate a lot of advice and become part of the Repository Repository (which surprisingly has not much advice of this kind yet).

I seed this with a few posts about this found on LessWrong in the comments. What other posts and links about financial effectiveness do you know of?

Rules:

Each comment should name a single recommendation.
You should give the effectiveness in percent per period or absolute if possible.
Advice should be backed by evidence as usual.

General Advice (from Guide to Rational Investing):

Capital markets have created enormous amounts of wealth for the world and reward disciplined, long-term investors for their contribution to the productive capacity of the economy. Most individuals would do well to invest most of their wealth in the capital market assets, particularly equities. Most investors, however, consistently make poor investment decisions as a result of a poor theoretical understanding of financial markets as well as cognitive and emotional biases, leading to inferior investment returns and inefficient allocation of capital. Using an empirically rigorous approach, a rational investor may reasonably expect to exploit inefficiencies in the market and earn excess returns in so doing.

So what are your recommendations? You may give advanced as well as simple advice. The more the better for this to become a real repository. You may also repeat or link advice given elsewere on LessWrong.

Follow-Up to: A Guide to Rational Investing Financial Planning Sequence (defunct) The Rational Investor

What are your recommendations and ideas about financial effectiveness?

I seed this with a few posts about this found on LessWrong in the comments. What other posts and links about financial effectiveness do you know of?

Rules:

Each comment should name a single recommendation.
You should give the effectiveness in percent per period or absolute if possible.
Advice should be backed by evidence as usual.

General Advice (from Guide to Rational Investing):

Capital markets have created enormous amounts of wealth for the world and reward disciplined, long-term investors for their contribution to the productive capacity of the economy. Most individuals would do well to invest most of their wealth in the capital market assets, particularly equities. Most investors, however, consistently make poor investment decisions as a result of a poor theoretical understanding of financial markets as well as cognitive and emotional biases, leading to inferior investment returns and inefficient allocation of capital. Using an empirically rigorous approach, a rational investor may reasonably expect to exploit inefficiencies in the market and earn excess returns in so doing.

A change of mind: The more expensive product can be cheaper in the long run.

Meaning that you can buy disposable cutlery for a few cents or buy proper cutlery for a few bucks and keep it for years and years on end. So when buying anything consider the cost of maintaining it (repairs, taxes, insurance, ...) and of disposing it. The more expensive the item, the more thought you should give to this. My recommendations are housing and transportation.

Be careful with this advice if you're clumsy or destructive or prone to losing things. A more expensive item only lasts longer under circumstances where it's able to be used the whole time.

5richard_reitz11y

It should be noted that there's a nonobvious opportunity cost here; specifically, money spent on the more expensive product can't be invested. For example, mechanical keyboards seem like something that costs more up front that's cheaper in the long run. They cost about an order of magnitude more than membrane keyboards, but last about ten times longer, so you only need one mechanical keyboard to ten membrane keyboards, so the cost equals out in the end. Since the typing experience is much better on mechanical keyboards, by paying more up front, you essentially get a much-improved typing experience for free. But, the extra money you spent on the nice keyboard could've been invested (or used to pay down debt) instead. If there's a an annual real interest rate of 10%, then buying 10 membrane keyboards at $10 over 10 years and investing the money you didn't spend nets $45, not counting re-investing (1). Note that these numbers are made up to make the math simple; in particular, the real real interest rate isn't that high. Also, the membrane keyboard you buy in year 10 isn't going to be the membrane keyboard you buy in year 1. (1) Using present value, in year 1, instead of paying $100 (cost of the mechanical keyboard, ten times the cost of the membrane keyboard), I pay $10 and invest $90 which, at 10%, yields $9. In year 2, you pull $10 out of the investment to buy the second membrane keyboard, so now you have $80 invested, yielding $8 returns. 9+8+...+1 = (9^2 + 9)/2 = 45.

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