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.
I'll admit to bias, because I am a professional financial advisor, but I'll make the case against index funds for completeness' sake.
If you have the discipline to invest a significant portion of your income, can weather storms in the market without panicking, and are in a simple enough taxation situation that you can figure out how best to shelter your income without needing professional advice, then you don't need an advisor. Empirically, however, most people do not meet this description. I know some who do, but a lot more say things like "I don't want to be bothered", or they have taxation situations that are complex enough they can't practically keep track(which is easier than it sounds - even having a company is more than enough to put you over that line), or they talk about how they sold all their investments and went to cash in January 2009. Active investments aren't terribly wonderful in their own right, but active investment with an advisor is empirically superior to passive non-advised investment for most people.
Also, the system does need some active management - passive investors are freeloading and not aiding price discovery, so if the whole market went passive then active investment would win handily. This isn't an issue right now, but it could well be if the passive school of thought gets much more prominent.
"active investment with an advisor is empirically superior to passive non-advised investment for most people." Can you source this?