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Metus comments on Open thread, September 15-21, 2014 - Less Wrong Discussion
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According to the efficient market hypothesis index funds should be the best way for the average person to gain a return from investment. Now there is a plethora of indices to invest in. How should one find the 'best' one?
Further, only a relatively small part of return generating assets are captured in publically tradeable assets. What about private equity and real estate, huge parts of the economy?
Funds take a fraction of the earnings out, as management fees, and you want the fund that charges the lowest such fees. The early retirement blogs I read seem to agree on Vanguard being the best choice, at least in the US.
IIRC real estate prices in the US rise about 1% per year inflation adjusted while stock markets rise about 7 % on average. An average person needs a huge loan to invest in real estate and go all in which means zero spread of risk. Real estate is also relatively illiquid not only because of practical reasons but because the return of investment depends on timing of the transaction. You're shit out of luck if you need money while the price of your house is plummeting.
Depends on your risk tolerance. The bigger the index, the lower the risk and the lower the possible returns, generally. Also bigger index funds are usually more liquid. Transaction costs matter quite a lot unless you have a big lump sum to invest, and even then you should consider dollar cost averaging.
That's not true. It's easy to get exposure to real estate through REITs. For example, through my wealthfront.com portfolio, I'm invested in Vanguard's US REIT ETF, VNQ.
I stand corrected.
YRC. I thought you were forgetting to adjust the stock market returns for inflation, so I went to hunt for more accurate numbers, but apparently 1950-2009 S&P500 inflation-adjusted returns (counting not just price rise, but dividends) averaged to 7% per year.
Thanks. If you care about transaction costs you should probably invest in funds that reinvest dividends automatically.
There is also real estate taxes just for holding the asset and upkeep expenses too! But to be fair, asset appreciation isn't the only return on real estate, many investment properties are income producing assets. But then again you can just get that exposure from REITS anyway.
I an efficient market the expected value wouldn't be all that different between options, so base it on your risk management preferences.