Markets are essentially random walks with an upward trend?
Yes, but with a relatively high variance.
“Index funds” are magic boxes that you put money in and your money will grow at the same rate of the market that the fund “indexes”?
This is more or less true (minus some potential entry/manteinance costs)
“Developing world” economies generally grow a lot quicker than those in the “developed world”?
In general this is true, but the variance here is even higher. Lately, though, they are not performing particularly well (see here for example).
And there are enough of these places over the world, and they’re independent enough, that natural disasters/political trouble/etc in a few of them still leave a consistent and high rate of average growth?
So shouldn’t I just put all my money in a fund that “indexes” all these “developing” economies together?
Yes, diversification reduces the risk, but the risk for equities remains in general significantly higher then the one for e.g. government bonds (i.e. losing your money is a real concern).
That said, even with a very good allocation, it should be very hard to make more than 8-10% a year with you investent (not impossible, mind you, chaotic systems are chaotic). This means rouglhy 1-1.3K per year in you condition. Of course, mr. exponential says that the longer the investment, the better (barring future market instabilities). It’s up to you to decide if it’s worth it.
On the other hand, if you don’t need the money now, there are other forms of investing that block your capital for a longer period of time, but with much lower risk.
EDIT
Maybe it’s an obvious advice, but be careful about what you’re doing. If there’s someone you trust to whom you can ask questions and submit invesment proposals for evaluation, absolutely do it. In any case, try to learn at least the basic features of what you’re investing in (e.g. stock markets’ returns have fat tails, whch means high probability of heavy losses, various derivatives can have many complicated features). I’ll be glad to answer any questions, here or by PM, the best I can, but any specific investment must be evaualted on its own.
but the risk for equities remains in general significantly higher then the one for e.g. government bonds
I would agree that this is true, but I’d caution against thinking of even government bonds as a textbook “risk-free” investment. There seems to be general agreement that balancing government budgets would create economic tragedy, but in that case the only reason to expect your bonds to be repaid is because someone else will buy more bonds later (because he expects to be repaid by someone else buying even more bonds even later). This reasoning has been correct for US bonds for several decades, but it’s still a little too close to “housing prices always rise so who cares if some mortgages default” or “I’ll resell the stock after it goes up more so who cares if the company is making a profit” for my liking.
On an unrelated note: has nobody mentioned tax issues yet? Canadians now have Tax-Free Savings Accounts available, and avoiding taxes on capital gains may be nearly as important as avoiding fees from overly expensive financial institutions. Keep enough liquid savings for emergencies and unexpected expenses, though.
I would agree that this is true, but I’d caution against thinking of even government bonds as a textbook “risk-free” investment.
Correct consideration, I personally know a greek guy who bought decennial bonds from his own country five years before the collapse and got heavily screwed. This should be a more remote possibilitie for e.g US bonds, and it’s kind of a “second order consideration” for someone who is just approaching the idea of investing money.
I’m not sure of the taxing policies in the US, so I can’t really help, but the priciple it’s true. One of the reasons why I was suggesting Insurance Companies in another post is that they usually are subjected to a different (lighter) tax regime.
All that said… how would you respond to question 4?
You can kind of tell that it was the question I came to realize was key, through the process of writing the post...
Should I even bother with this “investment” stuff right now, or just move the whole 13k sum to a simple savings account and worry about reinvesting it in a year?
Should I even bother with this “investment” stuff right now, or just move the whole 13k sum to a simple savings account and worry about reinvesting it in a year?
It depends on when you think you will need the money, and how much dependant you are on that amount. If you plan on using it at some point (e.g. for buying a car) then try something with low risk. Usually insurance companies have good low risk funds, which guarantee a minimum return of 2-3% a year, and average round 4-5% (they mainly invest in bond: you could do it directly on your own, but if you know nothing about finance, you should probably trust them).
If, on the other hand, you think you could afford to risk losing some money in the short run, then go for the equity investment, but try to spend some time to evaluate it and chose the mean return/risk profile that fits you best.
And my dad put the majority of investments in “Canada” and “US”, which… are in the group of economies represented by the lower lines. (And the rest in “world”, which is the average of the low and the high lines.)
As far as I can tell, his decision was based on… a heuristic that developing countries are lower status, and lower status=poorer=not a good investment? (I say “decision”, but I don’t know if it even occurred to him as an option...)
Just be careful that markets /= economy. The developing economies might still grow steadily, while their markets can fluctuate a lot. One of the most widely used Indexes for emerging markets is the Morgan Stanley BRIC. You can easily google and find some funds that invest in it and look at their performance to get an idea. The first one that I found (here) has a decent summary of its most important features. You can see that it is actually losing money . A very important number you should look at is the standard deviation, which is written to be 23% over three years. On the contrary, investing e.g. in the US health care sector has given much better results (see here) with less risk.
To summarize: what you say it’s true in the long run, but equity investments have a significant short and medium-term evolution, which is generally independent of the long-term trends.
Yes, but with a relatively high variance.
This is more or less true (minus some potential entry/manteinance costs)
In general this is true, but the variance here is even higher. Lately, though, they are not performing particularly well (see here for example).
Yes, diversification reduces the risk, but the risk for equities remains in general significantly higher then the one for e.g. government bonds (i.e. losing your money is a real concern).
That said, even with a very good allocation, it should be very hard to make more than 8-10% a year with you investent (not impossible, mind you, chaotic systems are chaotic). This means rouglhy 1-1.3K per year in you condition. Of course, mr. exponential says that the longer the investment, the better (barring future market instabilities). It’s up to you to decide if it’s worth it. On the other hand, if you don’t need the money now, there are other forms of investing that block your capital for a longer period of time, but with much lower risk.
EDIT Maybe it’s an obvious advice, but be careful about what you’re doing. If there’s someone you trust to whom you can ask questions and submit invesment proposals for evaluation, absolutely do it. In any case, try to learn at least the basic features of what you’re investing in (e.g. stock markets’ returns have fat tails, whch means high probability of heavy losses, various derivatives can have many complicated features). I’ll be glad to answer any questions, here or by PM, the best I can, but any specific investment must be evaualted on its own.
I would agree that this is true, but I’d caution against thinking of even government bonds as a textbook “risk-free” investment. There seems to be general agreement that balancing government budgets would create economic tragedy, but in that case the only reason to expect your bonds to be repaid is because someone else will buy more bonds later (because he expects to be repaid by someone else buying even more bonds even later). This reasoning has been correct for US bonds for several decades, but it’s still a little too close to “housing prices always rise so who cares if some mortgages default” or “I’ll resell the stock after it goes up more so who cares if the company is making a profit” for my liking.
On an unrelated note: has nobody mentioned tax issues yet? Canadians now have Tax-Free Savings Accounts available, and avoiding taxes on capital gains may be nearly as important as avoiding fees from overly expensive financial institutions. Keep enough liquid savings for emergencies and unexpected expenses, though.
Correct consideration, I personally know a greek guy who bought decennial bonds from his own country five years before the collapse and got heavily screwed. This should be a more remote possibilitie for e.g US bonds, and it’s kind of a “second order consideration” for someone who is just approaching the idea of investing money. I’m not sure of the taxing policies in the US, so I can’t really help, but the priciple it’s true. One of the reasons why I was suggesting Insurance Companies in another post is that they usually are subjected to a different (lighter) tax regime.
All that said… how would you respond to question 4?
You can kind of tell that it was the question I came to realize was key, through the process of writing the post...
Should I even bother with this “investment” stuff right now, or just move the whole 13k sum to a simple savings account and worry about reinvesting it in a year?
It depends on when you think you will need the money, and how much dependant you are on that amount. If you plan on using it at some point (e.g. for buying a car) then try something with low risk. Usually insurance companies have good low risk funds, which guarantee a minimum return of 2-3% a year, and average round 4-5% (they mainly invest in bond: you could do it directly on your own, but if you know nothing about finance, you should probably trust them).
If, on the other hand, you think you could afford to risk losing some money in the short run, then go for the equity investment, but try to spend some time to evaluate it and chose the mean return/risk profile that fits you best.
Hm.
Well, I just did a quick google search for
developing economiesand looked for graphs that seemed to deal with the comparison I’m interested in.For instance:
http://carnegieendowment.org/images/article_images/decoupleR1.gif
http://blogs.worldbank.org/files/prospects/charts/nl33cj23.sn0/chart-small.png
http://static.seekingalpha.com/uploads/2011/9/4/saupload_trendr1.png
http://farm5.static.flickr.com/4094/4771449749_7c63d01bdc.jpg
http://www.imf.org/external/pubs/ft/fandd/2012/09/images/dervis2.jpg
And my dad put the majority of investments in “Canada” and “US”, which… are in the group of economies represented by the lower lines. (And the rest in “world”, which is the average of the low and the high lines.)
As far as I can tell, his decision was based on… a heuristic that developing countries are lower status, and lower status=poorer=not a good investment? (I say “decision”, but I don’t know if it even occurred to him as an option...)
Just be careful that markets /= economy. The developing economies might still grow steadily, while their markets can fluctuate a lot. One of the most widely used Indexes for emerging markets is the Morgan Stanley BRIC. You can easily google and find some funds that invest in it and look at their performance to get an idea. The first one that I found (here) has a decent summary of its most important features. You can see that it is actually losing money . A very important number you should look at is the standard deviation, which is written to be 23% over three years. On the contrary, investing e.g. in the US health care sector has given much better results (see here) with less risk.
To summarize: what you say it’s true in the long run, but equity investments have a significant short and medium-term evolution, which is generally independent of the long-term trends.