that requires no upkeep, no worry, and good returns.
It is plausibly the “worry” (or discomfort) that is required for good expected returns. For instance, CAPM, implies you are being paid to hold undiversifiable risk. You get paid for it because of people’s distaste for it.
Your expected returns for a corporate bond, for example, might be because of the worry that it defaults (the extent to which this is undiversifiable, as there is a tendency for bond defaults to co-occur in bad times.), and an illiquidity premium—in bad times when you’d like to be able to liquidate your position, you’re likely to find no one who wants to buy it from you. This is why you can expect to get a return that more than compensates you for the expected loss.
This rules out real estate entirely, and the last criterion rules out letting money sit there.
You can invest in a real estate fund, which is probably a good idea for diversification purposes
get payed back and get taxed again.
typo: payed-> paid
So I should try to minimize these charges? Exactly!
Agreed: this is key.
Someone promises me higher returns for his fees! He’s lying: academic research has shown no evidence of after-fee returns beating the market in general.
A lot of money managers are probably not lying in the sense that they probably do believe they have skill even if they don’t. Also: some money managers probably do have skill: you just have no good way of determining which ones they are.
Do I need anything else? According to CAPM, no.
The CAPM is great in theory, but there is little evidence that it holds in practice. Within stocks, the longterm historical data shows that riskier stocks have a tendency to have lower returns. (CAPM on the other hand says undiversifiable risk will be priced; that is, you’ll get paid to hold it.). There does seem to be an equity premium over bonds though (i.e., across the asset classes, but not within). Excess returns can be earned through liquidity premia, exposure to various ‘factors’ such as value, momentum, low vol within stocks.
Look on Google Scholar for the works of Ilmanen, Asness, Fama, Carhart, and others to find out what works in investing.
CAPM is considered to be a clever model of a world that is not the one we live in. This is probably because people have some irrational behavioral biases, do not have the utility functions assumed by CAPM, and are exposed to principal-agent problems because money managers incentives are not directly aligned with their clients.
Owning the market through an index fund is not a bad idea. But the reason why it tends to work well is because of low costs and exposure to the equity premium over bonds. When you the own a market cap weighted fund you are getting some undesirable exposures too, such as companies that are not low vol or value. Dimensional offers low cost funds with factor exposures. AQR Capital is another one to look at.
CAPM explains 70% of equity returns, Fama French model 90%, but over the 20th century it’s not clear what the Fama-French factors are. I fully agree with your minor quibbles. As for upkeep and worry, yes, risk leads to return. But it is an input, and like any sort of input it should be minimized for a given level of output.
It is plausibly the “worry” (or discomfort) that is required for good expected returns. For instance, CAPM, implies you are being paid to hold undiversifiable risk. You get paid for it because of people’s distaste for it.
Your expected returns for a corporate bond, for example, might be because of the worry that it defaults (the extent to which this is undiversifiable, as there is a tendency for bond defaults to co-occur in bad times.), and an illiquidity premium—in bad times when you’d like to be able to liquidate your position, you’re likely to find no one who wants to buy it from you. This is why you can expect to get a return that more than compensates you for the expected loss.
You can invest in a real estate fund, which is probably a good idea for diversification purposes
typo: payed-> paid
Agreed: this is key.
A lot of money managers are probably not lying in the sense that they probably do believe they have skill even if they don’t. Also: some money managers probably do have skill: you just have no good way of determining which ones they are.
The CAPM is great in theory, but there is little evidence that it holds in practice. Within stocks, the longterm historical data shows that riskier stocks have a tendency to have lower returns. (CAPM on the other hand says undiversifiable risk will be priced; that is, you’ll get paid to hold it.). There does seem to be an equity premium over bonds though (i.e., across the asset classes, but not within). Excess returns can be earned through liquidity premia, exposure to various ‘factors’ such as value, momentum, low vol within stocks.
Look on Google Scholar for the works of Ilmanen, Asness, Fama, Carhart, and others to find out what works in investing.
CAPM is considered to be a clever model of a world that is not the one we live in. This is probably because people have some irrational behavioral biases, do not have the utility functions assumed by CAPM, and are exposed to principal-agent problems because money managers incentives are not directly aligned with their clients.
Owning the market through an index fund is not a bad idea. But the reason why it tends to work well is because of low costs and exposure to the equity premium over bonds. When you the own a market cap weighted fund you are getting some undesirable exposures too, such as companies that are not low vol or value. Dimensional offers low cost funds with factor exposures. AQR Capital is another one to look at.
CAPM explains 70% of equity returns, Fama French model 90%, but over the 20th century it’s not clear what the Fama-French factors are. I fully agree with your minor quibbles. As for upkeep and worry, yes, risk leads to return. But it is an input, and like any sort of input it should be minimized for a given level of output.