Following Buffet's advice re S&P 500 ETF

France and the UK did not move to the left, the opposite actually.

betonit wrote: »

a lot of talk of a correction over the last few months... how much of a correction are we looking at within what % range

I don't think anyone expects a crash. We have gone a long time without a correction, so the longer that goes imo, the more likely a correction even on moderately bad news or a smallish black swan event. The last two times QE was ended in the US there were moderate pullbacks, no reason why this should be different as it reduces liquidity at a time when market volumes are low already.

I think the thing most fear, including and maybe mostly corporates, is that the Fed will be ending their program just as we enter another even mild recession. Based on the normal business cycle a recession is due in 2015/16.

My own prediction for what it's worth is a 8-10% correction between now and September, followed by market recovery into early 2015, and SHTF time when a recession becomes apparent early in 2015.

Recondite49 wrote: »

Do you think it would be best to mitigate the risk by investing in an index fund like VEU ? I'm currently playing the market with a stock simulator (so much easier than real money!) and was advised to do this, although I doubt it'll do much good if we're due another recession.

International diversification makes sense, and VEU is one of the best ETFs out there as it provides exposure to all significant regions and countries outside the US. One caveat is that by owning a large cap US fund, such as VOO, you are getting international exposure anyway as most large cap US companies have significant revenue outside the US.

While VEU may mitigate risk somewhat, the problem is most international markets have a high correlation to the US in times of higher volatility / market declines. For example, in the late summer 2011 decline the US indices dropped on average 16%, while VEU declined by 24%. In general, international markets seem more volatile than US markets, especially emerging markets, but that of course could change in the future.

Bonds are generally the best assets for diversification, as they are the least correlated with equities (except for high yield corporate bonds, which are strongly correlated with equities). The risks right now are Iraq, should the conflict intensify (although I think we can be sure if oil supply is threatened swift bombing will follow), and the much larger risk of Q2 in the US being weaker than projected. There is growing unease that the growth projections for the second half of 3.5 to 4% are pie in the sky.

Recondite49 wrote: »

When it comes to bonds do you think it'd be best to buy them directly e.g Gilts or perhaps another ETF which invests in them directly? I did see Vanguard's Long Term Corporate Bond ETF VCLT but was worried for exactly the reasons you describe - that their success was tied to those self same corporations making a profit. Also as you can see from the website it woefully underperforms the S&P 500.

Bonds always underperform equities in the long run, by a factor of roughly 2X. However, there are periods where bonds do better, generally when the stock market is bearish, such as 2000 - 2002. YTD 2014 bonds are up roughly 2X equities which is a bit of a concern given that interest rates are projected to increase (if you believe the Fed), and rising interest rates or even the anticipation of higher interest rates should drive down the price of bonds.

VCLT is a good product, corporate debt of large multinationals. Things would need to get very bad, such as 2008, for a serious threat to this type of asset. What is at risk in a stock market decline is high yield products like JNK, as by definition high yield is associated with companies with riskier fundamentals.

Tomorrow will be interesting with the Fed due for their monthly chat. Inflation is trending up to +2% in the US in April/May and unemployment coming down to historic norms, which is the Fed's target, so will be interesting if they maintain their dovish stance. The doomsday scenario for the US economy is inflation with no growth, aka stagflation. A lot of the data suggests this, rising prices for fuel and food and flat or declining wages.

FURET wrote: »

Has anyone on this thread invested in an S&P 500 ETF bought off the Amsterdam exchange?

If so, how much Capital Gains Tax did you pay on it? I know that a certain amount is deducted at source in the US, but do the Dutch authorities also deduct a percentage on whatever's left?

I can see that iShares have listed an S&P 500 ETF on the Amsterdam exchange but can't find the name, perhaps you could enlighten me?

FURET wrote: »

I'm still at the research phase I'm afraid. My Saxo account went live today but I have yet to deposit the 20k dollars required for web access. I'm in no hurry as I want to research first. My account is denominated in euros so I will probably buy Vanguard or iShare ETFs from the Amsterdam exchange. Any reason why you would opt for iShares rather than VUSA?

Thanks Furet,

Saxo looks impressive from reading the literature and from what I can see it's more convenient in the sense you have a Euro account but can also change that into dollars if you want to play the US stock market.

The opening balance you mentioned is what put me off as I only have a couple of grand saved up - I do think you have the right idea though, I'm planning to invest in the S&P 500, the SPDR Gold ETF (GLD) and the Vanguard Total International Bond fund index (BNDX) - what do you reckon? Hopefully that'll help hedge bets.

As a previous poster pointed out, there's actually a good deal of international exposure through investing in the S&P 500 as many of these companies have foreign branches and of course their bank accounts will be denominated in other currencies.

FURET wrote: »

Well, I am only just starting out with investments. I will probably buy the S&P 500 ETF (VUSA) on the Amsterdam exchange with euros. The reason I'm thinking to do it this way is because if you buy off a US exchange, estate taxes will take approx 40% of your investment value if you die, leaving a much smaller inheritance for whoever is left behind.

The opening balance is 20k dollars for me because i have a joint account with my wife. Otherwise I believe it is only 5k or 10k, depending on your location. I plan to invest in the SP 500 ETF (35% of my portfolio), a whole-of world-excluding USA ETF (also 35%), and a short-term first world gov bond ETF (30%). I plan to keep my bond percentage relatively closely aligned with my age, so when I am 50, something like 45% will be bonds.

I am not a believer in gold, but I may look into metals in the future.

My guide book is "Millionaire Teacher" by Andrew Hallam, and also a book called "The Intelligent Investor".

I also will try to keep quite a bit in cash, in euros and US dollars.

Hi Furet,

Sorry for not responding sooner to your message but I wanted to read the book you recommended "Millionaire Teacher" - many thanks for pointing it out, I think the advice is excellent and it corroborates heavily with what I read in "A Random Walk down Wall Street".

I think trading on the Amsterdam exchange is a good one, as presumably you'd avoid paying Irish/UK Stamp duty on purchases if you did?

Your investment plan tallies nicely with what Hallam recommends : a broad based index fund of the S&P 500, a whole world fund (have you taken a look at VEU? - seems to fit the bill nicely) and a certain allocation of short term government bonds.

You seem to have in mind what Hallam recommends of weighting the level of bonds in accordance with your age but I was a little surprised by the method he suggested as if you have to continually sell shares in your ETF/All world bond index to rebalance your portfolio, won't you have to spend a fortune in fees?

I think I prefer the idea of his second suggestion which is to put aside some money each month and then you can just make a purchase accordingly once every quarter or similar to weight your portfolio as you'd like it.

Did you see Vanguard actually do offer 'Lifestyle Strategy' ETF's of various types which are weighted e.g all equity, 20% bonds, 30% bonds and so on? This might work out cheaper but also would take all the fun out of investing..!

The book also mentions that $1 invested in gold in 1801 would have been worth $73 in 2010. The same amount of money invested in an index fund would be worth over $10 million - so it seems precious metals aren't the way forward.

I think that people see gold as a safe bet in that it retains its value but given that even short term goverment bonds with an average return of 2.1% p.a could have beaten that lump of metal, I think perhaps it's best to cast it off, many thanks for the tip!

Best of luck with your investment plan and thanks again.

DarkDusk wrote: »

To use gold in any comparison before 1971 when Nixon severed all ties to gold would be completely ridiculous. The price of gold was set by the government! Was the price of stocks and bonds set by the government? Interesting how the author neglected to compare gold's performance to stocks over the last decade, gold blows away the paper in any fair comparison. Stocks have been going sideways for the last 15 years!

I'd recommend that you educate yourself about the basics of money before you try to even contemplate investing it.

Hi DarkDusk,

Thanks for your message.

I think the lesson to take away is that stocks will outperform other methods of investment provided you have a sufficiently broad index fund and enough time.

Gold may show some short term gains but overall I think it's more volatile.

I don't usually post Wiki facts but was able to verify the figures mentioned on the Gold as an Investment page. Since the Nixon shock the price of gold has increased a very impressive 929% but this pales in comparison to the DIJA which went up an impressive 1,259%.

I also had a peek on Google at the S&P 500 -

Value on June 13th 1975 : $90.32
Value today : $1,967.89

If I'm not mistaken this would give a return of a little over 2,165%. To put things into perspective $1,000 dollars invested on that day would be worth over $21,650 today.

$1,000 worth of gold would be worth just $9,290.

If you could go back then would you buy a gold bar or common stocks?

It's true an investment in an index fund tracking the price of gold may earn you more money in the short term such as over the past ten years but there's no contest when it comes to investments - stocks win over time.

For those of you who like me prefer graphs to stats, I managed to find this in the vaults:



Source : http://www.ritholtz.com/blog/2013/06/sbg/?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+TheBigPicture+(The+Big+Picture)

Read is S&P500, pink is gold. I certainly know where I'm putting my money...

nagirrac wrote: »

Gold is an inflation hedge. The run up in Gold post 2000 was due to the fears of inflation or even hyperinflation brought about by the Fed's various easy money policies. During this period Gold has greatly outperformed stocks. Gold declined in 2013 due to the expectation of higher interest rates which are generally correlated to the price of gold. If interest rates return to say the 4% range then the price of gold should revert to roughly $800/ounce.

What will happen to interest rates is the question. Obviously the bond market does not believe the economic growth story as yields have declined in 2014, and the bond market is generally correct on predicting the direction of the economy. The stock market can be hopelessly wrong as it is emotion driven in the short term, and was horribly wrong in 2000 and 2007.

If the doomsday scenario of stagflation plays out in the US, then gold is a good asset to have in your portfolio, maybe at 25% as the Permanent Portfolio recommends. Look at what gold did in the 1970s, the last period of stagflation in the US. If inflation picks up (it is based on two months data, noise according to Yellen) but real wages do not (they are not and have not for decades), the Fed are snookered.

Hi nagirrac,

I realise that some people believe Gold to be a good store of value (it is a good store relative to keeping money under your mattress certainly!) - based on the figures above though and given how average stock growth outstrips inflation over time wouldn't it be better to have a broad index fund?

If it comes down to it, I am sure we could find mutual funds which have outperformed the S&P500 over the past 15 years - the question is whether they like gold can do this in a consistent way over time? If you look at the charts gold is hugely volatile - do you really think this is the best way to protect against inflation?

betonit wrote: »

from the graph if u bought the SPY 2000 or 2007 you wouldnt have made any profit unitl 2012..... or even if u bought around those years you would have made very little. Seems to be very few years over a 12 year period where you would have made a decent return if you sold today after holding it for a long period of time

A long period in this case being 12 years?

All we can conclude from this is that the Stock Market isn't quite as good as gold if you wanted to make a fast buck over the past few years.

If it comes to that I'm sure we could also find mutual funds which beat gold hands down since 2000. However as Buffet himself says there isn't a way to outperform the market averages consistently over time.

Anyone who wants to put their money where their mouth is and invest equal amounts of gold to my index funds is welcome to send me a message - I'll send you an e-mail in twenty years' time and we'll see who's better off, even accounting for inflation.

Recondite49 wrote: »

Hi nagirrac, I realise that some people believe Gold to be a good store of value (it is a good store relative to keeping money under your mattress certainly!) - based on the figures above though and given how average stock growth outstrips inflation over time wouldn't it be better to have a broad index fund?

Hi. Absolutely a broad index fund is the best way to invest for the long term, and should make up the majority of most investor's portfolios, especially a younger investor. In terms of real returns historically (including reinvested dividends and after inflation), stocks have returned 7% and bonds about half that. The pertinent question however is how valuable is past performance in predicting future performance.

The chart by the way is misleading on 10 year treasuries, as it represents the yield on bonds which are inversely related to price. Bonds have been on a bull run since 1980 and have returned much higher real returns than historically, roughly double the historic 3% and pretty close to stocks over that period.

As for gold, I agree with the previous poster that comparing gold pre and post 1972 is meaningless as prior to 1972 it was pegged to the US dollar which is what the chart shows.

Recondite49 wrote: »

If it comes down to it, I am sure we could find mutual funds which have outperformed the S&P500 over the past 15 years - the question is whether they like gold can do this in a consistent way over time? If you look at the charts gold is hugely volatile - do you really think this is the best way to protect against inflation?

Stocks are the best way to protect against inflation in a normal economy, and over the long run, as the 7% real return demonstrates. However, when inflation surges as in early 1970s and early 1980s, gold absolutely skyrockets. Gold is an excellent hedge when inflation is high, as the only way to fight inflation is by increasing interest rates, and there is a point where higher interest rates hurt stocks (historically around 7%). When interest rates were high in the 70s and early 80s, stocks did very poorly and had essentially zero or negative real returns.

The answer as to whether gold is a good hedge against inflation right now depends on what happens in the coming years . My expectation for what its worth is for stagflation in the US in the coming decade, so I believe gold will do well over that period. Having said that, I wouldn't recommend gold above 25% of anyone's portfolio.

FURET wrote: »

I'm wondering whether you're better off buying the Vanguard VOO/VUSA (S&P 500) or the VTI (Total US stock market) which has over 3,000 US companies in it, of varying sizes.

The two ETFs track each other almost in lockstep, but VTI seems a shade better in terms of growth. Both have the same TER. Thoughts?

VTI incudes small and mid cap, and the Nasdaq, so over time it should grow faster than the S&P 500, while also being more volatile. A good example is the last few months when small caps had a decline, VTI declined more than VOO.

I like the combination of VTI and VYM (high dividend ETF). VYM pays almost 3%, close to 2X that of VTI.