Portfolio Manager
Investing
Finance
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COL Mikel J. Burroughs SFC Joe S. Davis Jr., MSM, DSL SSG Warren Swan TSgt Hunter Logan COL Jean (John) F. B. Col (Join to see) COL Sam Russell LTC John Shaw COL Vincent Stoneking LTC Gavin Heater CSM Michael J. Uhlig MAJ (Join to see) MAJ Anthony Henderson CPT Ahmed Faried CAPT Tom Bersson SCPO Charles Thomas "Tom" Canterbury ENS Jeremy Medlen SFC Stephen King COL Sam Russell CSM Carl Cunningham LCDR Ben Bines
Have you seen this post? How do you feel about investing? Where can the average soldier turn to for help regarding this matter?What do you think about the new retirement plan scheduled to take effect in 2018?
Have you seen this post? How do you feel about investing? Where can the average soldier turn to for help regarding this matter?What do you think about the new retirement plan scheduled to take effect in 2018?
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LCDR Ben Bines
CPT Cannonie, thank you for sharing this discussion. I'd enjoy speaking directly with anyone would like to discuss ways we can educate our community on the operational landscape of investment services to help service members and veterans avoid being right from an "investment thesis" perspective, but wind up losing on the investment because of operational misunderstandings. I've spent the past few years digging into this area, and am convinced that winning from the operational side will create more benefit for our people than any other area of focus. The cold reality is very few of us have access to information first and also the capacity to take advantage of the few pieces we might have. This simple fact will preclude most investors from ever being able to take advantage of any "tactical" trading strategy(ies). There are many who will point to past successes, but more often than not, they benefited from luck, as they did not have the asset level to be a first mover in any position they take. We need to show people why the cards are stacked against them so that they can make educated decisions. I'm not saying that people shouldn't be allowed to choose to invest the way they like, I'm simply saying that they should have all the information before making those decisions.
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LCDR Ben Bines
SGM David W. Carr LOM, DMSM MP SGT - SGM, the strategy you detailed for your retirement account is a smart strategy, and I don't presume to be telling you anything you don't know here, but the only way to take full advantage of a strategy like that is to be sure those dividends are reinvested. They do not need to be reinvested in the same companies, which many people don't think about. I like to spread my dividends from higher risk stocks into lower risk ones that I feel are undervalued from a longterm perspective.
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CPT (Join to see)
LCDR Ben Bines - Trying to increase your audience this is an important issue that needs to be discussed. Thank you for being here.
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SPC Paul Jennings, J.D.
Just to comment on the new modernized retirement system, I’ve actually been researching this for a while for an article I’m working on. In my opinion, it’s a bad deal for any career soldier or service member. First, you have no matching until after you complete three years, meaning that the time value of money is working against you. Next, it’s supposed to be replace the lost 10% final pay annuity, but it likely will not. The Commission made some gross generalizations in coming to their findings, like using a 16% personal rate of return to calculate an immediate pay out versus annuity for an enlisted senior service member. They also assume a life cycle TSP fund will return over 7% annualized. Again, this is highly unlikely based upon historical returns of the underlying indexes for the funds. However, there is a benefit to non-career soldiers and it is possible to make this new retirement system work for a career soldier if the individual branches are willing to put the time and energy into it.
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One of the main reasons there are so many S&P 500 Index Funds is because every investment company wants to generate revenue and Index funds are very popular. Many investors use index funds as inexpensive way to have market diversification at a lower cost than non-index mutual funds or active trading. Plus many investors do not feel they know enough to actively trade and therefor use index funds in a passive manner.
Of note, no two index funds are the same even though they mimic the same index such as the S&P500. There are different investment strategies, the purchase slightly different amounts of each stock that comprise the index, and different ways of accounting for taxes from the sale of positions in the index and a number of other factors that can cause one index to out perform another even if they are virtually identical. This outperformance will be subtle at first but over many years you will see less of a return with higher cost index funds. One should always look at the annual cost or expense ratio of owning a index fund to make sure you are not paying to much to the investment company, while you are being shortchanged on performance or vice versa, you are paying next to nothing for poor performance.
Here is an example lets look at 4 S&P 500 index funds:
FUND Expense Ratio (%) Return CY2015 (%)
SPDR S&P 500 ETF (SPY) 0.945% 3.02%
Fidelity Spartan 500 Index Investor Shares (FUSEX) 0.095% 2.94%
Schwab S&P 500 Index Fund (SWPPX) 0.090% 2.89%
Vanguard 500 Index Fund Investor Shares (VFINX) 0.170% 2.89%
TSP C Fund 0.029% 3.08%
Of note, this is why the TSP funds are a good investment if you want index funds since in 2014 they had an expense ratio of 0.029% or 29 cents per 1000 dollars.
Of note, no two index funds are the same even though they mimic the same index such as the S&P500. There are different investment strategies, the purchase slightly different amounts of each stock that comprise the index, and different ways of accounting for taxes from the sale of positions in the index and a number of other factors that can cause one index to out perform another even if they are virtually identical. This outperformance will be subtle at first but over many years you will see less of a return with higher cost index funds. One should always look at the annual cost or expense ratio of owning a index fund to make sure you are not paying to much to the investment company, while you are being shortchanged on performance or vice versa, you are paying next to nothing for poor performance.
Here is an example lets look at 4 S&P 500 index funds:
FUND Expense Ratio (%) Return CY2015 (%)
SPDR S&P 500 ETF (SPY) 0.945% 3.02%
Fidelity Spartan 500 Index Investor Shares (FUSEX) 0.095% 2.94%
Schwab S&P 500 Index Fund (SWPPX) 0.090% 2.89%
Vanguard 500 Index Fund Investor Shares (VFINX) 0.170% 2.89%
TSP C Fund 0.029% 3.08%
Of note, this is why the TSP funds are a good investment if you want index funds since in 2014 they had an expense ratio of 0.029% or 29 cents per 1000 dollars.
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SPC Paul Jennings, J.D.
Alpha is just return over the benchmark, usually contributed to a managers active role. Historically though Alpha tends to degree to the benchmark due to the associated higher fees inherent in active management versus passive.
As for risk premium, it's the return over the "risk free" investment, normally the T bill rate, but it can vary. If we're using an efficient market hypothesis and Modern Portfolio Theory, then we can balance the client's risk tolerance with expected returns to reach the optimal portfolio.
That being said, I'm not sure there is a winner and loser in a trade. That's like saying when you buy a car one party loses and the other wins. Ideally, this should be a mutual transaction between a willing buyer and seller. Are there sometimes fees and charges that are not needed and diminish the benefit of the sale to one party? Yes, but overall the market is efficient and these factors can be avoided. However, if your not a fan of the efficient market theory than obviously we would disagree on this!
As for risk premium, it's the return over the "risk free" investment, normally the T bill rate, but it can vary. If we're using an efficient market hypothesis and Modern Portfolio Theory, then we can balance the client's risk tolerance with expected returns to reach the optimal portfolio.
That being said, I'm not sure there is a winner and loser in a trade. That's like saying when you buy a car one party loses and the other wins. Ideally, this should be a mutual transaction between a willing buyer and seller. Are there sometimes fees and charges that are not needed and diminish the benefit of the sale to one party? Yes, but overall the market is efficient and these factors can be avoided. However, if your not a fan of the efficient market theory than obviously we would disagree on this!
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LCDR Ben Bines
For alpha to exist, there must be a party that is receiving what I like to call "Charlie". An asset has a single equilibrium value. It does not change based on who owns the asset. The only accept ion to this would be emotional connection. So anytime a person buys an asset for less than its equilibrium value, the receive alpha, while the other side received Charlie (less value than the asset was truly worth).
Again this USA great example of assumptions and misconceptions driving decision making that work against the investor.
The reason it's so difficult to value an asset is because you need to be able to accurately predict risk and growth. The value of any asset is the present value of all future cash flows, defined as CF/(r-g), where r is the discount rate (also known as required return or risk) and g is the stabilized growth rate. There is no other way to value an investment that will result in a financial gain for you as an investor.
You're description of the efficient frontier portfolio and how it creates a capital markets line that can be used to place an investor in an combined portfolio of the assets within the efficient portfolio and risk free rate asset is flawed my friend. It too is based on a misunderstanding of the realities of investing.
Risk premium is the required return for a given asset (which means a given risk) that in theory provides a net present value of $0. This simply means the asset was discounted at the true risk rate, it does not mean the rate of return is 0.
Again this USA great example of assumptions and misconceptions driving decision making that work against the investor.
The reason it's so difficult to value an asset is because you need to be able to accurately predict risk and growth. The value of any asset is the present value of all future cash flows, defined as CF/(r-g), where r is the discount rate (also known as required return or risk) and g is the stabilized growth rate. There is no other way to value an investment that will result in a financial gain for you as an investor.
You're description of the efficient frontier portfolio and how it creates a capital markets line that can be used to place an investor in an combined portfolio of the assets within the efficient portfolio and risk free rate asset is flawed my friend. It too is based on a misunderstanding of the realities of investing.
Risk premium is the required return for a given asset (which means a given risk) that in theory provides a net present value of $0. This simply means the asset was discounted at the true risk rate, it does not mean the rate of return is 0.
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I would assume it's because every financial firm wants to offer an S&P 500 Index Fund to their clients if there is customer demand for it. It sounds similar to asking why there is more than one company selling sugar or salt, even with if there is no material differentiation.
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COL Vincent Stoneking
LCDR Ben Bines - I assume you're wanting to focus on whether and to what extent there is a fiduciary responsibility and whether and to what extent there exist financial incentives that do not line up with the customer/client's best interests and the problem of Agency?
Disclosure: Used to be a Registered Rep and Registered Principal (Series 6, 7 and 24) back in the day. But I was a horrible fit for the industry.
Disclosure: Used to be a Registered Rep and Registered Principal (Series 6, 7 and 24) back in the day. But I was a horrible fit for the industry.
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