A little more info on why you recommend smaller and safer returns, rather than slightly-higher and somewhat riskier, would help a lot. The vast majority of medium- and long-term individual pure investing (that is, not mixed with housing or sweat-equity business investing) has a utility-to-money curve that is at least a little nonlinear, where returns are wonderful, and losses are painful, but a slight loss is not disastrous. Deciding where to be on the risk/return curve seems to be one of the more impactful investing decisions an individual can make.
That said, it’s useful to point out the variability in quality of offerings, and just how much improvement can be had with a small amount of research.
I’m a little unsure about Wealthfront—they used to be more about automated advice, and didn’t have great reviews. “FDIC insured” is pretty powerful, but the hassle factor is large if they go under. I don’t understand how they can offer so much more than other banks’ CDs, and that makes me suspicious. However, if you _do_ think they belong in the same category as the rest, you should probably lead with that, as there’s no reason to consider other options (including Vanguard bond funds).
The risk/return curve hides some important problems.
Many investors have more income when the stock market is high than when it is low.
For example, donations to MIRI are likely heavily influenced by the price of tech stocks and by cryptocurrency prices. MIRI needs to pay salaries that fluctuate much less than those prices. If MIRI invests in assets that have much correlation with those prices, MIRI will likely end up buying disproportionate amounts of those assets within a year after they peak, and buying less (sometimes even selling) within a year after they reach a low.
Maybe that works well for short-term market fluctuations, but whenever there are significant market fluctuations that last for several years, that would mean that MIRI would be buying mainly at the worst time. I expect that would cause them to underperform the relevant benchmark by at least a few percentage points.
So I expect MIRI will be better off minimizing the volatility of their investments.
Note that this conclusion holds even if MIRI is risk-neutral.
I expect that a fair number of individual investors have income fluctuations that imply the same conclusion.
A little more info on why you recommend smaller and safer returns, rather than slightly-higher and somewhat riskier, would help a lot. The vast majority of medium- and long-term individual pure investing (that is, not mixed with housing or sweat-equity business investing) has a utility-to-money curve that is at least a little nonlinear, where returns are wonderful, and losses are painful, but a slight loss is not disastrous. Deciding where to be on the risk/return curve seems to be one of the more impactful investing decisions an individual can make.
That said, it’s useful to point out the variability in quality of offerings, and just how much improvement can be had with a small amount of research.
I’m a little unsure about Wealthfront—they used to be more about automated advice, and didn’t have great reviews. “FDIC insured” is pretty powerful, but the hassle factor is large if they go under. I don’t understand how they can offer so much more than other banks’ CDs, and that makes me suspicious. However, if you _do_ think they belong in the same category as the rest, you should probably lead with that, as there’s no reason to consider other options (including Vanguard bond funds).
The risk/return curve hides some important problems.
Many investors have more income when the stock market is high than when it is low.
For example, donations to MIRI are likely heavily influenced by the price of tech stocks and by cryptocurrency prices. MIRI needs to pay salaries that fluctuate much less than those prices. If MIRI invests in assets that have much correlation with those prices, MIRI will likely end up buying disproportionate amounts of those assets within a year after they peak, and buying less (sometimes even selling) within a year after they reach a low.
Maybe that works well for short-term market fluctuations, but whenever there are significant market fluctuations that last for several years, that would mean that MIRI would be buying mainly at the worst time. I expect that would cause them to underperform the relevant benchmark by at least a few percentage points.
So I expect MIRI will be better off minimizing the volatility of their investments.
Note that this conclusion holds even if MIRI is risk-neutral.
I expect that a fair number of individual investors have income fluctuations that imply the same conclusion.
The first paragraph in the post links to Get Rich Slowly , the post where I explain the why and how of getting 6-8% on global equity index funds.