The wealth-building thread

[Timcognito]

Just a reminder for US investors, (not sure about account types OUS) but if you are worried about a downturn and want to take some profit, or make some large and/or drastic changes in anticipation of an upcoming volatile market, do it in predominately in your IRA accounts, if you have them. These accounts are easily manipulated, without tax consequences and misjudged or wrong decisions are quickly changed. Your portfolio needs to have the necessary preferred balance but each account does not.

 

[OCA]

The market can simply keep going higher

You can sometimes get hints on that following vega/theta closer to expiry...

 

[OCA]

Great questions. [and I've edited a bit to complete what I initially wrote]

Exceptional Returns
Let's presume you could put your money in a stock index fund and earn 8-10%. Exceptional returns would be well in excess of that, but there are two nuances: leverage and volatility.

So if you could earn 2X the index fund return, but your portfolio would be down 60% in 3 out of 10 yrs, would you do that? (kind of extreme, but for the point). Are you going to use the money anytime soon?

One way to generate exceptional returns is to invest in lower returning assets/strategies that can be leveraged. If you can borrow for less than the return you can magnify the return as much as your creditors will allow you to borrow. Of course, leverage increases total return volatility.

This is why investors use the Sharpe Ratio (https://www.investopedia.com/terms/s/sharperatio.asp) and/or information ratio (https://www.investopedia.com/terms/i/informationratio.asp) If either of these are high, you may generate exceptional returns. But one of the causes of the financial crisis was that banks could borrow huge amounts of money (20* their equity, roughly) and then invest in strategies/assets they though were low-vol but decent Sharpe. Then some of those strategies behaved unexpectedly...

Generally the Sharpe ratio indicates the attractiveness of an asset class (Sharpe is return per unit of risk), and an information ratio tells you the amount of performance the manager adds on top of the benchmark, so think of them as quality of returns of a benchmark and quality of returns of a strategy/manager. These lines get blurred when you have very specialized assets/strategies that can't be replicated passively (such as private equity, etc.). But any *manager's* Sharpe would include the asset class returns plus/minus their skill contribution.

But however you get it, a high Sharpe can be levered to increase returns. And the lower the volatility, likely the more leverage you'll be able to apply. So if I could trade one year Treasuries and earn an extra 0.4% per year, it wouldn't be terribly interesting without leverage. But with leverage at the cost of the one year+ say 0.05...You could multiply that 0.35% "positive float" to make it a lot more interesting. Until you were trading so much that the strategy's effectiveness was diminished. All strategies have this "capacity" limitation...

Market Impact
I imagine you are thinking that someone could tout a stock here and cause it to go up (sometimes known as pump-and-dump, depending on your post recommendation behavior). That isn't an investing strategy, it's a trade. At best it is having fun with fellow investors, at worst it is market manipulation. But the very fact of people crowding in and driving up prices is what creates capacity limitations in investing. Once the price is up, the potential returns go down. Definitionally.

Strategies are *systems*, however, designed to take advantage of inefficiency (in theory, a high Sharpe and/or information Ratio means investors are leaving return on the table by not driving the price of the asset or trade up) So if you have a *method* of trading, sort of like the fellow above, and it is high Sharpe, then telling people about it invites others in alongside you and arbitrages away your excess return. All good strategies have capacity limitations. Even asset classes do. At some point, the price of equities is too high...and then they adjust.

The most successful investors of the modern era are at Jim Simons' firm Renaissance. Their methods are a deep secret. 66%/year compounding consistently is extraordinary (it translates to 4.3% per month) and is considered the best track record known to man. And yet you see people claiming on the internet that they can make 5-10% per month**. Be *extremely* skeptical. There are such strategies around, but they usually arbitrage small effects (like promotional offers), and have capacity under $1000. Renaissance was doing it with billions. And they gave back ALL their client money in their main fund because they were already hitting capacity limits that would reduce returns. The inevitable destination for a killer strategy, if it exists, is all house money and top secret.

*since I'm a PM, the equivalent is dealers touting a strategy with a Sharpe over 5. Laughable.

Sortino ratio which measures only downside risks is a better indicator of investment performance than Sharpie since investors often don't care about unusually high gains as much as they do about losses.

 

[JeffS7444]

I don't think most investors or traders are served thinking about markets as "Institution" vs "Trader". "Institutions" are not some monolithic group and they do not all do the same thing. Also trying to "push" a stock or even more difficult an "index" around by selling or buying creates big risks for a limited reward. This whole trader vs institution explanation does not make sense to me.

If this theory has merit I believe it is because of "pin risk" where traders (both individuals and institutions) by trying to avoid "pin risk" (owning or being short options with a strike where the market settles on the last day and not knowing if you should exercise or not or if you are going to be exercised or not) will tend to push the price right to the strike. The more open interest the more this tends to happen. Like any technical analysis there is also a certain amount of "self fulfilling prophecy" when enough people believe in it.

Yes, "Real Peter Tarr"'s takeaway is that for someone in his position, MaxPain may make sense in very specific situations, but not so much for an individual like me. So in the foreseeable future, I'll stick with passive investing.

 

[amper42]

Fri Nov 22
SPY currently 595.56 +35%
MaxPain = 589
Good chance we see a flat to RED SPY by end of day?

 

[Blumlein 88]

Fri Nov 22
SPY currently 595.56 +35%
MaxPain = 589
Good chance we see a flat to RED SPY by end of day?

Well it is up about .4% right now. So we'll see in 3 hours.

 

[Koeitje]

Most of my portfolio consists of US companies but for reasons I want to divest and move into EU based companies. But I'm still worried about the influence of the US economy on those companies. What kind companies, maybe sectors should I look at to limit that effect? Maybe dredging, like Boskalis? Ahold Delhaize (too many US stores I guess)? Basically companies who's revenue and daily operations isn't too heavily tied to the US.

 

[levimax]

Most of my portfolio consists of US companies but for reasons I want to divest and move into EU based companies. But I'm still worried about the influence of the US economy on those companies. What kind companies, maybe sectors should I look at to limit that effect? Maybe dredging, like Boskalis? Ahold Delhaize (too many US stores I guess)? Basically companies who's revenue and daily operations isn't too heavily tied to the US.

The US equity market is ~6X bigger than the EU equity market and makes up ~60% of the worlds equity market. The US economy also has a large effect the world's economy. Outside of selling out of all equities it is going to be hard to "hide" from the US. You could theoretically buy only EU companies that only sell locally and manufacture locally and source locally but that would be an extremely limited universe of stocks which would not be a diversified portfolio which would add a lot of risk.

In general making investment decisions based on politics does not work out well.

 

[Koeitje]

The US equity market is ~6X bigger than the EU equity market and makes up ~60% of the worlds equity market. The US economy also has a large effect the world's economy. Outside of selling out of all equities it is going to be hard to "hide" from the US. You could theoretically buy only EU companies that only sell locally and manufacture locally and source locally but that would be an extremely limited universe of stocks which would not be a diversified portfolio which would add a lot of risk.

In general making investment decisions based on politics does not work out well.

I don't want to talk politics. I just want companies that are focused on the European market and have a little to do with the US as possible. There must be some for whom the EU or Asian markets take up the majority of their earnings. I know I cannot avoid the US in its entirety, I just want to balance out my portfolio by spreading the risk over multiple regions.

 

[Timcognito]

Most of my portfolio consists of US companies but for reasons I want to divest and move into EU based companies. But I'm still worried about the influence of the US economy on those companies. What kind companies, maybe sectors should I look at to limit that effect? Maybe dredging, like Boskalis? Ahold Delhaize (too many US stores I guess)? Basically companies who's revenue and daily operations isn't too heavily tied to the US.

https://www.morningstar.com/funds/best-international-stock-funds

 

[Koeitje]

https://www.morningstar.com/funds/best-international-stock-funds

Maybe I'll increase my share in NT Emerging markets. Funds not aimed at specific markets usually have a large share of companies that would get hit hard by an economic downturn in the US like TSMC and ASML (especially since they are not allowed to sell to everyone anymore). So I don't feel those kind of funds would be great options for me. Perhaps I should consider some car manufacturers like Renault (no US presence, but their partner Nissan does) and Stellantis who's presence in the US is already garbage anyway.

 

[amper42]

Maybe I'll increase my share in NT Emerging markets. Funds not aimed at specific markets usually have a large share of companies that would get hit hard by an economic downturn in the US like TSMC and ASML (especially since they are not allowed to sell to everyone anymore). So I don't feel those kind of funds would be great options for me. Perhaps I should consider some car manufacturers like Renault (no US presence, but their partner Nissan does) and Stellantis who's presence in the US is already garbage anyway.

All markets are interconnected. It's the world we live in. While different sectors will have different rates of return, I don't think it's possible to totally isolate one part of the world from the rest economically. Good luck!

 

[Blumlein 88]

Spy finished up a bit more than a third of a percent.

 

[amper42]

Spy finished up a bit more than a third of a percent.

Yes, we had some interesting moves lower during the day but finished positive. That's a bullish signal to me. Options expiration can be a dynamic game of tug-of-war.

 

[notinuse]

Spy finished up a bit more than a third of a percent.

Noise.

 

[Koeitje]

All markets are interconnected. It's the world we live in. While different sectors will have different rates of return, I don't think it's possible to totally isolate one part of the world from the rest economically. Good luck!

I never said I wanted total isoliation. Unfortunately discount grocery chains like Aldi and Lidl aren't publicly traded. Those tend to do little bit better during a recession. But perhaps you have some other suggestions for providers of necessities for whom their primary market is the EU?

Otherwise I'm just going to shift into gold and silver.

 

[Blumlein 88]

I never said I wanted total isoliation. Unfortunately discount grocery chains like Aldi and Lidl aren't publicly traded. Those tend to do little bit better during a recession. But perhaps you have some other suggestions for providers of necessities for whom their primary market is the EU?

Otherwise I'm just going to shift into gold and silver.

There are Euro consumer staples ETFs. Holdings are mostly Euro companies with some Euro divisions of American consumer staples companies.

 

[amper42]

I never said I wanted total isoliation. Unfortunately discount grocery chains like Aldi and Lidl aren't publicly traded. Those tend to do little bit better during a recession. But perhaps you have some other suggestions for providers of necessities for whom their primary market is the EU?

Otherwise I'm just going to shift into gold and silver.

Whichever investment vehicle you select I would suggest back testing it to verify it actually maintained value during a recession. You may be surprised how low tides can impact all boats to various degrees. While gold and silver have done well recently they also had periods of little growth. Safe investments offer stability and peace of mind but long term growth is also needed.

The key is to have the ability to never be required to sell at a loss and be invested in a vehicle with a tested history of success over the long term. Nothing is guaranteed so having daily expenses covered no matter what the market does in the short term provides staying power.

As an example of backward thinking, US homeowners who short sold their homes in 2008-2010 because their mortgage was underwater lost the vital asset of having a place to live and became renters. If they didn't buy another home shortly after that then they would now be paying much more in rent in 2024 than if they had stayed in their home. Even now, the press are claiming it costs 30% more to buy than rent. But anyone with long term vision and a calculator can see home ownership is really the only way to control long term living expenses. No landlord is going to give you a better deal.

Here is another example, Over the last 50 years, the S&P 500 has appreciated more than gold. From 1972 to 2024, an initial investment of $100 in the S&P 500 would be worth over $18,500, assuming reinvested dividends. In contrast, the same $100 invested in gold would be worth around $4,500. This significant outperformance of the S&P 500 is further supported by long-term annualized returns:

1. From 1983 to 2023 (40 years):
   • S&P 500: 11.5% annualized return before inflation, 8.4% after inflation
   • Gold: 3.8% annualized return before inflation, 0.9% after inflation
2. From 1993 to 2023 (30 years):
   • S&P 500: 10% annualized return before inflation, 7.3% after inflation
   • Gold: 6.1% annualized return before inflation, 3.5% after inflation

While gold has had periods of outperformance, particularly during times of economic uncertainty or high inflation, the S&P 500 has consistently delivered superior returns over the long term.

 

[Koeitje]

Whichever investment vehicle you select I would suggest back testing it to verify it actually maintained value during a recession. You may be surprised how low tides can impact all boats to various degrees. While gold and silver have done well recently they also had periods of little growth. Safe investments offer stability and peace of mind but long term growth is also needed.

The key is to have the ability to never be required to sell at a loss and be invested in a vehicle with a tested history of success over the long term. Nothing is guaranteed so having daily expenses covered no matter what the market does in the short term provides staying power.

As an example of backward thinking, US homeowners who short sold their homes in 2008-2010 because their mortgage was underwater lost the vital asset of having a place to live and became renters. If they didn't buy another home shortly after that then they would now be paying much more in rent in 2024 than if they had stayed in their home. Even now, the press are claiming it costs 30% more to buy than rent. But anyone with long term vision and a calculator can see home ownership is really the only way to control long term living expenses. No landlord is going to give you a better deal.

Here is another example, Over the last 50 years, the S&P 500 has appreciated more than gold. From 1972 to 2024, an initial investment of $100 in the S&P 500 would be worth over $18,500, assuming reinvested dividends. In contrast, the same $100 invested in gold would be worth around $4,500. This significant outperformance of the S&P 500 is further supported by long-term annualized returns:

1. From 1983 to 2023 (40 years):
   • S&P 500: 11.5% annualized return before inflation, 8.4% after inflation
   • Gold: 3.8% annualized return before inflation, 0.9% after inflation
2. From 1993 to 2023 (30 years):
   • S&P 500: 10% annualized return before inflation, 7.3% after inflation
   • Gold: 6.1% annualized return before inflation, 3.5% after inflation

While gold has had periods of outperformance, particularly during times of economic uncertainty or high inflation, the S&P 500 has consistently delivered superior returns over the long term.

I think you misunderstand what I'm trying to do. The plan is not to go into gold for the next 15 years. I'm trying to DCA my investments to a more stable form before we hit a global recession and when I feel we hit that DCA back into stocks. In the last 6 out of 8 recessions gold significantly outperformed the S&P 500.

 

[quattro98]

I think you misunderstand what I'm trying to do. The plan is not to go into gold for the next 15 years. I'm trying to DCA my investments to a more stable form before we hit a global recession and when I feel we hit that DCA back into stocks. In the last 6 out of 8 recessions gold significantly outperformed the S&P 500.

Timing the markets to avoid recessions and then jump back in isn't a winning strategy.

To globally diversify, just buy international stocks. The absolute simplest way to do this is with a global fund (ETF ticker VT as an example). Another way is to blend US & ex-US stocks at an approximately 60/40 ratio (ETF tickers VTI & VXUS as examples).