极简理财

The European Union will grow weaker in the next decade.

The consequences of the 2008 meltdown have highlighted how far Europe is from being a single and united geopolitical force.

Germany opposed bailout measures for weaker countries. This also highlights the reality that Europe's historical integration was imposed primarily by the necessity of organizing against the Soviet threat.

The confederate model for European organization and integration hasn't evolved into a deeper sense of unity over time. Even today, each constituent nation-state chooses whether to adopt the Euro as its currency, clings to its own history and identity and refuses to commit to a united defense policy.

Ultimately, though the EU will not disappear, the coming years will see some members stepping out of the eurozone. And without united military forces, the EU will never attain any real power.

极简不只是整然有序，而是选择重要的事情，然后专注于它

数据信息越多，你就越可能出错。如果你的模型把很多无关项或者弱联系因素都考虑进去，预测结果肯定会出错。人很自然就会订个计划，但是这样安排并不一定是有益的。硅谷的公司的雇员流动性很高，跳槽很常见，新概念新思想交流传播得很快，因而促进了创新的事物不断地涌现。

颠覆和变革的出现迫使我们主动去寻找新的有创造力的思路和方法。新奇的创意往往就是从混沌无序的状态中得来的。

同一个团队里面的人常常会发现相似的东西。但是如果从不同的角度看就很容易产生不同的想法，这些想法相互交流影响又可以进一步让思想维度变得更加多元。

不要过度审视你自己。过度审视怀疑自己很危险，会变成你尝试即兴创作的时候的阻碍或者陷阱。思考设定一定要摒弃看法和偏见，因为即兴创作依靠的就是无法预料地创造什么和一种创作者们很舒服的无序混沌的状态。

举个例子，整整齐齐地排好码好邮件从本质上来说是没有意义的。用搜索功能比花心思把所有邮件合理分类在一个个的文件夹里面快得多。不是说以后都不要提前计划安排什么，但是在计划的时候，要容许跟以往不一样的东西存在。​​​​

Minimalism does not always mean perfect order, but selecting what to focus on

With more data, you will pick up errors. If your model picks up these noises, predictions will go wrong. It is human tendency to prefer order. But order is not always beneficial. In Silicon Valley, employees hop around from job to job. These mean ideas are exchanged quickly, resulting in better innovation.

Disruptions force us to find new, creative approaches.  Novel ideas are usually discovered in disorderly periods.

Working groups often find their finds converging. But differing views help different ideas interact – allowing range of ideas to grow.

Stop censoring yourself. This is a risky step, but it's a risk you've got to take if you want to tap into the power of improvisation. Non-judgemental mind-set is crucial since improvisation depends on creating unpredictability, a chaotic state only they feel comfortable with. 

In another example, organizing your email is essentially pointless. It's quicker to use the search bar than to parse through a whole system of folders. This doesn't mean not planning, but that you should embrace differences even as you plan.

极简

Passive investing – the only way to plan for retirement

This entry includes highlights from a journal in CFA publications. My intention is to urge investors to invest in low cost index funds. The general rule of thumb is, the higher the cost, the lower your rate of return. Active managers who can outperform the market is incredibly hard to find. In fact, it’s quite improbably to find one who can outperform the market persistently, net of fees, over a long time.

There is extensive, undeniable data which show that identifying in advance any particular investment manager who will—after costs, taxes, and fees—achieve the holy grail of beating the market is highly improbable.

If there’s anything in the whole world of mutual funds that you can take to the bank, it’s that expense ratios help you make a better decision. In every single time period and data point tested, low-cost funds beat high-cost funds. Investors should make expense ratios a primary test in fund selection. They are still the most dependable predictor of performance.

[Kinnel, Russel. 2010. Morningstar FundInvestor, vol. 18, no. 12 (August):1–3.]

Whether one is investing a lump-sum amount or a series of periodic amounts, the arithmetic of investment expenses is compelling. Although a long-term investor may be able to find one or more high-cost managers who can beat an appropriate benchmark by an amount sufficient to more than offset the added costs, the reality is that “compared with the readily available passive alternative, fees for active management are astonishingly high” (Ellis 2012, p. 4).

Managers with extraordinary skills may exist, but as I argued in this publication many years ago (Sharpe 1991), another exercise in arithmetic indicates that such managers are in the minority. And as Ellis has reminded us, they are very hard indeed to identify in advance.

References
Ellis, Charles D. (2012). “Investment Management Fees Are (Much) Higher Than You Think.” Financial Analysts Journal, Vol. 68, No. 3 (May/June): 4-6.

Kimmel, Russell (2010). Morningstar Fund Investor, Vol. 18, No. 12 (August): 1-3.

Sharpe, William F. (1991). “The Arithmetic of Active Management.” Financial Analysts Journal, Vol. 47, No. 1 (January/February): 7-9.

Vanguard Group (2012). “Vanguard Total Stock Market Index Fund Admiral Shares.”
https://personal.vanguard.com/us/funds/snapshot?FundId=0585&FundIntExt=INT#hist=tab%3A3 (accessed 5 July 2012)

Further evidences that active management does not impress

Evidence that active management does not work – from Active Management in Mostly Efficient Markets (Robert C. Jones, CFA, and Russ Wermers)

The study shows that neither the average mutual fund nor the average institutional separate account (ISA) earned a positive alpha, net of fees and expenses, after adjusting for market and style risks. It is even harder for actively managed funds to outperform passive alternatives on an after-tax basis.

The study found that the average active manager earns a positive alpha before fees but that this alpha does not quite cover the costs of active management.

Most important findings in that study:
Active returns (adjusted for risk) across managers and time probably average close to zero, net of fees and other expenses. This finding is what we should expect in a mostly efficient market.

In another study (Does Active Management Pay? New International Evidence)
Quote: “The authors examine the empirical evidence for the common academic guidance that even sophisticated investors should avoid active equity management because of the outperformance of passive strategies after costs. They confirm this advice’s validity for the US equity market, the world’s most efficient market, but identify exceptions elsewhere.”

Active management might work in inefficient markets. But in efficient markets, active management does not work net of fees.

Expense ratio is key determinant to returns

This entry includes highlights from a journal in CFA publications. My intention is to urge investors to invest in low cost index funds. The general rule of thumb is, the higher the cost, the lower your rate of return. Active managers who can outperform the market is incredibly hard to find. In fact, it’s quite improbably to find one who can outperform the market persistently, net of fees, over a long time.

There is extensive, undeniable data which show that identifying in advance any particular investment manager who will—after costs, taxes, and fees—achieve the holy grail of beating the market is highly improbable.

If there’s anything in the whole world of mutual funds that you can take to the bank, it’s that expense ratios help you make a better decision. In every single time period and data point tested, low-cost funds beat high-cost funds. Investors should make expense ratios a primary test in fund selection. They are still the most dependable predictor of performance.

Whether one is investing a lump-sum amount or a series of periodic amounts, the arithmetic of investment expenses is compelling. Although a long-term investor may be able to find one or more high-cost managers who can beat an appropriate benchmark by an amount sufficient to more than offset the added costs, the reality is that “compared with the readily available passive alternative, fees for active management are astonishingly high” (Ellis 2012, p. 4).

Managers with extraordinary skills may exist, but as I argued in this publication many years ago (Sharpe 1991), another exercise in arithmetic indicates that such managers are in the minority. And as Ellis has reminded us, they are very hard indeed to identify in advance.

References

[Kinnel, Russel. 2010. Morningstar FundInvestor, vol. 18, no. 12 (August):1–3.]

Ellis, Charles D. (2012). “Investment Management Fees Are (Much) Higher Than YouThink.” Financial Analysts Journal, Vol. 68, No. 3 (May/June): 4-6.

Kimmel, Russell (2010). Morningstar Fund Investor, Vol. 18, No. 12 (August): 1-3.

Sharpe, William F. (1991). “The Arithmetic of Active Management.” Financial Analysts Journal, Vol. 47, No. 1 (January/February): 7-9.

Vanguard Group (2012). “Vanguard Total Stock Market Index Fund Admiral Shares.”

Sure way to lose money- crowdfunding a firm

Crowdfunding is often perceived as a way to democratize finance. Everyone can commit a small amount of money to fund small companies. Crowdfunding is also known as P2P lending.

Unlike VC funding or debt, crowdfunding requires potentially less paperwork. You can do it on Kickstarter, you can borrow from friend and friends. But crowdfunding can be dangerous. Better startups would have received attention from formal sources such as angel investors, venture capital firms, banks and laboratories. Crowdfunding firms bypassed these sources to ask the public for money. Is there a potential for adverse selection?

Can we conclude that there are more “thrashy” projects on crowdfunding platforms? People who invest little amount of money invest when they feel inspired by ideas. They probably do less due diligence than VCs. This is why crowdfunding can be dangerous for the investor.

There are intermediaries like Lending Club who tries to include some credit risk analysis into startups. But anyone will be able to attest that business stability leading to proper cash flow evaluation is always almost impossible. When the investor losses their investments in the case of crowdfunding, there is little recourse. Pursuing legal actions is costly and difficult. Here are some examples of start-ups which, even though they raised money, didn’t manage to complete their project successfully:

Pirate3D Inc raised nearly $1.5M on Kickstarter in 2013, planning to make a 3D printer available for use by anybody. A total of 3,520 backers invested money to the project including 3,389 who gave more than $300 to eventually get a printer.

Another example is that of Neil Singh’s lawsuit against Seth Quest. The latter launched a Kickstarter campaign in March 2011 for Hanfree, a standing iPad mount he’d devised. The crowdfunding campaign was initially a success, and he raised $35,000. However the production was a disaster and Quest couldn’t fulfill his backers’ pre-orders, one of whom was Neil Singh.

The fact is crowdfunding companies probably need more than capital. They need professional advice. Money is one of the many things they will need.

Summarily, if you are an individual, do not invest in startups in your retirement plans. Instead, keep them in an index fund, ensure low cost investments. There are plenty of evidences of how active management does not outperform passive management. Here are some links:

https://www.ft.com/content/2e975946-fdbf-11e5-b5f5-070dca6d0a0d

https://www.ft.com/content/c9aea9f0-74c2-11e6-b60a-de4532d5ea35

https://www.ft.com/content/e555d83a-ed28-11e5-888e-2eadd5fbc4a4#axzz43RnnhB3V

[UPDATE] A very recent and vivid example of crowdfunding risk, is that of FND Film, a filmmakers’ start up, which raised about $78,000 in 2014 through Indiegogo crowdfunding platform, regardless of the fact that they didn’t provide any other detail about their project, but the name of the film “It’s All Good”.

After raising all that money the filmmakers disappered and started posting photos in social media showing that they were enjoying themselves with champagne and limos in Italy. As it was expected, the people who funded the project got furious, for what eventually turned out to be a troll, as the filmmakers made the movie two years after. It came as a very pleasant surprise to their supporters that the project they funded, was actually a metamovie of not making a movie, illustrating vividly the risks that crowdfunding entails.

Passive funds are a better choice than active funds

At the end of 2015, more than 84% of U.S. active funds underperformed the S&P 500 over the year. From a long-term view, over the past ten years, more than 98% of active funds failed to beat their benchmarks. Diving through the data, active funds failed to outperform the market over almost all time frames, the report of S&P Dow Jones Indices shows.

Savita Subramanian, strategist of the Bank of America Merrill Lynch, stated briefly that the active fund managers continued to be on the wrong side of the trade this year. Telecom, utilities and energy benefited from the rebound of oil prices, to which many funds did not attach enough importance. On the contrary, healthcare and consumer discretionary, two of the three worst-performing sectors, were overweight in active funds.

The fees are eating into the gains of funds. If the investor was lucky and chose a follow-the-benchmark active equity fund, the fees would take 1/3 of the income, not to mention that most active funds usually underperformed the benchmarks. Although the fees keep lowering these years, there are quite amazing when the gains of the market and funds are modest.

As a result, investors gradually shifted from active funds to passive funds, for reducing the cost and stopping the loss. According to data from Morningstar, active funds have lost $149.8bn in assets in the first half of 2016, while passive funds took in $286.1bn.

How should you invest your retirement money?

Most agents want your money invested in funds that they can earn a commission from
Based on my experience, most agents are not highly skilled in assessing investment instruments. They pass a couple of mandatory exams. But they cannot explain simple quantitative risk measures.

Typically, they will show you a snapshot of how a fund performs over time. This is tricky. A study by Cass university shows how fund performances lack persistency. i.e. If you buy a loser, the chance of outdoing a winner next year is higher. Simply put, there is a return to average. It is a simple, yet stubborn principle.

Most fund returns are not persistent
In this study – Why Does Mutual Fund Performance Not Persist? The Impact and Interaction of Fund Flows and Manager Changes, it was concluded that the performance of the worst performing funds experiencing both the replacement of the fund manager (internal governance) and high outflows (external governance) enjoys a subsequent increase of 2.40 percentage points in the following year, relative to loser funds not experiencing these effects.

If statistically fund performance are not persistent, it makes more sense to just buy the cheapest index funds. “The persistence of performance among past winners is no more predictable than the flip of a coin,” said Peter Westaway, Vanguard’s chief economist in Europe.

The next step

• You should go direct. Skip agents and save cost
• You should have a longer time horizon. If you don’t have at least 10-year horizon, go for simple banking deposits.
• You should go for index funds that are cheap and broadly diversified, preferably cash based index funds and not diversified.

Read more here:
https://www.ft.com/content/996d4afa-1f5b-11e2-b2ad-00144feabdc0

Top performers definitely do not remain at the top.

Investing in actively managed funds is a bad idea

Investing in actively managed funds is a bad idea: they only eat up your hard-earned money, while financial mediators make a fortune. Make more of your money by investing in an index fund.

Actively managed funds are expensive and consequently often underperform the market.

Few funds perform well, and there’s no guarantee even those few will continue to do so.

Investors often underestimate the true cost of actively managed funds. Put the majority of your assets in safe, low-cost index funds.

Each index fund comprises an expense ratio that represents management fees and operating expenses. These expenses, though typically totalling less than one percent, can add up in a long-term investment.

Actionable advice: Invest the majority of your assets in an index fund, and if you want to gamble with some of your hard-earned money, then place a small amount in actively managed funds. If, despite what you’ve read you still want to partake in the thrill of risking some money and making fast profits in actively managed funds, bet on no more than 5 percent. You can afford to risk this small amount but absolutely keep the majority of your assets in a safe long-term investment.

The costs of investing in such a fund are very high. As an investor, you’d pay the brokerage commissions, the fund manager’s fees and so forth. All those fees add up to a hefty chunk of your expected profits.

If the funds perform extremely well, you might not mind those costs, but in the long run, actively managed funds are likely to yield you less profit than the overall stock market.

An actively managed fund will generate significantly less profit for you than a passive, low-cost index fund that merely mimics the performance of the overall market. In fact, if you had invested $10,000 in 1980, by 2005 you would walk away with 70 percent less if you invested in an active fund rather than an index fund, due to fees alone!

Investors pay huge fees to funds, deferring to financial experts who have a solid understanding of the stock market. However, despite industry knowledge or expertise, only 24 of the 355 mutual funds that existed in 1970 have outperformed the market consistently and remain in business.

Actively managed funds automatically come with high costs. However, fund managers rarely disclose the dollar amount. Instead, they boast about the high returns but forget to divulge what the investor will really earn after deducting all the performance and portfolio fees.

Surprisingly, that omission occurs often: 198 of the 200 most successful funds in the latter years of the 1990s reported higher returns than the investors actually earned!

Don’t let what you now know about actively managed funds persuade you to keep all your money under your bed. The index fund is your best alternative.

In contrast to actively managed funds, index funds are much more cost-efficient.

By definition, an index fund holds a diversified portfolio that reflects the financial market or a specific market sector. However, instead of betting on the market, index funds hold their portfolios indefinitely, eliminating the risks of making short-term, volatile bets while simultaneously minimizing operating costs.

Because index funds track the performance of all stocks included in the index without betting on individual stocks, they’re also called passive funds.

Since they simply hold shares across particular market sectors, you will not have to bear operating fees for buying and selling shares, financial consultants, or fund management. You will, however, reap the benefits of commercial net returns.

Another advantage to index funds is that they’re likely to outperform actively managed funds in the long-term.

For instance, many Vanguard index funds fees are less than 0.06% per annum. Both funds have expenses below 1 percent, but over longer investment periods like a decade, those tenths of a penny add up.

Since index funds fluctuations follow the overall market, go ahead and choose the fund with the lowest cost structure, knowing that a company’s expense ratio doesn’t equate with its level of performance.

The truth about preparing for retirement

I’m amazed by the proliferation of articles and content on methods to make big money online. On forums, ordinary men try to give advice on which broker to use, which product to buy.

The truth is simpler. People simply want to earn commissions on your investment. The more you trade, the more they earn. The more you buy into mutual funds, the more fees you pay to agents. Investments should be boring. Put your money in a globally diversified fund and leave it there. Do not move money. Companies layer fees when you try to move money.

Start young, have a long investment horizon. Go for globally diversified passive funds. I like ETFs in Singapore because we cannot buy Vanguard funds direct yet.

Avoid actively management funds. I wrote a few articles consolidating evidences on why active managed funds don’t work.

Also read vanguard’s studies. See the truth about active funds here. Don’t trade actively. Don’t invest in active funds. You are simply funding the high salaries of managers. More than 80% don’t even beat the benchmark market returns.

There are only 3 simple steps to investing:

1. Save monthly, 20 to 30% is a good figure.
2. Invest the money in index passive funds.
3. Leave it. Don’t touch the pot of gold.

Run away from people who are trying to sell you active investments. Don’t even talk to people who want you to believe trading leisurely will make you rich. Let your money work for you. Leave your money in a passive fund.