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There is false news, then there is real stupidity.
Consider the advice given in the New York Times last Sunday to a student who wanted to know more about saving and investing the nominal sum of $ 1,000: "Investing is overcoming the whims of capitalism. They prefer to take several credit cards to get a better credit score, the advisor concludes.
Even in view of the tendency of the left in the policy that puts the rich in its sights, this information is of little use for a novice who seeks to accumulate a nest egg that would probably not be threatened by the wealth tax of the Senator Elizabeth Warren.
In contrast, relatively inexperienced investors have embarked on free share trading applications. As the Wall Street Journal recently reported, this is reminiscent of the beginning of the boom in online commerce during the early-century Internet bubble, which allowed all sorts of zany titles to skyrocket, despite their lack of income or even, in some cases, sales.
How to set up such as Robinhood Markets, Webull, M1 Finance and the You Invest website
JPMorgan Chase
to make money? As a novice investor told the Journal, he used margin loans to increase his initial bet by $ 5,000. Not so different from bookmakers who make their profits on the vig.
Not all users of apps are caught off guard. A novice trader of our knowledge uses play money of a few hundred dollars for day trading options. At least with the options, your losses are limited to the few dollars you paid for the contract, which is no worse than playing the lottery.
This frenetic negotiation should not be confused with real investment. Investing is a long-term process, which is good news for novices because they have the time. The bad news: the usual advice they get, although not as bad as that offered by the gray lady, are still suboptimal.
Conventional wisdom is embodied in "life cycle" investing, which forms the basis of target date funds, a staple of retirement accounts such as 401 (k) s. The idea is that when you're young, you have to take a lot of risks and stock up on stocks. In case of crash, as in 2000 or 2008, you will have time to make up for the losses. Keeping the course after the big draws, the argument goes, will eventually pay off. Conversely, if you are just a few years away from retirement, you do not have time to make up for large losses, which favors less risky investments, such as bonds.
Logic enough … on the surface. But Research Affiliates, the institutional advisor founded by iconoclast Rob Arnott, has been arguing for years against the conventional wisdom embodied in target-date funds, particularly with respect to the clbadic advice given to young investors.
Her research (available at www.researchaffiliates.com) includes academic articles, as well as articles for interested non-professionals. They show that the standard "glide path" of target date funds, which are starting to be heavily weighted in equities and reallocated to bonds in later years, is not producing the expected results. In addition, Arnott and co-author Lillian Wu argue that young workers are particularly poorly served by today's usual stock allocation, which is generally heavy in equities, given the real challenges they face. .
When they start their careers, young people spend a lot of money to start their own home, while saving for down payments for housing and often juggling student debt. At the same time, they usually have less job security. And as the economy slows, unemployment rises as stocks decline. If young investors are fired, they risk being forced to withdraw their 401 (k) s at the worst possible time in a bear market. The usual advice is not to use pension plans, which may result in tax penalties. Yet this often happens because paying rent or other bills takes precedence over maintaining a wallet.
According to Research Affiliates, a better solution is for young investors to favor a less risky portfolio that can serve as a rainy day fund. Arnott and Wu recommend placing one-third of the "mainstream" shares, one-third of the "consumer" bonds and the rest of the inflation hedges. These include inflation-protected treasury securities, low-volatility stocks and high-yield bonds, as well as moderate doses of real estate and equity and emerging market bond funds, all of which can be obtained low cost funds.
Over time, young investors will build their portfolios to cover the inevitable rainy days, while gaining experience to overcome the inevitable ups and downs of the markets. They can then switch to riskier badets, possibly purchased on a free phone application. It is a better plan to deal with the vagaries of a market economy than to stack plastic.
Write to Randall W. Forsyth at [email protected]
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