Silly Questions from Newbie Investor/Trader

Apple Invs2Trad
Jun 9 15 Comments

1. Index funds diversification: I have been told about the benefits of diversification and going with index funds. Unless we actively manage them ourselves how are we going to get profited as market always goes through up and down cycles at least every decade?? For example, Vanguard’s VFIAX just provides just around 2% annual yield in dividends. How can this be beneficial unless I time the market (I.e. buy low and sell high) on an yearly basis at least? If I keep pouring my savings into this Index fund (or any mix of funds for that matter), there will come a day when there will be a repeat of 2000 and 2008 crashes which will downturn the market and start fresh! Am I missing something here?

2. Bonds: I thought bonds guarantee principal security but was told that their value decreases when interest rate increases. Does that mean when I complete the entire maturity term and by then the bonds value decreased from the original value, I will be selling short of the original value? Then what’s the difference between bonds (and bonds index) compared to stocks (and stocks index) except for less volatility factor?!

3. Fixed Index Annuities: Per my learning this is one of the solid investment vehicle that can secure principal and also provide some/most of market up trends without downtrend! Except for the catch that the money is less accessible until term completion, what are all the downsides that I’m missing to notice?

Thank you!!!

TC: 320 K

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TOP 15 Comments
  • Comcast G0ku
    1. You don’t try. Amateurs underperform a passive index when they try timing markets. Professionals can outperform a bit but after paying management fees it comes down to passive indexing again. 2% div yield is just a nice bonus to have, and is on par with US large cap index as a whole. You gain by long term appreciation

    2. Bonds are fixed income instruments. You’re guaranteed the coupon payments, and the face value at maturity, unless the issuer goes bankrupt. Bonds are auctioned off, and someone may choose to pay more/less than face value. When alternative investments start looking more attractive, traders pay less for bonds, and hence the price a seller will receive before maturity changes

    3. This is the worst choice so far, IRR is typically lower than a typical stocks/fixed income/money market portfolio
    Jun 9 6
    • New / Other
      DuQvV7y

      New Other

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      DuQvV7ymore
      Piggy backing onto this with short answers.

      1. The market goes up and down, yes. But the trend line is higher. To the tune of 9.8%/yr over the last 20 years and 6.4% over the last 30 years.

      2. Yes. What @Goku-jin is saying is if you hold to maturity, your principal stays intact.

      3. There are so many variants and most use actuarial math to skew payments against you. Beware of things that are not easily understood
      Jun 9
    • Apple Invs2Trad
      OP
      Thanks @G0ku, @DuQvV7y. #2 — How does Bonds index fund behave in this matter as they don’t have a said maturity date isn’t? So it’s just about coupons and a very slim appreciation in the best case (when interests go down)? #3 — Are you saying this is not a good choice OR this is a good choice but really hard to pick the right one in the market? I read about this in Tony Robbins Money Master the game and pretty Wikipedia also confirms what the book said about it.
      Jun 9
    • New / Other
      DuQvV7y

      New Other

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      DuQvV7ymore
      Bond funds trade liquidity for principal safety.

      The face value of a bond changes with interest rate fluctuations. This value is used to calculate a net asset value which becomes the price of the bond fund.

      Note that a bond fund could be made up of a variety of bonds so the NAV is an aggregation of the individual NAV * the invested amount in each.

      Why is this good: You can get dividend payment from bond funds and yet not be locked in to hold bonds to maturity.

      A long hold time typically smoothens this out however since the NAV values of a bond adjusts towards the face value as it approaches maturity.

      But but but... if you were going to hold a bond ETF for a long time, why not hold the actual bond and get the possible tax benefits vs a bond fund without tax benefits.
      Jun 10
    • Apple Invs2Trad
      OP
      @DuQvV7y, Thank you. Makes sense now!
      Jun 10
    • New / Other
      DuQvV7y

      New Other

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      DuQvV7ymore
      👍 BTW, fixed some egregious typos. Glad you found it half-readable.
      Jun 10
    • Apple Invs2Trad
      OP
      Cool 🙏🏼
      Jun 10
  • Lol index funds? Have fun with your 6% growth per year. Yolo weeklies put me up 65%.
    Jun 9 2
    • New / Other
      DuQvV7y

      New Other

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      Did stuff. Hustled hard. Retired
      DuQvV7ymore
      This is an example of what Warren Buffet calls a “shooting star”
      Jun 9
    • Microsoft idknbd
      see you in the welfare line
      Jun 9
  • Salesforce nBPC52
    Stock indexes are constantly being redefined to eliminate low value stocks and include high value stocks so you should probably be fine. The fund company is an independent business so check what happens if that company goes bust.

    Also, set reasonable expectations for returns, if any.

    The S&P 500 went sideways 1929-1954 and 1966-1982. 30 years after hitting its all time high, the Nikkei index is still bouncing around 50% of that high.

    The S&P could easily go back to pre-2008 or pre-1929 levels. All that it takes is a panic, with too many sellers and too few buyers. Keeping the index below a particular level for a prolonged period is much more complicated though.

    To be somewhat conservative, budget 30 years for getting a positive return. Assume you are buying at a high. The past century had two periods of multi-decade sideways movement. Another period like that isn’t impossible.

    You will also have to factor in those management fees. 30 years with a 2% management fee means if the market goes perfectly flat that whole time you will end up with 55% of your original investment. Inflation may also be a factor that may erode the value you reclaim after 30 years even further.

    30 years is coincidentally the term of most mortgages in the US.
    Jun 9 1
    • Apple Invs2Trad
      OP
      Thank you for the detailed explanation! It is also good to know such long period side runs! It really makes sense to avoid high expense ratio MFs in such scenarios! Any thoughts about #3? FIAs?
      Jun 10
  • Microsoft idknbd
    The market trends up over time. The market is far higher than it was 20 years ago even after 2000 and 2008. Market timing not required
    Jun 9 1
    • Apple Invs2Trad
      OP
      Ok history may not repeat itself but it rhythms so. Makes sense!
      Jun 10
  • Amazon / Eng xgIO00
    Why you are asking on Blind? Do some research online
    Jun 9 0

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