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birb_cromble  4d ago (text post)   1364 thread views

Weekly Finance Thread

Since a lot of us here have expressed interest in not starving to death in a gutter, I figured I'd start a weekly thread to discuss financial matters.

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  • Remember that we're all just Internet randos. Don't bet your life savings on a hot tip from this thread.
  • Keep culture war in the culture war thread. Yes, global events may impact our personal finances, but that does not mean we have to incessantly harp on culture war aspects here. If you are going to discuss it, please stick to the practical impacts of it on an individual level.
  • Be kind. Remember that everyone here comes from different circumstances. We all have different resources available and different risk tolerances.
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Let's say I managed to save up around 5000€. Is there any point in investing a sum that small? What if we also assume that another 5000€ join it every year?

Is there any point in investing a sum that small?

I would personally say yes. Every choice you make with money is an investment; the only difference is the return.

If you're talking about equities specifically, it's a more qualified yes. Are you willing to lose it? Can you afford to let it sit there locked up in the market for years if the economy is flat? Can you think of a better use for it (eg: home down payment, paying off expensive debt)? If the answers to those are yes, yes, and no, it's usually a good choice.

To be very honest, I don't even know what equities is. Or are. I am, as they say, financially illiterate beyond "penny saved > penny earned".

My answers are

  • Willing to lose (entirely): No.
  • Can afford to let it sit: Yes.
  • Better uses: No.

Put simply, there are broadly two ways to invest:

  • Loaning somebody money who will pay you back (also called the credit market or debt market, sometimes casually referred to as bonds)
  • Buying a (usually) tiny ownership share in a company (equities, most commonly represented by stocks).

When most people talk about "the market", they mean common stocks or funds on public exchanges. It has historically offered the best long term return on investment, but it carries the most risk. Stocks tend to grow, but that's a trend that can't be applied with certainty between any two specific points in time. In a bad year (eg: 2008), you might see the face value of your investments drop by 50% and take several years to recover. If you pick individual stocks and you're very unlucky, every single company could go out of business and cost you everything. You can mitigate those risks by buying into funds, which are baskets of multiple stocks. They won't all be winners, but it spreads the risk at the cost of some potential returns.

No one is forcing you to sit through a full crash or the bottoming out process. Stoplosses exist. Always pre-define your risk.

Those can kill you by a thousand paper cuts. IMO risk management is better done with appropriate sizing and asset allocation. Things like stop-losses or puts add completely different risks and performance drags. And since 2010 a lot V-shape recoveries especially at the index level.

In some way you have to establish a positive risk/reward ratio that does not rely on luck. Everyone will have losing trades. Anywhere from 30 to 70 percent of the trades will be losers, depending on the criteria you have established, and the market cycle and skill and chosen method (daytrading and swing-trading is much harder to pull off with a decent hitrate than position-trading).

Depending on your hit rate, you'll need at least 2:1 or 3:1 bigger gains when you are right, compared to the losses when you are wrong.

A 33% drawdown will need a +50% increase to get that portion of your money back up. After -50%. you need a doubling. After -75%? You need 4x to get back to even. Forget about it. You really can't get into a habit of entertaining huge losers remaining in your portfolio.

I'm not saying that a hard stop at 10 percent is always the right one. It may depend on the wider environment and stage of the credit cycle and macro goings-on. If you know the sell-off is very likely to be temporary and not an indictment of your chosen companies, you can ride it out.

But you absolutely have to control the drawdowns in your losers somehow.

Choosing lower risk entry points with a higher probability of going up than down, is also a big part of successful investing. Learning the fundamentals of technical analysis is essential.

Honestly yes you can take large losses and be profitable. That’s something they lie to you about in the trading books. Many strategies do just fine with it.

But I think this conversation was more about investing than trading. The market often does do mini crashes (sometimes big %) then end up fully mean reverting and then going up. Someone investing their savings and not trading would be very poorly served with stop losses. We’ve had many crashes that then V-shape back up. The correct thing for them to do to manage risks is diversifying, maybe risks-parity, and keeping beta down to their risks tolerance.

Stoplosses exist.

That's the second step. The first step, when somebody is "financially illiterate beyond penny saved > penny earned", is to point out that the risk exists. Once that's done, you move on to how to deal with that risk.

You should not divide those steps into separate sessions because the first one will needlessly scare people away.

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