Looking for the catch from Europe

[FrugalPatat]

Hi,

I am FrugalPatat. I am from Europe (Belgium). I am 30 years old and work in IT. I haven't typed any phrases in English since graduating so this takes some getting used to.

Last month I paid back almost all of my mortage ( I kept a small part of which 50% is paid by the government (due to tax reductions)). I guess I have to thank this site for that. Although I was never a really big spender; reading on this website made me become much more agressive in improving my financial situation.

While saving money to pay back my mortage I also read some books on investing but I am still unsure about what to do with that. Many point to index funds as free lunch (ETFs in my case because index funds are not available in my country) but I'm still trying to understand what are the different catches.

[BlueNote]

Welcome to the ERE forums FrugalPatat.

As I understand it, the conventional arguments behind using index tracking securities (mutual funds, ETF's, homebrewed) are:

1) Active management can almost never, on average, beat passively following an index after fees, spreads, taxes and other frictional costs are properly accounted for. As time passes the probability of beating the indexes by actively selecting securities (that you think will beat the index) becomes less likely. The statistics seem to indicate that this is a foregone conclusion for the average investor.

2) Information is priced into securities before the average investor ever has a hope of taking advantage of mispricing. This is basically the EMH (efficient market hypothesis) in a nutshell. Therefore it is pointless and pure speculation to try to pick securities in order to beat the market indexes. In order to get a better expected return , under the EMH, you have to shoulder more non-diversifiable risk. Risk and long term expected reward are essentially cause and effect in this model as long as the risks are unavoidable through diversification.

A good book for understanding the arguments above, the orthodox book, is a Random Walk down wall street by Burton Malkiel.

There are no catches, don't go looking for alternative views. Especially don't look into the alternate views in the article I linked to above to find catches.

[FrugalPatat]

Thanks. I am aware of those arguments. And I also read that book. It's not just the choice between active management and index tracking, but also the choice about how much to invest in the stock market in the first place (vs real estate,bonds or other).

[BlueNote]

@frugalpatat

What research have you done into asset allocation so far?

[FrugalPatat]

I just read some books related to investing; never looked for specifics. Those I remember:
-the four pillars of investing (bernstein)
-common sense on mutual funds (bogle)
-random walk on wallstreet
-fooled by randomness
-black swan
-The Dhandho Investor: The Low-Risk Value Method to High Returns
-warren buffet invests like a girl and why you should to

Otherwise just reading the internet. The hard part is finding What to read. I've got some new books lined up that were mentioned in this blogpost: http://earlyretirementextreme.com/start ... sting.html

But always happy to hear more recommendations.

[BlueNote]

@FruaglPatat

Sounds like you're trying to determine the right asset mix inside of your investment portfolio.

If you've been going through this site then you've likely come across concepts like asset allocation, ivy portfolio, permanent portfolio, diversification bonus etc.

I have found that I have to actually implement an investment concept before I really know if it is going to work for me. Fortunately this "hard knocks" education hasn't been too expensive and I have settled on a personalized version of the very conventional 60/40 portfolio. To each their own though! Asset allocation is really important but as the Ivy portfolio book shows diversification has been a flexible concept to implement successfully.

[DutchGirl]

Hi FrugalPatat,

I'm from the Netherlands. I'm using Binck for my investments in ETFs. This is also possible in Belgium, https://www.binck.be/ . I also use another company called Brand New Day, but they aren't in Belgium yet.

My personal asset allocation is 33% bonds and 67% stocks. My age is 39 and I'm quite risk aversive, that is why I personally have a relatively high percentage of bonds.

Welcome on this website and good luck!

[MegaRigger]

Hey FrugalPatat,

fellow Belgian here.

An import aspect for indexinvesting for Belgians is that there is no tax on capital gains but only on dividends. So if you invest in indextrackers always invest in the ones that automatically re-invest the dividends. This makes it very interesting from a fiscal point of view.

Congrats on paying back your mortgage! a lot of our fellow countrymen have troubles in that area.