Most commonly misused/misunderstood investing terms and concepts (on BH forum)

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MJW
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Most commonly misused/misunderstood investing terms and concepts (on BH forum)

Post by MJW » Tue Aug 28, 2018 5:03 pm

If you have followed the BH forum over the years you have probably seen certain terms or concepts referenced on a fairly regular basis. I thought it might be a helpful service to readers to cite which of these terms and concepts tend to be most susceptible to misunderstanding or misuse. Opinions may differ on this, obviously, but it never hurts for a reader to take pause and absorb the material with a more critical eye.

I’ll share a couple of mine to get the ball rolling...

Reversion to the mean – This one shows up continually and in almost every case the “mean” and corresponding timeframe are quite nebulous. It begs the question practically every time I see it used. It seems to be communicated more as an idea of the eventuality of shifting tides, or the pendulum swinging the other way, or some other metaphorical comparison.

Past results do not predict future performance – Alright, but there is also a question of whether anything is to be learned from past performance. Surely there is, or we would have little basis for making decisions one way or another. There would be little point to doing any research on investing. It’s a concept that is also used selectively when it suits an agenda, such as touting the benefits of the three-fund portfolio or dismissing potential “rivals” to the 3fund when the situation warrants.

Market at a high - I've seen this one used more lately, especially in the context of whether now is a good time to invest, or whether one should consider de-risking their portfolio or explore alternatives, etc. I don't have the data in front of me, but it's not terribly unusual for the market to be at a "high." If the market was at an all-time high right now for the rest of all times, those of us that haven't already won the game would be in for a pretty bleak future. We invest because we assume it's going to continue to go up over time.

What are some of yours?

[Edit: Would like to clarify that these are ideas that you believe are being applied improperly on the forum, not that you simply disagree with them]
Last edited by MJW on Tue Aug 28, 2018 6:36 pm, edited 2 times in total.

Woodshark
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Re: Most commonly misused/misunderstood investing terms and concepts (on BH forum)

Post by Woodshark » Tue Aug 28, 2018 5:40 pm

This Time It's Different:

Often said as a warning with a wink and a nod but sometimes opined by someone who truly believes that history will change it's mind and not repeat itself. According to Sir John Templeton, they are the four most expensive words in the English lauguage asnvestors tend to make the same mistakes again or make the mistakes other investors made earlier. They do not learn from mistakes. They feel that “it will be different this time” and do not remember the past.

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Re: Most commonly misused/misunderstood investing terms and concepts (on BH forum)

Post by retiredjg » Tue Aug 28, 2018 5:46 pm

There seems to be a lot of confusion between a simple Roth conversion and the "the back door" method for getting money into Roth IRA. These terms are frequently used incorrectly.

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Re: Most commonly misused/misunderstood investing terms and concepts (on BH forum)

Post by Tycoon » Tue Aug 28, 2018 5:54 pm

Middle class, low income, and average.
Appeal to Pity:When pity is envoked to support a statement | Appeal to Popular Sentiment:Appealing to unrelated prejudices and attitudes | Hasty Generalization:Too little evidence to support the conclusion

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Re: Most commonly misused/misunderstood investing terms and concepts (on BH forum)

Post by UpperNwGuy » Tue Aug 28, 2018 6:07 pm

I agree that the phrase “past results don’t predict future performance” is heavily overused and often misused around here. Just skim through the current thread on international stock funds to see some examples. I’m surprised, however, to see this phrase identified with advocates of the three-fund portfolio. I don’t think the three-fund folks are any more guilty of abusing this phrase than anyone else, so it isn’t fair to single them out.

As for me, I’m tired of hearing:
— A small cap value tilt Is better than untilted Total Stock
— Treasuries are the only bonds you need
— CDs are better than bonds
— Fidelity can’t be trusted because it is a for-profit corporation
— You should always pay off your mortgage first even when it makes no financial sense
— CAPE values indicate a coming crash

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Re: Most commonly misused/misunderstood investing terms and concepts (on BH forum)

Post by Fallible » Tue Aug 28, 2018 6:12 pm

Two often seen on the forum even though they are written up nicely in the wiki, BH books, and blogs:

-Market timing: the predictive component is sometimes misunderstood.

-Rebalancing: the purpose, which is to maintain a preset allocation, is sometimes misunderstood.
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Re: Most commonly misused/misunderstood investing terms and concepts (on BH forum)

Post by nps » Tue Aug 28, 2018 6:18 pm

Fallible wrote:
Tue Aug 28, 2018 6:12 pm
Two often seen on the forum even though they are written up nicely in the wiki, BH books, and blogs:

-Market timing: the predictive component is sometimes misunderstood.

-Rebalancing: the purpose, which is to maintain a preset allocation, is sometimes misunderstood.
And related, the notion of "dry powder" and an assumed rebalancing bonus.

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Re: Most commonly misused/misunderstood investing terms and concepts (on BH forum)

Post by Alexa9 » Tue Aug 28, 2018 6:30 pm

Three Fund Portfolio, Total Market Index Fund - that this is the perfect market cap weight for long term investing (good, not great)
Small Cap Value - that this is a guaranteed way to beat the market (long periods of underperformance)
The idea that investing is one size fits all - oversimplified (many special cases)

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Re: Most commonly misused/misunderstood investing terms and concepts (on BH forum)

Post by triceratop » Tue Aug 28, 2018 6:31 pm

Diversification -- Honestly not even sure there is a proper definition, but there certainly are a diverse set of definitions out there....of course that doesn't mean that the diversity leads to any greater understanding or improved outcome.

:twisted:
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Re: Most commonly misused/misunderstood investing terms and concepts (on BH forum)

Post by TravelforFun » Tue Aug 28, 2018 6:33 pm

Misunderstood concepts?

- 401k loans are bad.
- You pay taxes twice when you take out a 401k loan.

TravelforFun

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Re: Most commonly misused/misunderstood investing terms and concepts (on BH forum)

Post by mhalley » Tue Aug 28, 2018 6:34 pm

Another one might be “horrible” 401k plans. People often write about their horrible 401k plan expenses, but then it turns out to be 0.5 or so. It ain’t no admiral share er, but it ain’t horrible either.

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Re: Most commonly misused/misunderstood investing terms and concepts (on BH forum)

Post by TwstdSista » Tue Aug 28, 2018 6:40 pm

Often misused:

Adverse - Averse
Advice - Advise
Roth - ROTH

MJW
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Re: Most commonly misused/misunderstood investing terms and concepts (on BH forum)

Post by MJW » Tue Aug 28, 2018 6:46 pm

Fallible wrote:
Tue Aug 28, 2018 6:12 pm
-Market timing: the predictive component is sometimes misunderstood.
Agree that this seems to be a catch-all term.

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Re: Most commonly misused/misunderstood investing terms and concepts (on BH forum)

Post by H-Town » Tue Aug 28, 2018 6:57 pm

Misused/Misunderstood:

1) Diversification works, unless it comes to international stocks. Gotta ask them what do they think diversification means.

2) Warren Buffet is god and listen to his advice will lead you to heaven. Alright, a little exaggeration here... but 90% VOO and 10% short-term Treasury for everyone, come on!

3) "John Bogle is the second coming of god and let's do 100% U.S. equity like he said"... alright, I'll stop.. but his advice on international equity is misleading at the very least.There should be a lot of asterisks associate with his advice to stay 100% U.S. equity.

4) "100% stock will give you the best chance to retire early." This is half right. It could also give you the chance to go back to work an additional 5 to 10 years. Risk and rewards are two side of the same coin.

5) "If I save 15% of whatever I'm making, I'll retire comfortably." Be careful here. A general rule of thumb will not guarantee to work. Look at your personal situation and set goals.

6) "U.S. is the best country in the world so its stock market must be the best." It's a huge misconception. It maybe safer to invest in the U.S., but their returns are not among the best in the world.

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Re: Most commonly misused/misunderstood investing terms and concepts (on BH forum)

Post by whodidntante » Tue Aug 28, 2018 7:00 pm

Efficient market
How to classify DFA funds
Risk
Expected returns
401k loan repayment after separating service (someone always says 60 days with supreme confidence)
Factor investing
Derivatives

H-Town
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Re: Most commonly misused/misunderstood investing terms and concepts (on BH forum)

Post by H-Town » Tue Aug 28, 2018 7:01 pm

7) "As long as we save $1 million, we win in life". Money isn't everything. By the time you retire (early or at 60), you should be in good health and be happy with your life. Focusing solely on finance with do no good if you don't have health and happiness.

8) "Market is efficient". Well, not perfectly efficient. There are outliners. But if you look at the middle of the bell curve, then yeah, market is generally efficient.

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Re: Most commonly misused/misunderstood investing terms and concepts (on BH forum)

Post by iceport » Tue Aug 28, 2018 7:07 pm

Often misunderstood: "tax-deferred account"

It seems that investors frequently fail to understand the full magnitude of the tax advantage of these tax-advantaged accounts.

They focus first on the initial tax break, and then on the fact that they'll owe taxes on a large sum later, never realizing that for the vast majority of folks the tax-deferred account will leave them every bit as well off as (or better than) a tax-free account, aka Roth account. They'll often reason that a Roth is automatically better, because at least they won't owe taxes on "all the gains." While it's technically true that they'll be taxed on "all the gains," the end result is typically that, for their tax-adjusted share of the contributions to the account, all gains end up being tax-free, just like in a Roth.
"Discipline matters more than allocation.” ─William Bernstein

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Re: Most commonly misused/misunderstood investing terms and concepts (on BH forum)

Post by mortfree » Tue Aug 28, 2018 7:12 pm

Piece of mind vs peace of mind.

Especially when someone uses it incorrectly to describe how they felt paying off their mortgage.

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Re: Most commonly misused/misunderstood investing terms and concepts (on BH forum)

Post by Tdubs » Tue Aug 28, 2018 7:14 pm

MJW wrote:
Tue Aug 28, 2018 5:03 pm
It begs the question. . . .
Also a term not well understood.

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Re: Most commonly misused/misunderstood investing terms and concepts (on BH forum)

Post by ThrustVectoring » Tue Aug 28, 2018 7:30 pm

nps wrote:
Tue Aug 28, 2018 6:18 pm
Fallible wrote:
Tue Aug 28, 2018 6:12 pm
Two often seen on the forum even though they are written up nicely in the wiki, BH books, and blogs:

-Market timing: the predictive component is sometimes misunderstood.

-Rebalancing: the purpose, which is to maintain a preset allocation, is sometimes misunderstood.
And related, the notion of "dry powder" and an assumed rebalancing bonus.
There is a rebalancing bonus - it's just that with the expected returns and volatility of equity indexes, this "bonus" is smaller than the equity returns you miss out on. The break-even point for this "bonus" is the Kelley Criterion, and with current expectations you can lever up to like 140% and still out-pace the rebalancing advantage.

"Buy low, sell high" is a thing, but "buy early, buy often" is currently better.

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Re: Most commonly misused/misunderstood investing terms and concepts (on BH forum)

Post by staythecourse » Tue Aug 28, 2018 7:41 pm

MJW wrote:
Tue Aug 28, 2018 5:03 pm
Past results do not predict future performance – Alright, but there is also a question of whether anything is to be learned from past performance. Surely there is, or we would have little basis for making decisions one way or another. There would be little point to doing any research on investing. It’s a concept that is also used selectively when it suits an agenda, such as touting the benefits of the three-fund portfolio or dismissing potential “rivals” to the 3fund when the situation warrants.
This EASILY the most misunderstood phrase used on this board AND all of the books written by our many esteemed authors. I never understood/ believed what folks thought it meant so I did some investigation into the SEC website to find out what the origins of the phrase came from. It clearly documents that the phrase was a requirement to be placed on mutual fund advertisements during the 2000-2003 down markets. The documentation said it was in response to some active mutual funds claiming that they could deliver excellent returns by using the returns they had in the late '90's where everyone was shooting the lights out and making it seem they could reproduce those same returns during those early 2000 down markets.

So the phrase has NOTHING to do with "Well just because SCV has done well in past it will going forward" for example. It was meant for making sure active funds did not "suggest" that just because they have done well in past that they can repeat that performance going forward. It is more of an indictment that active funds are no gaurantee to repeat going forward just because they did in the past. This, of course, has been known since Jensen's article in the 1930's so nothing new there.

I may be the ONLY person I know who has actually looked into this and have written about it several times on this board yet no one seems to care. In my opinion, this explanation makes a lot more sense then the mantra often repeated on even this forum and by many of the great books we quote on here everyday.

Good luck.
"The stock market [fluctuation], therefore, is noise. A giant distraction from the business of investing.” | -Jack Bogle

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Re: Most commonly misused/misunderstood investing terms and concepts (on BH forum)

Post by 2015 » Tue Aug 28, 2018 7:54 pm

Perceptual/cognitive bias as it relates to investing. Not necessarily misused or misunderstood. Just largely and consistently overlooked.

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Re: Most commonly misused/misunderstood investing terms and concepts (on BH forum)

Post by Nicolas » Tue Aug 28, 2018 7:57 pm

Deleted
Last edited by Nicolas on Wed Sep 05, 2018 7:40 pm, edited 1 time in total.

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Re: Most commonly misused/misunderstood investing terms and concepts (on BH forum)

Post by flyingaway » Tue Aug 28, 2018 7:59 pm

staythecourse wrote:
Tue Aug 28, 2018 7:41 pm
MJW wrote:
Tue Aug 28, 2018 5:03 pm
Past results do not predict future performance – Alright, but there is also a question of whether anything is to be learned from past performance. Surely there is, or we would have little basis for making decisions one way or another. There would be little point to doing any research on investing. It’s a concept that is also used selectively when it suits an agenda, such as touting the benefits of the three-fund portfolio or dismissing potential “rivals” to the 3fund when the situation warrants.
This EASILY the most misunderstood phrase used on this board AND all of the books written by our many esteemed authors. I never understood/ believed what folks thought it meant so I did some investigation into the SEC website to find out what the origins of the phrase came from. It clearly documents that the phrase was a requirement to be placed on mutual fund advertisements during the 2000-2003 down markets. The documentation said it was in response to some active mutual funds claiming that they could deliver excellent returns by using the returns they had in the late '90's where everyone was shooting the lights out and making it seem they could reproduce those same returns during those early 2000 down markets.

So the phrase has NOTHING to do with "Well just because SCV has done well in past it will going forward" for example. It was meant for making sure active funds did not "suggest" that just because they have done well in past that they can repeat that performance going forward. It is more of an indictment that active funds are no gaurantee to repeat going forward just because they did in the past. This, of course, has been known since Jensen's article in the 1930's so nothing new there.

I may be the ONLY person I know who has actually looked into this and have written about it several times on this board yet no one seems to care. In my opinion, this explanation makes a lot more sense then the mantra often repeated on even this forum and by many of the great books we quote on here everyday.

Good luck.
Thank you for the research.

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Re: Most commonly misused/misunderstood investing terms and concepts (on BH forum)

Post by MJW » Tue Aug 28, 2018 8:18 pm

Tdubs wrote:
Tue Aug 28, 2018 7:14 pm
MJW wrote:
Tue Aug 28, 2018 5:03 pm
It begs the question. . . .
Also a term not well understood.
I believe stocks will revert to their mean because of reversion to the mean. :oops:

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Re: Most commonly misused/misunderstood investing terms and concepts (on BH forum)

Post by nps » Tue Aug 28, 2018 8:30 pm

ThrustVectoring wrote:
Tue Aug 28, 2018 7:30 pm
nps wrote:
Tue Aug 28, 2018 6:18 pm
Fallible wrote:
Tue Aug 28, 2018 6:12 pm
Two often seen on the forum even though they are written up nicely in the wiki, BH books, and blogs:

-Market timing: the predictive component is sometimes misunderstood.

-Rebalancing: the purpose, which is to maintain a preset allocation, is sometimes misunderstood.
And related, the notion of "dry powder" and an assumed rebalancing bonus.
There is a rebalancing bonus - it's just that with the expected returns and volatility of equity indexes, this "bonus" is smaller than the equity returns you miss out on. The break-even point for this "bonus" is the Kelley Criterion, and with current expectations you can lever up to like 140% and still out-pace the rebalancing advantage.

"Buy low, sell high" is a thing, but "buy early, buy often" is currently better.
That's precisely the misunderstanding. There is such a thing as a rebalancing bonus, particularly among asset classes that have high volatility and low correlation. As you note, it is not as significant (and possibly non-existent or negative) when considering rebalancing between stocks and bonds. However, the notion that maintaining "dry powder" provides a rebalancing bonus of presumed significance is often cited here to justify some higher asset allocations to bonds.

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Re: Most commonly misused/misunderstood investing terms and concepts (on BH forum)

Post by Atomic » Tue Aug 28, 2018 8:36 pm

Real return & time value of money.

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Re: Most commonly misused/misunderstood investing terms and concepts (on BH forum)

Post by Starfish » Tue Aug 28, 2018 8:37 pm

Inflation (especially in context of effective interest rates). Understandable because Americans did not go through periods when buying a car was a good investment.
Debt, as in debt aversion. This one is understandable as debt is not only the greatest tool for wealth creation but also for ruin.
1 million.
But favorite, the one I cannot understand: insurance against living too long. :?

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Re: Most commonly misused/misunderstood investing terms and concepts (on BH forum)

Post by nedsaid » Tue Aug 28, 2018 9:19 pm

triceratop wrote:
Tue Aug 28, 2018 6:31 pm
Diversification -- Honestly not even sure there is a proper definition, but there certainly are a diverse set of definitions out there....of course that doesn't mean that the diversity leads to any greater understanding or improved outcome.

:twisted:
Well, there are different types of diversification that I have heard described.
1) Diversification by number of securities held in a portfolio.
2) Diversification across asset classes.
3) Diversification across geography.
4) Diversification across factors.
5) Time diversification through dollar cost averaging.

I am certain there are others.
A fool and his money are good for business.

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Re: Most commonly misused/misunderstood investing terms and concepts (on BH forum)

Post by venkman » Tue Aug 28, 2018 9:21 pm

Individual bonds/CD's are "safer" than bond funds because you won't lose principal.

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Re: Most commonly misused/misunderstood investing terms and concepts (on BH forum)

Post by Tdubs » Tue Aug 28, 2018 9:22 pm

MJW wrote:
Tue Aug 28, 2018 8:18 pm
Tdubs wrote:
Tue Aug 28, 2018 7:14 pm
MJW wrote:
Tue Aug 28, 2018 5:03 pm
It begs the question. . . .
Also a term not well understood.
I believe stocks will revert to their mean because of reversion to the mean. :oops:
+1

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Re: Most commonly misused/misunderstood investing terms and concepts (on BH forum)

Post by SuzBanyan » Tue Aug 28, 2018 9:33 pm

The difference between a tax return and a tax refund. You want to file the former and deposit the latter.

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Re: Most commonly misused/misunderstood investing terms and concepts (on BH forum)

Post by runner3081 » Tue Aug 28, 2018 9:35 pm

Marginal vs effective tax rate.

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Re: Most commonly misused/misunderstood investing terms and concepts (on BH forum)

Post by delamer » Tue Aug 28, 2018 9:40 pm

“You receive a step-up in cost basis to date of death when inheriting assets.”

Posters continue to make this blanket statement, but it is not always true.

My concern is that when reading such a statement, inheritors can make mistakes with tax planning if their inheritance does not qualify for the step-up.

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Re: Most commonly misused/misunderstood investing terms and concepts (on BH forum)

Post by BolderBoy » Tue Aug 28, 2018 9:51 pm

H-Town wrote:
Tue Aug 28, 2018 7:01 pm
8) "Market is efficient". Well, not perfectly efficient. There are outliners.
"outliners" vs outliers. ;)
"Never underestimate one's capacity to overestimate one's abilities" - The Dunning-Kruger Effect

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Re: Most commonly misused/misunderstood investing terms and concepts (on BH forum)

Post by MJW » Tue Aug 28, 2018 9:56 pm

I didn't intend for this thread to be an indictment on grammatical errors. :)

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Re: Most commonly misused/misunderstood investing terms and concepts (on BH forum)

Post by Nate79 » Tue Aug 28, 2018 10:02 pm

Risk (of any type). Most of the time completely ignored.

The potential maximum loss for equities (often said as -50%) as well as not realizing the potential for negative returns even for over a decade.

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Re: Most commonly misused/misunderstood investing terms and concepts (on BH forum)

Post by diy60 » Tue Aug 28, 2018 10:29 pm

Social Security benefits, Social Security income, SSI (Supplemental Security Income), delayed filing, voluntary suspension of benefits, file and suspend, and just about anything related to Social Security.

Markets are at an all time high.

MPT (Modern Portfolio Theory).

Nominal bonds.

401K, Roth 401K, After tax subaccount in 401K.

Marginal tax rate.

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Re: Most commonly misused/misunderstood investing terms and concepts (on BH forum)

Post by baconavocado » Tue Aug 28, 2018 11:22 pm

Based on a recent thread, I'd say net worth means many different things to different people.

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Re: Most commonly misused/misunderstood investing terms and concepts (on BH forum)

Post by gostars » Tue Aug 28, 2018 11:23 pm

UpperNwGuy wrote:
Tue Aug 28, 2018 6:07 pm
— Fidelity can’t be trusted because it is a for-profit corporation
Vanguard's structure makes them better than everyone else :twisted:

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Re: Most commonly misused/misunderstood investing terms and concepts (on BH forum)

Post by Noobvestor » Tue Aug 28, 2018 11:32 pm

"You should own the whole market" written by people who are only buying the US market (around half the global market). :beer
"In the absence of clarity, diversification is the only logical strategy" -= Larry Swedroe

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Re: Most commonly misused/misunderstood investing terms and concepts (on BH forum)

Post by fennewaldaj » Tue Aug 28, 2018 11:46 pm

Tdubs wrote:
Tue Aug 28, 2018 7:14 pm
MJW wrote:
Tue Aug 28, 2018 5:03 pm
It begs the question. . . .
Also a term not well understood.
Heh yeah using begs the question to mean raises the question has been a pet peeve of mine since I took philosophy

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Re: Most commonly misused/misunderstood investing terms and concepts (on BH forum)

Post by MJW » Tue Aug 28, 2018 11:52 pm

fennewaldaj wrote:
Tue Aug 28, 2018 11:46 pm
Tdubs wrote:
Tue Aug 28, 2018 7:14 pm
MJW wrote:
Tue Aug 28, 2018 5:03 pm
It begs the question. . . .
Also a term not well understood.
Heh yeah using begs the question to mean raises the question has been a pet peeve of mine since I took philosophy
Fortunately it was not used that way in this thread.

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Re: Most commonly misused/misunderstood investing terms and concepts (on BH forum)

Post by daveydoo » Wed Aug 29, 2018 12:27 am

Dollar-cost averaging. On this forum it only applies to a lump-sum alternative (I've been told). For the rest of the known universe, and for many decades, it has been the concept that by buying a fixed dollar amount at regular intervals, one ensures that more lower-cost shares are purchased, relative to higher-cost shares. Even the Wiki says, "yeah, that's what it used to mean, but not for us." Yes, one can dollar-cost average by doing automatic investing -- they are not mutually exclusive. "The earth is round!" "No, dummy, the earth is blue!"
"I mean, it's one banana, Michael...what could it cost? Ten dollars?"

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Re: Most commonly misused/misunderstood investing terms and concepts (on BH forum)

Post by jalbert » Wed Aug 29, 2018 12:57 am

fennewaldaj wrote:
Tue Aug 28, 2018 11:46 pm
Tdubs wrote:
Tue Aug 28, 2018 7:14 pm
MJW wrote:
Tue Aug 28, 2018 5:03 pm
It begs the question. . . .
Also a term not well understood.
Heh yeah using begs the question to mean raises the question has been a pet peeve of mine since I took philosophy
However, that interpretation, which is more aligned with the literal meaning of the phrase, seems to have replaced the interpretation of it being a circular inference for common usage. The interpretation as a circular inference in which a conclusion to be derived is assumed as a premise seems to have arisen from an error by a 16th century translator who was translating a work of Aristotle from Greek to Latin.

https://www.merriam-webster.com/words-a ... e-question
Index fund investor since 1987.

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Re: Most commonly misused/misunderstood investing terms and concepts (on BH forum)

Post by smectym » Wed Aug 29, 2018 1:08 am

Add the supposedly bedrock principle that “CD’s offer higher yields than treasuries.” This assertion has been bandied about in several threads. Upon interrogation, it turns out that proponents of this maxim have in mind solely *brokered* CD’s (and only of certain maturities); not the typical bank CD most investors buy, and a fraction of the overall CD market. And of course additional caveats, including the impact of transaction costs on brokered CD purchases and the possible impact of state income taxes, must also be borne in mind.

Smectym

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Re: Most commonly misused/misunderstood investing terms and concepts (on BH forum)

Post by bayview » Wed Aug 29, 2018 1:15 am

"Can't afford to retire", followed by 7-figure portfolio...
The continuous execution of a sound strategy gives you the benefit of the strategy. That's what it's all about. --Rick Ferri

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Re: Most commonly misused/misunderstood investing terms and concepts (on BH forum)

Post by HEDGEFUNDIE » Wed Aug 29, 2018 2:19 am

“Nobody knows nuthin’”

Really? Then why are we giving advice of any kind? Might as well pick some sexy individual stocks and be done with it...

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Re: Most commonly misused/misunderstood investing terms and concepts (on BH forum)

Post by randomizer » Wed Aug 29, 2018 2:52 am

Taxation.
87.5:12.5 — HODL the course!

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Re: Most commonly misused/misunderstood investing terms and concepts (on BH forum)

Post by Dude2 » Wed Aug 29, 2018 3:04 am

Risk equals volatility

The entire financial industry, academics, BH forum members, and financial advisers all want to dumb down the concept of risk. Apparently it is accepted that risk equals volatility, and you should just know what everybody means when they use the term. On the other hand, every prospectus drones on and on about all the possible risks (risk factors) that a particular fund might be exposed to. Where is the transfer function that takes all of these sub-elements, turns the crank, and arrives at risk equals volatility? If, for some of these sub-elements, the risks showed up, and for others it did not, volatility maybe cancelled out. However, the risks still exist. Lack of volatility does not imply lack of risk. Great degrees of volatility may be associated with particular risk factors and not others. You may have to ride a bucking bronco to get exposure.

All there is to conclude about risk cannot be dumbed down to a single quantity that is assumed to be used universally. If volatility was a predictor, then somebody should be able to effectively predict something with it.
Last edited by Dude2 on Wed Aug 29, 2018 3:28 am, edited 1 time in total.

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