Public Service Announcement: Invest in Index Funds

PSA: Invest in index funds

We live in a sort of reverse Victorian age: it’s easier to talk of sexual matters than of money [1]. I have recently been surprised at how ignorant even highly educated Europeans are about their financial possibilities [2]. I meet people with large sums in savings accounts where the money is just sitting there or in hare-brained “investment” schemes. So, this is a bit of public service announcement, although there is a particular point that applies mostly to scientists.

Invest in index funds. An index fund is a fund which buys a large number of stocks to mimic an index (for example, the stocks that make up the S&P 500 index). You want ones with low fees (<0.5% per year). For diversification, you might buy more than one, but seriously it does not matter what you have as it’ll always be better than nothing or a savings account (savings accounts are paying 0.3% in Europe).

You should just assume that markets are efficient, Now, there is a debate in academic circles whether they are 99.9999% efficient (i.e., people who think they are efficient) or only 95% efficient (people who disagree). But if there are market inefficiencies, they’ll be exploited by professional hedge funds, not you in your free time. So, just assume that markets are efficient, you cannot beat them, and strive to minimize the amount you pay in fees[3].

Index funds are investment, not speculation, your goal is to collect dividends, not necessarily have the fund rise in price! If you buy a fund at the price 100 and later sell it at the price of 90, you might still have made money if you made more than 10 in dividends [4]. More typical however, is that you buy at 100, sell at 116 a few years later and will have collected 82 in dividends over that period (Some people don’t even know this basic fact of how these things work and are surprised when I mention dividends as a large part of the return I expect from my investments).

To actually buy these, you need a brokerage account. I use TD Direct Investing in Europe, but others exist. Your bank will generally not help you and will try to sell you products where they make large fees (it’s like going to a Chrysler dealer and telling them you know that Toyota/Honda have much better value for money, but could they please help you choose between an Accord and a Camry? [5]).

Do not pick stocks as it can lead to conflicts of interest I could again just say don’t pick stocks, assume markets are efficient, but an additional reason for me and for any scientist is that owning stock of particular companies is a conflict of interest if you ever have to evaluate anything which touches (even peripherally) on anything the company does. Note that a conflict of interest will not immediately translate to a bias and the practice in science is to disclose the conflicts without completely dismissing the speaker, but if you’re writing scientific papers or reviewing them, why force yourself to disclose a conflict when you could just as easily avoided the issue by not owning the stock in the first place? Further, it is an unnecessary risk that you unintentionally fail to disclose and someone will later point out that your paper on how X protein binds with Y protein conveniently fit with your ownership of pharma P’ stock as they have a large investiment on an X-inhibitor [6]. We scientists already have to spend too much time defending ourselves of the accusation that we are just flaks for Big Pharma or Monsanto, so just don’t own their stock.

If you’re thinking about buying gold, consider buying a gun instead. This is tongue-in-cheek, but there is this persistent idea that owning gold is a good idea because when the revolution comes, money and stocks will be worthless as civilization collapses. But when civilization has collapsed and we are all back in the state of nature where life is nasty, brutish, and short, a gun is even better than gold. If you have gold and your neighbour has a gun… well, at the end of the day, your neighbour will still have the gun, but you might have lost your gold. When civilization collapses, you’ll want to be the one who knocks.

So, if you’re worried about the incoming collapse of civilization into a Hobbesian nightmare, consider buying a gun. [7]

Back in the real world, gold is still a bad proposition, subject to volatile prices. Volatile means that (1) you can make large profits if you guess the time to sell&buy and (2) you can lose a lot of money by guessing wrong. However, you will likely not get the timing right. More importantly, unlike stock/bonds or real estate, there is no inherent income stream from holding gold. You are just betting that the price will go up. In recent years, perhaps because of the recent strong growth in the world economy, particularly in China and India (Indian culture is obsessed with gold) or perhaps because of rich people panicking (or whatever [8]), the prices of gold have risen (although volatility is high: just last week, it lost 10%). However, by buying now you might just be buying at the top of the growth curve [9].

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Introductory pop intro to this stuff

I will teach you to be rich by Ramit Sethi. Pretty basic stuff. One important point: if you do get a finantial advisor, get one paid by the hour; not one that gets paid by comission. You want to talk to an advisor, not a salesman.

[1] Arguably, much discussion of sex is not fully honest, particularly of the emotional/sexual nexus. Still, the point remains: it’s easier to get someone in bed that to discuss their financials.
[2] Americans tend to be a bit better because there is less fatalism wrt retirement. Many young Europeans are aware that their public pensions will be less than they were promised even just a few years ago, but they often just adopt a whatever will be, will be attitude. There may be increasing interest in alternatives to putting your trust on the promises of politicians, but ignorance is still rife.
[3] I actually believe a pretty strong version of market efficiency and I think that the large profits of financial corporations come from rent-seeking (i.e., taxpayer bailouts) and charging high fees for things that are not worth a lot. Still, even you think that markets are not that great and that there is a lot of potential to earn money by being better than the markets, then it is still likely that it will not be you who’ll do it.
[4] The example does not work so well for Europeans as a Fiat is much cheaper in Europe than Honda here so it’s not so obvious that the Honda is better value for money as Fiats.
[5] Some funds do not pay dividends per se and instead are engineered so that the dividends from the stock they own get translated into a higher price even if the underlying securities has not moved in price. This has some tax advantages in some jurisdictions, but it works out to be the same.
[6] Nowadays, stock ownership is rarely mentioned as an important conflict of interest in published papers, but who knows how ethical fashions will evolve and where your career will be in 10 years when an enterprising journalist decides to expose you as the Monsanto-fundede Big Pharma flak that all scientists really are.
[7] My guess is that guns hold their resale value, making them a good store of value, but I couldn’t really find data on this.
[8] This is another dependency on external factors that could potentially be a conflict of interest.
[9] I’d write top of the bubble, but I don’t think bubbles are a very useful concept. Gold is still as likely to go up as to go down or just to stay the same. If it goes down, we’ll retrospectively call it a bubble and whoever buys now will be labeled a sucker; in that case it’ll be obvious we were in a bubble now. If it doesn’t go down, well it will be obvious that gold is now a golden opportunity

Jug 1.0-release candidate 0

New release of Jug: 1.0 release candidate

I’ve put out a new release of jug, which I’m calling 1.0-rc0. This is a release candidate for version 1.0 and if there are no bugs, in a few days, I’ll just call it 1.0!

There are few changes from the previous version, but this has reached maturity now.

For the future, I want to start developing the hooks interface and use hooks for more functionality.

In the meanwhile, download jug from PyPI, watch the video or read the tutorials or the full documentation.

Modernity II

Modernity II

An obvious missing addition in my previous Modernity post was (as pointed out by Franklin Chen in the comments) was LaTeX, developed in the early 1980s as a set of macros for TeX (released in 1978).

By the way, if you prefer Microsoft Word, that technology is from the same era (first released in 1983), although it was a copy of early 1970s technology [1]. I remember using it on a Mac (I think it was the Macintosh SE) in the late 80s and, although it was black&white, it was already very close to today’s versions in look-n-feel.

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Some of our ideas of what’s modern in other areas of life are similarly off:

As our family debates education options for our children, we are choosing between Montessori schools, with Waldorf coming in a close second. Sometimes people will say oh, exploration-centred learning, how modern you guys are!

This reminds me of the classic quip about Brazil: it’s the country of the future! It has always been the country of the future and will always be the country of the future.

The first Montessori schools were opened over 100 years ago, while Waldorf is just slightly newer as the first school opened in 1919.

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Obviously, my point is that we tend to think that change is fast in our current society while we live in a Great Stagnation. A subsidiary point is that much of this feeling comes from ignorance.

[1] Yes, LaTeX is newer, more modern if you wish, than WYSIWYG editors.

Modernity

Modernity

The Bourne shell was first released in 1977 (37 years ago).

The C Programming Language book was published in 1978 (36 years ago), describing the C language which had been out for a few years.

Python was first released in 1991 (23 years ago). The first version that looks very much like the current Python was version 2.2, released in 2001 (13 years ago), but the code from Python 1.0.1 is already pretty familiar to my eyes.

The future might point in the direction of functional languages such as Haskell, which first appeared in 1990 (24 years ago), although the first modern version is from 1998 (Haskell 98).

Vim was first released in 1991, based on vi released in 1976. Some people prefer Emacs, released a bit earlier (GNU Emacs, however, is fairly recent, only released in 1985; so 29 years ago)

The web was first implemented in 1989 with some preliminary work in the early 1980s (although the idea of hypertext had been around for longer).

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The only really new software I use regularly is distributed version control systems, which are less than 20 years old in both implementation and ideas.

Edit: the original version of the post had a silly arithmetic error pointed out in the comments. Thanks

Friday Links

1. A nice talk on category theory

2. Reevaluating electroshock therapy

3. It’s world homeopathy awareness week! I’ll quote @mocost on twitter:

It’s World Homeopathy Awareness Week, apparently. Are you aware that homeopathy is pseudoscientific bullshit?

4. Angst in Germany over English invasion. I liked this bit about the lounge at train stations:

“I’m not sure if calling it a ‘lounge’ is better than using the German word ‘warteraum,’ ” Renner says. “I guess it’s more modern or hip.”

Warteraum just means waiting area (both literally and not-so-literately).

Recently, I got enough points to get “frequent travel status” on German trains. One of the perks is free access to the lounge area. Somehow, that perk would not feel like such a perk if they had written free access to the waiting area.

Quote of the Day

Shipping is a feature. A really important feature. Your product must have it. — Joel Spolsky

Papers are the same. Submission is an important argument. Your paper must have it.

Denmark

I was in Denmark last week, teaching software carpentry. The students were very enthusiastic, but they had very different starting points, which made teaching harder.

For a complete beginner’s to programming course, I typically rely heavily on the Python Tutor created by Philip Guo, which is an excellent tool. Then, my goal is to get them to understand names, objects, and the flow of control.

I don’t use the term variable when discussing Python as I don’t think it’s a very good concept. C has variables, which work like little boxes you put values in. If you’re thinking of little boxes in Python, things get confusing. If you try to think of little boxes plus pointers (or references), it’s still not a very good map of what Python is actually doing.

For more intermediate students (the kind that has used one programming language), I typically still go through this closely. I find that many still have major faults in their mental model of how names and objects work. However, for these intermediate  students have, this can go much faster [1]. If it’s the first time they are even seeing the idea of writing code, then it naturally needs to be slow.

Last week, because the class was so mixed, it was probably too slow for some and too fast for others.

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A bit of Danish weirdness:

sausage

 A sausage display at a local pub

[1] I suppose if students knew Haskell quite well but no imperative programming, this may no longer apply, but teaching Python to Haskell programmers is not a situation I have been in.