12 ms·

One thing I like to point out whenever this kind of discussion comes up, is that there is no single index. Articles like this always seem to assume that everyon

by cesarbs 10y ago

One thing I like to point out whenever this kind of discussion comes up, is that there is no single index. Articles like this always seem to assume that everyone will buy the same index, namely the S&P 500 or total US market. But that's not what a lot of index investors do. Indexers enjoy adding tilts to their portfolios. So some people will buy value funds, others will buy small cap funds, and yet others will buy small value funds. There are people who overweight certain sectors, like REITs or utilities. There are those who invest in international index funds (with all their variations) and those who don't. So there's a huge number of combinations you can think of when it comes to indexing. Now, with people indexing like that, there would still be market liquidity. Maybe not as much as when there are single stocks being actively traded, but on any given day there will be people buying into different indexes, selling shares, or rebalancing. Valuation would become troublesome though, but at least people would still get some return from dividends.

tedmiston 10y ago
> S&P 500 Plus everyone knows the S&P is a terrible benchmark because it excludes mid- and small-cap cos. After watching mine from a far for ~7 years, I've come to accept that one really needs to invest in multiple index funds to get global diversification as well.
- jonknee 10y ago
  > Plus everyone knows the S&P is a terrible benchmark because it excludes mid- and small-cap cos. Such a terrible fund that it is what almost everyone bases their performance off of.
  - fmp 10y ago
    Possibly because it's relatively easy to beat.
    - matt_wulfeck 10y ago
      Yet most investors can't beat it.
    - jonknee 10y ago
      You can be immensely wealthy if you beat it consistently. Almost no professionals can. Warren Buffet is winning his $1m charity bet that the S&P beats pro hedge funds over a decade: http://www.cnbc.com/2016/02/16/warren-buffett-slips-but-still-winning-epic-hedge-fund-bet.html http://www.cnbc.com/2016/02/16/warren-buffett-slips-but-stil... > His horse in the race, the Vanguard 500 Index Fund Admiral Shares, which tracks the benchmark S&P 500 index, is up 65.7 percent. That's well ahead of the 21.9 percent average gain for the unnamed five funds of hedge funds chosen by Protege Partners, a New York City money management firm. So not just an average of hedge funds, but ones specifically selected to out perform by a multi-billion dollar management firm.
      - deleted 10y ago
        [deleted]
      - dsacco 10y ago
        Warren Buffet is a spectacular value investor, but those funds are not representative of the best performers in the industry. A brief Google search demonstrates that a variety of hedge funds have consistently beaten the S&P 500 for well over a decade; in some cases, for 25-30 years. I do agree with you that almost no professional can beat the S&P 500, but I think that is due to a variety of factors, including but not limited to the outright difficulty. For example, if you beat the market consistently you still might not become rich. With $100k in starting capital, "merely" beating the S&P 500 by a few percentage points each year (let's say 10% average annual return instead of 7%) will not make you rich in the conventional sense of the word. This prevents many people with the aptitude from investing in the skill development because they could earn a greater living doing other things. A trader whose insight is primarily responsible for driving that same return on $2B in assets is already very rich or will very quickly become so. Beating the market with that kind of capital requires an entire infrastructure devoted to trading and execution just to make the trades with minimal market movement and signalling, let alone maintaining alpha on it. Not all people capable of beating the market can do so in a manner that is actually worth their own time, because the scale can be astronomically different.
  - jldugger 10y ago
    It's really not that bad. If you want, the Wilshire 5k is probably about as broad as you can go. And with market cap weighting, the additional diversification wouldn't likely help much.
  - tedmiston 10y ago
    Performance is irrespective of representing the market broadly.
pcsanwald 10y ago
That's a great point. I've always bought VTSMX, on the assumption that it's as close to "total US market" as one can get. Is anyone aware of downsides of VTSMX (excluding downsides of indexing in general)
- jonknee 10y ago
  The 5 year performance of VTI (the ETF version of that mutual fund) and SPY is .44% in favor of VTI. There is a better dividend yield on SPY though so you would have been better off there. Large companies dominate so adding in small caps doesn't really change things a ton. The two funds haven't diverged in a meaningful way in a very long time.
- Kadin 10y ago
  This may fall into the category of "downsides of indexing in general", but even VTSMX, which is based on the CRSP index, isn't necessarily getting you the entire stock market in the U.S., which is something to be aware of, I suppose. The criteria for inclusion in the CRSP index specify "a minimum total market capitalization of more than $10 million with a float that more than 10 percent of the total shares outstanding". So there is sub-micro stuff 'beneath' the index that's not included due to the $10M minimum, and others that aren't included because of the float requirement. Do you care? Probably not, but you might. Also, I've periodically heard arguments against market-cap weighting, which is what indexes do (this is probably one of those "downsides of indexing" arguments). If you are not careful, with a couple of index funds you can end up really exposed to a handful of very large, and therefore highly-weighted, blue chips. But I can't think of another way of weighting within a whole-market index that would make sense. The other thing that comes up a lot, mostly in tech circles, is that index funds (of course) don't give you exposure to the private market, and it seems that more and more tech companies are waiting a long time until they go public, such that at any given time a lot of growth is happening where most investors can't get in on it. The argument is that, if you are financially qualified, there are more opportunities out there for qualified/accredited investors on the private market. I don't personally agree with this if you're looking for an investment rather than a job as an investor, but you'll sometimes hear the argument get made.
ph0rque 10y ago
Hmmm... is anyone offering an index of indexes?
- sseveran 10y ago
  You can get a whole world index. MSCI offers an ETF like this (https://www.ishares.com/us/products/239600/ishares-msci-acwi-etf https://www.ishares.com/us/products/239600/ishares-msci-acwi...).
  - deleted 10y ago
    [deleted]
- nicky0 10y ago
  Vanguard's LifeStrategy funds are an index of indexes.
  - cesarbs 10y ago
    They're a fund of funds but not an index of indexes. An index of indexes would be composed of indexes weighted by how much money is invested in each. Vanguard's LifeStrategy funds have fixed allocations to each underlying fund.
    - nicky0 10y ago
      Useful to know, thanks for the correction.
StavrosK 10y ago
I guess this is a good place to ask: For someone who knows nothing about the market, what would be a good way to invest their money? From the responses here, I'm guessing "park them in an index fund", but is there a trustworthy company I can talk to that will do that?
- flavor8 10y ago
  Schwab, Vanguard.
- nicky0 10y ago
  Find a reputable low cost online broker in your country, look into Vanguard funds.
- theodorton 10y ago
  I would recommend Invest Like a Pro (10 day investing course) [1]. It's written by the founder of YNAB, and gives a really good introduction to different types of funds and investment vehicles. [1]: https://www.amazon.com/Invest-Like-Pro-10-Day-Investing-ebook/dp/B00O4G1BBI https://www.amazon.com/Invest-Like-Pro-10-Day-Investing-eboo...
- cesarbs 10y ago
  Quick answer: You could do a lot worse than parking it in an index fund, so yeah, that's a good approach :) If you have a 401(k) or other retirement account, it is quite common for those to offer an S&P 500 index fund where you could invest your money. If you want to do it in a taxable brokerage account, you should open an account with Vanguard and buy their Total Stock Market index fund (VTSMX, or VTSAX if you have more than $10,000 to invest). Then stay the course - if the market tanks 50% the day after you put your money in, don't panic. Wait it out. Your investment horizon here is at the very least 10 years. But that's the quick, the-best-time-to-invest-is-tomorrow-so-just-do-it answer. There are a number of things you should do if you want to learn more about how to invest your money in stocks (and maybe bonds): 0) A good resource to get started quickly is If You Can, by William Bernstein: https://smile.amazon.com/If-You-Can-Millennials-Slowly-ebook/dp/B00JCC5JKI/ref=tmm_kin_swatch_0?_encoding=UTF8&qid=1472318151&sr=8-3 https://smile.amazon.com/If-You-Can-Millennials-Slowly-ebook... But you can skip it if you want to dive deeper with the stuff that follows. 1) Learn about what investing in the stock market means, what's the nature of it and what to expect from it. I have two recommendations here: 1.1) jlcollinsnh's Stock Series: http://jlcollinsnh.com/stock-series/ http://jlcollinsnh.com/stock-series/ He recently released a book (The Simple Path to Wealth) which is supposedly a better-edited version of the Stock Series. He's a rather optimistic guy, but what he says is not wrong. He stays away from investing in non-US markets, which is not the most common position among indexers. 1.2) A Random Walk Down Wall Street, by Burton Malkiel. It's an amazing book that everyone should read if they want to learn about the stock market. Many people recommend Bogle's books (he's the father of index investing), but I find them incredibly tedious to read. 2) Learn about the different investment accounts available to you - 401(k)/403(b)/457(b)s, IRAs, HSAs, taxable brokerage accounts. Each one receives different tax treatment and you should be familiar with that in order to avoid "tax drag" i.e. taxes slowing down the growth of your investments. 3) Another resource I highly recommend is the Bogleheads wiki: https://www.bogleheads.org/wiki/Main_Page https://www.bogleheads.org/wiki/Main_Page. In particular, check out the following pages: https://www.bogleheads.org/wiki/Bogleheads%C2%AE_investing_start-up_kit https://www.bogleheads.org/wiki/Bogleheads%C2%AE_investing_s... https://www.bogleheads.org/wiki/Three-fund_portfolio https://www.bogleheads.org/wiki/Three-fund_portfolio https://www.bogleheads.org/wiki/Tax-efficient_fund_placement https://www.bogleheads.org/wiki/Tax-efficient_fund_placement 4) Don't obsess about it once you get started. After you've learned a few things it's tempting to start "tweaking" your investments here and there, but if you do that often you do yourself more harm than good. Invest your money then go have some fun :)

by cesarbs 10y ago

tedmiston 10y ago

> S&P 500 Plus everyone knows the S&P is a terrible benchmark because it excludes mid- and small-cap cos. After watching mine from a far for ~7 years, I've come to accept that one really needs to invest in multiple index funds to get global diversification as well.

jonknee 10y ago
> Plus everyone knows the S&P is a terrible benchmark because it excludes mid- and small-cap cos. Such a terrible fund that it is what almost everyone bases their performance off of.
- fmp 10y ago
  Possibly because it's relatively easy to beat.
  - matt_wulfeck 10y ago
    Yet most investors can't beat it.
  - jonknee 10y ago
    You can be immensely wealthy if you beat it consistently. Almost no professionals can. Warren Buffet is winning his $1m charity bet that the S&P beats pro hedge funds over a decade: http://www.cnbc.com/2016/02/16/warren-buffett-slips-but-still-winning-epic-hedge-fund-bet.html http://www.cnbc.com/2016/02/16/warren-buffett-slips-but-stil... > His horse in the race, the Vanguard 500 Index Fund Admiral Shares, which tracks the benchmark S&P 500 index, is up 65.7 percent. That's well ahead of the 21.9 percent average gain for the unnamed five funds of hedge funds chosen by Protege Partners, a New York City money management firm. So not just an average of hedge funds, but ones specifically selected to out perform by a multi-billion dollar management firm.
    - deleted 10y ago
      [deleted]
    - dsacco 10y ago
      Warren Buffet is a spectacular value investor, but those funds are not representative of the best performers in the industry. A brief Google search demonstrates that a variety of hedge funds have consistently beaten the S&P 500 for well over a decade; in some cases, for 25-30 years. I do agree with you that almost no professional can beat the S&P 500, but I think that is due to a variety of factors, including but not limited to the outright difficulty. For example, if you beat the market consistently you still might not become rich. With $100k in starting capital, "merely" beating the S&P 500 by a few percentage points each year (let's say 10% average annual return instead of 7%) will not make you rich in the conventional sense of the word. This prevents many people with the aptitude from investing in the skill development because they could earn a greater living doing other things. A trader whose insight is primarily responsible for driving that same return on $2B in assets is already very rich or will very quickly become so. Beating the market with that kind of capital requires an entire infrastructure devoted to trading and execution just to make the trades with minimal market movement and signalling, let alone maintaining alpha on it. Not all people capable of beating the market can do so in a manner that is actually worth their own time, because the scale can be astronomically different.
- jldugger 10y ago
  It's really not that bad. If you want, the Wilshire 5k is probably about as broad as you can go. And with market cap weighting, the additional diversification wouldn't likely help much.
- tedmiston 10y ago
  Performance is irrespective of representing the market broadly.

pcsanwald 10y ago

That's a great point. I've always bought VTSMX, on the assumption that it's as close to "total US market" as one can get. Is anyone aware of downsides of VTSMX (excluding downsides of indexing in general)

jonknee 10y ago
The 5 year performance of VTI (the ETF version of that mutual fund) and SPY is .44% in favor of VTI. There is a better dividend yield on SPY though so you would have been better off there. Large companies dominate so adding in small caps doesn't really change things a ton. The two funds haven't diverged in a meaningful way in a very long time.
Kadin 10y ago
This may fall into the category of "downsides of indexing in general", but even VTSMX, which is based on the CRSP index, isn't necessarily getting you the entire stock market in the U.S., which is something to be aware of, I suppose. The criteria for inclusion in the CRSP index specify "a minimum total market capitalization of more than $10 million with a float that more than 10 percent of the total shares outstanding". So there is sub-micro stuff 'beneath' the index that's not included due to the $10M minimum, and others that aren't included because of the float requirement. Do you care? Probably not, but you might. Also, I've periodically heard arguments against market-cap weighting, which is what indexes do (this is probably one of those "downsides of indexing" arguments). If you are not careful, with a couple of index funds you can end up really exposed to a handful of very large, and therefore highly-weighted, blue chips. But I can't think of another way of weighting within a whole-market index that would make sense. The other thing that comes up a lot, mostly in tech circles, is that index funds (of course) don't give you exposure to the private market, and it seems that more and more tech companies are waiting a long time until they go public, such that at any given time a lot of growth is happening where most investors can't get in on it. The argument is that, if you are financially qualified, there are more opportunities out there for qualified/accredited investors on the private market. I don't personally agree with this if you're looking for an investment rather than a job as an investor, but you'll sometimes hear the argument get made.

ph0rque 10y ago

Hmmm... is anyone offering an index of indexes?

sseveran 10y ago
You can get a whole world index. MSCI offers an ETF like this (https://www.ishares.com/us/products/239600/ishares-msci-acwi-etf https://www.ishares.com/us/products/239600/ishares-msci-acwi...).
- deleted 10y ago
  [deleted]
nicky0 10y ago
Vanguard's LifeStrategy funds are an index of indexes.
- cesarbs 10y ago
  They're a fund of funds but not an index of indexes. An index of indexes would be composed of indexes weighted by how much money is invested in each. Vanguard's LifeStrategy funds have fixed allocations to each underlying fund.
  - nicky0 10y ago
    Useful to know, thanks for the correction.

StavrosK 10y ago

I guess this is a good place to ask: For someone who knows nothing about the market, what would be a good way to invest their money? From the responses here, I'm guessing "park them in an index fund", but is there a trustworthy company I can talk to that will do that?

flavor8 10y ago
Schwab, Vanguard.
nicky0 10y ago
Find a reputable low cost online broker in your country, look into Vanguard funds.
theodorton 10y ago
I would recommend Invest Like a Pro (10 day investing course) [1]. It's written by the founder of YNAB, and gives a really good introduction to different types of funds and investment vehicles. [1]: https://www.amazon.com/Invest-Like-Pro-10-Day-Investing-ebook/dp/B00O4G1BBI https://www.amazon.com/Invest-Like-Pro-10-Day-Investing-eboo...
cesarbs 10y ago
Quick answer: You could do a lot worse than parking it in an index fund, so yeah, that's a good approach :) If you have a 401(k) or other retirement account, it is quite common for those to offer an S&P 500 index fund where you could invest your money. If you want to do it in a taxable brokerage account, you should open an account with Vanguard and buy their Total Stock Market index fund (VTSMX, or VTSAX if you have more than $10,000 to invest). Then stay the course - if the market tanks 50% the day after you put your money in, don't panic. Wait it out. Your investment horizon here is at the very least 10 years. But that's the quick, the-best-time-to-invest-is-tomorrow-so-just-do-it answer. There are a number of things you should do if you want to learn more about how to invest your money in stocks (and maybe bonds): 0) A good resource to get started quickly is If You Can, by William Bernstein: https://smile.amazon.com/If-You-Can-Millennials-Slowly-ebook/dp/B00JCC5JKI/ref=tmm_kin_swatch_0?_encoding=UTF8&qid=1472318151&sr=8-3 https://smile.amazon.com/If-You-Can-Millennials-Slowly-ebook... But you can skip it if you want to dive deeper with the stuff that follows. 1) Learn about what investing in the stock market means, what's the nature of it and what to expect from it. I have two recommendations here: 1.1) jlcollinsnh's Stock Series: http://jlcollinsnh.com/stock-series/ http://jlcollinsnh.com/stock-series/ He recently released a book (The Simple Path to Wealth) which is supposedly a better-edited version of the Stock Series. He's a rather optimistic guy, but what he says is not wrong. He stays away from investing in non-US markets, which is not the most common position among indexers. 1.2) A Random Walk Down Wall Street, by Burton Malkiel. It's an amazing book that everyone should read if they want to learn about the stock market. Many people recommend Bogle's books (he's the father of index investing), but I find them incredibly tedious to read. 2) Learn about the different investment accounts available to you - 401(k)/403(b)/457(b)s, IRAs, HSAs, taxable brokerage accounts. Each one receives different tax treatment and you should be familiar with that in order to avoid "tax drag" i.e. taxes slowing down the growth of your investments. 3) Another resource I highly recommend is the Bogleheads wiki: https://www.bogleheads.org/wiki/Main_Page https://www.bogleheads.org/wiki/Main_Page. In particular, check out the following pages: https://www.bogleheads.org/wiki/Bogleheads%C2%AE_investing_start-up_kit https://www.bogleheads.org/wiki/Bogleheads%C2%AE_investing_s... https://www.bogleheads.org/wiki/Three-fund_portfolio https://www.bogleheads.org/wiki/Three-fund_portfolio https://www.bogleheads.org/wiki/Tax-efficient_fund_placement https://www.bogleheads.org/wiki/Tax-efficient_fund_placement 4) Don't obsess about it once you get started. After you've learned a few things it's tempting to start "tweaking" your investments here and there, but if you do that often you do yourself more harm than good. Invest your money then go have some fun :)