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Question: how do index funds (or any kind of stock, really... in fact this question isn't really about index funds) "pull in the rest"? Do you actually manage t

Question: how do index funds (or any kind of stock, really... in fact this question isn't really about index funds) "pull in the rest"? Do you actually manage to sell them when they're high and buy when they're low again? Or do you get stocks with dividends and just make money using the dividends? Obviously merely possessing stock of high value is kind of moot if it doesn't turn into cash somehow, so I'm curious how people usually do this. (I don't know much/anything about finance.)

buf 10y ago
Sorry for the confusion. It's just a set it and forget it robo investment for now. I go in and adjust every quarter.
- wfunction 10y ago
  Ah, so no actual income then? Just stocks going up in value? As in, at some point you'd have to sell before you actually have any income from it, right?
  - bdowling 10y ago
    If you sell you pay taxes on the gains, so you are probably better off borrowing against your investments if you need cash, since borrowing isn't a realization event for tax purposes. Investments that pay dividends aren't as good for individuals since the dividends are taxes at ordinary rates.
    - wfunction 10y ago
      > you are probably better off borrowing against your investments if you need cash I don't understand what that means. Whom would you be borrowing from? Where would the cash be coming from?
      - supersaiyanverx 10y ago
        You would borrow from the bank, using your stock holdings as collateral. Not as easy as he makes it sound, but not unheard of if you have even a meager amount. Say, at least 50k.
      - rbcgerard 10y ago
        Your broker https://www.interactivebrokers.com/en/index.php?f=interest&p=schedule2 https://www.interactivebrokers.com/en/index.php?f=interest&p...
        wfunction 10y ago
        What happens if your stock goes to zero in the meantime while you've borrowed against it?
        agermanov 10y ago
        Broker will sell your stocks to prevent it's losses.
        wfunction 10y ago
        Also, wouldn't this mean you have to pay interest on the ENTIRE amount of the loan, as opposed to tax on just the gains? So if you have $1000 that means at 2% interest (I assume that's yearly) you're paying $20/year, whereas if your stock went up 5% (= $50), that means you'd be paying (say) 25% of that, which is $12.50. So it should be only better if either have a high tax rate or your stocks /really/ increased in value (not just kept pace with inflation).
        agermanov 10y ago
        That requires 110k$ and you can't just take money with that rate, it's margin. So you should have more than 110k$ to take some of that money and replace them with margin.
  - sanswork 10y ago
    Dividends
  - bertjk 10y ago
    Index funds tend to have some dividends, because while not all stocks yield dividends the dividends from the ones that do still get distributed to the holders of the fund.
    - wfunction 10y ago
      Ahh, makes sense, I should've guessed. Thanks!!
  - marvin 10y ago
    But even if a company doesn't pay dividends, it will often make a profit that ends up on the company's books. A part of this profit, proportional to your ownership, belongs to you who own the stock. In an index fund, the stocks contained in the index will on average pay out a certain dividend and turn a certain profit that isn't squandered on worthless projects. This last part is what makes stocks increase in market value long-term, and which also makes it reasonable to sell a small proportion of your shares every year as a passive income. If the dividends and your sales constitute less than 3-4% of your funds' total market value each year, you can expect your portfolio not to decrease in value long-term.
    - wfunction 10y ago
      > But even if a company doesn't pay dividends, it will often make a profit that ends up on the company's books. A part of this profit, proportional to your ownership, belongs to you who own the stock. You're totally missing my point. I'm saying, even if your stock is "worth" $1 trillion, if you don't actually ever sell it, you haven't earned a single penny from it. It's only money when it's actually money. So my question was whether the OP was ever selling the stock or not.
      - dgacmu 10y ago
        This part of your statement is incorrect: "It's only money when it's actually money." Stocks in major corporations are generally considered a liquid asset - i.e., they can be easily converted to cash. [1] Don't confuse liquidity and risk exposure. The money is still subject to the risk of the market when it's still being held in stocks, but it's approximately as good as money. [1] http://www.investopedia.com/terms/l/liquidasset.asp http://www.investopedia.com/terms/l/liquidasset.asp
buf 10y ago
To answer your other question (hn has a child-reply limit I think), it makes money on the dividends, which are reinvested back into the portfolio.
- wfunction 10y ago
  Ah, gotcha. Thanks!

buf 10y ago

Sorry for the confusion. It's just a set it and forget it robo investment for now. I go in and adjust every quarter.

wfunction 10y ago
Ah, so no actual income then? Just stocks going up in value? As in, at some point you'd have to sell before you actually have any income from it, right?
- bdowling 10y ago
  If you sell you pay taxes on the gains, so you are probably better off borrowing against your investments if you need cash, since borrowing isn't a realization event for tax purposes. Investments that pay dividends aren't as good for individuals since the dividends are taxes at ordinary rates.
  - wfunction 10y ago
    > you are probably better off borrowing against your investments if you need cash I don't understand what that means. Whom would you be borrowing from? Where would the cash be coming from?
    - supersaiyanverx 10y ago
      You would borrow from the bank, using your stock holdings as collateral. Not as easy as he makes it sound, but not unheard of if you have even a meager amount. Say, at least 50k.
    - rbcgerard 10y ago
      Your broker https://www.interactivebrokers.com/en/index.php?f=interest&p=schedule2 https://www.interactivebrokers.com/en/index.php?f=interest&p...
      - wfunction 10y ago
        What happens if your stock goes to zero in the meantime while you've borrowed against it?
        agermanov 10y ago
        Broker will sell your stocks to prevent it's losses.
      - wfunction 10y ago
        Also, wouldn't this mean you have to pay interest on the ENTIRE amount of the loan, as opposed to tax on just the gains? So if you have $1000 that means at 2% interest (I assume that's yearly) you're paying $20/year, whereas if your stock went up 5% (= $50), that means you'd be paying (say) 25% of that, which is $12.50. So it should be only better if either have a high tax rate or your stocks /really/ increased in value (not just kept pace with inflation).
      - agermanov 10y ago
        That requires 110k$ and you can't just take money with that rate, it's margin. So you should have more than 110k$ to take some of that money and replace them with margin.
- sanswork 10y ago
  Dividends
- bertjk 10y ago
  Index funds tend to have some dividends, because while not all stocks yield dividends the dividends from the ones that do still get distributed to the holders of the fund.
  - wfunction 10y ago
    Ahh, makes sense, I should've guessed. Thanks!!
- marvin 10y ago
  But even if a company doesn't pay dividends, it will often make a profit that ends up on the company's books. A part of this profit, proportional to your ownership, belongs to you who own the stock. In an index fund, the stocks contained in the index will on average pay out a certain dividend and turn a certain profit that isn't squandered on worthless projects. This last part is what makes stocks increase in market value long-term, and which also makes it reasonable to sell a small proportion of your shares every year as a passive income. If the dividends and your sales constitute less than 3-4% of your funds' total market value each year, you can expect your portfolio not to decrease in value long-term.
  - wfunction 10y ago
    > But even if a company doesn't pay dividends, it will often make a profit that ends up on the company's books. A part of this profit, proportional to your ownership, belongs to you who own the stock. You're totally missing my point. I'm saying, even if your stock is "worth" $1 trillion, if you don't actually ever sell it, you haven't earned a single penny from it. It's only money when it's actually money. So my question was whether the OP was ever selling the stock or not.
    - dgacmu 10y ago
      This part of your statement is incorrect: "It's only money when it's actually money." Stocks in major corporations are generally considered a liquid asset - i.e., they can be easily converted to cash. [1] Don't confuse liquidity and risk exposure. The money is still subject to the risk of the market when it's still being held in stocks, but it's approximately as good as money. [1] http://www.investopedia.com/terms/l/liquidasset.asp http://www.investopedia.com/terms/l/liquidasset.asp

buf 10y ago

To answer your other question (hn has a child-reply limit I think), it makes money on the dividends, which are reinvested back into the portfolio.

wfunction 10y ago
Ah, gotcha. Thanks!