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I invest in index funds that follow the S&P 500 according to a formula. The data shows that they tend to outperform managed funds in the long term. With so ma

by ishjoh 8y ago

I invest in index funds that follow the S&P 500 according to a formula. The data shows that they tend to outperform managed funds in the long term. With so many people following the same strategy it will be interesting to see if that stays true long term, but the problem is the same as it ever was. How do you identify an active fund manager that will outperform the market over a long time period? Do they still outperform the market when you also price in their fees?

turtlecloud 8y ago
Real life doesn't work like that. Not everyone can put money into a magic ETF that guarentees returns. The passive index funds are piggy backing off the work of active investors. Thought experiment: If everyone put money into an index fund that guarantees returns, what is the difference between that and a Ponzi scheme?
- icelancer 8y ago
  At no point did the parent comment say the returns were guaranteed, only that they were generally better than actively-managed funds (mostly due to fees).
- projektfu 8y ago
  Simple. The fundamentals. If the guaranteed return is less than or equal to the earnings per share, then the game can continue indefinitely. Index funds don't have gains because people keep believing the price will increase. They have them because the market as a whole gains in the long run. Index funds lose value during market downturns. Anyhow, no index fund offers guaranteed returns. These days I only see that from crypto ponzis.
- tathougies 8y ago
  > If everyone put money into an index fund that guarantees returns, what is the difference between that and a Ponzi scheme? No index fund guarantees returns, so the question is a non-sequitur. With regard to the question of how does the fund keep value -- the fund holds the equities that are in the index. The equity prices rise and fall with the market, which is hopefully based on the fundamental discounted future value of all cash flows from the company.
raesene9 8y ago
That's exactly what I think's happening, what you're doing is what a lot of people are doing. what will be interesting is, say there's a genuine market rout (e.g. what happened with Lehmans), which should depress stocks definitely in the sector, but also in the wider market. If all the money from the passively managed funds just stays put, will the stocks basically not take much of a hit? Of course if it gets bad enough for companies to go broke, that could go wrong for the passively managed crowd as they'll stay in there till the end, most likely.
- ishjoh 8y ago
  > If all the money from the passively managed funds just stays put, will the stocks basically not take much of a hit? The stocks will still take a hit, as we saw in the case of 2008 almost everyone loses money in a market-wide drop. Many active traders went bankrupt as well, the S&P500 lost 50% of its value but didn't go to 0. > Of course if it gets bad enough for companies to go broke, that could go wrong for the passively managed crowd as they'll stay in there till the end, most likely. It depends on how quickly the drop happens. S&P500 index funds will sell stocks as they exit the top 500 (this is a simplification of the actual mechanism), so if the drop is gradual then it's not so bad. If the drop is sudden then there is a bigger problem, but the sudden drop is a problem for everyone, active or passive unless you're doing HFT.
  - raesene9 8y ago
    so the difference I thought there might be now, as compared to 2008 is the percentage of funds that are passively managed. If a proportionately smaller percentage of stockholders are selling then it seems possible/likely that any price swing will be smaller. One example of this "stock markets not reacting to external events" that seems to fit the trend is, to me , the robustness of the FTSE100 since the Brexit vote. It's clear that companies are taking a financial hit in several places and will continue to do so (perhaps precipitously if it ends in no deal) however the FTSE100 is current around 1000 points higher than it was a year ago. That could be because a large percentage of the funds in those stocks are passively managed and therefore don't react particularly to those external events.

by ishjoh 8y ago

turtlecloud 8y ago

Real life doesn't work like that. Not everyone can put money into a magic ETF that guarentees returns. The passive index funds are piggy backing off the work of active investors. Thought experiment: If everyone put money into an index fund that guarantees returns, what is the difference between that and a Ponzi scheme?

icelancer 8y ago
At no point did the parent comment say the returns were guaranteed, only that they were generally better than actively-managed funds (mostly due to fees).
projektfu 8y ago
Simple. The fundamentals. If the guaranteed return is less than or equal to the earnings per share, then the game can continue indefinitely. Index funds don't have gains because people keep believing the price will increase. They have them because the market as a whole gains in the long run. Index funds lose value during market downturns. Anyhow, no index fund offers guaranteed returns. These days I only see that from crypto ponzis.
tathougies 8y ago
> If everyone put money into an index fund that guarantees returns, what is the difference between that and a Ponzi scheme? No index fund guarantees returns, so the question is a non-sequitur. With regard to the question of how does the fund keep value -- the fund holds the equities that are in the index. The equity prices rise and fall with the market, which is hopefully based on the fundamental discounted future value of all cash flows from the company.

raesene9 8y ago

That's exactly what I think's happening, what you're doing is what a lot of people are doing. what will be interesting is, say there's a genuine market rout (e.g. what happened with Lehmans), which should depress stocks definitely in the sector, but also in the wider market. If all the money from the passively managed funds just stays put, will the stocks basically not take much of a hit? Of course if it gets bad enough for companies to go broke, that could go wrong for the passively managed crowd as they'll stay in there till the end, most likely.

ishjoh 8y ago
> If all the money from the passively managed funds just stays put, will the stocks basically not take much of a hit? The stocks will still take a hit, as we saw in the case of 2008 almost everyone loses money in a market-wide drop. Many active traders went bankrupt as well, the S&P500 lost 50% of its value but didn't go to 0. > Of course if it gets bad enough for companies to go broke, that could go wrong for the passively managed crowd as they'll stay in there till the end, most likely. It depends on how quickly the drop happens. S&P500 index funds will sell stocks as they exit the top 500 (this is a simplification of the actual mechanism), so if the drop is gradual then it's not so bad. If the drop is sudden then there is a bigger problem, but the sudden drop is a problem for everyone, active or passive unless you're doing HFT.
- raesene9 8y ago
  so the difference I thought there might be now, as compared to 2008 is the percentage of funds that are passively managed. If a proportionately smaller percentage of stockholders are selling then it seems possible/likely that any price swing will be smaller. One example of this "stock markets not reacting to external events" that seems to fit the trend is, to me , the robustness of the FTSE100 since the Brexit vote. It's clear that companies are taking a financial hit in several places and will continue to do so (perhaps precipitously if it ends in no deal) however the FTSE100 is current around 1000 points higher than it was a year ago. That could be because a large percentage of the funds in those stocks are passively managed and therefore don't react particularly to those external events.