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Don’t you just end up with a portfolio weighted with half below average stocks? Seems like you could beat this just by buying stuff you’ve heard of. I’m sitting

Don’t you just end up with a portfolio weighted with half below average stocks? Seems like you could beat this just by buying stuff you’ve heard of. I’m sitting her with my Apple phone, using Verizon internet, burning electricity from a publicly traded utility that probably won’t go broke next week, wearing my Nike shoes and drinking a Coke. That portfolio probably beats your index and requires zero brains or effort.

tesin 7y ago
Every time you buy your stocks for those individual companies you're accruing fees. You're also extremely susceptible to sudden loss due to lack of diversity. And even if you had the time, energy and knowledge to pick what you think is the best half of the Russell 3000, you still wouldn't beat the index - https://www.fool.com/investing/2018/01/03/warren-buffett-just-officially-won-his-million-dol.aspx https://www.fool.com/investing/2018/01/03/warren-buffett-jus...
bitadder 7y ago
The problem isn't always knowing what to buy, but when to sell. For some who don't have the time of researching and rebalancing an index fund or ETF that does it for you is a good value prop. Example where that strategy might run into problems - hindsight is 20/20: https://pbs.twimg.com/media/EH6la6VWoAIC0cM?format=jpg&name=medium https://pbs.twimg.com/media/EH6la6VWoAIC0cM?format=jpg&name=...
- swinglock 7y ago
  Index funds don't try to time the market. Which ETFs are you thinking about? Hedge funds?
Hn-acc-1 7y ago
It does not. If it was that simple, there wouldn't be an entire trillion dollar industry based on it.
eloff 7y ago
The problem is there's no way for you to pick the winners and losers accurately. Most people who spend their whole career picking stocks actually don't beat the market indices. It's not as trivial a problem as you seem to think it is.
joshuamorton 7y ago
Over the past 5 years, Nike has gone up by 100%, coke by 20%, Verizon by 15%, and apple by ~125%. The s&p500 has gone up by ~50%. So if you invested 100 in an index fund, you'd have 150, if you invested 100 split evenly in those 4 stocks, you'd have 165. Of course, if you invested in GE, you'd have lost money. And if you invested in Amazon alone, you'd have $500.
- buffaloo 7y ago
  This analysis is flawed in two respects: 1. It neglects dividends. 2. The S&P 500 as presently constituted omits all the companies that were excluded during that time period (eg., went broke). If you just buy good solid companies that pay dividends, you do ok.
  - matwood 7y ago
    > If you just buy good solid companies that pay dividends, you do ok. What are the good, solid companies 10 years from now? 20 years? When should I dump my current good, solid companies?
    - joshuamorton 7y ago
      Echoing this, the median amount of time a given S&P500 sits in the S&P500 is less than 20 years. This becomes a tricky problem.
  - joshuamorton 7y ago
    > 1. It neglects dividends. True, but if I replaced S&P500 with VTSMX (a Vanguard index fund, which got marginally higher than 50% returns over the same time period) would not. > 2. The S&P 500 as presently constituted omits all the companies that were excluded during that time period (eg., went broke). The current S&P 500 does, but watching the S&P500 index over time does not. And index funds generally rebalance to take these things into account. As another user mentioned: knowing which companies are "good solid companies" is a trillion dollar industry. No simple strategy beats the market over the long term, other wise passive investors would all do it, and start beating the market.

tesin 7y ago

Every time you buy your stocks for those individual companies you're accruing fees. You're also extremely susceptible to sudden loss due to lack of diversity. And even if you had the time, energy and knowledge to pick what you think is the best half of the Russell 3000, you still wouldn't beat the index - https://www.fool.com/investing/2018/01/03/warren-buffett-just-officially-won-his-million-dol.aspx https://www.fool.com/investing/2018/01/03/warren-buffett-jus...

bitadder 7y ago

The problem isn't always knowing what to buy, but when to sell. For some who don't have the time of researching and rebalancing an index fund or ETF that does it for you is a good value prop. Example where that strategy might run into problems - hindsight is 20/20: https://pbs.twimg.com/media/EH6la6VWoAIC0cM?format=jpg&name=medium https://pbs.twimg.com/media/EH6la6VWoAIC0cM?format=jpg&name=...

swinglock 7y ago
Index funds don't try to time the market. Which ETFs are you thinking about? Hedge funds?

Hn-acc-1 7y ago

It does not. If it was that simple, there wouldn't be an entire trillion dollar industry based on it.

eloff 7y ago

The problem is there's no way for you to pick the winners and losers accurately. Most people who spend their whole career picking stocks actually don't beat the market indices. It's not as trivial a problem as you seem to think it is.

joshuamorton 7y ago

Over the past 5 years, Nike has gone up by 100%, coke by 20%, Verizon by 15%, and apple by ~125%. The s&p500 has gone up by ~50%. So if you invested 100 in an index fund, you'd have 150, if you invested 100 split evenly in those 4 stocks, you'd have 165. Of course, if you invested in GE, you'd have lost money. And if you invested in Amazon alone, you'd have $500.

buffaloo 7y ago
This analysis is flawed in two respects: 1. It neglects dividends. 2. The S&P 500 as presently constituted omits all the companies that were excluded during that time period (eg., went broke). If you just buy good solid companies that pay dividends, you do ok.
- matwood 7y ago
  > If you just buy good solid companies that pay dividends, you do ok. What are the good, solid companies 10 years from now? 20 years? When should I dump my current good, solid companies?
  - joshuamorton 7y ago
    Echoing this, the median amount of time a given S&P500 sits in the S&P500 is less than 20 years. This becomes a tricky problem.
- joshuamorton 7y ago
  > 1. It neglects dividends. True, but if I replaced S&P500 with VTSMX (a Vanguard index fund, which got marginally higher than 50% returns over the same time period) would not. > 2. The S&P 500 as presently constituted omits all the companies that were excluded during that time period (eg., went broke). The current S&P 500 does, but watching the S&P500 index over time does not. And index funds generally rebalance to take these things into account. As another user mentioned: knowing which companies are "good solid companies" is a trillion dollar industry. No simple strategy beats the market over the long term, other wise passive investors would all do it, and start beating the market.