6 ms·

Obviously not “everyone” will ever invest in index funds. HFT firms, leveraged buyout folks, and prop traders at investment banks aren’t going to stop betting o

Obviously not “everyone” will ever invest in index funds. HFT firms, leveraged buyout folks, and prop traders at investment banks aren’t going to stop betting on individual securities. The people who have more information, quicker ability to act on information, or superior ability to analyze information shouldn’t buy index funds (they’re also the people who contribute meaningfully to price discovery). A smart individual retail investor is statistically unlikely to “beat” those people, and should buy index funds.

mancerayder 6y ago
I hear this over and over again. Beating the HFT firms, insiders, big money shops and so forth. It's not a zero sum game necessarily. A stock picker approach that you have as a retail investor that many trading shops do not have is this: time. You can make your bet, and if it fails in the short term you can hold onto the stock long term, unless the company is going bankrupt (which hasn't been a common occurrence up to now, given the overall number of stock symbols). Traders are individuals and groups with books, quarterly numbers to meet and yearly returns to care about. They'll beat you if you're a day trader, sure, but I think it's a false dichotomy to say, you're either a) a day trader or b) a boglehead.
- throw0101a 6y ago
  > It's not a zero sum game necessarily. It is, actually. William F. Sharpe laid it out in the 1991 paper "The Arithmetic of Active Management": * https://web.stanford.edu/~wfsharpe/art/active/active.htm https://web.stanford.edu/~wfsharpe/art/active/active.htm * https://www.jstor.org/stable/4479386?seq=1 https://www.jstor.org/stable/4479386?seq=1 Sharpe won the 1990 Economics Nobel for other work: * https://en.wikipedia.org/wiki/William_F._Sharpe https://en.wikipedia.org/wiki/William_F._Sharpe The more active a trader is, over a longer time frame, the more likely they are to underperform the market. This has been shown through SPIVA over 15+ years, at least in the US and Canada: * https://www.tma-invest.com/spiva-data-reveals-15-years-of-active-underperformance/ https://www.tma-invest.com/spiva-data-reveals-15-years-of-ac... * https://www.ifa.com/articles/despite_brief_reprieve_2018_spiva_report_reveals_active_funds_fail_dent_indexing_lead_-_works/ https://www.ifa.com/articles/despite_brief_reprieve_2018_spi... As of the end of 2019, internationally active managers didn't do too well either: * https://dividendstrategy.ca/what-is-spiva/ https://dividendstrategy.ca/what-is-spiva/ This has been known to varying degrees since at least the 1970s: * https://en.wikipedia.org/wiki/A_Random_Walk_Down_Wall_Street https://en.wikipedia.org/wiki/A_Random_Walk_Down_Wall_Street
  - quotemstr 6y ago
    That can't possibly be true in the limit though. A market with no active management would allocate capital arbitrarily, without an eye to returns. A company burning money on making millions of unwanted skunk-scented bouncy balls would be as likely to attract capital as one that made, say, food or medicine. Resource allocation would break down if nobody made active capital allocation decisions. The question is how high the share of passive investment can go before we see misallocation.
    - mancerayder 6y ago
      Yes, and not only that, but the index funds a skewed towards entities with large market caps. Someone could make their own "index fund" with 10% of it allocated to FAANG, maybe 20% of it in the largest tech names overall, and then a distribution of the largest market cap names, and lo and behold, one has an s&p 500 "index fund". Tesla's about to be added to the S&P 500. There are strong opinions on both sides - it's going up, no, it's going down. You don't have much of a choice if you're a Boglehead who bought into the S&P 500, you're just in it for the ride.
      - throw0101a 6y ago
        > Yes, and not only that, but the index funds a skewed towards entities with large market caps. There are index funds of every publicly traded company in the US: * https://en.wikipedia.org/wiki/Russell_3000_Index https://en.wikipedia.org/wiki/Russell_3000_Index Vanguard themselves have changed things so that employees no longer have the option of choosing the S&P 500 fund in their own retirement accounts, but rather the Total Market fund: * https://www.marketwatch.com/story/vanguard-thinks-its-own-employees-should-own-this-fund-not-the-sp-500-theyre-right-2018-06-08 https://www.marketwatch.com/story/vanguard-thinks-its-own-em... * https://www.marketwatch.com/story/bogle-explains-why-vanguard-employees-wont-have-a-flagship-sp-500-fund-in-their-401k-2018-06-07 https://www.marketwatch.com/story/bogle-explains-why-vanguar... > You don't have much of a choice if you're a Boglehead who bought into the S&P 500, you're just in it for the ride. Anyone investing in equities is just in it for the ride, as it is impossible to predict what will happen: * https://en.wikipedia.org/wiki/A_Random_Walk_Down_Wall_Street https://en.wikipedia.org/wiki/A_Random_Walk_Down_Wall_Street An individual's best bet, long term: buy as much of 'The Market' as you can. The greater, the better. The S&P 500 is simply a smaller portion of the market, and while not bad, may not be ideal: * https://www.pwlcapital.com/should-you-invest-in-the-sp-500-index/ https://www.pwlcapital.com/should-you-invest-in-the-sp-500-i...

mancerayder 6y ago

I hear this over and over again. Beating the HFT firms, insiders, big money shops and so forth. It's not a zero sum game necessarily. A stock picker approach that you have as a retail investor that many trading shops do not have is this: time. You can make your bet, and if it fails in the short term you can hold onto the stock long term, unless the company is going bankrupt (which hasn't been a common occurrence up to now, given the overall number of stock symbols). Traders are individuals and groups with books, quarterly numbers to meet and yearly returns to care about. They'll beat you if you're a day trader, sure, but I think it's a false dichotomy to say, you're either a) a day trader or b) a boglehead.

throw0101a 6y ago
> It's not a zero sum game necessarily. It is, actually. William F. Sharpe laid it out in the 1991 paper "The Arithmetic of Active Management": * https://web.stanford.edu/~wfsharpe/art/active/active.htm https://web.stanford.edu/~wfsharpe/art/active/active.htm * https://www.jstor.org/stable/4479386?seq=1 https://www.jstor.org/stable/4479386?seq=1 Sharpe won the 1990 Economics Nobel for other work: * https://en.wikipedia.org/wiki/William_F._Sharpe https://en.wikipedia.org/wiki/William_F._Sharpe The more active a trader is, over a longer time frame, the more likely they are to underperform the market. This has been shown through SPIVA over 15+ years, at least in the US and Canada: * https://www.tma-invest.com/spiva-data-reveals-15-years-of-active-underperformance/ https://www.tma-invest.com/spiva-data-reveals-15-years-of-ac... * https://www.ifa.com/articles/despite_brief_reprieve_2018_spiva_report_reveals_active_funds_fail_dent_indexing_lead_-_works/ https://www.ifa.com/articles/despite_brief_reprieve_2018_spi... As of the end of 2019, internationally active managers didn't do too well either: * https://dividendstrategy.ca/what-is-spiva/ https://dividendstrategy.ca/what-is-spiva/ This has been known to varying degrees since at least the 1970s: * https://en.wikipedia.org/wiki/A_Random_Walk_Down_Wall_Street https://en.wikipedia.org/wiki/A_Random_Walk_Down_Wall_Street
- quotemstr 6y ago
  That can't possibly be true in the limit though. A market with no active management would allocate capital arbitrarily, without an eye to returns. A company burning money on making millions of unwanted skunk-scented bouncy balls would be as likely to attract capital as one that made, say, food or medicine. Resource allocation would break down if nobody made active capital allocation decisions. The question is how high the share of passive investment can go before we see misallocation.
  - mancerayder 6y ago
    Yes, and not only that, but the index funds a skewed towards entities with large market caps. Someone could make their own "index fund" with 10% of it allocated to FAANG, maybe 20% of it in the largest tech names overall, and then a distribution of the largest market cap names, and lo and behold, one has an s&p 500 "index fund". Tesla's about to be added to the S&P 500. There are strong opinions on both sides - it's going up, no, it's going down. You don't have much of a choice if you're a Boglehead who bought into the S&P 500, you're just in it for the ride.
    - throw0101a 6y ago
      > Yes, and not only that, but the index funds a skewed towards entities with large market caps. There are index funds of every publicly traded company in the US: * https://en.wikipedia.org/wiki/Russell_3000_Index https://en.wikipedia.org/wiki/Russell_3000_Index Vanguard themselves have changed things so that employees no longer have the option of choosing the S&P 500 fund in their own retirement accounts, but rather the Total Market fund: * https://www.marketwatch.com/story/vanguard-thinks-its-own-employees-should-own-this-fund-not-the-sp-500-theyre-right-2018-06-08 https://www.marketwatch.com/story/vanguard-thinks-its-own-em... * https://www.marketwatch.com/story/bogle-explains-why-vanguard-employees-wont-have-a-flagship-sp-500-fund-in-their-401k-2018-06-07 https://www.marketwatch.com/story/bogle-explains-why-vanguar... > You don't have much of a choice if you're a Boglehead who bought into the S&P 500, you're just in it for the ride. Anyone investing in equities is just in it for the ride, as it is impossible to predict what will happen: * https://en.wikipedia.org/wiki/A_Random_Walk_Down_Wall_Street https://en.wikipedia.org/wiki/A_Random_Walk_Down_Wall_Street An individual's best bet, long term: buy as much of 'The Market' as you can. The greater, the better. The S&P 500 is simply a smaller portion of the market, and while not bad, may not be ideal: * https://www.pwlcapital.com/should-you-invest-in-the-sp-500-index/ https://www.pwlcapital.com/should-you-invest-in-the-sp-500-i...