4 ms·

Kindof. The mere fact that the S&P 500 exists causes the potential jump in price for that one stock, but since you hold everything in VTSMX, you also see the j

by MR4D 6y ago

Kindof. The mere fact that the S&P 500 exists causes the potential jump in price for that one stock, but since you hold everything in VTSMX, you also see the jump in TSLA. Worse, since you own every stock (not really, but close enough), you now have the 500 companies representing about $27 trillion of market cap, and then thousands more representing only another $8-9 trillion. So any change in the smaller companies is dwarfed by one good (or bad) day of AAPL, AMZN, GOOG, etc (as happened yesterday). So if you want the whole stock market, buy it in multiple pieces - a large cap, a small cap, and a mid-cap funds. As to your bookkeeping comment about being easier, you are absolutely correct. In fact, a competent financial advisor has the tools to trade the S&P themselves for clients (literally buying all 500 stocks individually and in correct proportions to the index). Market cap source: https://siblisresearch.com/data/us-stock-market-value/ https://siblisresearch.com/data/us-stock-market-value/

djrogers 6y ago
> a competent financial advisor has the tools to trade the S&P themselves for clients (literally buying all 500 stocks individually and in correct proportions to the index). That’s not the point though. A one time buy is easy - rebalancing quarterly, and rebalancing when a huge new company is added is the hard part (as evidenced by the need for buying $35-40Billion worth of TSLA and selling an equivalent amount of other stocks).
- MR4D 6y ago
  Depends on the scale. For vanguard, it’s a lot of work. For a financial advisor, the software to rebalance runs in a web browser on a laptop (heck, even an iPad!). Rebalancing has been figured out and automated very well for a few years now, with several different vendors all competing.
xur17 6y ago
> Worse, since you own every stock (not really, but close enough), you now have the 500 companies representing about $27 trillion of market cap, and then thousands more representing only another $8-9 trillion. So any change in the smaller companies is dwarfed by one good (or bad) day of AAPL, AMZN, GOOG, etc (as happened yesterday). > So if you want the whole stock market, buy it in multiple pieces - a large cap, a small cap, and a mid-cap fund. But this only makes sense because you think holding companies based on market sector (equally weighting each sector) makes more sense than just basing it on the size of the company. What evidence do you have that this is a better approach?
- smabie 6y ago
  Fama and French determined that higher exposure to their size factor led to outperformance. Equal weighting increases your portfolios size exposure. See https://en.m.wikipedia.org/wiki/Fama%E2%80%93French_three-factor_model https://en.m.wikipedia.org/wiki/Fama%E2%80%93French_three-fa...
jefftk 6y ago
> So any change in the smaller companies is dwarfed by one good (or bad) day of AAPL, AMZN, GOOG, etc (as happened yesterday). This doesn't seem that bad to me? Imagine that you own FOO and BAR. They're each 1% of your holdings and each 1% of the US stock market. Now they merge. How much of your holdings should be the new company FOOBAR? Seems to me like it should be 2% now that FOOBAR is ~2% of the market. AAPL, AMZN, GOOG, etc each represent a large number of products and businesses, and I don't see why you'd want to decrease your exposure just because they trade under a single stock symbol.
- zurfer 6y ago
  FOO is Salesforce. BAR will be my future start-up. After the IPO I will make sure that Salesforce acquires all our shares and your example will become the ultimate example for finance or stock text books.
- ethbro 6y ago
  One of the commonly expressed intents for buying indices is lazy diversification. By having vastly unevenly-weighted indices, one fails to accomplish that aim. Assuming diversification is the goal, your comment would only be true (that 1+1 and 2 are equivalent) if the constituent parts of hyper-scale companies operated independently. In reality, I'd say that rarely happens. At best, you get something like Facebook (there can only be so many true chiefs). At worst, you get something like GE (cannibalizing viable businesses to feed others). And all of this is to say nothing of that fact that, historically, Amazons don't become 2x Amazons with the frequencies that {mid-cap} become {large cap}, simply by virtue of total addressable market maximums in mature business areas.
zie 6y ago
In the 2000 crash, VTSAX came back about a year before the S&P 500 did. source: https://www.portfoliovisualizer.com/backtest-portfolio?s=y&timePeriod=2&startYear=1985&firstMonth=1&endYear=2020&lastMonth=12&calendarAligned=true&includeYTD=false&initialAmount=10000&annualOperation=0&annualAdjustment=0&inflationAdjusted=true&annualPercentage=0.0&frequency=4&rebalanceType=1&absoluteDeviation=5.0&relativeDeviation=25.0&showYield=false&reinvestDividends=true&portfolioNames=false&portfolioName1=Portfolio+1&portfolioName2=Portfolio+2&portfolioName3=Portfolio+3&symbol1=VTSMX&allocation1_1=100&symbol2=VFINX&allocation2_2=100&symbol3=CASHX&symbol4=PSLDX https://www.portfoliovisualizer.com/backtest-portfolio?s=y&t... see the drawdowns tab.
- MR4D 6y ago
  Right. But that’s not what I mean. Split the total market into 3 funds and see how much better it compares to your solution. (Drawdowns tab also) https://www.portfoliovisualizer.com/backtest-portfolio?s=y&timePeriod=2&startYear=1985&firstMonth=1&endYear=2020&lastMonth=12&calendarAligned=true&includeYTD=false&initialAmount=10000&annualOperation=0&annualAdjustment=0&inflationAdjusted=true&annualPercentage=0.0&frequency=4&rebalanceType=1&absoluteDeviation=5.0&relativeDeviation=25.0&showYield=false&reinvestDividends=true&portfolioNames=false&portfolioName1=Portfolio+1&portfolioName2=Portfolio+2&portfolioName3=Portfolio+3&symbol1=VTSMX&allocation1_1=100&symbol2=VFINX&allocation2_2=34&symbol3=VISGX&allocation3_2=33&symbol4=VMCIX&allocation4_2=33 https://www.portfoliovisualizer.com/backtest-portfolio?s=y&t...
  - bsmith89 6y ago
    I think what you're seeing is the higher yield (+risk) of the small-cap fund. See this comparison to VISGX only: https://www.portfoliovisualizer.com/backtest-portfolio?s=y&timePeriod=2&startYear=1985&firstMonth=1&endYear=2020&lastMonth=12&calendarAligned=true&includeYTD=false&initialAmount=10000&annualOperation=0&annualAdjustment=0&inflationAdjusted=true&annualPercentage=0.0&frequency=4&rebalanceType=1&absoluteDeviation=5.0&relativeDeviation=25.0&showYield=false&reinvestDividends=true&portfolioNames=false&portfolioName1=Portfolio+1&portfolioName2=Portfolio+2&portfolioName3=Portfolio+3&symbol1=VTSMX&allocation1_1=100&symbol2=VFINX&allocation2_2=34&symbol3=VISGX&allocation3_2=33&allocation3_3=100&symbol4=VMCIX&allocation4_2=33 https://www.portfoliovisualizer.com/backtest-portfolio?s=y&t...
joubert 6y ago
> In fact, a competent financial advisor has the tools to trade the S&P themselves for clients (literally buying all 500 stocks individually and in correct proportions to the index). At lower cost than what you’d pay via a large investment company like Vanguard/Fidelity/BlackRock?

by MR4D 6y ago

djrogers 6y ago

> a competent financial advisor has the tools to trade the S&P themselves for clients (literally buying all 500 stocks individually and in correct proportions to the index). That’s not the point though. A one time buy is easy - rebalancing quarterly, and rebalancing when a huge new company is added is the hard part (as evidenced by the need for buying $35-40Billion worth of TSLA and selling an equivalent amount of other stocks).

MR4D 6y ago
Depends on the scale. For vanguard, it’s a lot of work. For a financial advisor, the software to rebalance runs in a web browser on a laptop (heck, even an iPad!). Rebalancing has been figured out and automated very well for a few years now, with several different vendors all competing.

xur17 6y ago

> Worse, since you own every stock (not really, but close enough), you now have the 500 companies representing about $27 trillion of market cap, and then thousands more representing only another $8-9 trillion. So any change in the smaller companies is dwarfed by one good (or bad) day of AAPL, AMZN, GOOG, etc (as happened yesterday). > So if you want the whole stock market, buy it in multiple pieces - a large cap, a small cap, and a mid-cap fund. But this only makes sense because you think holding companies based on market sector (equally weighting each sector) makes more sense than just basing it on the size of the company. What evidence do you have that this is a better approach?

smabie 6y ago
Fama and French determined that higher exposure to their size factor led to outperformance. Equal weighting increases your portfolios size exposure. See https://en.m.wikipedia.org/wiki/Fama%E2%80%93French_three-factor_model https://en.m.wikipedia.org/wiki/Fama%E2%80%93French_three-fa...

jefftk 6y ago

> So any change in the smaller companies is dwarfed by one good (or bad) day of AAPL, AMZN, GOOG, etc (as happened yesterday). This doesn't seem that bad to me? Imagine that you own FOO and BAR. They're each 1% of your holdings and each 1% of the US stock market. Now they merge. How much of your holdings should be the new company FOOBAR? Seems to me like it should be 2% now that FOOBAR is ~2% of the market. AAPL, AMZN, GOOG, etc each represent a large number of products and businesses, and I don't see why you'd want to decrease your exposure just because they trade under a single stock symbol.

zurfer 6y ago
FOO is Salesforce. BAR will be my future start-up. After the IPO I will make sure that Salesforce acquires all our shares and your example will become the ultimate example for finance or stock text books.
ethbro 6y ago
One of the commonly expressed intents for buying indices is lazy diversification. By having vastly unevenly-weighted indices, one fails to accomplish that aim. Assuming diversification is the goal, your comment would only be true (that 1+1 and 2 are equivalent) if the constituent parts of hyper-scale companies operated independently. In reality, I'd say that rarely happens. At best, you get something like Facebook (there can only be so many true chiefs). At worst, you get something like GE (cannibalizing viable businesses to feed others). And all of this is to say nothing of that fact that, historically, Amazons don't become 2x Amazons with the frequencies that {mid-cap} become {large cap}, simply by virtue of total addressable market maximums in mature business areas.

zie 6y ago

In the 2000 crash, VTSAX came back about a year before the S&P 500 did. source: https://www.portfoliovisualizer.com/backtest-portfolio?s=y&timePeriod=2&startYear=1985&firstMonth=1&endYear=2020&lastMonth=12&calendarAligned=true&includeYTD=false&initialAmount=10000&annualOperation=0&annualAdjustment=0&inflationAdjusted=true&annualPercentage=0.0&frequency=4&rebalanceType=1&absoluteDeviation=5.0&relativeDeviation=25.0&showYield=false&reinvestDividends=true&portfolioNames=false&portfolioName1=Portfolio+1&portfolioName2=Portfolio+2&portfolioName3=Portfolio+3&symbol1=VTSMX&allocation1_1=100&symbol2=VFINX&allocation2_2=100&symbol3=CASHX&symbol4=PSLDX https://www.portfoliovisualizer.com/backtest-portfolio?s=y&t... see the drawdowns tab.

MR4D 6y ago
Right. But that’s not what I mean. Split the total market into 3 funds and see how much better it compares to your solution. (Drawdowns tab also) https://www.portfoliovisualizer.com/backtest-portfolio?s=y&timePeriod=2&startYear=1985&firstMonth=1&endYear=2020&lastMonth=12&calendarAligned=true&includeYTD=false&initialAmount=10000&annualOperation=0&annualAdjustment=0&inflationAdjusted=true&annualPercentage=0.0&frequency=4&rebalanceType=1&absoluteDeviation=5.0&relativeDeviation=25.0&showYield=false&reinvestDividends=true&portfolioNames=false&portfolioName1=Portfolio+1&portfolioName2=Portfolio+2&portfolioName3=Portfolio+3&symbol1=VTSMX&allocation1_1=100&symbol2=VFINX&allocation2_2=34&symbol3=VISGX&allocation3_2=33&symbol4=VMCIX&allocation4_2=33 https://www.portfoliovisualizer.com/backtest-portfolio?s=y&t...
- bsmith89 6y ago
  I think what you're seeing is the higher yield (+risk) of the small-cap fund. See this comparison to VISGX only: https://www.portfoliovisualizer.com/backtest-portfolio?s=y&timePeriod=2&startYear=1985&firstMonth=1&endYear=2020&lastMonth=12&calendarAligned=true&includeYTD=false&initialAmount=10000&annualOperation=0&annualAdjustment=0&inflationAdjusted=true&annualPercentage=0.0&frequency=4&rebalanceType=1&absoluteDeviation=5.0&relativeDeviation=25.0&showYield=false&reinvestDividends=true&portfolioNames=false&portfolioName1=Portfolio+1&portfolioName2=Portfolio+2&portfolioName3=Portfolio+3&symbol1=VTSMX&allocation1_1=100&symbol2=VFINX&allocation2_2=34&symbol3=VISGX&allocation3_2=33&allocation3_3=100&symbol4=VMCIX&allocation4_2=33 https://www.portfoliovisualizer.com/backtest-portfolio?s=y&t...

joubert 6y ago

> In fact, a competent financial advisor has the tools to trade the S&P themselves for clients (literally buying all 500 stocks individually and in correct proportions to the index). At lower cost than what you’d pay via a large investment company like Vanguard/Fidelity/BlackRock?