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All this is true, and there are many good comments in the thread here. But this "hey dude, stock picking is for idiots and all non idiots but index funds" shoul

All this is true, and there are many good comments in the thread here. But this "hey dude, stock picking is for idiots and all non idiots but index funds" should be treated with caution. Index funds are an extremely clever idea but were never meant to be used on such a scale. To give you some ideas: https://www.forbes.com/sites/chriscarosa/2024/04/02/index-funds-surge-in-popularity-but-pose-risks-for-the-market/ https://www.forbes.com/sites/chriscarosa/2024/04/02/index-fu...

tossandthrow 2y ago
There are a lot of unknown for the markets in the future. Also the 0 or negative interest rate environments we will probably enter (again). IMHO we need to rethink or tweak the financial system sooner rather than later.
nerdponx 2y ago
On the contrary, that article makes it seem perfectly fine to invest in index funds.
jacobsimon 2y ago
One of my big brain investing ideas is to pick the stocks at the top of the index instead of buying the whole index. If index funds continue to rise in popularity, the stocks that are at the top will benefit most from passive investment volume. Plus, index funds follow a kind of Pareto principle where the top stocks contribute disproportionately to the total return anyway. As I’ve gotten older though, one of my realizations is that the tax-free rebalancing of index ETFs is their most valuable property, rather than their actual choice of equities.
- jackcosgrove 2y ago
  I had an active manager reach out to me with exactly this strategy. I didn't look at the fees or rebalancing schedule super closely, because I didn't want to invest with the guy, but IMO his market-beating claims were due to increased concentration during a bull market (risk) which could go sideways fast if he didn't rebalance at opportune times.
  - ghaff 2y ago
    Which, without looking, probably means NASDAQ today--and certainly the top 50 or whatever tech stocks by whatever metric. That didn't look so great in late 2001. Certainly my T Rowe Price tech fund cratered. Tech has been very good, even relatively speaking through the great recession, since then.
    - jacobsimon 2y ago
      The best approximation I’ve found is S&P has this Top 10 index[1]. Over the last 10 years it has performed 18% annually vs 11% for the overall S&P 500, but that’s obviously been a historic bull run in large cap growth stocks. I can’t find data going back to 2000 to see how that strategy would have played out, but curious if someone else finds it or crunches the numbers. 1. https://www.spglobal.com/spdji/en/indices/equity/sp-500-top-10-index/#overview https://www.spglobal.com/spdji/en/indices/equity/sp-500-top-...
      - ghaff 2y ago
        Yeah, for what it's worth, my financial advisor is pushing me towards more value stocks and some more bonds. (I am somewhat older as well in addition to be in a position where being conservative makes sense.) Was just doing some research.
        throwaway2037 2y ago
        What do you pay for that advice?
- Mistletoe 2y ago
  https://www.aqr.com/Insights/Perspectives/Value-Spreads-Back-to-Tech-Bubble-Highs-Are-You-People-Crazy https://www.aqr.com/Insights/Perspectives/Value-Spreads-Back... I’d be cautious that you are about to get a wicked mean reversion.
  - jacobsimon 2y ago
    Yeah to clarify, I don’t necessarily recommend (or even follow) this strategy, I still mostly invest in passive index funds.
    - Mistletoe 2y ago
      Ah I see, carry on then!
- WillPostForFood 2y ago
  There is an old strategy that is kind of the inverse of this this called Dogs of the Dow where. You buy with stocks with the highest dividend-to-price ratio (implicitly underperforming), looking for the rebound. https://en.wikipedia.org/wiki/Dogs_of_the_Dow https://en.wikipedia.org/wiki/Dogs_of_the_Dow
  - jacobsimon 2y ago
    I don’t know for sure, but I have a hunch this strategy has done below-average for the past 10-20 years, because most of the above-average returns have been driven by growth stocks with low dividends. Stock buybacks have also become a really popular way of returning value to shareholders instead of dividends.
- Etheryte 2y ago
  Hint: this idea has been around for as long as index funds have been around, if it actually worked well, everyone would be doing it. Alas, a big part of why index funds work well in the long term is diversification, and when you cherry pick a subset you also lose out on diversification. It's one of those strategies that looks clever if you don't delve into it, but actually the returns are worse. As an example, if you take the SP100 it might outperform the SP500 on single year performance every now and then, but in the long term, SP500 has consistently outperformed it.
  - jacobsimon 2y ago
    Do you have data to back that up?
    - Etheryte 2y ago
      You can pull up SP100 and SP500 and look at their historical returns. SP100 is an actual index, not something I made up for illustration. If you look at the last 40ish years, SP100 is up roughly 45 times, SP500 is up roughly 50 times. What might help understand this concept intuitively is if you take it to the extreme: what if you always held only the very first company of the SP500. Sure, you would have a lot of the upside, but you would also be completely naked to the downturns. Similarly, you would lose a lot of money on commissions whenever the leader changes. Taking any other smaller subsection has the same problems, it's simply a matter of what tradeoff works best for you.
      - jacobsimon 2y ago
        Sorry I know what you mean - I’m just having trouble finding any data source / website that shows useful comparisons going back that far - what website are you looking at? These are the 10 year returns I’m seeing according to S&P: S&P 500: 11.1% S&P 500 Top 50: 13.2% S&P 500 Top 10: 18.1% The trend is pretty clear, at least in the last decade. My other point was that the historical data may not be as relevant because the index is much more top-heavy today, perhaps in part due to the popularity of index funds and part because the top companies are actually outperforming. Here’s an article to that effect - the top 20 stocks in the S&P accounted for ~90% of the index’s gains last year: https://www.visualcapitalist.com/cp/top-20-stocks-sp-500-returns/ https://www.visualcapitalist.com/cp/top-20-stocks-sp-500-ret... To your question about picking the extreme Top 1 stock - again I’m having trouble finding good data on that, but I’d be curious what the hypothetical outcome would have been over the last 20 years.
- humansareok1 2y ago
  100% you're just adding additional volatility for higher returns. Backdate the strategy, doubtful you're beating the overall index on decade timescales.
bityard 2y ago
Index funds are not some clever hack, they are just tracking the combined productivity of the publicly traded companies that make them up. Whole market, or the top 500 as a representative slice, whatever. When you buy the whole US market for example you are saying, "I strongly believe that the overwhelming majority of companies in the US want to make shitloads of money and pass it down to themselves and their shareholders." Index funds will never bring down the market as long as individuals and companies are allowed to trade individual stocks at prices of their choosing. There will _always_ be someone who thinks a particular stock is overvalued or undervalued. Those people set the prices.
- dukeyukey 2y ago
  Something I've wondered is how index funds effect companies entering the index for the first time. Like, let's say there's a company (TryerCo) that is the 501st biggest in the US. Big, but still one step away from being in the S&P 500. Then, one of the S&P 500s collapse. They exit the index, and TryerCo enters the index at position 500, despite no material change since the day before. Doesn't this mean a whole _heap_ of index funds will suddenly start buying TryerCo stock, sending it up thanks to the arbitrary number 500?
  - gizajob 2y ago
    The ETFs are generally rebalanced once a quarter, so yeah, it really is a big deal when a company enters one of the main indices, and the price starts to move up in anticipation of the listing, then stays up because the ETFs, as you intuit, have to start buying it as a component of the market. Supermicro entering S&P500 and Arm entering Nasdaq 100 being good examples recently.
  - Marsymars 2y ago
    This is basically priced in based on the odds of entering an index in the same way that potential acquisitions get priced in based on the odds of the acquisition going through. I swear I've seen actively managed funds that explicitly trade based on stocks' potential to enter/leave indexes, but it's a terrible batch of terms to try to google.
  - 2y ago
deleted 2y ago
[deleted]

tossandthrow 2y ago

There are a lot of unknown for the markets in the future. Also the 0 or negative interest rate environments we will probably enter (again). IMHO we need to rethink or tweak the financial system sooner rather than later.

nerdponx 2y ago

On the contrary, that article makes it seem perfectly fine to invest in index funds.

jacobsimon 2y ago

One of my big brain investing ideas is to pick the stocks at the top of the index instead of buying the whole index. If index funds continue to rise in popularity, the stocks that are at the top will benefit most from passive investment volume. Plus, index funds follow a kind of Pareto principle where the top stocks contribute disproportionately to the total return anyway. As I’ve gotten older though, one of my realizations is that the tax-free rebalancing of index ETFs is their most valuable property, rather than their actual choice of equities.

jackcosgrove 2y ago
I had an active manager reach out to me with exactly this strategy. I didn't look at the fees or rebalancing schedule super closely, because I didn't want to invest with the guy, but IMO his market-beating claims were due to increased concentration during a bull market (risk) which could go sideways fast if he didn't rebalance at opportune times.
- ghaff 2y ago
  Which, without looking, probably means NASDAQ today--and certainly the top 50 or whatever tech stocks by whatever metric. That didn't look so great in late 2001. Certainly my T Rowe Price tech fund cratered. Tech has been very good, even relatively speaking through the great recession, since then.
  - jacobsimon 2y ago
    The best approximation I’ve found is S&P has this Top 10 index[1]. Over the last 10 years it has performed 18% annually vs 11% for the overall S&P 500, but that’s obviously been a historic bull run in large cap growth stocks. I can’t find data going back to 2000 to see how that strategy would have played out, but curious if someone else finds it or crunches the numbers. 1. https://www.spglobal.com/spdji/en/indices/equity/sp-500-top-10-index/#overview https://www.spglobal.com/spdji/en/indices/equity/sp-500-top-...
    - ghaff 2y ago
      Yeah, for what it's worth, my financial advisor is pushing me towards more value stocks and some more bonds. (I am somewhat older as well in addition to be in a position where being conservative makes sense.) Was just doing some research.
      - throwaway2037 2y ago
        What do you pay for that advice?
Mistletoe 2y ago
https://www.aqr.com/Insights/Perspectives/Value-Spreads-Back-to-Tech-Bubble-Highs-Are-You-People-Crazy https://www.aqr.com/Insights/Perspectives/Value-Spreads-Back... I’d be cautious that you are about to get a wicked mean reversion.
- jacobsimon 2y ago
  Yeah to clarify, I don’t necessarily recommend (or even follow) this strategy, I still mostly invest in passive index funds.
  - Mistletoe 2y ago
    Ah I see, carry on then!
WillPostForFood 2y ago
There is an old strategy that is kind of the inverse of this this called Dogs of the Dow where. You buy with stocks with the highest dividend-to-price ratio (implicitly underperforming), looking for the rebound. https://en.wikipedia.org/wiki/Dogs_of_the_Dow https://en.wikipedia.org/wiki/Dogs_of_the_Dow
- jacobsimon 2y ago
  I don’t know for sure, but I have a hunch this strategy has done below-average for the past 10-20 years, because most of the above-average returns have been driven by growth stocks with low dividends. Stock buybacks have also become a really popular way of returning value to shareholders instead of dividends.
Etheryte 2y ago
Hint: this idea has been around for as long as index funds have been around, if it actually worked well, everyone would be doing it. Alas, a big part of why index funds work well in the long term is diversification, and when you cherry pick a subset you also lose out on diversification. It's one of those strategies that looks clever if you don't delve into it, but actually the returns are worse. As an example, if you take the SP100 it might outperform the SP500 on single year performance every now and then, but in the long term, SP500 has consistently outperformed it.
- jacobsimon 2y ago
  Do you have data to back that up?
  - Etheryte 2y ago
    You can pull up SP100 and SP500 and look at their historical returns. SP100 is an actual index, not something I made up for illustration. If you look at the last 40ish years, SP100 is up roughly 45 times, SP500 is up roughly 50 times. What might help understand this concept intuitively is if you take it to the extreme: what if you always held only the very first company of the SP500. Sure, you would have a lot of the upside, but you would also be completely naked to the downturns. Similarly, you would lose a lot of money on commissions whenever the leader changes. Taking any other smaller subsection has the same problems, it's simply a matter of what tradeoff works best for you.
    - jacobsimon 2y ago
      Sorry I know what you mean - I’m just having trouble finding any data source / website that shows useful comparisons going back that far - what website are you looking at? These are the 10 year returns I’m seeing according to S&P: S&P 500: 11.1% S&P 500 Top 50: 13.2% S&P 500 Top 10: 18.1% The trend is pretty clear, at least in the last decade. My other point was that the historical data may not be as relevant because the index is much more top-heavy today, perhaps in part due to the popularity of index funds and part because the top companies are actually outperforming. Here’s an article to that effect - the top 20 stocks in the S&P accounted for ~90% of the index’s gains last year: https://www.visualcapitalist.com/cp/top-20-stocks-sp-500-returns/ https://www.visualcapitalist.com/cp/top-20-stocks-sp-500-ret... To your question about picking the extreme Top 1 stock - again I’m having trouble finding good data on that, but I’d be curious what the hypothetical outcome would have been over the last 20 years.
humansareok1 2y ago
100% you're just adding additional volatility for higher returns. Backdate the strategy, doubtful you're beating the overall index on decade timescales.

bityard 2y ago

Index funds are not some clever hack, they are just tracking the combined productivity of the publicly traded companies that make them up. Whole market, or the top 500 as a representative slice, whatever. When you buy the whole US market for example you are saying, "I strongly believe that the overwhelming majority of companies in the US want to make shitloads of money and pass it down to themselves and their shareholders." Index funds will never bring down the market as long as individuals and companies are allowed to trade individual stocks at prices of their choosing. There will _always_ be someone who thinks a particular stock is overvalued or undervalued. Those people set the prices.

dukeyukey 2y ago
Something I've wondered is how index funds effect companies entering the index for the first time. Like, let's say there's a company (TryerCo) that is the 501st biggest in the US. Big, but still one step away from being in the S&P 500. Then, one of the S&P 500s collapse. They exit the index, and TryerCo enters the index at position 500, despite no material change since the day before. Doesn't this mean a whole _heap_ of index funds will suddenly start buying TryerCo stock, sending it up thanks to the arbitrary number 500?
- gizajob 2y ago
  The ETFs are generally rebalanced once a quarter, so yeah, it really is a big deal when a company enters one of the main indices, and the price starts to move up in anticipation of the listing, then stays up because the ETFs, as you intuit, have to start buying it as a component of the market. Supermicro entering S&P500 and Arm entering Nasdaq 100 being good examples recently.
- Marsymars 2y ago
  This is basically priced in based on the odds of entering an index in the same way that potential acquisitions get priced in based on the odds of the acquisition going through. I swear I've seen actively managed funds that explicitly trade based on stocks' potential to enter/leave indexes, but it's a terrible batch of terms to try to google.
- 2y ago

deleted 2y ago

[deleted]