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Worth calling out: if your money isn't tax sheltered (IRA or 401k) then an index fund will be worse than buying those individual stocks. That's because with in

Worth calling out: if your money isn't tax sheltered (IRA or 401k) then an index fund will be worse than buying those individual stocks. That's because with individual stocks you can sell the losers from time to time, buy a similar replacement (ex: Coke for Pepsi) to avoid the wash rule, and harvest a bunch of capital losses to offset future gains. Proper tax management is a HUGE part of this and is almost always overlooked in these kinds of articles.

JeffL 12y ago
Doesn't that assume that you have enough money to properly diversify without the transaction costs being too much as a percentage? If you are going to buy 500 stocks to get the same diversity, then at $10 per trade fee, that's a lot of money. Seems like for most people, there would be a tax management/diversity trade off. I would think that a combination of individual stocks and index funds would probably be good for most people.
cperciva 12y ago
if your money isn't tax sheltered (IRA or 401k) then an index fund will be worse than buying those individual stocks. ... as long as you're handling sufficiently large amounts of money that you don't lose the difference on trade commissions. Rebalancing my ETF portfolio costs me $60 (6 ETFs, $10/trade), but rebalancing a portfolio consisting of the 2000 individual stocks and bonds in those ETFs would be insane.
- Lightbody 12y ago
  Absolutely right. It helps that you don't really need all x000 stocks since a diversified subset (say 100) will be very close to index performance and still yield the harvesting benefit.
- jordanthoms 12y ago
  You may want to look at Vanguard as a broker - trading Vanguard ETFs through them is free.
thebear 12y ago
OP here: very true. We're not done with performance measurement and benchmarking until we fully account for taxes, and for all fees as well. My grand vision is a system that does that effortlessly for every individual investor. But that's a tall order, considering the data that's needed. We'll get there. But it's probably a long way off. One step at a time.

JeffL 12y ago

Doesn't that assume that you have enough money to properly diversify without the transaction costs being too much as a percentage? If you are going to buy 500 stocks to get the same diversity, then at $10 per trade fee, that's a lot of money. Seems like for most people, there would be a tax management/diversity trade off. I would think that a combination of individual stocks and index funds would probably be good for most people.

cperciva 12y ago

if your money isn't tax sheltered (IRA or 401k) then an index fund will be worse than buying those individual stocks. ... as long as you're handling sufficiently large amounts of money that you don't lose the difference on trade commissions. Rebalancing my ETF portfolio costs me $60 (6 ETFs, $10/trade), but rebalancing a portfolio consisting of the 2000 individual stocks and bonds in those ETFs would be insane.

Lightbody 12y ago
Absolutely right. It helps that you don't really need all x000 stocks since a diversified subset (say 100) will be very close to index performance and still yield the harvesting benefit.
jordanthoms 12y ago
You may want to look at Vanguard as a broker - trading Vanguard ETFs through them is free.

thebear 12y ago

OP here: very true. We're not done with performance measurement and benchmarking until we fully account for taxes, and for all fees as well. My grand vision is a system that does that effortlessly for every individual investor. But that's a tall order, considering the data that's needed. We'll get there. But it's probably a long way off. One step at a time.