Furthermore, it’s diversified. But to answer the original question, it’s just a benchmark. And even an index fund won’t match it because of the transaction fees.
Yes, that’s right. The S&P 500 index, and by extension index funds that track it, is an actively managed low turnover large cap fund. Those guys on the committee over at Standard and Poors are the ones picking the stocks, whenever there’s a merger or some other opening to fill.
https://www.wsj.com/articles/david-m-blitzer-stock-picker-behind-the-s-p-500-1495186202
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You make adjustments based on the market condition. Nothing is static and will be dangerous to assume that buying an index fund will immune an investor from a market turmoil. Adjustments on index funds are very limited and therefore maximizing returns are also somewhat handicapped.
Don’t get me wrong. There is nothing wrong with index funds. But it’s better not to put all investment money into them. Rather, I would recommend a mixture of some index funds, BRK, aggressive individual stocks during a bull market, and 10% in cash just in case a good opportunity comes along.
If an investor is novice, then I would recommend 60% in BRK, 30% in index funds, and 10% in cash. Of course, cash position increases in a bearish market.
To assume that Index funds are finally going to beat BRK for the next 10 years is a terrible gamble and somewhat being ignorant to recognizing a talented team. A winning team that has consistently beaten SP500 is the horse an investor should pick. Warren Buffet has trained his team well and will most likely continue to beat SP500 even when he is no longer running BRK.
You think you’re investing, but you’re not. You’re speculating. You’re speculating on what you think the “market conditions” are now and what they are going to be in the future. Are you the new Marvel hero Speculon™, who zigs when other zags? By the time you adjust your portfolio to what you think the market is doing, it’s too late. I’ve asked you before, and I’ll ask you again: What makes you think you are qualified to make a statement on the status of market conditions? What makes you think the people you see on TV who make such claims are qualified? (hint, being on TV is not a qualification). Expand that and explain how you or the talking heads are qualified to set an allocation?
#YOU ARE NOT QUALIFIED AND NEITHER ARE THE SO CALLED “EXPERTS”
Your faith in Buffet and his successors is foolhardy, especially considering their past performance is a good indication that the days of huge gains are all but over. There are several problems with purchasing BRK now, many of which Buffet has alluded too, but don’t let that get in the way of your dogma. Whatever fundamental/technical analysis scheme you come up with has about as much chance for success/failure as a monkey picking stocks by flinging poo on the WSJ.
@xerty is correct that there are some who do manage to beat the S&P, and those are some quantitative traders. But for every Renaissance Technology there are hundreds that fail. Just pick the ones that don’t fail, right? Oh wait, you can’t. The successful ones are never open to new investors because they don’t want to share. The unproven ones will gladly take your money. Good luck with that.
As an off-topic aside, quantitative traders are the ones who take advantage of market inefficiencies by spotting them and then leveraging them. Go find one of them and give them your cash. RT takes a 5% asset cut (wow) and then the standard 20% rake. Or go start your own. Read up on the Black Scholes arbitrage methodology and write your own. Or buy some real estate next the the NYSE and install some high speed computers so you can start micro trading. There are people spending billions (and investing billions) into technology so they can get a surefire return. Get in on it by picking the right group. Or be a sport and continue to invest the way you have been. Every trade you make helps put a few of your dollars into their pockets because they are more efficient than you.
Not sure who “you” is. If you’re referring to me, I’m very minimally invested in the stock market at all. For the most part, the only funds of mine invested in the stock market are retirement funds because I don’t have a lot of other choice on those.
And, if you’re saying people who pick individual stocks are speculating, so are you. You still haven’t answered the question of what makes the people picking the S&P 500 so special that their “fund” outperforms all other funds. I understand that they don’t actually operate a fund, but they are still picking stocks and according to you, investing in their choices is the only real way to “invest” without “speculating.” If you think they just happen to be the smartest stock pickers, that’s definitely a fair point to make, but you’re still relying on the “experts” when you invest in the stocks they’ve chosen. If you’re saying its because its diversified, what makes their diversification better than anyone else’s? Again, they may actually be better, but it’s still just a group of people picking stocks.
Also, you seem to be saying two contradictory things at the same time. You continue to bring up the point that the S&P 500 has consistently outperformed other stock pickers in the past so therefore, it’s the best investment choice. But then, when confronted with BRK.x, you appear to concede that it has consistently outperformed the S&P 500 in the past, but go on to say that there’s no evidence it will continue to outperform, so you should pick the under-performer.
From what I understand of the argument for the S&P 500 indexes, the logic is flawed. Now, just because the logic is flawed doesn’t make the conclusion wrong.
In my opinion, from what I’ve read, the strongest argument for the index is that people don’t have time to monitor their investments, they don’t understand the market, and they don’t want to have to actively manage their accounts. Those people are happy with a relatively steady x% return. From what I’ve read I think the diversification aspect is played up too much and risk is played down too much, but I definitely understand the argument that it’s just not worth it to actively manage a portfolio.
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By you I pretty much mean everyone. What makes the S&P special? Nothing at all. It’s just a diversified portfolio. There are several index funds that outperform the S&P. They might be perfectly suitable for your portfolio. The only thing that differentiates index funds is the risk.
What Tesla is advocating is individual stocks and managed funds. The evidence that stock pickers can’t outperform low cost index funds is legion. And by extension, the same thing holds true for managed funds.
How do you conclude the S&P will be the under performer going forward? The evidence that a funds past performance does not predict future performance is ample. People wrongly equate a fund manager’s skill akin to batting average. Even Buffet has atttributed BRKx to luck. It is mind boggling that people want to continue to invest in BRKx when the man running the thing is telling you low cost index funds are where you should be parking your money. The cognitive dissonance approaches new levels.
That [quote=“Full_Disclosure, post:67, topic:1725”]
In my opinion, from what I’ve read, the strongest argument for the index is that people don’t have time to monitor their investments, they don’t understand the market, and they don’t want to have to actively manage their accounts.
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That’s an unintended feature, but a nice one. The main reason for low cost, diversified index funds is that your risk is spread out, and your returns aren’t being eaten up by fees. I personally use Vanguard robo-advisers. Yes, I’m paying a fee, though a low .3% compared to the standard 1%. And my investments are all in low cost index funds. I’m paying my manager to select the best portfolio of funds to match my retirement goals and risk levels. The money I’m spending is by far offset on the fees I’d be paying towards managed funds, not even counting that the performance of the managed funds will most certainly be less than the indexed funds.
That’s the entire point of diversification. To lower risk.
At the end of the day, so are you. You are just advocating holding a lot of them. Of course the expense of actually owning each individually would generally be cost prohibitive, so that’s where the ETFs come in, but it’s still based on individual stocks. So the ETFs likely save you fees and certainly save you time, but then that is the benefit. It’s not about the stocks in the fund.
I’m not saying it will be. When I said under performer, I meant in the past. I’m saying it has been the under performer in the past (my understanding is that you agree with this so I never actually looked this up). Question: How do you conclude BRK.x will be the under-performer going forward? You can’t simply say that past performance does not predict future performance. You are comparing the performance of two different investments. You’re ending your analysis once you conclude that there’s no evidence the first one will beat the second one. But you never get around to proving how you know the second one is a better investment. Is it diversification? If so, why doesn’t someone create an ETF with 600 stocks instead of 500 (not that this would necessarily increase diversification, but assuming it can)?
The stocks chosen for the S&P 500 are not chosen for the purpose of creating a good investment. They’re chosen to emulate the performance of the whole market. Even the people running the thing are telling you they aren’t making investment recommendations when they put the S&P 500 together.
You say Warren Buffet is just lucky, and he is no better at picking stocks than anyone else. But then you say Warren Buffet is telling people to invest in index funds, so that is what you should do. It’s important to at least acknowledge the fact that you’re relying on his advice even when you say he is just lucky and not skilled.
No, I’m saying the S&P 500 is not as diversified as most people think. And the risk is not as low as most people think.
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It is 500 companies across various industries. How much more diversification do you think is necessary?
True it is US specific, but if you want foreign exposure you can buy a international fund as well.
I pretty much did say that and stand behind it, because study after study has shown this to be the case. Do you know why more investors are not flocking to BRKx? I don’t know for certain, but I suspect it is viewed as overvalued[quote=“Full_Disclosure, post:69, topic:1725”]
You say Warren Buffet is just lucky, and he is no better at picking stocks than anyone else. But then you say Warren Buffet is telling people to invest in index funds, so that is what you should do. It’s important to at least acknowledge the fact that you’re relying on his advice even when you say he is just lucky and not skilled.
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Now you’re just being pedantic. I’m not relying on his advice, I’m relying on conventional wisdom and decades of research (not mine) and performance.[quote=“Full_Disclosure, post:69, topic:1725”]
No, I’m saying the S&P 500 is not as diversified as most people think. And the risk is not as low as most people think.
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And what’s the basis for your opinion? 500 stocks is pretty darned diverse, and I’m pretty sure most financial advisors who know what diversity is would strongly disagree with you. I don’t know how many sectors are involved, but I’d imagine there are a lot. But if that isn’t diverse enough for you, there is the S&P 1000. Then there are index funds for foreign markets. I know I’m invested in those, because a diverse portfolio should not be all US centric. There are index funds for Asia, which are going gangbusters, but the general consensus is those carry more risk.
Do you know how most people think about the risk of an S&P 500 fund? I sure don’t. But by definition they certainly carry less risk than the S&P 100. Their beta values show this to be true. Risk means different thing to different investors. Older people are more risk adverse (or they should be) because they are nearing retirement, while a younger person can afford to be more aggressive. This is why financial advisors steer their older clients to a portfolio with safer securities like bonds and fixed income investments. But this safety comes at a price; they don’t perform nearly as well. But hopefully by the time they reach retirement they can afford to be more conservative.
This seems to be core of the debate. Please carefully define what you mean by investing vs speculating so we can tell which is which.
The previous thread tried to draw a distinction between positive expected return games (investing) vs negative ones (gambling). I’m not saying I have a strong view on that definition, but not knowing anything specific about a company you would expect that their stock has a positive expected return (or else why would anyone buy it? Presumably if no one thought it would go up from that price, there would only be sellers and the price would fall to one where there were risky but positive prospects).
@xerty is correct that there are some who do manage to beat the S&P, and those are some quantitative traders. But for every Renaissance Technology there are hundreds that fail. Just pick the ones that don’t fail, right? Oh wait, you can’t. The successful ones are never open to new investors because they don’t want to share. The unproven ones will gladly take your money. Good luck with that.
Picking good managers before they have a proven record and too much money has worked for me. Of course you have to know a lot about trading to tell the good ones from the poor ones, and all of them say they’re good and want your money. It’s the same problem as picking a good financial advisor - if you know enough to tell a good one from a slick annuity salesman, you can do it yourself and don’t need one; if you can’t, you’re very likely to fall for the much more numerous and less capable salesman advisor. Incidentally, I have done better with my own trading than having others do it, so again if you want it done right, you’re usually better off doing it yourself (and saving on fees too).
As an off-topic aside, quantitative traders are the ones who take advantage of market inefficiencies by spotting them and then leveraging them. Go find one of them and give them your cash. RT takes a 5% asset cut (wow) and then the standard 20% rake. Or go start your own. Read up on the Black Scholes arbitrage methodology and write your own. Or buy some real estate next the the NYSE and install some high speed computers so you can start micro trading. There are people spending billions (and investing billions) into technology so they can get a surefire return. Get in on it by picking the right group. Or be a sport and continue to invest the way you have been. Every trade you make helps put a few of your dollars into their pockets because they are more efficient than you.
A few comments. Renaissance charged 5 & 44%, not 5 & 20% back when they had outside investors. As for collocated computer space, you can rent it from Nasdaq or NYSE, but the data centers are not in NYC next to the exchange building, but off in Mahwah or Carteret . Don’t forget your microwave cross connects and your custom hardware chips for trading - going to the software layer is way too slow for real speed trades.
So I’m a novice with risk assessment and diversification analysis. However, the number of companies isn’t necessarily indicative of diversification. Sure, you’re diversifying against individual company risk. However, if you actually look at the makeup of the S&P 500, because it’s weighted by market cap, something like 3-4 companies make up 10% of it, and maybe ~25 companies make up 30% of it. So you’re not really diversified to smaller companies. Not to mention the fact that you’re leaving the <5B (except for legacy) companies out of your investment strategy. I’m not saying there’s no diversification, but people think the more companies involved, the more its diversified. Which again is true in terms of diversifying against company risk, but the number of companies doesn’t touch other risks.
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Lol, you quoted from the point after the question I asked and stated something that is not an answer to the question. So, how do you know that BRK.x will under-perform the S&P 500?
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[quote="Full_Disclosure, post:67, topic:1725,
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In my opinion, from what I’ve read, the strongest argument for the index is that people don’t have time to monitor their investments, they don’t understand the market, and they don’t want to have to actively manage their accounts. Those people are happy with a relatively steady x% return. From what I’ve read I think the diversification aspect is played up too much and risk is played down too much, but I definitely understand the argument that it’s just not worth it to actively manage a portfolio.
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Agree completely
44% ?!?!? LOLOLOLOL. A sure thing is surely going to cost you.
Regarding doing it yourself: That’s the Bogleheads mantra. And they are right, you can develop your own low cost index fund portfolio and do it about as well as a Vanguard robo-adviser. Takes a lot of work though. A younger investor would do well to put this work in, even though the management fees they are paying are very low. But by the time they hit their mid 30s they can be saving a lot of dough. It definitely adds up over time, not to mention the compounding you get on those returns. Personally, I don’t have the patience to learn. And I spent years with the same portfolio because I never got off my ass to learn how to do it. I finally bit the bullet and paid for the 1% manager for a couple of years, then switched to Vanguard .3% robo-adviser. I wish I did it years ago.
It was still making a pretty consistent 30-35% net of fees, so a good deal for sure. IIRC, most mutual funds are net positive , i.e. outperforming their benchmark, it’s just that’s before fees. So it’s not that these active managers suck (although some do or are unlucky, etc), it’s that they charge more than they’re worth. This is why DIY is attractive, or cheap indexing via fixed fee advisors, or the like.
Regarding doing it yourself: That’s the Bogleheads mantra. And they are right, you can develop your own low cost index fund portfolio and do it about as well as a Vanguard robo-adviser. Takes a lot of work though.
I’m surprised to hear you say that as an index fan. Picking a 3 fund index portfolio is super easy and low maintenance and costs you nothing aside from the 0.1% ER of the funds. I’m not sure why you’d pay triple that for a robo-advisor. If you aren’t sure how to set it up or what’s appropriate for your situation, you can always just post on Bogleheads and they’ll very patiently answer your questions and give you good suggestions.
Regarding the Buffett exception, it’s important to realize that in many (most?) cases he was far from a passive investor. Therefore he created a lot of the value through his negotiation and management skills. And the biggest component of this management skill was hiring or retaining excellent managers. As passive investors, we have little ability to influence a company like Buffett can.
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Because I have more complicated situation than most. Between my wife and me I think we have 6 different accounts. Taxable joint, taxable individual, IRA rollovers, Roth IRAs, SEP IRA, etc. Those taxable accounts require us to be cognizant of taxable events because of our income which varies year to year. I don’t want surprises come April 15 and have to sell a position in our taxable account which will trigger another taxable event for the next year. Suffice it to say, it’s somewhat complicated for someone who doesn’t want to spend the time. And an advantage of using a management service is that tax harvesting is included. They are aware of not only our retirement goals, but our desire for predictability and to minimize our overall taxes.
Our first FA strongly advised us to use a CPA for our taxes. We tried two different ones, the first guy couldn’t even remember our names! The second guy wanted us to fill out paperwork. I’m not paying you $500 or more a year so that I can have the privillege of making your data entry easier. I ended up just going back to TurboTax which does the job just fine.
Speaking of FAs, my folks got one of those free dinners if you listen to a FA’s spiel. It was a so-so dinner, and they guys “system” was the typical rebalance portfolio setup. When we made the decision that we wanted an FA, we went into interview this guy. Then they bait and switched us and gave us his junior partner. My wife found a list of questions you should ask an FA. One of them was “Why did you get into this line of work?” And he put his head back, his eyes looked to the sky and he said “It’s lucrative.” Honest answer I suppose, but he definitely gave me the impression he was more concerend about his benefit over trying to make our portfolio successful. A Freakanomics situation if there ever was one. We ended up going to Rick Edelman, who I’ve been listening to his show for years. He’s a straight shooter and put together a nice firm. His advisors understand their business will be successful by putting their clients needs first. What sealed the deal for me was that he treated his employees well. I’m a strong believer in that stuff rolls down hill. Take care of your employees and they will take care of their customers. They told me a story where he saw a guy using three monitors, and he asked him why three was better than two. He liked the answer so much that the next week everyone got a three monitor setup.
I left Edelman for two reasons. I wasn’t happy with their online system. It was hard to get a quick view of your performance like you could at Vanguard. After two years of complaining about this they still never fixed it to my liking. But mainly we left because robo-advising started to really take off, and I couldn’t justify that extra .7% that I would be paying a full service advisor. I’m pretty happy with Vanguard. I wouldn’t recommend it for everyone, especially if you can do it yourself. But I would totally recommend it to anyone paying 1%. My friend has one of those, and this guy hooks him up with sports tickets every now and then, but I point out he could be buying courtside tickets with his savings if he went robo. Meanwhile he sees his advisor pointing on social media all the places he’s going golfing, and I point out that he’s a real nice guy paying for his FA’s trips.
Yes the S&P 500 does not include small companies. S&P 500 doesn’t cover everything. But it does pretty well cover the US stock market.
You could instead choose something like the Vanguard total stock market fund which is a index that models the entire stock market.
But now compare the performance of the S&P 500 and the Vanguard total market fund. Its almost identical over long periods of time.
I bet you could probably pick 500 random companies in the US and get a nearly the performance of the entire market. 500 companies is a lot of companies. Its going to cover most everything.
I really don’t know what kind of diversification you might be really missing out on if you’re buying the S&P500. (we are talking specifically about investing in stocks here of course)