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A Professor Who Was Right About Index Funds All Along

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Re: A Professor Who Was Right About Index Funds All Along

#131

Post by bjterry »

hiou wrote: post #123

Index fund tracking has become successful because one of the goals of US Government policy is to maintain that things like the S&P 500 continue to go up over time. If they go down people get voted out of office. So the index funds have the full force of the US Government watching over them. This is why economics is not just some math puzzle but often more about politics and sociology.

The goals of the Federal Reserve are "maximum employment, stable prices, and moderate long-term interest rates." The real goal, though, is economic growth, and we just happen to believe that those intermediate goals are good at serving long-term economic growth.

The prices of stocks are one of the most forward-looking macroeconomic measures that we have available to us. The better we get at improving long-term economic growth, the higher stock prices will go, other things being equal. So basically, if you have good policy, stock prices should always go up (in real terms). If the Federal Reserve were perfect at preventing recessions and everyone knew it, stock prices would be higher.

While you would probably not want to make stock index growth the target of monetary policy because of Goodhart's Law, it is very reasonable to take it into account as a part of a forecast of how well your policy is working.

Re: A Professor Who Was Right About Index Funds All Along

#132

Post by Animats »

It would be interesting to have a fund which was mostly an index fund, but avoided "losers" based on simple criteria. Picking overpriced losers is easier than picking winners. (I did that for the first dot-com boom, at "downside.com".) That's a concept worth testing against historical data.

Re: A Professor Who Was Right About Index Funds All Along

#133

Post by jonknee »

grondilu wrote: post #32
ikeboy wrote: post #24

Earlier quoted context omitted.

But then it's not a one time-fee. More generally, your strategy only works if you're investing a large amount every time, it doesn't scale down. You can't put 10k into 5000 stocks, and even 500 stocks would be difficult.

> But then it's not a one time-fee. I meant one time per line, not per portfolio. > it doesn't scale down. It scales down just fine if you're willing to accept that you're going to pay a lot in broker fees, with the only consolation that you'll pay them only once per line in your portfolio. If you have say 500 stocks and pay like $10 in broker fees per stock, in the end you'll pay $5000. That's not the end of the wor…

> If you have say 500 stocks and pay like $10 in broker fees per stock, in the end you'll pay $5000. That's not the end of the world for a long term investment.

If you only buy each stock one time. Which is absurd if you want a balanced portfolio you would need to buy a little bit of all 500 stocks a lot of times. A ETF lets you do this cheaply.

Re: A Professor Who Was Right About Index Funds All Along

#134

Post by Godel_unicode »

hilop wrote: post #88
paulpauper wrote: post #62

Earlier quoted context omitted.

but that won't happen because companies will still have to disclose financials, and companies with poor fundamentals will be shorted by arbitragers. The pricing mechanism can never go away completely

Sure for companies that are headed to bankruptcy. But what about companies that are overpriced and cover expenses but never pay a dividend?

There are indexes of dividend-paying stocks. If the market decides dividends are important, companies which pay them will do better.

Re: A Professor Who Was Right About Index Funds All Along

#135

Post by tommynicholas »

jbuzbee wrote: post #23

I'm a big believer in index funds and have been putting my money into them for a long time. But... you have to wonder where this is all ending up as more and more people move to passive index funds. The power of the market is based on millions of individual opinions on the price of a company's stock. On average, over time, these collective opinions will be correct. But say in the extreme case, it got to the point whe…

Agreed - it's what the average investor should do. Even if it's really hard to beat Index Funds consistently, there are two factors that will make active trading always important:

1. Some people will beat the market, and regardless, someone has to try or there's a massive opportunity left on the table.

2. Indexing actually has more of a certain type of risk than passive investing, because if you take a huge loss for some period of time, you can't hedge it and cut the short term loss. You have to just hold. Active investing can be really valuable for folks as they enter phases of their life where big losses are unacceptable and they're willing to forgo some of the upside.

Re: A Professor Who Was Right About Index Funds All Along

#136

Post by auntienomen »

ves wrote: post #39
n72 wrote: post #16

Earlier quoted context omitted.

Point is, could you have identified Renaissance Technologies in 1994 as one of the few companies to beat the market? If not, then your odds are better going with an index fund. At this point, because of Renaissance Technologies' success, their fees will likely offset the gains they'll net you.

They still make you tons of money net of fees. However, because of their success, they very quickly attracted all the money they thought they could handle and closed the fund to new investors. I think recently their performance slipped a bit and they started taking money again, but the above point was true for a long time.

There's a subtlety here:

Renaissance is a company which manages hedge funds. They're famous because their main fund, Medallion, has done exceptionally well. The only investors in Medallion are Renaissance employees; it's capacity is limited, so that even employees can't generally invest as much as they'd like. Renaissance also manages several other hedge funds, which have much higher capacity, and have both employee and outside investors.

Re: A Professor Who Was Right About Index Funds All Along

#137

Post by devilsavocado »

Taek wrote: post #66
jbuzbee wrote: post #23

I'm a big believer in index funds and have been putting my money into them for a long time. But... you have to wonder where this is all ending up as more and more people move to passive index funds. The power of the market is based on millions of individual opinions on the price of a company's stock. On average, over time, these collective opinions will be correct. But say in the extreme case, it got to the point whe…

Well, you've always got insiders in the sense that most people know their own industry better than they know other industries. Passive funds are great when you want to diversify or lack knowledge. But for example I've got a ton of money in cryptocurrency right now, it's my field and I've got way better-than-average knowledge about some of the coins. This helps me make informed investments, and I've been able to beat…

Can you expand on how having better-than-average knowledge about some crypto currencies allows you to make money investing in them?

I doubt you mean that you actually have knowledge of when and how the price is going to change. Are you just betting on a general increase in value, or doing some form of pairs trading or arbitrage? How comfortable are you with rapid 30% price swings?

Re: A Professor Who Was Right About Index Funds All Along

#138

Post by aianus »

chuymax wrote: post #91
aianus wrote: post #49

Earlier quoted context omitted.

It would cost $2500 in fees for me to buy a single share of every stock in the S&P500. Compared with $0 + some negligible MER to buy an ETF with the same money.

If you want to buy every stock in the S&P500, any reason not to use Robin Hood with their $0 transaction fee?

It's not available in Canada.

Re: A Professor Who Was Right About Index Funds All Along

#139

Post by astrange »

n72 wrote: post #103
shostack wrote: post #102

Earlier quoted context omitted.

Do they offer anything over zero fee robos like Schwab? What about vanguard's robo offering?

I don't know for sure, but I'm pretty sure Schwab and Vanguard don't tax loss harvest.

Schwab does, but they achieve zero fees by keeping a lot of your portfolio in cash and keeping the interest on it for themselves.

Re: A Professor Who Was Right About Index Funds All Along

#140

Post by astrange »

n72 wrote: post #105
n72 wrote: post #100

Earlier quoted context omitted.

Really the only thing you have to do is rebalance. I do it every half year, but some people even do it every two years. And it takes all of, maybe, 20 minutes. Of course, you need to grasp the principles, which takes reading a book or two, so that's, say, 10 more hours. With compounding over the next forty of fifty years, saving those 25 basis points or whatever it is that betterment charges over Vanguard's fees is n…

Oh, and I tax loss harvest at the end of the year if any funds are down for the year by the end of December. Again, this is maybe 10 minutes per fund. 5 minutes for selling a fund, 5 minutes for buying a similar fund (and making sure I don't get into a wash sale situation.) So, that's at most, say, 20 minutes a year.

The end of the year isn't the best time to capture tax losses. And where do you go to get trades with fractional shares for less than 0.25% in trade fees?
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