Buy and Hold Stock Millionaires

[vnatale]

Great stories, for sure.

But, for every one of those winners, there are probably at least 10 losers who bought stocks in companies that went bust. LIke, say, Enron. Or Eastman Kodak. Or Woolworths.

What would have happened to a person who bought the equivalent of an index fund instead of stock XYZ? They wouldn't have done as spectacularly, but they sure would have beat the pants off of 99% of typical investors.

https://www.wsj.com/articles/the-fund-t ... 1576854661

This fund actually beats the indexes by doing nothing for almost 100 years!

The article was from nearly three years ago. Anyone done any updated analysis to see if the headline still holds true?

[vnatale]

A Total stock market index fund seems to me the definition of doing nothing. I have become more and more a fan of total instead of any slice and dice stock funds.

I would disagree. Index funds are active funds as they add stocks when the corresponding index adds them and then they sell stocks with they are removed from the index. The index itself is an actively managed group of stocks. That is different than buying a group of stocks, evenly weighting them and then not touching them for 100 years which is what the fund in the article did.

You are correct that index funds are not doing nothing. However, they are definitely not active but are passive. They are only doing something which keeps the fund following the index it's designed to follow. An active fund is one wherein the fund manager uses discretion to make purchases and sales.

[jalanlong]

A Total stock market index fund seems to me the definition of doing nothing. I have become more and more a fan of total instead of any slice and dice stock funds.

I would disagree. Index funds are active funds as they add stocks when the corresponding index adds them and then they sell stocks with they are removed from the index. The index itself is an actively managed group of stocks. That is different than buying a group of stocks, evenly weighting them and then not touching them for 100 years which is what the fund in the article did.

You are correct that index funds are not doing nothing. However, they are definitely not active but are passive. They are only doing something which keeps the fund following the index it's designed to follow. An active fund is one wherein the fund manager uses discretion to make purchases and sales.

I think we are picking nits here. The indexes are making additions and subtractions based on their criteria such as size, profitability, liquidity, float etc. As we saw with their bond ratings in 2008, S&P is certainly not flawless in their analyses. In any case, whether it is the index or the fund, it is nonetheless stock picking using screening criteria. So there is a myth to the passive investing name somewhat.

[jalanlong]

Great stories, for sure.

But, for every one of those winners, there are probably at least 10 losers who bought stocks in companies that went bust. LIke, say, Enron. Or Eastman Kodak. Or Woolworths.

What would have happened to a person who bought the equivalent of an index fund instead of stock XYZ? They wouldn't have done as spectacularly, but they sure would have beat the pants off of 99% of typical investors.

https://www.wsj.com/articles/the-fund-t ... 1576854661

This fund actually beats the indexes by doing nothing for almost 100 years!

The article was from nearly three years ago. Anyone done any updated analysis to see if the headline still holds true?

The S&P has slightly outperformed the fund since 2019. Although this year the fund is flat and the index is down 16%. Going back to 1970 (the time period the article quotes) the fund has still outperformed the index by slightly less than 1% a year.

[Xan]

A Total stock market index fund seems to me the definition of doing nothing. I have become more and more a fan of total instead of any slice and dice stock funds.

I would disagree. Index funds are active funds as they add stocks when the corresponding index adds them and then they sell stocks with they are removed from the index. The index itself is an actively managed group of stocks. That is different than buying a group of stocks, evenly weighting them and then not touching them for 100 years which is what the fund in the article did.

You are correct that index funds are not doing nothing. However, they are definitely not active but are passive. They are only doing something which keeps the fund following the index it's designed to follow. An active fund is one wherein the fund manager uses discretion to make purchases and sales.

I think we are picking nits here. The indexes are making additions and subtractions based on their criteria such as size, profitability, liquidity, float etc. As we saw with their bond ratings in 2008, S&P is certainly not flawless in their analyses. In any case, whether it is the index or the fund, it is nonetheless stock picking using screening criteria. So there is a myth to the passive investing name somewhat.

whatchamacallit specifically said a total stock market index fund. Does that not remove most if not all of these concerns?

[jalanlong]

A Total stock market index fund seems to me the definition of doing nothing. I have become more and more a fan of total instead of any slice and dice stock funds.

I would disagree. Index funds are active funds as they add stocks when the corresponding index adds them and then they sell stocks with they are removed from the index. The index itself is an actively managed group of stocks. That is different than buying a group of stocks, evenly weighting them and then not touching them for 100 years which is what the fund in the article did.

You are correct that index funds are not doing nothing. However, they are definitely not active but are passive. They are only doing something which keeps the fund following the index it's designed to follow. An active fund is one wherein the fund manager uses discretion to make purchases and sales.

I think we are picking nits here. The indexes are making additions and subtractions based on their criteria such as size, profitability, liquidity, float etc. As we saw with their bond ratings in 2008, S&P is certainly not flawless in their analyses. In any case, whether it is the index or the fund, it is nonetheless stock picking using screening criteria. So there is a myth to the passive investing name somewhat.

whatchamacallit specifically said a total stock market index fund. Does that not remove most if not all of these concerns?

It depends on which index is being used. Even the SPDR Total Market Index uses S&P as their index provider and they have profitability screens. Russell and CRSP don't have profitability screens although they still have volume, float and market seasoning screens. But that is probably about as close as you can get to a buy and hold forever portfolio. Although they seek to mimic the entire market so they will make changes accordingly. The Voya fund in the article bought 30 stocks almost 100 years ago and has done absolutely nothing since. So I would still give the advantage to that fund for passive investing after the original stocks were purchased. But given the fact that they do nothing, the .50% expense ratio they charge is ridiculous. Which goes back to the original post about just buying and holding a portfolio forever yourself. No expenses, no turnover etc.

[whatchamacallit]

I can see what you are saying with trying to mimic the whole market requiring a change.

If a new company goes public and is added to the index then there would be no other option but to sell at least a little bit of the smaller sized companies to make room for the new company.

It would seem this would be quite minuscule but would dilute your holdings of the companies you had originally purchased in the index.

I also think this feature of the index lowers your risk more than the potential gains from holding only the original stocks would be worth.

[jalanlong]

http://web.archive.org/web/200602162234 ... s/0429.pdf

This study is 20 years old but interesting nonetheless. Conclusion was that buying the original S&P 500 stocks and holding them with no changes led to a much better outcome than following all of the changes the index made thru the years.

https://jwm.pm-research.com/content/10/4/64

Similar study here shows holding the stocks the DOW removes is actually better than going along with the changes it makes.

[seajay]

Great stories, for sure.

But, for every one of those winners, there are probably at least 10 losers who bought stocks in companies that went bust. LIke, say, Enron. Or Eastman Kodak. Or Woolworths.

What would have happened to a person who bought the equivalent of an index fund instead of stock XYZ? They wouldn't have done as spectacularly, but they sure would have beat the pants off of 99% of typical investors.

https://www.wsj.com/articles/the-fund-t ... 1576854661

This fund actually beats the indexes by doing nothing for almost 100 years!

The article was from nearly three years ago. Anyone done any updated analysis to see if the headline still holds true?

The S&P has slightly outperformed the fund since 2019. Although this year the fund is flat and the index is down 16%. Going back to 1970 (the time period the article quotes) the fund has still outperformed the index by slightly less than 1% a year.

PV for LEXCX

Recently around 80% of its weighting is in 5 stocks, with UNP being the largest at over a third of the total portfolio

UNP Union Pacific Corp 36.77%
BRK/B Berkshire Hathaway Inc Class B 13.55%
XOM Exxon Mobil Corp 11.74%
MPC Marathon Petroleum Corp 9.85%
Linde PLC 9.03%

When indexes rebalance/change they are potentially reducing out of the best holdings to add to others, not rebalancing to end up with a high weighting in the stock(s) that did best can yield satisfactory results, but does entail higher concentration risk. If UNP faltered/failed for instance then that would be a -36% hit for LEXCX, but maybe less than a few percent hit for the broader stock index.

But buying a bunch of diverse stocks in around equal initial measure, and leaving that as-is, does tend to work out OK, IF you don't mind the heavier exposure in a few stocks that tends to lead to. In past times market makers might have applied 10% spreads and brokers fees were much higher in real terms than nowadays, so many investors followed that buy a bunch of stocks and leave-as-is approach, simply for cost reasons.