S&P 500's Dirty Little Secret (Joshua Kennon)

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S&P 500's Dirty Little Secret (Joshua Kennon)

Post by dualstow » Mon Apr 13, 2015 8:40 am

Three Examples of How the S&P 500 Index Methodology Has Been Quietly, But Substantially, Changed Over the Past 13 Years
http://www.joshuakennon.com/sp-500s-dir ... le-secret/

I don't mind continuing to hold the S&P 500 after learning this, but maybe the total market is better.
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Re: S&P 500’s Dirty Little Secret (Joshua Kennon)

Post by Ad Orientem » Mon Apr 13, 2015 1:51 pm

Thanks for posting. That was illuminating in an unpleasant sort of way.
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Re: S&P 500’s Dirty Little Secret (Joshua Kennon)

Post by dualstow » Mon Apr 13, 2015 2:21 pm

I don't think it's actionable but it's always good to know what's under the hood. There are a few threads about float weighting at Bogleheads, but none of them really took off. Quietly swept under the rug, in a Dead Sea Scrolls sort of way.
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Re: S&P 500’s Dirty Little Secret (Joshua Kennon)

Post by sophie » Tue Apr 14, 2015 9:19 pm

Thanks dualstow!  I wonder about whether there is a piece of advice in here worth considering:
In nearly every case, under nearly every valuation scenario, when you stretch the performance period out to 25 years or more, a basket of a given index bought and held on the date it was acquired, with absolutely zero subsequent changes, ended up outperforming the index itself.  Activity is frequently the  mortal enemy of good returns.
Buying 500 individual stocks is not a realistic option for most of us, but one possibility is to split the stock portion between a total stock market index fund and a collection of individually held stocks chosen from the index.  Harry Browne advised holding 20 stocks because he considered that to be enough risk mitigation.
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Re: S&P 500’s Dirty Little Secret (Joshua Kennon)

Post by lordmetroid » Wed Apr 15, 2015 3:20 am

Shouldn't a Dow Jones Index fond be sufficient.
As I am living in Sweden I am using a index fond that tracks the OMXS30 (30 largest swedish stocks).
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Re: S&P 500’s Dirty Little Secret (Joshua Kennon)

Post by dualstow » Wed Apr 15, 2015 7:58 am

sophie: Before Bogleheads, I started out with John Slatter's 100 Best Stocks for 2002 book (or whichever year) and stuck with that series for a while. I've always had about sixty individual stocks, but while the 100 Best series was quite diversified, I always ended up with too many consumer staples due to exposure/familiarity bias. 

Since even Kennon is still pro-indexing, I like to think of my index funds as a completely balanced meal like an astronaut might take with him. As long as the index funds are what I continue to add to, I can keep my individual stocks, which are figuratively the burgers and doughnuts of my holdings (and which literally included McDonald's and Dunkin) and rationalize violating the rule about having too many strategies.

For the purposes of the pp, it's far easier to hold an index fund and just sell down a specific $ amount when it's time to rebalance.

lordmetroid:
Shouldn't a Dow Jones Index fond be sufficient.
Different experts give different numbers. In 25 years, let us know how it works out.  :)
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Re: S&P 500’s Dirty Little Secret (Joshua Kennon)

Post by sophie » Wed Apr 15, 2015 9:57 am

Love the junk food analogy...

I was thinking about individual stocks as "deep stocks".  Sort of the equivalent of I bonds for the stock allocation. You'd keep at least 25-50% of the allocation in an index fund to make it easy to sell down for rebalancing, and put the rest into individual stocks.  I already do something similar with bonds:  I keep some TLT for easy buying/selling, but most of my bond allocation is in individual Treasuries.

This thread is timely because I've been wondering about buying individual stocks the next time I contribute to the stock allocation.  I could put low dividend payers in taxable and high dividend payers in the Roth IRA.  The expense ratio would be even lower than the ETFs, since I'd be holding them for many years, ideally.
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Re: S&P 500’s Dirty Little Secret (Joshua Kennon)

Post by dualstow » Wed Apr 15, 2015 10:26 am

Deep stocks, nice.  :) If you've already got a pure index, though, why mess with the simplicity? I only did it because I was barely out of my twenties and didn't know any better. If I were just starting now, I'd probably follow Kennon's advice to keep dollar cost averaging into index funds. Actually, that's what I'm doing, but I can't resist a stock once in a blue moon.
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Re: S&P 500’s Dirty Little Secret (Joshua Kennon)

Post by sophie » Wed Apr 15, 2015 10:30 am

dualstow wrote: Deep stocks, nice.  :) If you've already got a pure index, though, why mess with the simplicity? I only did it because I was barely out of my twenties and didn't know any better. If I were just starting now, I'd probably follow Kennon's advice to keep dollar cost averaging into index funds. Actually, that's what I'm doing, but I can't resist a stock once in a blue moon.
Because.

Seriously, it's mainly to remove one layer of ownership and optimize taxes + expense.  Although, it just occurred to me that I'd have to be very careful to pick stocks that wouldn't constitute a "conflict of interest" under the sunshine act.  So no pharmaceuticals or medical device companies, at the very least.  How annoying.
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Re: S&P 500’s Dirty Little Secret (Joshua Kennon)

Post by dualstow » Wed Apr 15, 2015 10:32 am

Well be sure to let us all know what you would've bought if you weren't concerned about running afoul of Sunshine.
Wink wink.

Removing a layer of ownership: I assume, though, that you'll still use a brokerage house. I do miss the days when all layers were removed, i.e. when I held paper certificates. But it's all more convenient now, and with low fees. We're living in good times.
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Re: S&P 500’s Dirty Little Secret (Joshua Kennon)

Post by Kbg » Tue Apr 21, 2015 8:26 pm

ETF Symbol: RSP
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Re: S&P 500’s Dirty Little Secret (Joshua Kennon)

Post by dualstow » Tue Apr 21, 2015 8:52 pm

Kbg wrote: ETF Symbol: RSP
Nice!
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Re: S&P 500’s Dirty Little Secret (Joshua Kennon)

Post by Kbg » Tue Apr 21, 2015 9:21 pm

dualstow wrote:
Kbg wrote: ETF Symbol: RSP
Nice!
I personally think this one is a no-brainer. I HIGHLY recommend you compare RSP with other large cap ETFs on Morningstar. I think you will be pleasantly surprised. However, the reality is RSP is more akin to a largish mid cap fund than a by the book large cap. Beta is higher than the S&P500 TR but RSP also actually generates real alpha.
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Re: S&P 500’s Dirty Little Secret (Joshua Kennon)

Post by Ad Orientem » Tue Apr 21, 2015 9:36 pm

Kbg wrote: ETF Symbol: RSP
Interesting though I think the ER is a little on the steep side for an ETF.
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Re: S&P 500’s Dirty Little Secret (Joshua Kennon)

Post by D1984 » Wed Apr 22, 2015 12:00 am

Kbg wrote:
dualstow wrote:
Kbg wrote: ETF Symbol: RSP
Nice!
I personally think this one is a no-brainer. I HIGHLY recommend you compare RSP with other large cap ETFs on Morningstar. I think you will be pleasantly surprised. However, the reality is RSP is more akin to a largish mid cap fund than a by the book large cap. Beta is higher than the S&P500 TR but RSP also actually generates real alpha.
Just curious...how does it compare against a revenue-weighted S&P 500 fund? We have results for RWL from 2008 on and results for the underlying index for it from 1979 on...do you know of any equally weighted S&P 500 funds that predate both the Invesco Equal Weighted S&P 500 Fund (open ended mutual fund; started in late 1980s and thus predates RSP by over a decade; to get a fair comparison one would have to use RSp expense ratio since the abovementioned Invesco fund mentioned had a horribly high expense ratio during its early years)....I know CRSP has an equal weight index dating back to 1926 but they charge for it....I could've swore I saw an annual returns chart for equal weight S&P back to 1970 on the Motley Fool Mechanical Investing boards a while back.
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Re: S&P 500’s Dirty Little Secret (Joshua Kennon)

Post by ILoveMoney » Fri Apr 24, 2015 10:14 pm

sophie wrote: Thanks dualstow!  I wonder about whether there is a piece of advice in here worth considering:
In nearly every case, under nearly every valuation scenario, when you stretch the performance period out to 25 years or more, a basket of a given index bought and held on the date it was acquired, with absolutely zero subsequent changes, ended up outperforming the index itself.  Activity is frequently the  mortal enemy of good returns.
Buying 500 individual stocks is not a realistic option for most of us, but one possibility is to split the stock portion between a total stock market index fund and a collection of individually held stocks chosen from the index.  Harry Browne advised holding 20 stocks because he considered that to be enough risk mitigation.
I was listening  to a random walk down wall street. They mentioned that 50 stocks provided good diversification. If you hold 50 stocks in one single industry that benefit is instantly reduced with (at least) 60%.
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Re: S&P 500’s Dirty Little Secret (Joshua Kennon)

Post by Kbg » Fri May 01, 2015 9:31 am

D1984 wrote:
Kbg wrote:
dualstow wrote: Nice!
I personally think this one is a no-brainer. I HIGHLY recommend you compare RSP with other large cap ETFs on Morningstar. I think you will be pleasantly surprised. However, the reality is RSP is more akin to a largish mid cap fund than a by the book large cap. Beta is higher than the S&P500 TR but RSP also actually generates real alpha.
Just curious...how does it compare against a revenue-weighted S&P 500 fund? We have results for RWL from 2008 on and results for the underlying index for it from 1979 on...do you know of any equally weighted S&P 500 funds that predate both the Invesco Equal Weighted S&P 500 Fund (open ended mutual fund; started in late 1980s and thus predates RSP by over a decade; to get a fair comparison one would have to use RSp expense ratio since the abovementioned Invesco fund mentioned had a horribly high expense ratio during its early years)....I know CRSP has an equal weight index dating back to 1926 but they charge for it....I could've swore I saw an annual returns chart for equal weight S&P back to 1970 on the Motley Fool Mechanical Investing boards a while back.
I always enjoy posts from these guys. Their blog is definitely worth a read. (Alpha Architect's)

http://seekingalpha.com/article/3118616 ... etfs?ifp=0
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Re: S&P 500’s Dirty Little Secret (Joshua Kennon)

Post by MachineGhost » Fri May 15, 2015 9:41 pm

Kbg wrote: I personally think this one is a no-brainer. I HIGHLY recommend you compare RSP with other large cap ETFs on Morningstar. I think you will be pleasantly surprised. However, the reality is RSP is more akin to a largish mid cap fund than a by the book large cap. Beta is higher than the S&P500 TR but RSP also actually generates real alpha.
RSP is small cap/value exposure.  Read my thread on equalizing the market cap exposure of the PP.  It only takes three or four free ETF's at Schwab.

As to the article:

The original S&P had nothing to do with the "biggest, most important market capitalization-weighted firms".  It wasn't even large cap.

Float-adjusted is actually a benefit.  You want to be buying more shares as they go down in price to help offset the market cap overweighting (buying more shares as they go up in price) which drags down portfolio returns.

I'm scratching my head at the exclusion of foreign and inclusion of mortgage REITs.  But keep in mind that the S&P 500 is run by a Politiburo at S&P -- it is not a quantitative selection process.  Additions and deletions are subjective and biased.  The Dow is even worse.
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Re: S&P 500’s Dirty Little Secret (Joshua Kennon)

Post by Kbg » Mon May 18, 2015 11:54 pm

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