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The hazards of index funds
Posted: Wed Jun 27, 2018 7:16 am
by sophie
Very interesting article on the effect of passive indexing on the markets! I had been wondering about some of this myself which is why I decided to start collecting individual stocks for the "deep" 1/3 of my stock allocation.
On the other hand, there's nothing here to say that overall performance of indexes will suffer over time, just that it might be a lot bumpier ride than you might otherwise expect: outperformance when the overall market is doing well, and underperformance when it's not.
The most well-known indexes are weighted based on the size -- i.e., the market capitalization -- of the companies within. That includes the most commonly tracked index, the S&P 500, which is essentially a collection of the 500 largest publicly traded U.S. companies as measured by market cap (some exceptions apply). The largest companies, then, receive the most investment when money flows into passive investments.
That money acts like water on the pumpkin patch. Every time money flows from active to passive management, it's as though water is flowing to the biggest pumpkins (i.e., holdings) by virtue of their size. And then, as a consequence of the new money, the big get bigger.
If this sounds peculiar, or even illogical, that's because it is. But it's how passive indexing works...
https://www.fool.com/investing/2018/06/ ... ubble.aspx
Re: The hazards of index funds
Posted: Wed Jun 27, 2018 8:49 am
by Xan
I've taken to doing Total Stock Market funds. I've also been wondering about weightings other than market cap, but funds like that seem to have much higher expenses.
Re: The hazards of index funds
Posted: Wed Jun 27, 2018 10:03 am
by ochotona
I have been looking at Research Affiliates Fundamental Index (RAFI) weighted funds, which are at Schwab as house brand ETFs using the "FN" as the first two letters of the symbol... but they don't seem to outperform. Maybe something to try in the next stock market cycle. Another one to monitor is RSP, the equal-weight S&P500 ETF.
I think right now everyone is just piling into the Big Names in the stock market, of course much of which is due to cap-weighted indexing itself, but this may end in tears someday. In the aftermath, the fundamental factors tracked by the RAFI ETFs may be more effective. They should be more effective, but for now they are being drowned out by stupid.
Re: The hazards of index funds
Posted: Wed Jun 27, 2018 1:42 pm
by ochotona
Value has done poorly in recent years, meaning it could do well in the future.
Re: The hazards of index funds
Posted: Wed Jun 27, 2018 4:04 pm
by Dieter
Xan wrote: ↑Wed Jun 27, 2018 8:49 am
I've taken to doing Total Stock Market funds. I've also been wondering about weightings other than market cap, but funds like that seem to have much higher expenses.
One thing to like about GB with it's SCV tilt.
Of course, SCG has done better recently. Could just add Small or mid index in place of SCV -- any diversifies away from huge growth stocks......
Re: The hazards of index funds
Posted: Thu Jun 28, 2018 1:05 am
by boglerdude
https://www.bogleheads.org/forum/viewtopic.php?t=252434
A problem with "everyone indexing" might be panic. I dont know what companies I own. Stock pickers who research fundamentals might be less likely to panic sell compared to Joe six-pack. Or, maybe not...traders gotta trade.
Re: The hazards of index funds
Posted: Sat Sep 01, 2018 7:39 am
by ochotona
I am moving my 401(k) to the actively managed PRIMECAP Odyssey Aggressive Growth fund. I noticed it has outperformed the S&P500 but the drawdown in last recession was less than the S&P500. Nice combo! Someone was steering it.
Re: The hazards of index funds
Posted: Sat Sep 01, 2018 9:20 am
by ochotona
Yup. PPNGOFP! I just want to di-worse-ify my equities away from SP500
Re: The hazards of index funds
Posted: Sat Sep 01, 2018 10:32 am
by Tyler
If you're interested in factors and looking to diversify away from the capitalization-based market as a whole, I'd recommend reading
this book by Larry Swedroe. It will help you understand each of the major factors, how they work, and just how dependable they are so you're not swinging in the dark at whatever sounds compelling at the time.
Re: The hazards of index funds
Posted: Mon Sep 03, 2018 2:49 pm
by dualstow
Xan wrote: ↑Wed Jun 27, 2018 8:49 am
I've taken to doing Total Stock Market funds. I've also been wondering about weightings other than market cap, but funds like that seem to have much higher expenses.
+1 on Total Market.
I started doing that late considering I’ve been preaching it forever, but my Tot Mkt is finally starting to catch up with my midcap, smallcap, and s & p.
I feel very comfortable with VTSAX. No churn or unnecessary distributions. If it crashes it’s a sale, not a falling knife.
Re: The hazards of index funds
Posted: Mon Sep 03, 2018 5:57 pm
by ochotona
dualstow wrote: ↑Mon Sep 03, 2018 2:49 pm
Xan wrote: ↑Wed Jun 27, 2018 8:49 am
I've taken to doing Total Stock Market funds. I've also been wondering about weightings other than market cap, but funds like that seem to have much higher expenses.
+1 on Total Market.
I started doing that late considering I’ve been preaching it forever, but my Tot Mkt is finally starting to catch up with my midcap, smallcap, and s & p.
I feel very comfortable with VTSAX. No churn or unnecessary distributions. If it crashes it’s a sale, not a falling knife.
VTSAX is 0.93% microcap, 5.54% small cap, 17.61% mid cap, 75.92% large and giant cap.
If I turn my Roth IRA into a small cap account, my 401(k) into a mid cap account, and leave Traditional IRAs alone, then I arrive approximately at VTSAX. The problem is balkanization across different plans, and not all of them offer small and mid cap offerings... someday everything will be in one place, and much simpler to manage.
Re: The hazards of index funds
Posted: Mon Sep 03, 2018 8:35 pm
by dualstow
Do they all offer VTSAX?
ochotona wrote: ↑Mon Sep 03, 2018 5:57 pm
VTSAX is 0.93% microcap, 5.54% small cap, 17.61% mid cap, 75.92% large and giant cap.
If I turn my Roth IRA into a small cap account...
Re: The hazards of index funds
Posted: Tue Sep 04, 2018 2:13 am
by ochotona
dualstow wrote: ↑Mon Sep 03, 2018 8:35 pm
Do they all offer VTSAX?
ochotona wrote: ↑Mon Sep 03, 2018 5:57 pm
VTSAX is 0.93% microcap, 5.54% small cap, 17.61% mid cap, 75.92% large and giant cap.
If I turn my Roth IRA into a small cap account...
Not at all. The 401k is the problem. I have to split things up