Actual ways in which a large Index Fund / ETF could "blow up"

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ThisDinosaur
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Re: Actual ways in which a large Index Fund / ETF could "blow up"

Post by ThisDinosaur »

@brighteye Thanks for the link.

I shouldn't be surprised at this point that Jacob seems to be so damn right all the time. But I still have some fear about choosing individual securities instead of diversified funds. Epistemologically, I have know way of knowing which quadrant I'm in:
1) Those who know that they can beat the market.
2) Those who know that they can't beat the market.
3) Those who don't know yet that they can beat the market.
4) Those who don't know yet that they can't beat the market.
It was arguments from Index Fund Enthusiasts that convinced me to start managing my own money to begin with, instead of punting to "advisors." Since then, I've learned a lot, but I still see a lot more risk in owning 20 stocks than in owning damn near all of them. If you want to own income-producing assets, risk of ruin likelihood goes 1)personally held business, 2)handful of carefully picked securities 3)almost all publicly traded securities. I don't see any way around this.

IlliniDave
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Joined: Wed Apr 02, 2014 7:46 pm

Re: Actual ways in which a large Index Fund / ETF could "blow up"

Post by IlliniDave »

bryan wrote:
Fri Jun 23, 2017 3:34 am


Define market. VTSAX doesn't have much exposure to small business/startups (or other private companies) or international companies; except by way of inter-connectedness and second order effects etc..
Sigh. In the context of VTSAX (and SP500) market = US stock market. In the context of mutual funds it's the universe of shares in publicly-traded corporations in the US that have enough outstanding shares that they can readily be bought and sold**. For simplicity think NYSE+NASDAQ. It excludes anything that is not a stock in a corporation traded publicly in the US. So pork bellies and collectible autographed baseballs and private businesses and non-US stocks are not included in it.

It's good that you are thinking about things, challenging them, and asking questions. I would suggest doing a fair bit of reading, including a good dose of stuff that comes from a library or bookstore rather than the internet. It's pretty clear your understanding of index funds is a little jumbled (or perhaps mine is), and if we can't even use a term like "the market" in a conversation about index funds, the SP500, and VTSAX, without it leading to confusion, the conversation won't be productive.

Good luck.

**Some of the smaller microcap/nanocap stocks are avoided by most mutual funds because their liquidity is unsuitable. There are a few funds that specialize in them but the performance of the funds is generally regarded as not so good as or the most part fund returns significantly lag the performance of the stocks they hold.

IlliniDave
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Joined: Wed Apr 02, 2014 7:46 pm

Re: Actual ways in which a large Index Fund / ETF could "blow up"

Post by IlliniDave »

ThisDinosaur wrote:
Fri Jun 23, 2017 9:19 am
@brighteye Thanks for the link.

I shouldn't be surprised at this point that Jacob seems to be so damn right all the time. But I still have some fear about choosing individual securities instead of diversified funds. Epistemologically, I have know way of knowing which quadrant I'm in:
1) Those who know that they can beat the market.
2) Those who know that they can't beat the market.
3) Those who don't know yet that they can beat the market.
4) Those who don't know yet that they can't beat the market.
It was arguments from Index Fund Enthusiasts that convinced me to start managing my own money to begin with, instead of punting to "advisors." Since then, I've learned a lot, but I still see a lot more risk in owning 20 stocks than in owning damn near all of them. If you want to own income-producing assets, risk of ruin likelihood goes 1)personally held business, 2)handful of carefully picked securities 3)almost all publicly traded securities. I don't see any way around this.
I'm probably either in 2 or 3, but like you have no way of knowing, so just equaling the market seems a reasonable approach, as it will almost certainly land me in the top half of the class.

Someday I might put together a play portfolio of individual stocks just to test myself (current favored strategy is to equal weight a random selection out of the SP500), but for a guy less than 2 years from retirement who hopes to spend a good chunk of his future off-grid, putting it all in a self-managed portfolio of individual issues, especially if it involves a fancy derivative arrangement, doesn't make sense. "Beating the market" is unnecessary to me, and since it adds risk, possibly cost, takes up time, and doesn't fit my lifestyle, I've judged it not worthwhile for me. I'll just continue to ratchet down my relative exposure to stocks, continue oversaving (while I'm working), and hope I don't paddle out of the wilderness one day into a mid-Apocalypse world.

ThisDinosaur
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Joined: Fri Jul 17, 2015 9:31 am

Re: Actual ways in which a large Index Fund / ETF could "blow up"

Post by ThisDinosaur »

The only reason "beating the market" is worthwhile is if there is significant concern that returns of the market will be inadequate and/or negative.

bryan
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Re: Actual ways in which a large Index Fund / ETF could "blow up"

Post by bryan »

@IlliniDave I think you've misread me or I've done a poor job at representing what I am trying to say. Obviously an S&P 500 index fund can do a pretty good job of tracking the S&P 500 index. I don't agree with the definition of "the market" (as people use the term in the personal finance investing sense e.g. "just capture the market since most active managers can't beat it! Save fees!") as being the "CRSP US Total Market Index" or even the "FTSE Global All Cap Index"; I would like to be explicit, as necessary (and I think it is worthwhile in this case). I think Jacob and others and other threads and articles have made some points more clearly, even if it is off topic to OP. Anyway, I will go back to ceding the point, for this thread, that there exists some index fund that tracks what people really mean when they talk/assume things about market returns.

Index Investing is starting to feel like paying into social security for the last couple years.. but again that has nothing to do with tracking error.

IlliniDave
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Re: Actual ways in which a large Index Fund / ETF could "blow up"

Post by IlliniDave »

bryan wrote:
Fri Jun 23, 2017 4:10 pm
Index Investing is starting to feel like paying into social security for the last couple years.. but again that has nothing to do with tracking error.
At least there are a couple of notable exceptions: you are not obliged by law to invest in an index fund and if you do you can pull out anytime you want!

You are right, I have had a hard time determining what you are getting at. When it comes to stocks and stock markets, I only know the traditional vocabulary. There are certainly a lot of things a person can invest in outside of stocks, and unfortunately perhaps in investing there is not a literal supermarket that covers it all. The stock market is a specialty market.

IlliniDave
Posts: 3845
Joined: Wed Apr 02, 2014 7:46 pm

Re: Actual ways in which a large Index Fund / ETF could "blow up"

Post by IlliniDave »

ThisDinosaur wrote:
Fri Jun 23, 2017 3:31 pm
The only reason "beating the market" is worthwhile is if there is significant concern that returns of the market will be inadequate and/or negative.
Like you alluded to in a prior post, I think it often still boils down to weighing risk/reward. Beating the market would always be worthwhile. Attempting to beat the market would be worthwhile if the risks were sufficiently low.

If I thought the market was going to be negative over the remainder of my investing horizon I wouldn't participate. The most likely outcome for a random DIY investor (i.e., the hypothetical me) who tried to beat a multi-decade down market is the DIY investor losing more than the market. If the expectation were that market returns would be inadequate I'd look to earn the rest of the money I needed some other way for the same reason: I'd likely wind up with even more inadequate returns. In the 30ish years I've been involved in stock investing I've learned some sobering lessons, but perhaps those lessons suggest an incorrect conclusion.

In the "money where my mouth is" department, realistically I'm looking at about a 30-year investing horizon. Over that time I think stock returns will likely be lower than historical averages but non-negative (though there will almost certainly periods of negative return). So my strategy to navigate those expectations is to gradually lower stock exposure and to work a few years beyond the point of nominal FI to pad my financial picture. Together it's a very simple-minded way of lowering of risk. If I were much younger than I am I might be more inclined to opt for riskier rather than more conservative strategies. That seems like the right approach from an intellectual perspective, but I'm not sure I'd have the emotional constitution to keep it up for decades.

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