Creating a Private Index Fund

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slowtraveler
Posts: 722
Joined: Sun Jan 11, 2015 10:06 pm

Creating a Private Index Fund

Post by slowtraveler »

Hello,

I'm look at how to own the index in the most effective way possible, below are my premise and the implementation:

The Premise:

The advantages of going through a mutual fund begin to get outweighed by the advantages of building my own index fund, ideally with equal weights at time of purchase and no subsequent rebalancing.

It states that buying the components directly, in equal portions rather than by market capitalization and letting it ride out over 20+years adds to the long term gain, allows for more advanced tax techniques (capital loss and gains harvesting rather than capital gains distributions common in MFs), lower commissions, avoids the drawbacks of float-adjustment, and avoids the conundrum of buying high/selling low that happens with a weighting by market capitalization (ie-I avoid buying tech stocks at the peak of the tech bubble and selling at the bottom this way). He points out the Bogle and Siegel's work in the field of studying indexing supports buying in equal weights with no subsequent rebalancing as a superior method to what we currently have with the mass adoption of indexed mutual funds. I have not read these books but plan to in the coming year.

So please tell me, what are your ideas on this? Is there anything I'm overlooking or places for improvement?

Thank you.
Last edited by slowtraveler on Sun Nov 08, 2020 11:53 am, edited 1 time in total.

jacob
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Re: Creating a Private Index Fund

Post by jacob »

This is exactly how the [well-known?] Dogs of The Dow portfolio (which could also said to be an index ... pretty much anything can) is run. You can even stick to even only rebalancing only what falls outside of a 5% or a 10% band or whatever. No-fee is better than low-fee.

If you get lazy or willing to pay for the service, I would expect it to be quite possible to find an equal-weight index fund offered up from Wall Street. The difference between equal weight and market weight is that equal weight naturally emphasizes stocks with low P/Bs and small market caps more. Both have been shown to outperform the market during the last century-ish.

Dragline
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Joined: Wed Aug 24, 2011 1:50 am

Re: Creating a Private Index Fund

Post by Dragline »

This is the traditional way of building a diversified stock portfolio that pre-dates index funds. So yes, it should work fine so long as you can keep your transaction costs low relative to the size of the portfolio. It also may give you greater flexibility in managing taxes.

slowtraveler
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Joined: Sun Jan 11, 2015 10:06 pm

Re: Creating a Private Index Fund

Post by slowtraveler »

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Last edited by slowtraveler on Sun Nov 08, 2020 11:52 am, edited 1 time in total.

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

Re: Creating a Private Index Fund

Post by IlliniDave »

You can do that, but it won't really be an index fund, it'll just be a portfolio of stocks. You would have more tax flexibility, and I don't know if $500K is the number, but at some size the costs associated with all the individual transactions will be small enough relative to the total not to have too adverse an effect on the returns. It's probably not a bad approach for those who want to be more hands-on and favor a relatively passive strategy.

BlueNote
Posts: 501
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Location: Toronto, Canada

Re: Creating a Private Index Fund

Post by BlueNote »

I've thought about doing something like this myself by replicating an index via buying a heavily co-related weighting of the underlying securities. The primary cost, for me, was the opportunity cost of maintaining the custom index vs having someone else do that for a fee. I found that the cost of my time and annoyance outweighed the tax and other benefits for my FIRE capital requirements. Index fund Fee's are very low and going lower these days. Don't forget that you can also replicate, to a high degree, the indexes by owning ETF's that track underlying cap weightings (small/mid/large) . That would give more opportunity for tax loss harvesting then owning something that tracks the whole index, plus you can overweight to small and mid to capture the same 'small vs. big' factor that an equal weight index would.

bryan
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Location: mostly Bay Area

Re: Creating a Private Index Fund

Post by bryan »

I've always wanted something like http://motifinvesting.com/, but last I looked at it it didn't actually meet my needs. Sorry I forget why...

What has been interesting me lately is instead just owning various mutual funds, etfs and then taking a short position for a sector or corporation that I want to reduce exposure to (you could do the opposite as well).

To that end does anyone know of a website that looks at all your holdings (like http://sigfig.com, http://personalcapital.com) that then gives you a nice report on the portfolio, as if it was actually a single fund (e.g. holdings of corps, asset allocation, fees, region/country, currencies, etc).

edit: to add that https://hellomoney.co is a lot like what I am looking for like sigfig, but still not showing holdings of corps afaict
Last edited by bryan on Wed Nov 23, 2016 4:33 pm, edited 1 time in total.

slowtraveler
Posts: 722
Joined: Sun Jan 11, 2015 10:06 pm

Re: Creating a Private Index Fund

Post by slowtraveler »

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