I suppose they could but hot stock tips seem to change every week or month so a fund tracking an index that did that would defeat the whole premise behind index funds and would make them no different than any actively managed mutual fund or large portfolio. When you dig into index funds one of the hallmarks is exceptionally low turnover.bryan wrote: ↑Wed Jun 21, 2017 4:10 pmadd emphasis on funds but really it's not the case. The funds are implementation defined methodology whereas the index methodology itself is defined and is used as the benchmark for tracking error for the funds. I admit I don't dig into the stuff in depth/breadth though.
> but they aren't lists of someone's hot stock tips in general
Why shouldn't they be?
Going back to VTSAX, the fund owns nearly 3,600 publicly-traded US stocks, cap weighted. How can it not track total market performance? It is structured to be a detailed scale replica of the total market. With ER of 0.04%, practically no transaction costs (turnover < 5%), no 12b or other fees, it's tracked the total market within .01% (net of fees) since it was launched 17 years ago. It is not an outlier among index funds from any provider that I am aware of.bryan wrote: ↑Wed Jun 21, 2017 4:10 pmAgain, (the biggest) index funds are only useful since they combine "total market performance" (debatable, but I submit for now given "gravity of capital" effect i.e. mo' money, even mo' money) with low fees. Indexes I suppose are in charge of the former whereas the funds the later. Why shouldn't there be boutique indexes?
I'm not sure if there is a metric that combines fund fees w/ tracking error to come up with actual cost/performance?
I don't think there is such a metric. Fees lower the return to investors dollar-for-dollar so that's reflected in performance data. Tracking error is interesting but not of enough interest to investors that it gets much publicity (but it is typically reported implicitly by comparing results to the benchmark index). Morningstar has mined their data to show that performance tends to be inversely proportional to fees. Vanguard published data annually showing where their funds' performance stacks up against other funds in the same Morningstar category.
My opinion: the stability comes from the personality of index investors on the whole (which includes a lot of institutions and endowments). They are not out to make a quick buck, they are generally playing the long game, and stay positioned such that they believe whatever they might lose in the short/medium term, they can afford to wait for eventual recovery.bryan wrote: ↑Wed Jun 21, 2017 4:10 pm
I agree there is a lot of stabalization thanks to index fund popularity. But I also think in the event of a downturn the diversification touted of an index will evaporate. You will want a strategy for this case. Maybe it means owning gold, bonds, cash, or shares in a hedge fund. I think hedge funds (or active funds) are underrated today (bunch of losers!).
I would say index fund investors who invest 100% in stocks are a significant minority. Most of them have healthy bond positions (often also index funds, btw), some amount of cash (both largely depending on where they are relative to retirement), and occasionally a commodity like gold. Despite the popular narrative, for the most part they are not stupid people who are ignorant of the risks inherent to investing in stocks.[/quote]
I'll send the "?" back to you: you' made a comment about whether EMH would save index fund investors, implying they expected it to. Half of them don't even agree with the EMH, much less believe it would somehow shield them from the vagaries of the stock market..
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I don't think anyone does pretend that index funds have existed forever. As far as calculators, that's all sort of related to history. Indexes were originally intended to be metrics that would measure movements the stock markets (or segments of the stock markets). When mutual funds came into existence, the accepted indices were a natural standard by which to measure fund management's performance. When it became apparent after several decades that in the aggregate mutual funds returns received by investors lagged the indices consistently over time (typically the SP500 was the accepted benchmark), and thereby the accepted measure of the market itself, a few people got the idea that, "Heck, if we just hug the SP500 our clients would be much better off." And so index funds were born. It's just a coincidence in a sense that the best, most accessible, historical performance data we have is the SP500, making an SP500 index fund a natural pair when trying to extrapolate with that data. I agree that there are risks involved in trying to predict the future based on the past. But whatever the SP500 does, someone owning an SP500 fund will match it pretty closely.bryan wrote: ↑Wed Jun 21, 2017 4:10 pm
Excellent! I've always thought it's dubious to pretend like we had index funds in the past. Thus many FIRE/investment portfolio calculators are also dubious. Much more interesting to have a calculator that is more like "follow the (smart, middle-class) crowd for investment decisions"; in the last decade the crowd is saying "buy index funds". Maybe a decade from now the crowd is saying buy AppleTokens. Some assets just aren't available to an average middle-class investor through time. Sounds like a project for @Tyler9000..
I think some of the confusion comes from thinking that people who invest in index funds see it as a materially different action than investing in the stock market via some other vehicle (active mutual funds, personal portfolios of individual stocks, or even derivatives). It's just a no-nonsense vehicle to get direct exposure to equities. Traditionally the goal was "to beat the market". For index investors the goal is modified to "match the market."