One thing I like to point out whenever this kind of discussion comes up, is that there is no single index. Articles like this always seem to assume that everyone will buy the same index, namely the S&P 500 or total US market.
But that's not what a lot of index investors do. Indexers enjoy adding tilts to their portfolios. So some people will buy value funds, others will buy small cap funds, and yet others will buy small value funds. There are people who overweight certain sectors, like REITs or utilities. There are those who invest in international index funds (with all their variations) and those who don't. So there's a huge number of combinations you can think of when it comes to indexing.
Now, with people indexing like that, there would still be market liquidity. Maybe not as much as when there are single stocks being actively traded, but on any given day there will be people buying into different indexes, selling shares, or rebalancing.
Valuation would become troublesome though, but at least people would still get some return from dividends.
Plus everyone knows the S&P is a terrible benchmark because it excludes mid- and small-cap cos.
After watching mine from a far for ~7 years, I've come to accept that one really needs to invest in multiple index funds to get global diversification as well.
It's really not that bad. If you want, the Wilshire 5k is probably about as broad as you can go. And with market cap weighting, the additional diversification wouldn't likely help much.
You can be immensely wealthy if you beat it consistently. Almost no professionals can. Warren Buffet is winning his $1m charity bet that the S&P beats pro hedge funds over a decade:
> His horse in the race, the Vanguard 500 Index Fund Admiral Shares, which tracks the benchmark S&P 500 index, is up 65.7 percent. That's well ahead of the 21.9 percent average gain for the unnamed five funds of hedge funds chosen by Protege Partners, a New York City money management firm.
So not just an average of hedge funds, but ones specifically selected to out perform by a multi-billion dollar management firm.
Warren Buffet is a spectacular value investor, but those funds are not representative of the best performers in the industry. A brief Google search demonstrates that a variety of hedge funds have consistently beaten the S&P 500 for well over a decade; in some cases, for 25-30 years.
I do agree with you that almost no professional can beat the S&P 500, but I think that is due to a variety of factors, including but not limited to the outright difficulty. For example, if you beat the market consistently you still might not become rich. With $100k in starting capital, "merely" beating the S&P 500 by a few percentage points each year (let's say 10% average annual return instead of 7%) will not make you rich in the conventional sense of the word. This prevents many people with the aptitude from investing in the skill development because they could earn a greater living doing other things.
A trader whose insight is primarily responsible for driving that same return on $2B in assets is already very rich or will very quickly become so. Beating the market with that kind of capital requires an entire infrastructure devoted to trading and execution just to make the trades with minimal market movement and signalling, let alone maintaining alpha on it. Not all people capable of beating the market can do so in a manner that is actually worth their own time, because the scale can be astronomically different.
The key point of the wager is that the bettor must select the funds at a point in time and bet only on the future returns.
Gazing back into the history of thousands of funds to find a few funds who have beaten the S&P 500 over 25 years is interesting, but is far a guarantee that those funds will beat going forward.
I guess this is a good place to ask: For someone who knows nothing about the market, what would be a good way to invest their money? From the responses here, I'm guessing "park them in an index fund", but is there a trustworthy company I can talk to that will do that?
I would recommend Invest Like a Pro (10 day investing course) [1]. It's written by the founder of YNAB, and gives a really good introduction to different types of funds and investment vehicles.
Hello StavrosK - I recommend you find an RIA (Fee Based Fiduciary Registered Investment Advisor) who offers DIMENSIONAL FUNDS = DFA. www.dfaus.com they are NOT really 'passive' and they are NOT really an 'indexer' - yet - over an extended period of time their funds have demonstrated outperformance when compared to their relevant benchmarks
You could do a lot worse than parking it in an index fund, so yeah, that's a good approach :) If you have a 401(k) or other retirement account, it is quite common for those to offer an S&P 500 index fund where you could invest your money. If you want to do it in a taxable brokerage account, you should open an account with Vanguard and buy their Total Stock Market index fund (VTSMX, or VTSAX if you have more than $10,000 to invest).
Then stay the course - if the market tanks 50% the day after you put your money in, don't panic. Wait it out. Your investment horizon here is at the very least 10 years.
But that's the quick, the-best-time-to-invest-is-tomorrow-so-just-do-it answer.
There are a number of things you should do if you want to learn more about how to invest your money in stocks (and maybe bonds):
0) A good resource to get started quickly is If You Can, by William Bernstein:
But you can skip it if you want to dive deeper with the stuff that follows.
1) Learn about what investing in the stock market means, what's the nature of it and what to expect from it. I have two recommendations here:
1.1) jlcollinsnh's Stock Series: http://jlcollinsnh.com/stock-series/ He recently released a book (The Simple Path to Wealth) which is supposedly a better-edited version of the Stock Series. He's a rather optimistic guy, but what he says is not wrong. He stays away from investing in non-US markets, which is not the most common position among indexers.
1.2) A Random Walk Down Wall Street, by Burton Malkiel. It's an amazing book that everyone should read if they want to learn about the stock market. Many people recommend Bogle's books (he's the father of index investing), but I find them incredibly tedious to read.
2) Learn about the different investment accounts available to you - 401(k)/403(b)/457(b)s, IRAs, HSAs, taxable brokerage accounts. Each one receives different tax treatment and you should be familiar with that in order to avoid "tax drag" i.e. taxes slowing down the growth of your investments.
4) Don't obsess about it once you get started. After you've learned a few things it's tempting to start "tweaking" your investments here and there, but if you do that often you do yourself more harm than good. Invest your money then go have some fun :)
That's a great point. I've always bought VTSMX, on the assumption that it's as close to "total US market" as one can get. Is anyone aware of downsides of VTSMX (excluding downsides of indexing in general)
This may fall into the category of "downsides of indexing in general", but even VTSMX, which is based on the CRSP index, isn't necessarily getting you the entire stock market in the U.S., which is something to be aware of, I suppose.
The criteria for inclusion in the CRSP index specify "a minimum total market capitalization of more than $10 million with a float that more than 10 percent of the total shares outstanding". So there is sub-micro stuff 'beneath' the index that's not included due to the $10M minimum, and others that aren't included because of the float requirement. Do you care? Probably not, but you might.
Also, I've periodically heard arguments against market-cap weighting, which is what indexes do (this is probably one of those "downsides of indexing" arguments). If you are not careful, with a couple of index funds you can end up really exposed to a handful of very large, and therefore highly-weighted, blue chips. But I can't think of another way of weighting within a whole-market index that would make sense.
The other thing that comes up a lot, mostly in tech circles, is that index funds (of course) don't give you exposure to the private market, and it seems that more and more tech companies are waiting a long time until they go public, such that at any given time a lot of growth is happening where most investors can't get in on it. The argument is that, if you are financially qualified, there are more opportunities out there for qualified/accredited investors on the private market. I don't personally agree with this if you're looking for an investment rather than a job as an investor, but you'll sometimes hear the argument get made.
No love for equal weight? RSP has some interesting performance characteristics. There is the Wilshire 5000 Equal Weight Index, but, alas, no fund tracks it.
I highly recommend most people, at least when they are young, don't put all their eggs into market cap weighted total market funds by getting at least some direct exposure to mid and small-caps. You can potentially leave a lot of growth on the table by being too heavily weighted towards the more conservative big boys(and conversely, lose a lot by not being so weighted towards them, but that's why you do it when you are young).
Not really? Go to http://quotes.morningstar.com/chart/fund/chart?t=VITSX®io... and click on "Maximum" and compare to VFINX. The total market and S&P500 indices have tracked really closely for a long time. You're not missing out on much, if anything, by holding only the S&P500.
tcoppi is arguing against market cap weighting, which is the reason why VITSX is so close to VFINX despite containing other stocks.
If the total market is outperforming S&P 500, that means the companies not in S&P 500 perform better overall, so giving them greater weight than suggested by their relative market cap would have been beneficial.
Total market has outperformed slightly since 2008, but for a good period prior to that, the S&P500 was outperforming total market (also slightly). It's not super cut and dried.
The 5 year performance of VTI (the ETF version of that mutual fund) and SPY is .44% in favor of VTI. There is a better dividend yield on SPY though so you would have been better off there. Large companies dominate so adding in small caps doesn't really change things a ton. The two funds haven't diverged in a meaningful way in a very long time.
They're a fund of funds but not an index of indexes. An index of indexes would be composed of indexes weighted by how much money is invested in each. Vanguard's LifeStrategy funds have fixed allocations to each underlying fund.
But that's not what a lot of index investors do. Indexers enjoy adding tilts to their portfolios. So some people will buy value funds, others will buy small cap funds, and yet others will buy small value funds. There are people who overweight certain sectors, like REITs or utilities. There are those who invest in international index funds (with all their variations) and those who don't. So there's a huge number of combinations you can think of when it comes to indexing.
Now, with people indexing like that, there would still be market liquidity. Maybe not as much as when there are single stocks being actively traded, but on any given day there will be people buying into different indexes, selling shares, or rebalancing.
Valuation would become troublesome though, but at least people would still get some return from dividends.