I agree with the (downvoted) guy who said, I'm an index fund skeptic.
Something is true with index funds that was less true historically, which is the concentration of a few large companies in the largest indexes - as in, the amount of percentage of capital they have. Fact, FAANG make up 10% of the s&p 500 index, tech makes up 20+ %. It's NOT at all averaged out in the way the Bogleheads might think it is. Is it a "bet on the economy," or is it a bet on the stocks of big tech?
Which brings me to something else that appears to have changed: big tech stocks are viewed as a safe haven, increasingly. With the overall economy being in a shambles combined with a virtual work world, this is even more important.
Put those two things together, and the S&P 500 index isn't diversified.
Edit: we're at the top of the cycle right now, or so it seems. We're all waiting for the other shoe to drop.
But it's worse. What happens if you stick everything in there, you need the money in 5 or 10 years and you just hit the bad part of the cycle (look what happened in March).
I'm doing the opposite of what the Bogleheads do, even though I'm extremely familiar with this extremely conservative approach. What's the fun in risking my capital with some index fund that's tied to concentrated entities like that, when I can risk a small percentage of my capital on highly volatile stocks, and make a similar return? You can repeatedly swing trade stocks like SPCE and some of the biopharma stocks and make money over and over again with a tiny percentage of your capital.
I'm more interested in understanding how the bond market will work now in this strange new reality. Are bonds not a safe haven place to park cash?
Why do you think an index that is 20% tech stocks "isn't diversified"? The S&P 500 has had more than 20% in several different sectors over its history, from transport to energy to communications. With indexing, you have whatever investments are worth making in the current economy. You don't have to predict the trends or decide what's overinvested in.
You're conflating index funds with S&P 500 Index funds, though. You can buy an index fund with _zero_ tech stocks. You can buy something like VINIX which has considerably less weight on the BigN tech firms.
The VINIX is down 3% YTD while the rest of the market ballooned.
Looks like we "picked stocks" by picking the indexes here, too?
I just don't understand the insistence on indexes. We're afraid of picking stocks that go bankrupt?
We work in tech, and a lot of us are science nerds. Surely we can pick names based on how we think those technologies are likely to be successful. We have access to a lot more information than people did in the 1990's with this Boglehead stuff.
Well, yeah, that's absolutely expected. The promise of index funds isn't "you'll always make money!!" over any short-term period, the promise is that if the stock market as a whole increase, which it tends to do, you'll also benefit from that.
>Surely we can pick names based on how we think those technologies are likely to be successful.
Time and time again, especially now, "fundamentals" has proven to be a poor predictor, at least in the short term. You have companies with P/E ratios of 20-30 right now.
It's not just about the underlying product, perception and all kinds of human effects also matter, which makes it a perilous place to be.
Throw your money in a big bucket and over 20-30 years, you'll be up. That's the point.
That's a matter of opinion, wrong mindset. I bought gold miners that ballooned, and swing traded pharma. This turned into money that I can use to buy things like computers and furniture. Or buy even more of the fabled broad index funds.
Vanguard and Schwab, with an increase move of capital to Schwab. They allow more advanced trading like options (no, I'm not that crazy - yet), shorting, buying and selling in the same day, etc, that Vanguard doesn't even support. Also, there's a downloadable web client that lets you create complex If Then type conditions, as well as aggregate news and customize dashboards and a bunch of other stuff.
I'm not that active trading, maybe I perform an action once every one to two weeks. I spend almost all my time just trying to absorb information.
Honestly, with all my questioning of index funds and contrarianism in comments above, I am slightly skeptical that the average person should have this much access to these types of tools. I could instantly blow away all my money and be left in debt (given they allow margin).
It's not about the amount of information you have, it's about the amount you have _relative to other investors_. In the era of algorithmic trading where companies are spending millions to get information milliseconds faster, the extra information you have by working in tech and being a science nerd is meaningless.
I highly suggest following /r/wallstreetbets for any length of time. If you see a "great deal" put in a reddit remindme and go back and figure out your "gains". You'll quickly realize stock picking with all the "better information" we have today means every other single investor has the same info. It's a madhouse of everyone seeing the same things and rushing for it, but you're doing it with Robinhood with delays and the big players have hardline terminals a dozen feet from the stock exchange.
MSCI World is also basically the top stocks from the top economies. If you want exposure to, for example, developing markets, you have to explicitly put your money into a developing market ETF. And even then, many of them have outsized holdings in a few big Chinese companies.
Psychological reasons. Retail traders performance chase, selling things when they have temporary (multi-year) losses and buy when they have temporary high gains. It's incredible how strong it is even for people who are somewhat knowledgeable about finance like Bogleheads. It's also been studied by Jack Bogle himself. There was a famous study comparing Value vs. Growth stocks he noted where retail traders who invested based off either ended up doing worse than just holding both because in aggregate they kept buying the one that recently did well and then selling it when it had done poor. Buy high, sell low.
The highest gains are also only available for a few days in the year. If there are three really good days for a stock then you're going to hit all of them if you hold it for the entire year. If you buy and sell shortly after you might miss all of them.
>" It's NOT at all averaged out in the way the Bogleheads might think it is."
Correct. There are smart people doing research out there right now demonstrating that "passive" isn't really passive, and that people regularly buying into indices at any price is skewing the market.
No one is clear on what the ramifications of this are, but as the old adage says, "past performance no guarantee of future success". The same goes for buying the SPY and forgetting about it.
> […] and that people regularly buying into indices at any price is skewing the market.
And at what price should people be investing in the market? Sitting on the side in cash, waiting for the dips and crashes to occur, will give you mediocre results:
For most people, most of the time, the best thing they can do is just chug along putting a little bit of money away every month. Put in what you can, but a good goal (if you can afford it) is to put away at least 5% of your income (and maybe up to 10%).
> The same goes for buying the SPY and forgetting about it.
You're not wrong, but: what's the alternative? Unless you can show something that's demonstratively better than a low-fee S&P 500 or Russell 3000 index fund (perhaps tempered with some bonds for risk/volatility management), bemoaning the situation is not very productive.
I'm also an index fund skeptic mainly because it's now such a convention that taxi drivers and shoeshine boys will tell you that's where you should put your money. People used to say the same things about investing in real estate and many other things and for a time in history those things were demonstrably the best investment long term, until it wasn't. It looks like now is that time again for the stock market to look good. It still doesn't mean it's a bad investment either and no one will blame you if you suffer with everyone else when it goes wrong. However, it's also never worth putting all your money into unless you can afford to ride through a slump that could last well over a decade.
We are in unprecedented times. Highest debt, lowest bond yields, crazy P/Es, historic GDP drop (worst since 1929, or since WW2 for some). We don't yet know how inflation/deflation will play out. CPI is useless. A lot "inflation" is going into real estate / land and the stock market.
I don't think past wisdom applies anymore. If you put money into most products (including most index funds) on the stock market today you are in fact stock-picking / gambling.
Also tech companies are partially up for a good reason.
Small caps have lost a lot earnings power.
https://twitter.com/NorthmanTrader/status/128335311697343283...
Much much more than tech stocks.
E.g. tech stocks were almost the only ones doing any buybacks last quarter.
Stay-at-home companies, solid/value companies, and cheap stocks is where hedgefunds seem to move to. But yes, some valuations are bonkers. EV stocks, CVNA, W, ...
Personally, I've been late to the party, and needed to learn on the fly, BUT:
I now own a portion of gold and royalty and streaming companies (mining exposure with less risk of badly run mining companies. They lend money to miners in return for metal. I.e. miners don't need to worry about the price of the metal.)
Mind that GLD and SLV are not fully backed by gold and silver. There is significant counter-party risk (E.g. if the bank goes bankrupt you might not receive anything). They also haven't really been audited, and JP Morgan employees have been charged for price manipulation of metals.
I reduced my bond exposure, and I will probably soon move into gov bonds exclusively. I don't want to gamble on MBSs, CLOs, corporate bonds being bailed out. (The Fed and ECB's policies skew the bond market. Ratings and yields are (increasingly) not great indicators of company health).
There is little room for lower yields.
Real yields (bond yield - inflation) will turn negative or are already.
When rates eventually will be hiked, both stocks and bonds will fall. (See 2019 / December 2019)
I started stock picking. Mainly value, but really random stuff I find on Youtube investment channels and Reddit (Of course I read up on them, listen to financial calls. Balance sheet. Cash flow. Exposure to potential problems.).
I sleep better at night with a cheaper stock that has less downside, even if it isn't riding the current trend/bubble.
Other than that I'd keep a good amount of cash for potential opportunities. In the current climate, stocks could fall any week, real estate will likely be on sale (depending on how many rich people will try scoop it up at the same time), or perhaps you can buy a share in a local business.
I tend to agree with this and I'm also long several gold miners, and I've swing traded some of them (one was a value buy with a long-standing issue with the Greek government that I was watching the news on for years).
It baffles me how this Bogleheads philosophy has taken tech people. People can't wrap their heads around the idea that gold goes up in times of trouble, or that work from home tech is likely to go up, or that oil is likely to go down, or whatever other myriad bets one can make.
My approach is to maintain almost all cash and to trade a small percentage of the cash on extremely volatile stocks, preparing to hold long-term if necessary. I rarely invest in fully scammy pump and dumps (but lately pharma has paid off, for obvious reasons).
I use the news cycle and try to anticipate what others are doing. You don't need to sell at the top and buy at the bottom to make money.
In contrast, I'm looking at my work 401K which is managed with those mathemetically unstoppable index funds. It's down 2 percent while I'm up 30.
Now what am I to do with the cash portion of my investment. I'm leaning in bond funds (because bond picking is something I have no idea about).
How long do you think you can keep up the 30% returns? How many active investors/traders do you know have had 30% returns year after year? I think it is easy to lose sight of the long term possibilities when you are thinking about the short term.
I'm up 75% this year [0] by buying companies I like and holding them 'forever'. But if someone asks me for investing advice I'll still tell them to go for index funds.
Because while I might be lucky enough to trounce the market right now, that doesn't mean I'll trust anyone to pick the right companies. It's safer to go for average returns than to risk the market trouncing you, especially with the vast majority of your wealth. And no, this etoro account is not my main investment account.
I'm happy you've been beating index funds and hope you can keep that streak going. Have you considered the opportunity cost of spending time researching and picking stocks though? You don't just need to beat index funds, you need to beat index funds plus whatever you could earn by spending that time on something else.
I like GDX as it contains both these and miners.
FNV, WPM, SAND. There should be a lot more.
The problem is that they are already extremely pricy.
All gold related stocks had quite the ralley in 2020.
> Put those two things together, and the S&P 500 index isn't diversified.
You're not wrong, but trying to explain to the layman about all this technical minutiae will cause their eyes to glaze over. So for the average Joe the Plumber the easiest message to get across is "invest in 'index fund' (=S&P 500)". Once you get people to actually save on a regular/monthly basis in low-fee funds, you're >80% of the way to a somewhat successful retirement strategy.
If you want to argue about &P 500 vs 400 vs 600 vs 1500 vs Russell 3000: that's for later once people actually have something going into a retirement account.
Something is true with index funds that was less true historically, which is the concentration of a few large companies in the largest indexes - as in, the amount of percentage of capital they have. Fact, FAANG make up 10% of the s&p 500 index, tech makes up 20+ %. It's NOT at all averaged out in the way the Bogleheads might think it is. Is it a "bet on the economy," or is it a bet on the stocks of big tech?
Which brings me to something else that appears to have changed: big tech stocks are viewed as a safe haven, increasingly. With the overall economy being in a shambles combined with a virtual work world, this is even more important.
Put those two things together, and the S&P 500 index isn't diversified.
Edit: we're at the top of the cycle right now, or so it seems. We're all waiting for the other shoe to drop.
But it's worse. What happens if you stick everything in there, you need the money in 5 or 10 years and you just hit the bad part of the cycle (look what happened in March).
I'm doing the opposite of what the Bogleheads do, even though I'm extremely familiar with this extremely conservative approach. What's the fun in risking my capital with some index fund that's tied to concentrated entities like that, when I can risk a small percentage of my capital on highly volatile stocks, and make a similar return? You can repeatedly swing trade stocks like SPCE and some of the biopharma stocks and make money over and over again with a tiny percentage of your capital.
I'm more interested in understanding how the bond market will work now in this strange new reality. Are bonds not a safe haven place to park cash?