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Re: Index funds beat most active funds
Old 10-18-2006, 03:40 PM   #41
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Re: Index funds beat most active funds

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Originally Posted by MasterBlaster
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Well that is only true if your portfolio or "the stock market" reflects the market cap distribution of the indices.

If like many people you hold a portfolio of individul stocks then your premise is probably invalid.

Again, the indices move up or down based largely on the heavy weighting of those few large cap stocks. The market as a whole may do otherwise.
I agree to a point, that if you hold one of each of the 5,000 stocks in the market (a ball park figure) that the Wilshire 5000 index will move slightly differently than your portfolio because the movement of the large market cap stocks will more heavily influence the index than your portfolio.

However, I respectfully disagree that the Wilshire 5000 index does not reflect "the market as a whole." The value of the entire market is, itself, weighted more heavily toward the large capitalization stocks in greater proportions than simply the number of large cap stocks would indicate. (Stated differently, the market value of Microsoft is far far greater than the market value of Sears, so it is fair that a change in the value of Microsoft stock should have a greater influence on the index) Thus, the market weighted index accurately reflects the market weighted market.
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Re: Index funds beat most active funds
Old 10-18-2006, 03:41 PM   #42
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Re: Index funds beat most active funds

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Originally Posted by MasterBlaster
SC521, MickD, JC:

I was just making a point about the cap weighted issues of the indices.

The optimal weighted portfolio is up for discussion. John Bogle of Vanguard believes (like you) that the market cap weighted approach is best. There are others that beleive that your portfolio should be in as many un-correlated buckets as possible and that the market cap weighted approach is sub-optimal.
MB, you are mixing issues together. I NEVER said that a market weighted portfolio is best. I said that the Wilshire 5000 is probably the best index to track the performance of the entire US stock market.

Whether you should invest your portfolio in the same weight as the US Stock market is a different discussion.
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Re: Index funds beat most active funds
Old 10-18-2006, 03:52 PM   #43
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Re: Index funds beat most active funds

JC:

I believe that we are all on the same page here.

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Re: Index funds beat most active funds
Old 10-18-2006, 04:03 PM   #44
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Re: Index funds beat most active funds

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the Wilshire 5000 is probably the best index to track the performance of the entire US stock market.
Vanguard disagrees as they use the MSCI US Broad Market Index for the Total Stock Market Index Fund as it better reflects the stocks that are available for trade (all regularly traded US stocks).
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Re: Index funds beat most active funds
Old 10-18-2006, 04:14 PM   #45
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Re: Index funds beat most active funds

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I can't understand how after over 7,000 posts here you still can't figure out how to 1) post with a quote and 2) go back and fix the original mistake without posting a second post on the same topic. It really isn't that difficult is it?
Nope. Not difficult. I just don't want to. How's that smart guy?

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Re: Index funds beat most active funds
Old 10-18-2006, 06:01 PM   #46
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Re: Index funds beat most active funds

5 years is to short a time to really see whats going on, asset classes havent had a chance to even get a good run.

the last 5 years my average annual is about 6.8% but if you pull out any 10 year time frames of my annual returns they all seem to smooth out at about 12.8 % annual average . What makes it so amazing is most of the time im no more than 80% in stock and as little as 65-70%...

as of last year i toned it down and run around 60% stock and 40% everything else.
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Re: Index funds beat most active funds
Old 10-18-2006, 06:14 PM   #47
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Re: Index funds beat most active funds

I'm sure that MF companies will be glad to get rid of 2001 and 2002 in their 5 Year #. This will make their 5 yr total look better however, it will still influence the 10 year # for quite a while.

This is why you need to keep a perspective when looking at your total returns. It's all very relative.
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Re: Index funds beat most active funds
Old 10-18-2006, 10:36 PM   #48
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Re: Index funds beat most active funds

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Originally Posted by mathjak107
5 years is to short a time to really see whats going on, asset classes havent had a chance to even get a good run.

the last 5 years my average annual is about 6.8% but if you pull out any 10 year time frames of my annual returns they all seem to smooth out at about 12.8 % annual average . What makes it so amazing is most of the time im no more than 80% in stock and as little as 65-70%...

as of last year i toned it down and run around 60% stock and 40% everything else.
I agree that it's better to look at 10 year returns. The 10 year return for VFINX right now is 8.51 percent. I hope your right that the returns "smooth out" to about 12.8 percent, but only time will tell.
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Re: Index funds beat most active funds
Old 10-19-2006, 03:10 AM   #49
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Re: Index funds beat most active funds

remember also indexes for some crazy reason never include dividends which to me dosnt make sense.
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Re: Index funds beat most active funds
Old 10-19-2006, 06:41 AM   #50
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Re: Index funds beat most active funds

The advantage of the cap weighted index fund is that no rebalancing transactions are needed as the values of the individual stocks in the index change. Early attempts to equal weight an index incurred high rebalancing transaction costs.

Comparing passive index funds and active management is really making no comparison at all, other than expenses. You need to specify which active trading stratgey will beat the passive index. (head & shoulders patterns, momentum, value, fibonacci numbers, phases of the moon)

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Re: Index funds beat most active funds
Old 10-19-2006, 06:49 AM   #51
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Re: Index funds beat most active funds

Historically, investors wanted information as to the current value of their holdings, so dividends were omitted from published index results. Since most investors (which most folks weren't) held few securities, they probably already knew what they were recieving in dividends. This was the pencil and paper era - no calculators.
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Re: Index funds beat most active funds
Old 10-19-2006, 12:26 PM   #52
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Re: Index funds beat most active funds

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Originally Posted by mathjak107
remember also indexes for some crazy reason never include dividends which to me dosnt make sense.
Mathjak107, I already corrected you on this in reply #16. This is NOT TRUE of ALL indexes. For example, the Wilshire 5000 index DOES include dividends.
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Re: Index funds beat most active funds
Old 10-19-2006, 01:27 PM   #53
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Re: Index funds beat most active funds

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Originally Posted by JustCurious
I agree that it's better to look at 10 year returns. The 10 year return for VFINX right now is 8.51 percent. I hope your right that the returns "smooth out" to about 12.8 percent, but only time will tell.
12.8% would be nice but there are no pundits that would forecast that. Without a return to high inflation, the effects of FTAs are likely to keep returns lower (with a few exceptions not impacted by FTAs).
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Re: Index funds beat most active funds
Old 10-19-2006, 05:53 PM   #54
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Re: Index funds beat most active funds

Quote:
Originally Posted by JustCurious
Mathjak107, I already corrected you on this in reply #16. This is NOT TRUE of ALL indexes. For example, the Wilshire 5000 index DOES include dividends.
correct the wilshire 5000 and russell 2000 both include dividends.


thank you for pointing that out, never really looking at what the index included i wasnt aware those 2 did.

the dow and s&p dont count them, that to me does seem a little silly .

after all knocking the share prices down by the amount of the dividend and then not figuring it dosnt seem accurate but heck who am i to question somethings that been in use for decades. i can see not counting dividends as reinvested but not counting them at all is a mystery.
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Re: Index funds beat most active funds
Old 10-20-2006, 10:56 AM   #55
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Re: Index funds beat most active funds

This is one of those threads that completely and totally reinforces my hypothesis about the benefits of this board....Here it is, the hypothesis!!

I have very little understanding of what is being discussed on this thread, but because I understand the basics of index investing from these folks, I am doing great in early retirement, and FIREcalc has me totally secure for the next 30 years...No financial planners, no individual stocks, and 5 years cash as cushion...

I am blissfully ignorant of the depth of this thread and loving it!!!

Your favorite lurker...Ted
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Re: Index funds beat most active funds
Old 10-20-2006, 03:33 PM   #56
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Re: Index funds beat most active funds

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Originally Posted by tednvon
This is one of those threads that completely and totally reinforces my hypothesis about the benefits of this board....Here it is, the hypothesis!!

I have very little understanding of what is being discussed on this thread, but because I understand the basics of index investing from these folks, I am doing great in early retirement, and FIREcalc has me totally secure for the next 30 years...No financial planners, no individual stocks, and 5 years cash as cushion...

I am blissfully ignorant of the depth of this thread and loving it!!!

Your favorite lurker...Ted

Ted,

I've trying to understand what Index Fund is all about, do I buy shares like Mutual Funds or Individual Stocks?, how do I measure risks?. Would you kindly explain?

Mach1
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Re: Index funds beat most active funds
Old 10-21-2006, 09:33 AM   #57
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Re: Index funds beat most active funds

Whoa, remember, I am the one who just listens on these boards!! Let's see if I have this right!!!

Index funds are mutual funds that follow a particular type of stocks or bonds.
Mutual funds of course are exactly what the name implies...funds that are bought and mutally owned by many many investors. It allows the smaller investor to own part of a fund that invests in many different stocks or bonds. The mutual fund is managed by a company (that charges either low great fees like Vanguard, Tiaa-
Cref or very high rip off fees like many of the rest, especially the ones you see advertising big time on TV and/or ones that you get from your friendly "finanial planner")

Now index funds as I understand it follow certain types of stocks. For example the S&P 500 invests only in those 500 stocks...A "small cap" fund is a mutual fund that invests only in small cap stocks...Here is Vanguard's take on "index funds"
What Are Index Funds?

Index funds use an investment approach that seeks to track the investment returns of a specified stock or bond market benchmark, or index. An investment manager attempts to replicate the investment results of the target index by holding all of the securities in the index or—when full replication is not practical because of the size of the index or regulatory restrictions—a portfolio that will closely approximate the index in key characteristics. There is no attempt to use traditional "active" money management or to make "bets" on individual stocks or narrow industry sectors to outpace the index. Indexing is a "passive" investment approach that emphasizes diversification within a designated market segment and low portfolio trading activity.

Low cost is a key advantage of index funds. An index fund should pay only minimal advisory fees, keep operating expenses at the lowest possible level, and keep portfolio transaction costs at minimal levels. By keeping costs low, index funds leave a larger share of the investment returns for investors.

Investors can implement a wide range of distinctive investment strategies through indexing. Money can be invested in large, medium, or small companies; "value" or "growth" stocks; international stocks; and fixed income investments—in combinations suited to an investor's objectives, risk tolerance, and time horizon.

Vanguard is the pioneer of mutual fund indexing. We are committed to retaining a leading position as a provider of a broad range of index funds that have some of the lowest costs in the mutual fund industry.

If you go to the Vanguard site they will show you all the "index funds" they have

Here is the site...

https://flagship.vanguard.com/VGApp/hnw/FundsIndexOnly

As I understand it, index funds can be a very narrow range of stocks in a specific area or very broad like Vanguard' total stock market index fund which invests in some 3000 or so stocks...that is the one I am very heavy into as I do not want to try and hit it big in the pacific rim or some small risky bet...I am very happy with about 75% to total market and 25% spread between international index, and a little real estate...Hope this helps

Ted

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Re: Index funds beat most active funds
Old 10-23-2006, 12:14 PM   #58
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Re: Index funds beat most active funds

Ted,

Thanks so much for the explanation and information on Index Fund. I got it now.

Mach1
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