S&P 500 Index

[street]

This will be another question which will show my lack of intelligence on how things work in the financial world. LOL

So I have a small percent invested in the S&P 500. So how does that work and how it works to be invested in S&P as an Index fund?

Is it good or bad to be part of the S&P?

 

[OldShooter]

An S&P index fund is maybe the most popular stock purchase. Warren Buffet recommends it.

That said, it is a sector fund. You are investing ONLY in the 500 largest capitalization US companies. You have no stake in mid-size and small companies. You also have no stake in the half of the world's stocks that are not US stocks.

A purist (like me) would say that a total world market index fund is a better, more diversified investment. A practical person, particularly one who doesn't want to invest in "furrin" stocks would point out that the S&P is 80% of the US market capitalization, so you have a finger in most pies.

So it's not super good IMO but it is certainly not bad.

 

[street]

Thanks that was a great explanation. So when you say "world market index fund" is that the same as International or Global market funds?

 

[OldShooter]

Thanks that was a great explanation. So when you say "world market index fund" is that the same as International or Global market funds?

Well, you have to be careful. The nomenclature is not completely standardized. Generally "global" will refer to everything and "international" will refer to non-US stocks. But read carefully.

My favorites are Vanguard (of course!):

VGTSX which is non-US and often paired with the all-US VTSMX fund in a ratio to suit the investor's taste for non-US exposure.

-or-

VTWSX, which is the whole world. It varies as sectors wax and wane, but US stocks are in the range of 50% of the total in the fund. This is our current strategy, up from an international allocation of 30%. That (30%) seems to be a pretty popular number.

There are also ETF versions of these funds. Someone will be along shortly to argue for buying ETFs. There are reasons I do not but they are out of scope here.

There is quite a good video here on home country bias: https://famafrench.dimensional.com/videos/home-bias.aspx

 

[brucethebroker]

People seem to like the 500 index because it is easy to check up on. Most "newspapers", TV newscasts and financial web sites quote it daily. There are other mutual funds that will spread your money over more stocks, but you might have to dig a little to get your daily update.

Not a bad strategy, if you just want to invest and forget it. Or do a little research (Old Shooter has good suggestions) and spread your funds around a little more-maybe even outside the US.

 

[street]

Thank you again for the help it is very much appreciated.

 

[alaska55]

An S&P index fund is maybe the most popular stock purchase. Warren Buffet recommends it.

That said, it is a sector fund. You are investing ONLY in the 500 largest capitalization US companies. You have no stake in mid-size and small companies. You also have no stake in the half of the world's stocks that are not US stocks.

A purist (like me) would say that a total world market index fund is a better, more diversified investment. A practical person, particularly one who doesn't want to invest in "furrin" stocks would point out that the S&P is 80% of the US market capitalization, so you have a finger in most pies.

So it's not super good IMO but it is certainly not bad.

A purist in what? I'm happy with 100% of my equity side in VTSMX(vanguard total us stock market, as John Bogle says you get enough international exposure from the the big US multi-national companies.

 

[Katsmeow]

For awhile in my 401k the only low fee fund they had was a S&P 500 fund so I had most of my money in it. But, it bothered me that I didn't cover all the US market. In Vanguard, I separately bought from an international fund. And, I bought some of the extended market fund which covers the part of the US market that isn't covered by the S&P 500 fund.

 

[UnrealizedPotential]

I think overall it's good to have a certain percentage invested in the SP500. I have about 20% of my investable assets in the index. When you buy it, you get a lot of big, individual companies, traditionally profitable too with a history. So I think it deserves a spot in ones portfolio for the stock portion.

 

[street]

I think overall it's good to have a certain percentage invested in the SP500. I have about 20% of my investable assets in the index. When you buy it, you get a lot of big, individual companies, traditionally profitable too with a history. So I think it deserves a spot in ones portfolio for the stock portion.

I also favor your thinking and why wouldn't investors want at least a dab of it.

 

[kgtest]

For awhile in my 401k the only low fee fund they had was a S&P 500 fund so I had most of my money in it. But, it bothered me that I didn't cover all the US market. In Vanguard, I separately bought from an international fund. And, I bought some of the extended market fund which covers the part of the US market that isn't covered by the S&P 500 fund.

I had this problem at my current employer. I complained to the comptroller in charge of communications between our shwab retirement plan rep and the company. Voila. Now I have all of my current 401k in SCHG and I'm appreciating the gains from the increased opportunity.

 

[explanade]

Heard the other day that most of the gains of the S&P for the past year or so comes from the FAANG stocks.

I don't know if all of them are in the S&P but the ones which are, like AAPL, have such a huge market cap that when they move, they move the whole index.

So maybe S&P diversification isn't what it used to be?

 

[gcgang]

https://en.m.wikipedia.org/wiki/S&P_500_Index

Above is Wikipedia of S&P500. Gives history. It is not the 500 largest companies. Companies to be included have to meet certain criteria and be selected by a committee. To my surprise, I think it even said there were nonUS companies in it. How the index is weighted and so forth is explained.

 

[donheff]

For awhile in my 401k the only low fee fund they had was a S&P 500 fund so I had most of my money in it. But, it bothered me that I didn't cover all the US market. In Vanguard, I separately bought from an international fund. And, I bought some of the extended market fund which covers the part of the US market that isn't covered by the S&P 500 fund.

Same with my wife's 401K. I don't know why they don't offer VG Total Market (all US) but they do have VG S&P 500 and VG Extended Market. so we use those.

 

[pb4uski]

For awhile in my 401k the only low fee fund they had was a S&P 500 fund so I had most of my money in it. But, it bothered me that I didn't cover all the US market. In Vanguard, I separately bought from an international fund. And, I bought some of the extended market fund which covers the part of the US market that isn't covered by the S&P 500 fund.

^^^ Good idea.

I've also done that to sidestep Vanguard's sometimes nonsensical frequent trading restrictions. I recall a number of years ago that I wanted to harvest some tax gains and if I sold Total Stock I could not buy it back again for a period of time... I tried to explain to the rep that I was just doing a sell and buy the same day so it was only an accounting entry and wouldn't affect the fund at all.... but the rules are the rules when you are dealing with Vanguard.

So I sold Total Stock and bought S&P 500 and Extended Market funds (65/35 as I recall) and effectively side-stepped the frequent trading restriction.

 

[audreyh1]

Heard the other day that most of the gains of the S&P for the past year or so comes from the FAANG stocks.

I don't know if all of them are in the S&P but the ones which are, like AAPL, have such a huge market cap that when they move, they move the whole index.

So maybe S&P diversification isn't what it used to be?

I think it has always been like that - dominated by a few stocks. The dominating stocks though change around quite a bit.

 

[OldShooter]

Fun thread!

People seem to like the 500 index because it is easy to check up on. Most "newspapers", TV newscasts and financial web sites quote it daily. There are other mutual funds that will spread your money over more stocks, but you might have to dig a little to get your daily update. ...

Yes, but @street, uinderstand that watching a portfolio daily can be very hazardous to your financial health. I watch the market daily as kind of an abstract spectator sport but DW and I only look seriously at our portfolio once a year, between Christmas and New Year. At that I would say that we only make a strategic trade every two or three years.

A purist in what? ...

A purist in the church of academic research, aka Fama and French. If you haven't clicked on the video link in my Post #4, I encourage you to do it. Ken French will explain.

Gene Fama simply says: "You have to hold the market portfolio." IOW, everything.

... John Bogle says you get enough international exposure from the the big US multi-national companies.

Yes. But remember that Bogle did not achieve his fame by being a successful investor. He built the mutual fund company that we all benefit from, that made passive investing a reality for us little guys. The academic research says he is simply wrong on this and, more specifically, with the recent outperformance by US stocks, regression to the mean may well make non-US stocks the winners in the next decade. No one knows, of course.

I think overall it's good to have a certain percentage invested in the SP500. ...

Absolutely. But understand that if you hold a total US market fund, about 80% is in S&P stocks. In fact, there are current debates about whether cap-weighted indices are the best idea and whether tilting a portfolio away from the S&P by buying extended market funds might be a good idea. Five or ten years of future history will tell us the answers. For our portfolio I am simply buying the world in cap-weighted index funds and sitting back to watch the action. I have no crystal ball.

Heard the other day that most of the gains of the S&P for the past year or so comes from the FAANG stocks. ... So maybe S&P diversification isn't what it used to be?

Yes. Hence the discussions about other index weightings besides market cap and portfolio tilts away from the S&P.

Another factor, not yet mentioned, is that with the massive success of indexing, even among naive investors, much of that money has flowed into the S&P. The argument then is that this flow may have overvalued the S&P relative to the rest of the world's stocks. Yet another thing that five or ten years of future history will tell us.

 

[alaska55]

Fun thread!

Yes. But remember that Bogle did not achieve his fame by being a successful investor. He built the mutual fund company that we all benefit from, that made passive investing a reality for us little guys. The academic research says he is simply wrong on this and, more specifically, with the recent outperformance by US stocks, regression to the mean may well make non-US stocks the winners in the next decade. No one knows, of course.

Regession to what mean, The world has change so much what is the mean?

The trouble with academic research is they only look at numbers, they don't look at world events or history.

But lets look at some numbers I'll start with 1986,the year I separated from the US Navy and started my 1st job with a 401k. started $10k and put $200 a month til now.

global total stock market ex US $387,961

total US stock market $912,247

50/50 the above two rebalanced annually $614,127

Now I Retired in 2014 but the numbers above are for 32 years and the out performance isn't just the recent years.

Oh and about your little dig "one who doesn't want to invest in "furrin" stocks" You like to put down the other people as uneducated. I would say the practical person was the smart one.

 

[DrRoy]

You might also consider RSP, which is the S&P 500 but equal weight instead of market cap weighted, or FSTVX, which is total US market - all size stocks but no international.

 

[street]

Regession to what mean, The world has change so much what is the mean?

The trouble with academic research is they only look at numbers, they don't look at world events or history.

But lets look at some numbers I'll start with 1986,the year I separated from the US Navy and started my 1st job with a 401k. started $10k and put $200 a month til now.

global total stock market ex US $387,961

total US stock market $912,247

50/50 the above two rebalanced annually $614,127

Now I Retired in 2014 but the numbers above are for 32 years and the out performance isn't just the recent years.

Oh and about your little dig "one who doesn't want to invest in "furrin" stocks" You like to put down the other people as uneducated. I would say the practical person was the smart one.

You did very well in your investments.

 

[alaska55]

You did very well in your investments.

No that not my results. That was just for comparing the US stock market to the international market. You need to use this site to compare Portfolios.

https://www.portfoliovisualizer.com/

 

[OldShooter]

Regession to what mean, The world has change so much what is the mean? ...

Well, we'll find out. Remember though, that many people have observed that the most expensive four words in investing history are: "This time it's different."

But lets look at some numbers ...

The nice thing about backtesting is that you can usually come up with a set of parameters to prove whatever point you are trying to make. Playing with Portfolio Visualizer a little more it is easy to see the decades when one or the other portfolio outperformed. The last decade or so, of course, US-only outperformed. So it is soon probably international's time; maybe our president is holding a lot of non-US stock.

If you are interested in this subject, this Vanguard paper is pretty good: https://www.vanguard.com/pdf/ISGGEB.pdf Figure 8 illustrates the historical relative performance of the two alternatives. The conclusion of the paper is to recommend a portfolio allocation of 20-40% international.

You might also consider RSP, which is the S&P 500 but equal weight instead of market cap weighted, or FSTVX, which is total US market - all size stocks but no international.

Yes, equal weighting seems to be gaining some adherents based on good-looking backtestings. I have noticed, though that the guys out in front often come back with arrows in their chests. So I am content to wait for 5-10 years of future history before changing what has been a very effective (cap weighted) strategy. YMMV, however.

Re FSTVX, yes. I was trying to keep the examples simple but we actually hold quite a bit of FSTVX matched with VGTSX. IIRC Fido also has an extended market "fill-in" fund but a year or so ago when I looked I couldn't find a total world fund. Maybe I just missed it though.

 

[Chuckanut]

No that not my results. That was just for comparing the US stock market to the international market. You need to use this site to compare Portfolios.

https://www.portfoliovisualizer.com/

I just used the Porfolio Visualizer site and found an amazing difference.

Period:1972 to 2018, rebalance annually, no additional funds added, not inflation adjusted.

10,000 dollars grows to $666,000 with a 60% US Stock Market and 40% Intermediate Treasury Bonds.

Change the allocation so that the bond portion is now 40% Total US Bond Market and the $10,000 grows to only $143,000.

Over a $500,000 difference just between having Intermediate Treasury bonds versus the Total US Bond Market. I find that amazing. Unbelievable.

Or perhaps I messed up?

 

[alaska55]

I just used the Porfolio Visualizer site and found an amazing difference.

Period:1972 to 2018, rebalance annually, no additional funds added, not inflation adjusted.

10,000 dollars grows to $666,000 with a 60% US Stock Market and 40% Intermediate Treasury Bonds.

Change the allocation so that the bond portion is now 40% Total US Bond Market and the $10,000 grows to only $143,000.

Over a $500,000 difference just between having Intermediate Treasury bonds versus the Total US Bond Market. I find that amazing. Unbelievable.

Or perhaps I messed up?

The total us bond only goes back to 1987, you can run up to 3 portfolio at the same time.

 

[OldShooter]

... Over a $500,000 difference just between having Intermediate Treasury bonds versus the Total US Bond Market. I find that amazing. Unbelievable.

Or perhaps I messed up?

I don't know but I'll guess: We held long TIPS (2% of 2026) starting a couple of years before the 2007-2008 excitement. We saw them jump in value by 50% when interest rates went to zero. Probably long bonds were even more exciting. So just the addition of long bonds vs only intermediate might be the reason.

You might try comparing a 100% intermediate and a 100% total market portfolio and see if something exciting happens to the graphs in 2008.