Index funds beat most active funds

[retire@40]

Quote:

Originally Posted by Mr._johngalt ...Oops, I see I screwed up the quote again...

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?

[FinanceDude]

Quote:

Originally Posted by JustCurious Your response makes no sense. It's true that the composition of the SP500 index slowly changes over time because it generally tracks the larges 500 stocks, and of course companies continue to grow and contract, and the index reflects that.

Your analysis is well thought out, but your info on the S&P 500 Index fund is inaccuarate:

http://www.beaconequityresearch.com/...-ind_sp500.php

[brewer12345]

Quote:

Originally Posted by retire@40 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?

I think it stems from the same wellspring that gifts him with a shaky grasp of the real world and some issues with logic.

[FinanceDude]

Quote:

Originally Posted by brewer12345 I think it stems from the same wellspring that gifts him with a shaky grasp of the real world and some issues with logic.

Which is why we like him on here............a different perspective............

[mickeyd]

"Active investing is therefore a zero-sum game. The only way for one active investor to do better than average is for another active investor to do worse than average" Fortune's Formula (Page 170) by Willian Poundstone

[saluki9]

Quote:

Originally Posted by mickeyd "Active investing is therefore a zero-sum game. The only way for one active investor to do better than average is for another active investor to do worse than average" Fortune's Formula (Page 170) by Willian Poundstone

It's actually worse than that. All investors divy up the market return MINUS EXPENSES.

[Patrick]

Quote:

Originally Posted by mickeyd "Active investing is therefore a zero-sum game. The only way for one active investor to do better than average is for another active investor to do worse than average" Fortune's Formula (Page 170) by Willian Poundstone

This is true for non-active investors too, since they don't actually make any money until they sell, and someone has to be on the "buy" side of the equation at that time.

[Nords]

Quote:

Originally Posted by JohnEyles Not disputing your overall point, but ... if the SP500 index is lower (or equal to) what it was in 2000, and overall return has averaged 6.8%, doesn't that imply that the dividend yield was 6.8% or more ? What am I missing ?

I think that's a total return of 6.8% over the last five-six years, not an average annual return.

Quote:

Originally Posted by mickeyd "Active investing is therefore a zero-sum game. The only way for one active investor to do better than average is for another active investor to do worse than average" Fortune's Formula (Page 170) by Willian Poundstone

Luckily it's not hard to find those worse-than-average active investors... and their fund managers.

[JustCurious]

Quote:

Originally Posted by FinanceDude Your analysis is well thought out, but your info on the S&P 500 Index fund is inaccuarate: http://www.beaconequityresearch.com/...-ind_sp500.php

You are correct that the SP500 is not limited to the 500 largest stocks, and that is why I used the modifier "generally" when I said the SP500 generally tracks the largest 500 stocks. According to Standard and Poor's, a publicly traded company must have a market capitalization of at least 4 billion dollars to be considered for inclusion in the 500 index (among other criteria), and they also state that the 500 index focuses on the large cap segment of the US stock market. So my point that the SP500 is a good benchmark for large cap mutual funds is valid.

[JustCurious]

Quote:

Originally Posted by Nords I think that's a total return of 6.8% over the last five-six years, not an average annual return. Luckily it's not hard to find those worse-than-average active investors... and their fund managers.

Nords, actually, 6.8 percent does reflect the average annual return, not the total return, of Vanguard's SP500 index fund for the last 5 years, up to Sep. 30, 2006. Go to vanguard.com, and look at the performance for VFINX.

[FinanceDude]

Quote:

Originally Posted by JustCurious You are correct that the SP500 is not limited to the 500 largest stocks, and that is why I used the modifier "generally" when I said the SP500 generally tracks the largest 500 stocks. According to Standard and Poor's, a publicly traded company must have a market capitalization of at least 4 billion dollars to be considered for inclusion in the 500 index (among other criteria), and they also state that the 500 index focuses on the large cap segment of the US stock market. So my point that the SP500 is a good benchmark for large cap mutual funds is valid.

Good point.............the only real problem I have with the S&P is the market cap weighted approach...........i.e. the blue chips will dominate the index, and I feel that is not as broad-based as one would think. MSFT comes to mind, it's in ALL THREE major indexes.......ergo it is hard to get away from..............

I had a Wall Street trader tell me that a $1.00 move in MSFT would raise the Dow 93 points by itself.....................

[JustCurious]

Quote:

Originally Posted by FinanceDude Good point.............the only real problem I have with the S&P is the market cap weighted approach...........i.e. the blue chips will dominate the index, and I feel that is not as broad-based as one would think. MSFT comes to mind, it's in ALL THREE major indexes.......ergo it is hard to get away from.............. I had a Wall Street trader tell me that a $1.00 move in MSFT would raise the Dow 93 points by itself.....................

You raise another good point, that many people use the S&P 500 index as a barometer of the entire US market, when it is far, far from that! In my opinion, the best index to reflect the whole of the U.S. stock market is the Dow Jones Wilshire 5000 index (^DWC).

[MasterBlaster]

Quote:

Originally Posted by JustCurious You raise another good point, that many people use the S&P 500 index as a barometer of the entire US market, when it is far, far from that! In my opinion, the best index to reflect the whole of the U.S. stock market is the Dow Jones Wilshire 5000 index (^DWC).

The Wilshire 5000 is also market cap weighted and suffers from the same issues that the S&P500 does

[JustCurious]

To illustrate the difference between the S&P 500 index, as compared to the total US market consider this:

The five year average annual return of VFINX (Vanguard's S&P500 index fund) is 6.85 percent.

The five year average annual return of SWTIX (Schwab's total stock index fund which tracks the Wilshire 5000 index) is 8.40 percent.

The difference is attributable to the fact that the total stock market fund benefited from the relatively good performance of small and mid cap stocks over the last 5 years, as compared to large cap stocks. And consider that the person who invested in the total stock market fund over the last 5 years earned 1.55 percent more each year with LESS RISK. (they were more diversified)

[MasterBlaster]

JC: Nobody refutes your figures.

However, because the S&P500 and the Wilshire 5000 indices are dominated by a relatively few large cap stocks the relative movement of the index (or indices) is not always indicative of the relative movement of the US economy.

That was the point made. That both of these indices suffer from that issue not just the S&P500.

[JustCurious]

Quote:

Originally Posted by MasterBlaster JC: Nobody refutes your figures. However, because the S&P500 and the Wilshire 5000 indices are dominated by a relatively few large cap stocks the relative movement of the index (or indices) is not always indicative of the relative movement of the US economy. That was the point made. That both of these indices suffer from that issue not just the S&P500.

MB, I did not suggest that the Wilshire 5000 index is "indicative of the relative movement of the US economy." I suggested that it is a very good indicator of the US stock market.

[mickeyd]

" A passive investor is defined as anyone sensiable enough to realize you can't beat the market. The passive investor puts all his money into a market portfolio of every stock in existance.

An active investor is anyone who suffers from the delusion that he can beat the market. The active investor puts his money into anything except a market portfolio." Fortune's Formula

[SecondCor521]

Quote:

Originally Posted by MasterBlaster However, because the S&P500 and the Wilshire 5000 indices are dominated by a relatively few large cap stocks the relative movement of the index (or indices) is not always indicative of the relative movement of the US economy.

MB, I'd like to understand this point better. What would you suggest is the best proxy for "the relative movement of the US economy"? If a person is just discussing stocks, I think that ^DWC (and mutual funds like SWTIX and VTSMX) does a pretty swell job. Clearly they don't reflect the performance of bonds, real estate, commodities, collectibles, or cash. Please clarify, thanks.

Edit: I see JC has made a similar point.

2Cor521

[MasterBlaster]

JC:

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.

[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.