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Comment by refurb | Hacker News Reader

Interesting that for the 2007 financial crisis, you only had to wait until early 2012 to make up your loses.

Even for the crash of the early 1930's, after 8 years you were back to where you were.

That discounts businesses that collapse entirely, or under-preform enough to exit the index market. Indexes are misleading because they have a strong survivor bias. Stocks that slipped out of the S&P 500 entirely no longer register, but the money you had in them sure does.

https://seekingalpha.com/article/207935-is-there-survivorshi...

I'd like to see the S&P performance of then current index stocks over the same time period, im guessing it would be significantly worse.

What happens to your money if you invest in an index fund and companies drop out of the index?

The fund rebalances regularly. Before the company is dropped out its value will have dropped, of course, causing the entire fund to drop proportionally in value.

Index funds typically rebalance quarterly, I believe. The index also rebalances, usually called reconstitution [1]; the Russell indexes rebalance yearly, for example.

Which means there can be a discrepancy between the fund and the index at any given time. This can result in arbitrage opportunities, I believe.

Interestingly, the selling and purchasing involved in adding or removing a stock from an index/fund also has an effect on the market [2].

[1] https://www.investopedia.com/terms/r/reconstitution.asp

[2] https://www.cxoadvisory.com/miscellaneous/strategies-for-exp...

The broad index funds (VTI, Russel) are indexed to market cap, so when individual stock prices change, it stays balanced or very close to it.

When a fund rebalances, it has tax consequences, so funds are incentivized not to do it.

When a company drops out of the index, the fund sells all its shares in it and buys shares of the new company that took its place.

But it should be said that the price that the fund manages to sell the shares at could be far lower than the price at the time the company exited the index since many funds and others will be trying to get out at the same time.

So wait, is throwaway2048 correct that this type of analysis misses companies who dropped out? Or are the gross return numbers including selling the shares of 'leaving the index' companies at a loss? I would imagine the latter and so his point is wrong, but I'm open to being corrected

Are you saying that there is a huge untapped arbitrage opportunity?

Nope, just that even if you do have data that captures when and at what price a company exited an index, you still wouldn't quite be able to work back to the performance of a tracking index fund (because you don't when and what price the index fund sold)

That would be the massive amount of QE & money injected into the system. I doubt next recession it will be so simple to sell the bonds we need to to run a massive QU campaign again

Hasn't the Fed mostly rollbed back the QE by selling off the assets they bought?

Looking at Fed total assets [0], the Fed's sold off only a fraction of what it took on during the crisis and QE.

[0] Fed total assets from FRED: https://fred.stlouisfed.org/series/WALCL

Wow, no kidding. I wonder how the mix has changed? Obviously I was wondering about overall going down, but I seem to recall there being like a change of short for long term assets or something?

The fed purchased long term assets like mortgage backed securities to provide liquidity and relief to corporations that held too much bad debt on their balance sheets. This provided immediate relief for distressed institutions.

The fed also expanded the balance sheet by selling long term bonds, which offered relatively lower rates in comparison to short term notes and bills, this provided the cash infusion needed for QE to stimulate the economy.

The fed’s balance sheet went from roughly 4 t down to I think ? 3.5 T and now it’s ramping up again at the top of cycle + lending hundreds of billions a month to banks in the repo markets. Given the pace we’re going at now I doubt we’ll be able to sustain the pace in a recession

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