Yeah, about that active comeback...
ft.com
ft.com
In some senses, behind the scenes its likely similar to the Twitter/FB/Netflix algorithm - at some point there is some editorial opinion being inserted via criteria and weighing of those criteria.
"Some years ago Bill Miller, then a well-known Legg Mason portfolio manager with a stellar record of beating the market, noted that the S&P 500’s track record of being very hard to beat suggested that active management can succeed and that the Index Committee were actually good active managers."
https://www.indexologyblog.com/2014/08/07/inside-the-sp-500-...
Another thing to think about is that most of the outperformance of the index is driven by the largest companies. But not because they were added when they were their current size. But because of the buy and hold approach of getting them in when they're still on the small end of the large caps. There was a good recent paper on this concept, showcasing that most of the big index returns are attributable to only a few stocks. Similar to how most of global market returns are mostly just US.
Here's the current breakdown:
Apple 7.08%, Microsoft 6.20%, Amazon.com 2.62%, NVIDIA 1.87%, Alphabet 1.84% Berkshire 1.65% Alphabet 1.61% Tesla 1.44%
which if it was an active manager would be highly opinionated.
There's a slight deviation because it's float-adjusted and I'm assuming their marks are at some frequency, but those numbers aren't mysteries.
Investing proportionally more in a huge company than you do in the 500th largest eligible company seems much more passive than active to me.
If two S&P companies were to merge and everything else remained the same, I’d think that having the combined amount invested in the combined company to be more sensible than cutting your investment proportion in half merely by a merger.
Or if a company you’d invested in doubled in value, I’d rather hold the constant number of shares rather than sell half of them to bring my exposure to the winner down. I’d also view that as passive and un-opinionated. Selling half feels more active and opinionated than simply holding.
I think maybe you are talking about risk, but it’s a completely separate idea.
Also, the market cap of company 450 and company 550 are close enough that recent market performance can flop ]back and forth fairly regularly, which the S&P has further rules to try and limit, though again I don't remember the details. Again, they try to be fairly rules based, but do exercise some discretion in creating the rules.
When it comes to tiebreak decisions, there may be 5 or so potential adds when there is 1 delete. There may be a focus on evening out sector exposures, preferencing underweight sector adds. (Just my guess)
However with very significant profitability outliers, such as power law distributions, then you have to own all the shares to ensure you don’t miss out on the one or two shares that make up most of the gains. Venture capitalists talk about this a lot.
Historically the same issue occurred with market timing: most market gains are made during only a few relatively short unpredictable periods. You need to own shares for a long time to ensure you are in the market when those few unpredictable ups occur.
What do you mean by this? That pension saving make up the bulk of wealth in the US? Because from what I can gather that's not correct.
What happens is the ridiculous return of the sp500.
Sorry, about this link in advance: https://www.ramseysolutions.com/retirement/the-national-stud...
[1]-It’s about 9% of American adults.
How is this counted wrt spouses?
I'm not asking that our advisor take leverage, but merely asking whether she/he has, to gauge confidence in the investment thesis.
Not wrong, but the rules are relatively fixed and known ahead of time and somewhat more deterministic compared to the decision-making process of most active funds.
It should also be noted that the S&P 500 isn't the only index. The Russell 3000 and Wilshire 5000 try to cover "all" publicly trade companies in the US:
* https://en.wikipedia.org/wiki/Russell_3000_Index
* https://en.wikipedia.org/wiki/Wilshire_5000
But "passive" investing does exist on a spectrum:
> The terms passive investing and index investing are often intertwined, but they are not exactly the same thing. Today’s guest is Adriana Robertson, the Honourable Justice Frank Iacobucci Chair in Capital Markets Regulation […].Adriana is interested in index investing and, in this episode, we hear her views on whether or not index investing is passive. Hear facts from her paper on the S&P 500 Index fund specifically, and all of the reasons that it's not passive, as well as some of the issues that are potentially arising from the creation of so many indexes or so-called passive investments. A more recent paper by Adriana, published in The Journal of Finance, surveyed a representative sample of U.S. individual investors about how well leading academic theories describe their financial beliefs and decisions, and Adriana shares the differences in something like value growth from an academic perspective versus a real-world perspective. Find out how investors can go about evaluating the performance of their portfolios and what they should be looking for when deciding which index fund to invest in, as well as why index funds aren’t a meaningful category anyway, factors from Adriana’s surveys that might influence investor’s equity allocation, and the trend towards indexing and whether it will overtake active portfolios. Tune in today for all this and more!
It's as if researchers complained that placebo is too therapeutic.
The SP500 index might be a little more complicated than just the 500 biggest public companies. When Tesla was rejected despite meeting criteria, it was odd. However “edition” impacts less than 1% the actual value.
If you can compare VOO (Vanguard sp500 tracking) vs VV (Vanguard 566 large cap), it’s the same: https://www.etf.com/etfanalytics/etf-comparison-tool/VOO-vs-... (20 basis-point difference)
I’d be worried if nobody could beat the market. 7% to 15% beating the market seems reasonable to me. The market is an incredible abstraction and it works, and it’s also still great and reassuring to know that there’s still an echelon of actively managed funds that beat the market.
This ‘score’ has other useful properties. A successful fund manager has to operate under difficult and changeable conditions for long periods of time. They can’t get there just by default or by being lucky. Knowing which people can do this very challenging task means the advice they give about investing, managing your own psychology and life in general is imbued with a legitimacy that is difficult to find elsewhere.
Why do you say that? If I ran a League of Coinflip Guessers with 10,000 entrants, someone would still win the league, and probably with an astonishing score too. Why not the same with stock returns? You have 10k managers it stands to reason some of them will by pure chance beat whatever metric you set.
(80% * managers return) - 2% < market return.
Not:
managers return < market
It's quite different.
https://www.forbes.com/sites/dereksaul/2023/04/10/these-7-te...
Everything else is still down and recession likely glooming. And when the recession hits the massive gainers are likely getting same-size correction.
- They are making $40/year avg. off a user by selling users data
- They announced massive stock buybacks
Not sure if this is the best capital allocation for society - would love to see less parasitic platforms to success.
Not really sure why people complain so much about stock buybacks. They're tax advantaged dividends.
OK.
So they are returning that money to their shareholders. Which is kind of the point of a company.
Does that mean the company is no longer a growth stock? Probably. But not being a growth stock isn't exactly a crime against humanity.
How many mergers and acquisitions have we seen epically blow up? How many billions down the drain on projects like the windows phone or Google+? Hindsight is 20-20 but when it comes to pouring tons of money into new products we're not exactly blind either.
Metaverse comes to mind.
Stock buybacks were outlawed for decades as insider trading. At some point it became legal, people made money, and all sorts of verbiage piles on when people make money. It’s still insider trading and insider trading does things like mucking up actual market valuations and adds leverage for a later correction to unwind, dramatically.
Companies that issue dividends usually have that dividend as a prominent feature within their business case. As in “we send out 90% of our profit as dividends after all costs/maintenance are paid.” They’re also usually almost cookie cutter businesses like REITs or mines. (Cookie cutter as in there’s well established business models already in place for decades/centuries. There’s differences one company to another but it’s characteristics of the assets of that company which change not fundamental components like renting out owned assets or digging up rocks from the ground.)
Compare that with returns to technological innovation. Econ defines tech innovation as “growth in profit not attributable to any other traditional business operation.” In a sense, a “tech company” retiring cash to their market cap is saying they can’t think of any other thing to do with that cash, including growth of their bottom line ie technology. Quitters mindset.
The obviousness of it being insider trading probably becomes even more glaring if we could see the machinations of a stock buyback. They’re probably timing the market to make sure the price increase is most pronounced or meets some metric that’s dubious.
Further, it’d be interesting to see how the stock market would respond to a company class defining themselves as stock-buy backers ala “we use 90% of our profits to buy back stocks” like the more traditional dividends. Would the stock value reflect today all the expected stock buybacks in the future at a time value discount?
Stock buybacks are not dividends. Dividends are paid out to shareholders at a declared date and come from a defined source of funds. The separation of the source of funds for a dividend and the rest of the companies accounts is clear cut. Buybacks are murky in comparison. If the market or stock has a bad day on the day of executing the buyback the actual buyback could be negated by the overall trend. Further, a company would logically not buyback their stock on such a day unless it fit their criteria otherwise. Ie insider trading. It’s not possible to call dividends insider trading in the same sense because dividends are paying out shareholder income.
People need to stop parroting this. Meta targets ads with user data. That's very different than selling user data.
Just to be clear, we're in a recession and have been for a while now, despite government administrators attempts to change the definition.
By what possible criteria are you using to assert we’re currently in a recession?
But see above, there is no "recession". The economy is growing.
Interesting reading: https://www.economist.com/briefing/2023/04/13/from-strength-...
Your original comment was insinuating political figures are changing the definition. I'm assuming you mean if we just had 2 consecutive quarters of GDP decline then that definitively means we're in a recession... But that is objectively not the case by the figure you just told me to look up. We're in 2 quarters of real GDP increase.
So yeah, what you're saying is exactly how it's meant to go.
Also, "recession is looming" is easy to say at literally any time in history. Eventually, you'll be right. The trick is to know precisely when it will take place.
Exxon Mobil (XON) was the #3 company in 2001, but not even in the top twenty in 2021:
* https://www.bespokepremium.com/think-big-blog/largest-25-sto...
<5% of companies have driven most of the returns of equities:
> We study long-run shareholder outcomes for over 64,000 global common stocks during the January 1990 to December 2020 period. We document that the majority, 55.2% of U.S. stocks and 57.4% of non-U.S. stocks, underperform one-month U.S. Treasury bills in terms of compound returns over the full sample. Focusing on aggregate shareholder outcomes, we find that the top-performing 2.4% of firms account for all of the $US 75.7 trillion in net global stock market wealth creation from 1990 to December 2020. Outside the US, 1.41% of firms account for the $US 30.7 trillion in net wealth creation.
* https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3710251
> Four out of every seven common stocks that have appeared in the CRSP database since 1926 have lifetime buy-and-hold returns less than one-month Treasuries. When stated in terms of lifetime dollar wealth creation, the best-performing four percent of listed companies explain the net gain for the entire U.S. stock market since 1926, as other stocks collectively matched Treasury bills. These results highlight the important role of positive skewness in the distribution of individual stock returns, attributable both to skewness in monthly returns and to the effects of compounding. The results help to explain why poorly-diversified active strategies most often underperform market averages.
* https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2900447
The trick is knowning which company(ies) will be that 5% and when: some do well for a time and then fade away: you would have to know when to jump in and out of them.
Also, the S&P 500 being concentrated is not new and has been the case for 40+ years:
* https://awealthofcommonsense.com/2020/02/5-companies-make-up...
It's just the companies have changed (and there's no way of easily of predicting which ones did / will rise and fall).
The article was written in mid-2022. from https://get.ycharts.com/resources/blog/whats-the-sp-500-with...:
Given the sheer size of “mega cap stocks”—being Apple (AAPL), Microsoft (MSFT), Amazon (AMZN), Alphabet (GOOG & GOOGL), Meta Platforms (FB), Tesla (TSLA), NVIDIA (NVDA), and formerly Netflix (NFLX)—most portfolios carry noteworthy exposure to these companies.
When stripping out the entire cohort of Mega Cap Stocks, the S&P 500’s annualized performance in the five-year period ending February 28, 2022 would have fallen to 6.98% from 15.17% annually—a reduction of more than half. The index’s standard deviation would have seen an improvement of 4 percentage points, but the lost returns seem to sting more than the reduced volatility.
The pattern persists in each full calendar year since 2015. When each Mega Cap Stock is hypothetically excluded from the S&P 500’s total return, the index suffers. Notably, 2020’s 18.4% total return for the S&P 500 would have been a mere 3.3% had the eight Mega Cap Stocks been excluded, by our calculations.
Only in 2022 (year-to-date, through February 28, 2022) would removing the Mega Cap Stocks have actually boosted the S&P’s growth.
Are there low-fee funds that just track the S&P 500? That would seem to be the way to go for long-term investing? What such funds can I find? (taking into account as other comments in this thread point out that, yes, the S&P is actually actively managed itself, sort of).
"...If you had invested $10,000 in the S&P 500 index in 1992 and held on with dividends reinvested, you'd now have more than $170,000. The market volatility in 2022 could cause this return to decline somewhat. However, the index has proven to be a winner over the long term..."
If I plug this into a random calculator on the web without knowing what I'm doing, $10K to $170K over 20 years looks like... around 15.25%? That does seem quite high, can that be right?
https://www.investopedia.com/ask/answers/042415/what-average...
"The average annualized return since adopting 500 stocks into the index in 1957 through Dec. 31, 2022, is 10.15%."
"Over the past 20 years (2002 to 2022), the average annualized return on the S&P 500 is 8.19%."
So a conclusion might be: if you've been getting less than 8% (after fees) over ~10 years in any managed fund... you might want to reconsider your investments, seems like. But if you've been getting 8-10% or more, you're pretty good. Does that make sense?
But then, if you know this... have you switched any actively managed to funds to an S&P index fund? Why would this not be the obvious thing to do?
https://www.thebalancemoney.com/what-is-the-average-mutual-f...
It does note that that includes "the average for all mutual funds, including index funds." But if the answer is "oh yeah, the index funds bring up the average a lot"... why would anyone use anything but an index fund?
Is it going to be a lot lower than that over 20, even though that already includes 2008?
I admit this is all pretty confusing to me.
What returns would you consider acceptable over 10-20 years? Or do you not even look at past returns when deciding whether to keep your money in a given fund, or invest in a given fund?
“They will envy you for your success, your wealth, for your intelligence, for your looks, for your status - but rarely for your wisdom.” ― Nassim Nicholas Taleb, The Bed of Procrustes: Philosophical and Practical Aphorisms
If not on past returns, how do you decide where to invest your money? Have you ever decided to remove your money from a fund, on what basis would you make that decision?
There is _no_ returns that would cause you to re-evaluate your current investments? If you were invested in a fund that had given you say an average of 0.5% a year over the past 10 years, that would not cause you to re-evaluate your investment?
What about dividing funds for investment in three parts?
1-> Give to an active investor you respect
2-> One third to an Index Fund
3-> Last manage it yourself.
Compare performance after 5 years :-)
I.e. the entry point matters a lot.
If you win a lump sum, studies show that the best time to put it in the market is all of it right now, not trying to time the market or DCAing it into the market. Of course, you could get unlucky, so that you're initially in the 2000->2013 style window, but you can't know that at the time.
Of course, most of us do / should invest smaller amounts over time, just because that is what our earning profile is like.
2000+ was only an issue for US-only, equity-only investors: if you were globally diversified you were fine. Even if you were US-only, but had at least 20% bonds, you were also fine:
* https://www.forbes.com/sites/investor/2010/12/17/the-lost-de...
* https://ofdollarsanddata.com/the-cost-of-waiting/
Author has a repo where he often shares the data/code used in generating analysis:
https://m.youtube.com/watch?v=X1qzuPRvsM0
TLDW: just invest it all, right now, in value small caps.
Which is the whole point of DCA. It makes it less likely to get unlucky. (It also makes it less likely to get lucky. DCA makes it more likely that you will simply regress to the mean.)
...yes. Sorry, I don't mean to sound like a jerk, but is this really a question? There are dozens of them: https://www.thebalancemoney.com/the-cheapest-sandp-500-index...
I'm continually astounded by techies who have so much money and so little idea what to do with it. It's not like this stuff is even hard, not compared to keeping up the latest JS nonsense: https://www.bogleheads.org/wiki/Main_Page#mp-gs-h2
You may be over-estimating how much money I have as a techie, I work in non-profit/academic sector. My retirement funds are relatively paltry compared to what you may assume about techies with so much money (but perhaps still more than US median for my age; googling says median US retirement savings across all working-age households is $95,776), and mostly in managed 401k/403b where I have previously just chosen "lifecycle funds". ¯\_(ツ)_/¯
People make a lot of assumptions about how much wealth random HN commenters or the HN audience in general have, and sometimes I start feeling like I'm really poor compared to all you techie multi-millionaires... but when I actually pay attention to comments, I realize, nope, a lot of HN is more like me (although probably often ashamed to say so).
So in this toy scenario obviously active funds would underperform after fees. But there's more reason for investors to pick stocks than just beat the market (risk preferences - for a lot of people the benchmark is not the S&P but bond yields). The majority of active management is not hedge funds and are not in the business of providing outsized returns (especially not to small retail clients). To beat the market, one must take risks that the other active managers or index committees deem to be unacceptable.
> From 1994 through mid-2014, it averaged a 71.8% annual return, before fees.
"Renaissance suffers $11b exodus with meager quant returns - https://economictimes.indiatimes.com/markets/stocks/news/set...
Or in general what can be done to economically align hedge funds with making some basic 5% or more return?
But there are more gen x, millennials, and now gen z that are buying into the market every 2 weeks. The boomer sellers are outnumbered.
Part of me feels like the market is a pyramid at this point, newcomers are paying for older generation in hopes the next generation will do the same.
The actual amounts sold by retirees are probably low (say a few percent a year), although I would like to see some numbers per age group. Presumably it is common for sudden death and their shares to be passed on to children?
That said, dividends are a decent proxy for company stability and health, but execs also know this, so they play games with dividends to keep income investors interested.