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Comment by gitfan86 | Hacker News Reader

This fundamentally misunderstand the point of an index. The fundamental reason S&P 500 exists is to let people buy the entire market ( the top 500 companies make up most of the entire market ). That is it. Period.

They are not saying these 500 companies are going to be the most successful in 6 months or 10 years. At one point Enron was 0.6% of S&P500 because it was a large company, not because the directors at S&P500 thought the management were honest people.

If you don't like that, fine, don't buy S&P500 and buy stocks or other funds that do have companies you like.

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This disregards the fundamental reason why people buy index funds in the first place. Rules for consistent GAAP profitability and cooldown periods specifically prevent retail investors from being exposed to particular malicious stock market tactics and overall risks that otherwise could significantly hurt them in the short term. So it's more like saying "you don't like extra risk? too bad."

Yes, if someone thinks that the top 500 companies include too much risk then yes too bad, you need to move out of SPY.

It isn't called the S&P495 because they kick out 5 of the biggest companies that some people consider to be risky.

I personally think its super risky to want to be Diversified and NOT include any exposure to SpaceX. Yes, Elon is unique but that doesn't mean his companies are going to fail especially given the potential risk of AI changing the world. Is IBM going to keep selling overpriced IT outsourcing in 5 years?

It's not about the overall long term risk of the company, it's the inherent short term risk of the IPO that will potentially hurt retail investors. Why not have them trade for a while and go to business as usual so things settle down and the index can prevent wild fluctuations? The only ones who might benefit from this rule change are pump-and-dump types.

The goal of SP500 is to provide exposure to the 500 biggest companies, not protect shareholders. I think IBM might do poorly when AI destroys their overpriced IT outsourcing business, but that doesn't mean SP500 should kick them out.

Again, that's not the issue here. Long-term, these things should absolutely go into the index if they fulfill the size requirement. It's the IPO process that has people worried (and rightly so).

You are talking nonsense.

The reason why I liked the SP500 is especially BECAUSE they had guardrails against unprofitable speculative companies that just got added on the stock market. On average those stocks are going down on their first public year. The SP500 made sure to have a cooldown period before adding them.

Now you are trying to justify why we should have them anyways, even though I never chose that to start with.

The issue everyone is having is the rule changes to add them in a couple trading days. How can you defend that?

You misunderstood what you were buying if you thought that S&P500 could never change their processes.

This is simply not true and a misrepresentation of the issue. There is no issue with SP500 buying into all these companies. The issue is that “valuation” should be determined by the market before the index funds buy into it hence the original rules and policy in place. Else wise we run into the issue now where our 401K is pumping the IPO, regardless of fundamentals.

> The fundamental reason S&P 500 exists is to let people buy the entire market

And why do people want to buy the entire market in the first place? They want to diversify and insulate themselves from a single company crashing their portfolio value.

What are people afraid of right now? They're afraid of a single company crashing their portfolio value.

Why are people afraid of their portfolio value crashing? Because these 3 companies will fundamentally increase the overall risk and volatility of the index.

Do you see the problem?

The problem is people equating S&P 500 with "set and forget" investment when that's never what it was. It's an index. You're not paying anyone to balance it with a particular risk profile.

There are indexes that invest equal amounts of money into all companies, so Nvidia doesn't dominate. Or you can pick low growth high dividend indexes to insulate against AI. Or just grab Vanguard LifeStrategy if you don't want to think.

The current situation is unusual. No index can handle all situations. Either adapt or use a fund that does the thinking for you, right?

People use the dollar in business becaUse its a stable currency.

If the US does something to destabilize the dollar, will economists be running around saying “the dollar was never intended to be used for that purpose!”? No.

It doesn’t really matter if the index “wasn’t supposed” to be something it became. The problem is the same. The only difference is who you blame.

The current situation is unusual and the standard rules handled it fine. For some reason they're changing the rules. That's not "no index can handle all situations." It's a deliberate, harmful change.

well, i had that, and now they're making me think, when they could instead keep it the way it was

Why would you accept this? Who does this serve?

I want to believe the world is full of good people but I read stuff like this and realize otherwise.

Why do you assume SpaceX will be a failure? Do you have a track record of being correct on Elon companies? If SpaceX succeeds and its in the SPY from day one that serves everyone who owns index funds.

Because the economics are simply not there.

There is not enough money in space exploration, let's be real. SpaceX biggest customer is itself. Hence the vaporware about datacenters in space.

Why the special rules for SpaceX though? I still do not understand why the world’s richest man and one of the most valuable companies needs an exemption? Genuinely confused.

Makes you think how he got so rich in the first place…

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