= 27d567bc2d48d9f40e9ccc20ea370b15)
ChrisHallquist comments on Open Thread, September 30 - October 6, 2013 - Less Wrong
You are viewing a comment permalink. View the original post to see all comments and the full post content.
= 783df68a0f980790206b9ea87794c5b6)
Loading…= b715d02e85f7b3b4ae65ca3d3e450868)
Subscribe to RSS Feed
Powered by Reddit
= f037147d6e6c911a85753b9abdedda8d)
You are viewing a comment permalink. View the original post to see all comments and the full post content.
Comments (295)
Topic: Investing
There seems to be a consensus among people who know what they're talking about that the fees you pay on actively managed funds are a waste of money. But I saw some friends arguing about investing on Facebook, with one guy claiming that index funds are not actually the best way to go for diversified investing that does not waste any money on fees. Does anyone know if there is anything too this? More specifically, are Vanguard's funds really as cheap as advertised, or is there some catch to them?
The idea is that you can't, on average and long term, beat the market. So paying extra money for a fund that claims to be able to do that is an unnecessary gamble. Accumulating the expertise to evaluate a fund's ability to perform better than the market would give you the ability to just invest at that level anyway, so you might as well save your time and money and stick it in the cheapest market funds you can manage.
Yes, some strategies beat the market, sometimes (they also sometimes fail catastrophically). But you can do pretty damn well comparably in the long term by having a very low-cost, low-effort strategy that frees up a lot of time and effort for other pursuits.
You can look up expense ratios on Google, Morningstar, etc. Vanguard does pretty well. They're pretty well represented here.
The issue with an index fund that based on something like the SAP 500 is that the SAP 500 changes over time.
If a company loses their SAP 500 all the index funds that are based on the SAP 500 dump their stocks on the market. On average that's not going to be a good trade. The same goes for the trade of buying the companies that just made it into the SAP 500. On average you are going to lose some money to hedge funds or investment banks who take the other side on those trades.
In general you can expect that if you invest money into the stockmarket big powerful banks have some way to screw you. But they won't take all your money and index funds are still a good choice if you don't want to invest too much time thinking about investing.
This sounds like a sufficiently obvious failure mode that I'd be extremely surprised to learn that modern index funds operate this way, unless there's some worse downside that they would encounter if their stock allocation procedure was changed to not have that discontinuity.
They do because their promise is to match the index, not produce better returns.
Moreover, S&P500 is cap-weighted so even besides membership changes it is rebalanced (the weights of different stocks in the portfolio change) on a regular basis. That also leads to rather predictable trades by the indexers.
Being an index fund is fundamentally about changing your portfolio when the index changes. There no real way around it if you want to be an index fund.
If you could consistently make money by shorting stocks that are about to fall off an index, the advantage would arbitraged to oblivion.
The question is whether you know that the stocks are about to fall off the index before other market participants. If your high frequency trading algorithm is the first to know that a stock is about to fall off an index, than you make money with it.
Using the effect to make money isn't easy because it requires having information before other market participants. That doesn't change anything about whether the index funds on average lose money on trades to update their portfolio to index changes.
This seems like a really weird question. If your friend is advocating something else, how about you tell us what it is? If your friend is knocking Vanguard, but not specifying what's better, why should I care? Your last sentence suggests that Vanguard is lying about it's fees. That would be a reasonable thing to say in isolation, but it's not true.
Most likely the alternative is to pay his friend to actively manage your money using his secret knowledge.
This does not automatically mean the friend is wrong. But I also wouldn't expect any kind of proof or guarantee. We are moving from the evidence area to "just trust me, I'm smart" area.
Asset allocation matters too. Vanguard target retirement funds follow the conventional wisdom (more stocks when you're young, more bonds when you're older) and are pretty cheap. Plowing all new investments into a single target-date fund is good advice for most people*.
I implemented a scheme to lower my expenses from 0.17% to 0.09%, but it was not worth the time, hassle, and tax complications.
*People who should do something more complicated include retirees, who should strongly consider buying an annuity, and people who are saving to donate to charity.
Generally it depends and there are certainly exceptions, but this position is a good prior to be modified by evidence. Absent evidence it stands :-)
Investing is complicated. There is no simple, bulletproof, one-size-fits-all recipe. To talk about "the best way" you need to start by specifying your goals and constraints (including things like risk tolerance) -- that's surprisingly hard.
There is no catch, you don't pay anything other than their advertised fees. Andrew Tobias has been using them as an example of a great way to invest in the market for years. (His writings on investing are great, ignore anything he says about politics on his blog.)