T Nation

Buying The Whole Index Market


#1

I am not a fan of managed money in general. I believe I am better off buying a very diversified basket of index funds.

The best would be a basket of index funds that covers the whole global markets ... or the most important ones. Or an index of indices.

Does Vanguard offer such a product? Or any competitor that has its products listed on the US exchanges? I doubt iUnits has such a bundle offered to Canadians.

Thanks in advance!


#2

Yes, the Vanguard Total Stock Market Index (VTSMX) is one.


#3

Just keep in mind that if you are buying funds that attempt to replicate the index, there is no point in diversifying into other funds that replicate the same index as you are only buying the same thing. If you want to replicate the index, just pick a fund that most closely resembles the stocks in the particular index and make sure that you check out the Management Expense Ratio. You dont want to be paying an index manager much in fees as they are not really doing anything to earn their fees except for placing trades.


#4

Mr Chill --

Yeah vangaurd started the index thing if im not mistaken. They wont have much management or marketing fees so they stack up pretty well against the active managed ones.

I am not a big fan of funds of funds or the funds of indexes if what you are talking about is where they buy several other indexes as part of the portfolio because they will probably have a lower net return after their management fees are taken out even though their returns will be smoother. But indexes themselves are great im with you there.

Is this for retirement down the road? or something else? Im asking because if the time horizon when you will be cashing in is more than 15 years down the road it will pay off to be a little more agressive until about 5 or 8 years before you need the money so you can have some growth on your portfolio.

If your a young turk like most of us here , put a small portion of your portfolio in bonds or bond funds in case the market crashes. But im not really telling you anything that you cant figure out for yourself in a Money magazine or from a financial planner.


#5

I reckon that you really need to get some professional advice if you are serious about this. The reason is that if you start talking to many people you are going to get significantly differing recommendations, and rationales for those recommendations. It is very easy to get confusing information.

For example, I could say to you that I dont really think the last poster is giving you the best information. I believe that index funds are useful in a portfolio for controlling costs, but if you do your research right, get some competent advice you may find that actively managed funds can return greater net profits, even allowing for their higher management costs. An active fund with a good manager can exploit the inefficiency of the share markets and increase the level of net returns through the many opportunities that exist. That being said, picking the wrong active manager can have bad side effects, but so can being in the market in general. Having said that, the risk of not being in the market and therefore not getting the returns can be the greatest risk of all. The level of risk and generally therefore the level of return that you can get has to be controlled by you and your choices.

In addition, if you are a young guy, and you have a long intestment time frame (7 - 10 years minimum) I would consider minimising or eliminating entirely the amount of bonds or fixed interest that you hold in your portfolio. If you have a long time to invest the one thing that can be guaranteed is that the markets will go up and down at some point. Historically they go up more than they go down, and stock markets historically go up a lot more than bond markets do. Too much money in bonds may mean that you miss out on higher returns over a long period of time. However, if you are only considering investing for a short period of time, a mix of stocks (domestic and international) and bonds, as well as some property funds and hybrids could be a good mix.

I guess what I am trying to say is that firstly you need to answer some personal questions about investing.

  1. Why are you investing
  2. How long are you prepared to invest for
    3.How much risk are you prepared to take
    4.What sort of return do you want from your investment (income or capital growth)

When you can answer these questions I would recommend that you go and see a financial planner, or get some qualified advice, if you cant answer these questions, definately go and see a financial planner as they can help you with this side of it as well.


#6

Wow. Thanks for the information and comments.

I am in a hurry, but I work in the financial services industry and have come to the conclusion that for short-term purposes, actively managed money can be good. For example, balanced and asset allocation funds can offer some downside protect when markets go crazy, since the manager can call shots.

In the long-term however, the % of managers who consistently beat the market is too small and reversion to the mean is almost inevitable*.

  • Even if it were inevitable, how does one find the NEXT Peter Lynch? The chances of missing are just too high.

So for the short-term, I want to throw one, ideally 2, year's salary in a money market fund. Or some real-return product. But not riskier than that.

For the rest, I want growth. Since nobody can beat the market consistently on the long-term, I just want to buy the whole market. Period. In short ... if you can't beat 'em, join 'em.

And indeed it is passive management and therefore I should also seek the lowest management fees product out there.

I found something called the Morgan Stanley All Country

http://www.msci.com/methodology/methodology.html

http://www.morganstanley.com/cgi-bin/morganstanley.com/pressroom.cgi?action=load&uid=404

However their is not one ETF (exchange traded fund) that represents it. :frowning:

More later. Thanks!


#7

Get the newsletter from Morningstar.com

They often rate funds as well as individual stocks and let you know how they are doing throughtout the year.

You'll learn about what to look for in a fund (expenses and management) and stocks (wide moats, etc)

It's free...


#8

Check out these guys. They favor index funds. According to them, most managed funds, on average and in the long run, will not outperform the market as a whole. So why pay a fund manager?

http://www.fool.com/


#9

Thanks for the info. Always appreciated!

I think I found it ... rather close to the MSCI AC index:

http://flagship4.vanguard.com/VGApp/hnw/FundsPerformance?FundId=0129&FundIntExt=INT&DisplayBarChart=false

(Vanguard Global Equity Fund - Ticker: VHGEX)

Other cool links that I found via Fool.com, YahooFinance.com, or About.com:

http://www.fundadvice.com/FEhtml/BHStrategies/0006a.html

(FundAdvice.com / Paul Merriman)

The guys rule... to bad I don`t have the minimum 100 000$ to invest with them:

http://www.ifa.com/

And an interesting comparison:

http://www.altruistfa.com/dfavanguard.htm


#10

I second that recommendation, and glad to see another Fool out there.

As you previously stated, very few fund managers consistently beat the market, despite all the hype. For a LONG-TERM strategy, I believe it is best to allocate a portion of your investments to index funds. Deposit on a monthly basis and forget about it.

Another part of your allocation can be used for more immediate returns -- immediate being five years down the road.

Investing for the short-time rarely works out. Day traders amaze me.


#11

There's another interesting option you might wish to consider, especially if you're plunking down a good bit at once, and plan to hold it:

iShares Trust MSCI EAFE Index Fund (EFA)

It's an ETF by Barclay's that tracks international value stocks.


#12

In agreement on indexing. My school day recollection is that the % of of active money managers that consistantly beat the index is about the same as the % of people who beat the index by random guessing.

Question about why you want to find a fund to include multiple indexes? Why don't you just pick a fund to index what you trust like the S&P? Or, just spread your cash out over a few index funds so you can choose the %'s you like?


#13

yeah motley fool is a good website

why we are on the subject what's everybody's opinion on day trading? of course the guys at motley fool don't recommend it has anyone tried it or have any opinion regarding it ????


#14

I don't see how day trading can work, given the transaction costs, unless you're dealing with either huge amounts of money (in which case, if it's yours, why are you bothering?) or you're highly leveraged (in which case, it's way too dangerous).

The market is generally efficient for stocks that are well known and liquid -- and if they're not well known and liquid, where are you getting quality information on a consistent basis?

I'd say, bad idea.


#15

It depends. I wouldn't advocate day-trading per se, but let's take a sample scenario. Stock A is selling at $1 /share. You buy 1000 shares of A, and it goes up $0.25. You just made $250, or 25%. This is a very, very simplified example, but the point is that you can get a decent return on investments if you can afford to buy a larger number of shares (as BB pointed out). The more money you put in, the more small upward fluctuations can reward your investment, and small downward fluctuations can punish it. The problem, of course, is that most people are not in a good enough financial situation to do this kind of very active trading.

Most people would probably benefit from getting a decent mutual fund or two, including a general index fund like the Vanguard Total Stock Market Index. These aren't as sexy as actively managing your stocks, but a lot more sexy than losing your shirt. (Unless you're a hot chick, in which case I advocate you losing your shirt as much as possible. But I digress).


#16

Chill...a couple of thoughts for you. First, there are a lot of people who agree with your premise; that is, indexing is better than active management. David Swenson, who runs Yale's endowment has a book out titled Unconventional Wisdom that basically discusses that very topic. His point is that the asset allocation decision is the biggest decision and that there is very little value added to active management (in fact, he believes it is value detracting).

Now, with that in mind, the idea of trying to buy 1 ETF or index fund to get the whole enchilada is, IMO, the wrong approach. I think you need to parse the world into a few different categories. You could do it very simply with U.S. and International. Alternatively, you could get more complex, let's say, U.S. Large, U.S. Small, International, Emerging Markets, Real Estate and Commodities. You can then buy ETFs or Index Funds to fill in each of those categories (for the first, maybe your Vanguard Total Market Fund that you mentioned, an EAFE fund as I think was mentioned by Boston). It can get much more complicated, of course, but studies have shown that if you are disciplined and rebalance on a regular basis, the above will generally do a pretty good job for you over the long term. Also, I have not included any bonds, which may be appropriate given your time horizon and risk profile.

I could spend a lot more time on this. Let me know if you need more insights.

Best of luck.


#17

Much agreed here as well. I only know a few people who have done well at day trading, but it's risky business even in just stock. Most people loose their shorts.


#18

Yeah, but in that example, the stock could go down too. And, you still have your transaction costs and taxes.

Unless you get your information on the exchage floor, it's stale. The smart investors have already taken the spoils. I don't like to play a game where I am at an immediate disadvantage.


#19

That's true... I'm not advocating day trading. But I know several people who made money through buying fluctuating stocks in volume. It's a shorter-term strategy, but it's not as short-term as day trading.


#20

A couple of limitations: minimum purchase amounts and transaction costs.

I agree with what most of you have posted, especially for boosting returns. Ideally, I'll end up with a small basket of indices, including ones who are more Growth oriented, to skew my returns upwards*, because as well all know historically small caps have given a 20% premium on returns over big caps.

(* That's what IFA/DFA does, but I don't have the 100 K$ minimum account (and won't have for a quite some time either).)

Long story short, I also can't market-time shit. I know the US represents roughly half of the world's stock market capitalization. But one year it's the USA, the next it's Mexico, the next it's Lithuania, etc.

Call it too simplistic, but I see this as a whole. To quote a chemist, "Nothing is lost, nothing is created, everything is transformed." ... or more aptly "everything changes hands" with regards to money. Since I can't market-time, and guess what the next big thing will be, I thought I'd just buy the whole enchilada ... for starters.

Sure, I won't get stellar nor dumpster returns, but for now I can live very well with a 10 year 11.60% average (Vanguard VHGEX) return. Either I dollar-cost average it, add indices one at a time (and feed the laggers), or buy sub-sectors to augment concentrations ... all will depend on future cash flows.

Thanks! Currently searching for something similar on the fixed-income/bonds part of the porfolio. My 'gamble' money is in the world indices, but the 'safe' part must get higher returns than money market funds.

What a hobby!