Flaws in Indexing Tactics

Indexing done correctly does work very well for long term investors. The are guaranteed to perform close to the averages and pay very, very low fees for administration and management. Considered collectively, the underperformance of managed portfolios is a virtual mathematical certainty due to the fees, which add up fast. Over 20 years, paying a 1% per annum management fee amounts to 20%, which is one entire bear market. And choosing a good manager is as hard as choosing a good stock. In fact, one is much better off spending time picking some good stocks for a portion of one's long term investments (an "alpha fund") and letting the rest be indexed. This is due to the fact that the reward from picking an outperforming stock is far higher than for picking a good manager.

BUT ...

Indexing can be done poorly. A poorly chosen index can give one a systematic loss or erratic performance over multi-year time periods. Both occur from the same error, which is choosing an index that is a mere component to the "market" versus the entire market.

The way to buy the ENTIRE market is to buy the Vanguard Total Market index fund or its sister ETF - ticker VTI. This is the optimal index tactic for US stocks.

Babblevision and lots of pundits talk about buying the S&P 500 index funds. BUT those invest in only large stocks selected by S&P, not all stocks. They leave out small stocks and mid-cap stocks and the sector weights (industrial, financial, utility) are erratic. There have been and will be multi-decadal periods when large cap stocks underperform.

Also, buying the S&P 500 fund alone introduces systematic errors and costs, too, from the changing components of the index. Periodic rebalancing costs money, as a stock is added or removed. And the tendency is to remove poor (past) performing low market value stocks and add the best performing mid-cap stocks. That's a form of Sell Low, Buy High. The total market index avoids all that. It suffers much, much less re-balancing (really only for cash mergers and buyout). And it buys small companies holds them, capturing all the gains that can occur until such a company gets added to the S&P 500.

So if you choose to index US stocks, use the correct index - the Total Market Index. And the way to do that is through the Vanguard Total Market Index Fund or its VTI exchange traded fund.

My Krypto Fund does just that for its US stocks.

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Looking around for screaming buys or sells, finding none yet.

Word of the Day

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