Good comments- As someone that has found more "success' in Investing over the longer term vs dabbling now and then as time permits in trading-my 2 bits- i have some follow up questions- Index Funds indeed offer a low cost way to invest-or trade- eliminating the risk that comes if one bets large on any individual stock- essentially "safer" by spreading out the Risk across multiple holdings. You still have sector Risk- or Market Risk- But you are not betting the farm on the latest Enron. As RMorse points out- Investors have a totally different mindset than traders-full time jobs, longer term goals- and need to rely on the relative long term overall performance of investing as a way to achieve some kind of financial gain . Many just "Know" this is something they have to be responsible and contribute to- something- Most are too involved in raising the kids, buying the house, plan for college, planning the summer vacation , to really focus on a retirement that is 20,30 years away- They hope the plan they set up when they hired in and got the employer match will take care of all that stuff way down the road. It is only when-in the later years, college bills , and some increased medical expenses start rolling in -that they get more interested and start counting Down to how many years they have left. Visaria points out "However, they are mainly used passively which is of course pure gambling and hoping." Perhaps it appears that way over the short term- when the position declines - but keep in mind- that Investors - have a much longer window they view from - decades in duration for most. - every month - are buying shares during declines as well as trends-DCA regularly through the up and downs-and ideally in diversified accounts. Scataphagos-Points out that over the long term- DCA is a "Buy and Hold" approach- However, that should not be the way an investment account is managed-........IMO- further comment to be made. another observation"investors need to learn how to avoid the damage of bear markets* at least some of the time." That would require active involvement, time, understanding and some study of the market actions- and then making a proactive decision- All of which is outside their which is why most retail Investors Never take action -until they wake up one day and find their account value dropped 20, 30, 40%- and are ready to react. Usually, too late, selling positions at the lows- (Done that too) I read some time back (Likely put forth by the Mutual Fund Industry) that semi Active investors are willing to take some minor volatility often react late when volatility increases- Net result is while they mistakenly believe that by taking action they are saving themselves some greater losses- seldom ever get back into the market for a gain over where they sold. Also - that While the market averages 7% +/- over the long term- Active Investors trying to shift assets into cash and then reinvest generally underperform the market average by 50%. I don't know if this is truly accurate- but - it makes sense. Traditional passive investors are ignorant of the extra high fees they are paying- and end up taking what remains over decades of overpaying for relative underperformance. "*I'm a retired CFP who used to have a "for fee" practice." Please share your past experience and thoughts: There is a large shift from actively managed higher cost Mutual fund accounts going into lower cost passive index accounts- Long term Investors are becoming aware of the impact of higher fees that active management requires, and the net Industry average underperformance over the very long term of the majority of active managers- (Yes, there are a few exceptions) . I think the future trend for long term Investors (with decades ahead) will continue to shift towards Investing models that reduce costs, (often that means passive index funds) ; Diversified wide asset allocations- (Don't just buy a single S& P 500 fund and call that your retirement account)- a 12-20 position model with stocks, bonds & global exposure- rebalance whenever the model sees an excess gain- reinvest the dividends- and- over time - shift the asset allocation into more conservative holdings as one nears their later years- Some of this can be done through the recent Robo models, or general 'Target Date Funds" -serving the purpose of many just wanting to have a long term approach that makes sense- but for some, paying a Fee for a more personalized service tailored more to one's personal overall financial goals and Risk tolerance- offers the financial adviser the opportunity to contribute his experience. As a follow up -somewhat reverse questions in this thread- To those that are making their living as "Traders"- and not Investors- The thread started with a note about long term Investors- What about Traders? What is Plan B? OR- Is there a Plan B? Is there any truth that those attempting to trade for a living has a very high mortality rate? When you have a winning week- or a winning month- Do you skim any of the profits aside and DCA into an "Investment Account' - separate from the trading account? While there may be some extremely successful traders in this thread- Consider that these may be the exceptions to the Rule. these "Exceptions' are perhaps the minority of would-be- traders. Perhaps the thread could address the Plan A for whom Trading does not bring the success they have hoped for- and the possible need for a Plan B- the value of indeed considering a separate Plan B investment plan- In case the trading plan does not work out as hoped for. Statistically- this is likely a reality for many would-be traders- Why not promote Plan B 1st for the majority to establish- and Plan A (trading) as the possible higher Risk alternative?
Yes, S&P 500 is up because the contents of the index change over time. If you're in a large draw in an individual basket of your own stocks, those stocks could come back, but don't necessarily have to rally. The index fund, however, will rally, and that is why EVERY single large draw in history always recovers, regardless of the reason for the draw. In other words, the emotional turmoil causes investors to panic out of their stocks during periods of uncertainty and increased volatility, yet the index funds, given the changing nature of their contents, survive any wave of panic selling and eventually recover, at least for the U.S. stock market.
%% Good points S -Joe. .In other words, they kicked Citigroup out of Dow [DIA]..... LOL, so ''passive'' can be more active than some thought.LOL . Indexes are also ''better than deserved '', no commissions, no slippage..... One more important point, they used to pay DOW dividends of 10% +/, but they do NOT have to pay any dividends or rally or uptrend for decades. Sure, SPY most likely will rally or uptrend,pay dividends, bear trend, but that is NEVER a prediction; simply the highest probability, over time.
Yes, not only did they kick out C, but also kicked out BAC and replaced it (among others). The most recent additions to the dow are V/GS/NKE/AAPL. These are all HIGHER priced stocks, AND all which pay dividends. Sure, they do "NOT have to pay dividends" however the stocks in the dow (and those most heavily weighted in the S&P) carry a yield. Since the dow is a price weighted index, the more stocks with higher prices, the greater the upside moves of the index (downside as well, of course). As long as the contents keep changing (kick out the "bad" lower priced stocks, add the new "good" higher priced stocks), the index has a very high probability of rebounding off every draw. There are no guarantees, only predictions. It's a probability trade, and as you said, it's simply "the highest probability, over time." Check out the historical components of the dow, quite interesting. https://en.wikipedia.org/wiki/Historical_components_of_the_Dow_Jones_Industrial_Average
If they replaced GS with BAC, the index multiplier would change to ensure that the index value wouldn't change over the transition. The reason they keep higher priced stocks is so that no stock dominates the index. It's just to maintain parity. Similarly, they won't put stocks with too high of a price (like GOOG) because it will dominate the index - even though they could and just lower the index multiplier.
That's true, it's not really "passive" when the contents change, and the investor has no input in which stocks go in/out. Adding AAPL to the dow wasn't a democratic vote by investors, lol! The fact sheet in the overview page of the Diamonds ETF (DIA) has the following statement: "The DJIA is a price-weighted index of 30 component common stocks, the components of which are determined by the Averages Committee, which is composed of the managing editor of The Wall Street Journal, the head of Dow Jones Indexes research and the head of CME Group research."
"The reason they keep higher priced stocks is so that no stock dominates the index." Putting in a greater amount of higher priced stocks will create bigger fluctuations in the daily movement. To calculate the relative change in the dow for any of its stocks, take the change in stock price divided by the current divisor, which currently is .14602. Ya, they can't add GOOG because of the price is simply too high. If GOOG trades at 700 and loses 5%, it accounts for 239 points drop in the dow (35 points/.14602), not including what the other stocks would do. This is why they had to wait for AAPL to split 7 for 1 before adding it.
If they dumped all 30 stocks and added more $10 stocks and changed the divisor, they would see bigger fluctuations. Goal of DOW index group is pretty simple: They just want the stocks to be diversified. High float (so index funds can buy in easily) Similar stock prices to prevent one stock from dominating It happens the blue chip stocks they have happen to be in the 70-150 dollar range. so that's what they will bias towards when selecting the next one.
Ok I see your point. It seems there have been changes to the divisor over time (see link below). They could have replaced C, AA, BAC and HPQ with similar lower priced stocks, but they didn't. A 2% fluctuation in GS creates a larger impact than a 2% fluctuation in BAC, even with the slight change in the divisor. It's true they currently happen to be in the 70-150 range, but some of those stocks could drop over time, and if they drop significantly, they'll just boot them and add new ones. It's often said that the dow is a "flawed index" since it's price weighted instead of market cap weighted. http://www.djaverages.com/docs-private/level2/djia-history-divisor.pdf