Community Discussions
Explore the latest discussions and community conversations related to this domain.
Are there any bad index funds?
Main Post:
Back again with another silly little question from a beginner. I love how diverse index funds are and the stability that brings. With that being said, are there any to avoid?
Top Comment:
Sure. Those with high expense ratios, and those that focus on narrow segments of the market.
Economics of bad fund selection? - Bogleheads.org
Main Post: Economics of bad fund selection? - Bogleheads.org
Help please!! Is my financial advisor pushing a bad fund on me?
Main Post:
I just invested $9k into a managed account. Our financial advisor already takes a 1% fee - they have suggested a fund with the below info to invest the entire $9k:
Management Fee 0.95%
Gross Expense Ratio 3.54%
Net Expense Ratio 3.29%
My gut is that is crazy and they are pushing this on me since it is a fund affiliated with their firm (fund has firm name in title).
Help? Thoughts?
EDIT/UPDATE: Woah! Thank you for all the responses! I wanted to clarify some questions - we added the $9k to a currently $65k fund. The fund is one my partner's parents started for him while young, the advisors came with it (I ideally would not be paying a 1% fee but my partner worries about me handling it myself). We do actively manage our own Roth IRAs that I put into 0% ER index funds. When we put the $9k in, we let them know it was for a purchase (not retirement) so liquidity and being able to extract contributions as tax free as possible was a goal (which my understanding is that this fund does not achieve and is overall illiquid).
Top Comment: Tell them to sit on a cactus. Take the money and put it in a low-cost index fund.
Is fund admin really that bad?
Main Post:
I’ve had a career change into into fund accounting at a growing international fund administrator that focuses on P/E. Since I’m still pretty early into my professional career I’m still trying to figure out where I want to go with it, I am definitely more interested in working at a P/E firm but Im seeing a lot on here that fund admin is a dead end. Im curious to why many think that, I’m pretty happy with the people I’m working with and with the work I’m doing and feel as I’m fairly compensated for the work I’m doing especially since I’m coming in with no accounting experience or background (majored in Finance). Looking to hear everyone’s thought on the topic especially those who are in P/E. Thanks in advance.
Top Comment:
The “dead end” comes about because PE firms typically only outsource the most basic/mundane activities to their fund admins. The more complex “big picture” work is typically done in-house. So if you stay at the fund admin, the most you can do as you get promoted is manage an increasing number of teams and clients doing the same mundane work.
That said, there’s nothing wrong with just working to become a very good senior manager+ at an admin if you enjoy the work. You’ll make plenty of money and enjoy solid job security
220512 'Good Boy Gone Bad' & 'Trust Fund Baby' to be performed on M Countdown today
Main Post: 220512 'Good Boy Gone Bad' & 'Trust Fund Baby' to be performed on M Countdown today
Top Comment:
so if TFB is the promoted bside, then my fingers are crossed this means we'll get a video for Opening Sequence
If Hedge Funds really do such a bad job, why do people with money trust them with their money?
Main Post:
Seems odd that all of us poor people on reddit are saying that Hedge Funds are bad and they rarely beat the SPY anyway
but if that was trully the case, why would the rich entrust their millions to Hedge Funds and other similar institutions?
seems like a lot of people downplay the fact that you give a fund money, they take a cut and they make you money BUT if this is how the "rich" handle their investments why shouldnt the poor people do it also?
seems like more "poor" people lose money trying to make money than actually make money
Edit: u/Ronaldoooope makes a great point
I know we focus on percentages but 1% of 100 million is quite the gain compared to 1% of 1000
I'm assuming the "rich" are a lot more okay with only making 5% a year when that 5% is coming from a portfolio of $10 Million
for the lazy, its $500,000 a year or one VERY expensive Lambo
Top Comment: Hi, welcome to r/investing . Please note that as a topic focused subreddit we have higher posting standards than much of Reddit: 1) Please direct all advice requests and beginner questions to the stickied daily threads. This includes beginner questions and portfolio help. 2) Important: We have strict political posting guidelines (described here and here ). Violations will result in a likely 60 day ban upon first instance. 3) This is an open forum but we expect you to conduct yourself like an adult. Disagree, argue, criticize, but no personal attacks. I am a bot, and this action was performed automatically. Please contact the moderators of this subreddit if you have any questions or concerns.
Is it a bad idea to just buy an index fund that gives a good yield
Main Post:
I know it is not the best way of getting dividend but I don’t want to spend a lot of time looking for good stocks that could drop at any second.
Top Comment: Well what’s your definition of “a good yield”?
The Index Fund 'Bubble' - Should you be worried?
Main Post:
A recurring theme over the past year has been one ‘expert’ after another bashing index funds calling them a massive bubble that is waiting to pop.
Could Index Funds Be ‘Worse Than Marxism’? – The Atlantic
This [index funds] is very much like the bubble in synthetic asset-backed CDOs before the Great Financial Crisis. It will be the Greatest Speculative Bubble of All Time in All Things – Michael Burry
Is Passive Investment Actively Hurting the Economy? - The New Yorker
But at the same time, we have investors like Warren Buffet who still swear by a low-cost index fund and recommends it over his own Berkshire Hathaway stock! So, in this week’s issue, we analyze both sides of the argument and see if we [1] should be worried about the index fund bubble!
The Problem
The argument against the index fund is a logical one. The basic premise is that index funds affect the price discovery of stocks in the market. If a stock is bid up just based on the presence in an index and not by analyzing the underlying asset, then it can lead to a bubble-like scenario where you are buying more and more just because the asset prices are going up.
If you look at the above chart, you could see that in the first 4 months of 2021, a fund inflow of more than $20 Billion occurred just to the Vanguard 500 index fund. There are arguments stating that in the US, index funds make up more than 50% of the fund market. (This exponential growth is not a surprising one given my last analysis showed that passive funds have summarily beaten active funds over the last 2 decades)
If you think about this, more than half of the money that is flowing into the market is now just buying stocks that are on an index without doing any underlying stock analysis. The problem becomes that companies get more and more investment just because they are big and not because of their future growth prospects. So the question becomes
Is the index fund affecting the integrity of the stock market?
The problem with the fund inflow statistics is that stock price is not decided solely based on fund inflow but majorly by trading.
If you look at this study done by Vanguard [2,3], it destroys the price discovery argument. It shows that only 5% of the overall trading volume is captured by index funds. The rest of 95% of trading is made by active traders, pension funds, and institutional investors who do individual stock analyses.
Adding to this, even if the index funds become large enough to create significant price distortions, it’s something that the active fund managers can benefit from as it would give them more opportunities to short overvalued companies and create outsized returns. The fact that it’s not happening right now shows that we are not anywhere near a situation where the index fund is big enough to fundamentally alter the market[4].
Now that we know that index funds are not causing any price distortions, one has to wonder
why there is a sudden rise in concerns regarding an index fund bubble over the past 2-3 years?
I believe that this issue is being brought up by institutions and active fund managers as there is a drastic shift from active to passive management over the last few years.
The above chart from Morningstar showcases that active funds on average lost more than $150B every year over the 2014-18 period and this trend is only becoming worse for the active funds. This trend is also replicated worldwide with more than $300B is pulled out of active funds and $500B is pushed into index funds every year (as of 2016).
Finally, as of 2019, for the first time, more money is being pushed into passive than active funds! All of this must be ringing alarm bells across active funds as their income is directly dependent on the total asset under management.
Alternatives to index funds
While researching this topic, I came across some genuine concerns about index funds. The most important of them being that you might not be as diversified as you expect investing in an index fund.
As of Aug 2021, the top 5 tech stocks (AAPL, MSFT, GOOGL, AMZN & FB) account for more than 23% of the S&P500! While this worked out great for the overall index over that last decade given the tech rally, any long-term downturn for tech stocks will significantly affect your portfolio.
There are two alternatives that I found to the regular market cap based index fund allocation
Equal-weighted index funds: Equal-weighted index fund allocates your capital equally across the stocks in the given index. For Eg. in S&P500 index, all the 500 companies would get an equal proportion of your index. This will avoid your portfolio becoming concentrated on a few highly overvalued stocks!
Reverse weighted index funds: This one is for the more adventurous, where the investments are made by turning S&P500 upside down on its head! The smallest companies on the list get the largest share of investment! Even though this reduces your exposure to large tech stocks and blue-chip companies (which get a lot of attention and is possibly overvalued), your investments will be concentrated on smaller companies that are inherently volatile and can produce outsized returns! Even though this strategy has beaten the traditional index returns, you still have to consider that this type of fund was introduced just two years ago.
Conclusion
I believe that the index fund bubble narrative is over-blown and is being predominantly driven active fund managers who are trying to stop losing their business to the passive funds every year. All the data from our research shows that we are nowhere near a situation where index funds can alter the price discovery in any significant way!
While the index fund bubble might be getting undeserved attention, it's always a good thing to check if you are comfortable with the current skewness of your portfolio towards tech stocks. After all, the tech rally over the last decade has undoubtedly benefitted all our portfolios, but we should also be ready for when the party inevitably comes to a close!
Until next week :)
Footnotes
[1] This is the first time in an analysis where I cannot claim to be unbiased as a substantial portion of my portfolio (>90%) is tied up in an index fund. So take all the arguments with a grain of salt!
[2] Setting the record straight: Truths about indexing is an excellent study done by Vanguard in 2018 where they review the rationale for indexing’s efficacy, quantify the benefits of indexing to investors, clarify the definition of indexing, and explore the validity of claims that indexing has an adverse impact on the capital markets.
[3] This study also showcases that ETF trading (creation/redemption mechanism of exchange-traded funds (ETFs)) has minimal impact on the underlying securities as only 6% of the trading is involved in primary market trading with the rest being in the secondary market.
[4] This is also known as the Grossman-Stigliztz paradox:- There would be a point where indexing would become big enough to affect price discovery, then active managers would be able to profit off that, and more and more people would move to the active funds. Finally, in an efficient market, an equilibrium point would be reached where neither party (index funds or active fund managers) would be able to beat each other.
Top Comment: User Report | Total Submissions | 64 | First Seen In WSB | 8 months ago | Total Comments | 218 | Previous DD | x | | x | | x | | x | | x | | x | | x | | x | | x | | x | | x | | x | | x | | x | | x | | x | | x | | x | | x | | x | Account Age | 1 year | scan comment | scan submission Hey u/nobjos , positions or ban. Reply to this with a screenshot of your entry/exit.
Washington State Cares Fund - good for whom?
Main Post:
I recently spoke with a life insurance salesman who told me about the upcoming Washington State Cares Fund, going into effect this November, website here: WA Cares Fund website. He said it is a statewide fund which purportedly provides long-term care benefits for all employed workers in the state. He said this fund would be a bad deal for me and told me about long-term care insurance policies which would better suit my situation (I am currently quite healthy and do not foresee a need to use long-term care for a long time, barring a tragic event). He also said payment into the fund, which is taken out of the paychecks of all employees working in the state, will start in November 1, which is the deadline to opt-out by having a qualifying insurance policy. Here is the comparison he gave:
If I opt into the WA Cares Fund (by doing nothing and waiting for November 1 to arrive):
- I would pay 0.58% of my paycheck (gross, I believe) toward the fund as long as the fund remains active. As such, the more I make, the more I pay.
- I would have a cap of $36,500 after I qualify for benefits (refer to the website). As such, even if my income via paychecks increases significantly, I would still have only this maximum to draw from.
- I would not have access to the fund's long-term care if I moved in the future to another state.
- He also mentioned that he read the bill and, according to him, the language is vague so politicians could use the money for much more than solely providing long-term care benefits. As such, the pool could "mysteriously" dry up quicker than expected. I don't mean to make this a political discussion but figure it is worth mentioning to factor in risk.
If I opt out of the fund via purchasing a long-term care insurance policy:
- I would pay a static amount each year (depending on the level of insurance, anywhere from $20 to $100 per month). This amount would not increase based on my earnings.
- I would have an increasing amount I could withdraw for long-term care purposes based on how long I had paid into the policy.
- I would have a growing cash benefit that would, when I am around 68 years old, exceed how much I had paid into the policy.
- I would have a death benefit of around $40,000.
In summary from what I have been told and seen on the WA Cares Fund website, I will be required to pay at least $20 per month (since I make more than enough to pay that much into the Cares Fund) to a long-term care plan, and the insurance policy seems to provide much more benefit to me once I exceed the $36,500 paid-up benefit (roughly 5 years from now).
Am I missing anything? This guy is a salesman, and I am wary of walking into something with unforeseen consequences. I'm looking for one or multiple "catches" to this offer. What do you think would be a good decision: using the state's plan or a private insurance plan such as what the salesman proposed?
Top Comment: The law is soo poorly written, administrative rules are still being created on the fly. Additionally, the state program is already projected to be insolvent, and the law requires its solvency, so the tax to fund the program will go up. The biggest kicker is, if you ever leave Washington, the state "benefit" does not follow you. If you paid into it for 15 years, then move out of state for retirement, you will not receive any benefit from the State of Washington. A lot of people are buying 3rd party coverage, opting out of the state coverage, and plan on canceling the 3rd party coverage to get out of the tax. Once you get an exemption from the state and opt out of the state program, you will never qualify for the state program ever - that's how the the law is written. What I am facing is salesmen telling me that they expect the state to fine people who opt out and not keep their long-term care insurance. However, there is nothing in the law authorizing the state to fine or tax anyone who get an exemption, but the scare tactic (real or not) is that the state can write their own administrative rules and may use the solvency requirement to fine people who don't keep long term coverage.