Look, you have to decide if you are passive investing or not.
The point of the article is that tech, specifically the big names we all know, account for the vast majority of the indexes gain this year.
They are asking if you should go against the index weighting and do your own weighting so you aren't so heavy on tech, but again, that goes against the ethos of passive investing.
If you make a change like that then you are an active investor.
So just decide if you are an active or passive investor and let that settle your path.
If you chose a market cap weighted index then there will always be outliers, just because right now there are a few in tech doesn't mean you should throw away your passive investment thesis and go active to avoid the gains you make from them.
Remember, these companies are not speculative, they are making gains because they are making money hand over fist.
That just seems like a bad move.
If you don't want outliers then chose an equal weight index, just know that you'll almost always under perform but usually have less volatility.
> The point of the article is that tech, specifically the big names we all know, account for the vast majority of the indexes gain this year. They are asking if you should go against the index weighting and do your own weighting so you aren't so heavy on tech, but again, that goes against the ethos of passive investing.
I don’t think this is quite right. The article is observing that weighted indexing goes against the ethos of pure passive investing, since it overweights the bigger companies and exposes you too more risk in the event that one of the highly-weighted stocks takes a big hit. This is a choice that folks might not be intentionally making. If you become aware of this exposure and decide to opt for a an equal-weight index, you aren’t engaging in “active investing”. Quite the opposite.
Exactly this. There was a time I tried diversifying from mostly FDN (tech only) to include VTI (S&P) to still trend growth. And eventually realizing these indexes are mostly the same, switched the lower-growth side to include VT. But I find even that, while not as much, is still dominated by the same companies. I would say these two are the vanguard of passive investing (pun intended) but are not working as they used to at diversifying. It might not matter though given these big companies seem too big to fail at this point and some growth is still desired, cash doesn't seem far worse than equal weight indexes at least for now.
I suspect everyone is saying the same thing, S&P isn't broken, it's not as diverse as it may have been, but that doesn't mean it's something to avoid when doing passive investing, knowing it's not quite diverse would be a plus though.
I agree with this except the “if you change weights on your index fund you’re an active investor.” Granted it is taking action, but not to the level of someone who is picking stocks regularly. It’s like calling me an active investor because I choose my risk profile for my 401k, which would make everyone an active investor.
"Passive investing" is a largely beaten-to-death turn of phrase because you can't truly be a passive investor in anything. Every "passive investing" focused fund has some degree of selection bias, because the index itself is arbitrarily declaring that it's only buying the "top 500" or whathaveyou. So you're "passively" investing in the top 500 companies, which means "actively" choosing not to invest in the rest.
You can go one level up from there and buy VTSAX if you want to buy everything and truly "passively" invest in US stocks, but again, you'd be "actively" choosing not to invest in international stocks then.
You’re better off buying the whole market than picking stocks. You’re better off buying and holding than trying to time the market. Splitting hairs with regards to the definition of ‘passive’ doesn’t change these simple facts.
Passive investing remains the best path for the middle class to financial security and comfortable retirement. Spreading your ignorant navel-gazing on this matter could potentially do real damage to real people’s financial futures. Please stop.
Historically equal weighted indices haven't almost always underperformed according to the article. Actually the recent unusual divergence is a focus of the article. They note that historically the divergence is -0.17%, i.e. the opposite of always underperforming.
In fact, coming at investing from a fundamental/business perspective where one is seeking to buy companies at as low a valuation as possible relative to earnings, equal weighting should systematically tilt more toward cheaper companies which should have slightly higher expected return. Market cap weighting tilts towards companies like nvidia whose valuation is ballooning.
The point of the article is that tech, specifically the big names we all know, account for the vast majority of the indexes gain this year.
They are asking if you should go against the index weighting and do your own weighting so you aren't so heavy on tech, but again, that goes against the ethos of passive investing.
If you make a change like that then you are an active investor.
So just decide if you are an active or passive investor and let that settle your path.
If you chose a market cap weighted index then there will always be outliers, just because right now there are a few in tech doesn't mean you should throw away your passive investment thesis and go active to avoid the gains you make from them.
Remember, these companies are not speculative, they are making gains because they are making money hand over fist.
That just seems like a bad move.
If you don't want outliers then chose an equal weight index, just know that you'll almost always under perform but usually have less volatility.