Including stocks like CELG, a penny stock in 1998 that wasn't added to the S&P index until 2006, clearly biases this simulation. Sure it's ~9,000% gain over that time looks impressive, but how many people would have picked that penny stock over the countless others that are no longer with us?

As others pointed out above, you cannot look at what's in an index today, than back-invest in them 10 years ago and compare with the index return. Your simulation is worse than the typical survivor bias that plauges these types of comparisons, as you're creating historical opportunities that did not in fact exist.

 

Sure, just manipulate statistics, or even dismiss them all together, to make whatever point you want. To hell with flipping a coin 5 times and getting 4 tails, you seem to live in a world where it's not all that uncommon for the lone head to be worth 70x your money.

 

And in your world stocks are either $1 or $0 right?

CELG was not a penny stock in 1998. It closed the day Jul 28 1998 at $10.06. Where you get penny stock from I have no idea. It split a gazillion times since then.

Don't waste my time. I've gone to great effort to research what I post and you respond with shit. http://finance.yahoo.com/q/hp?s=CELG&a=06&...e=28&f=1998&g=d

Ok, I've made the point so I'll move on and leave you to do with your money as you wish. I can't force you to consider alternatives. You're right, good luck.

 

You are right, I failed to account for the splits, so the stock was not in fact a penny stock. But that doesn't change my main point, that you are introducing into this simulation stocks that were not part of the defined universe of stocks one would have picked at the time, and those that were part of that universe and are not any longer, were excluded. This is data mining and you dismiss it as not having a significant effect on the outcomes.

I have no problem with people who seek to beat the market, I do it myself with a portion of my portfolio. But the way you suggest that any idiot can pick 5 stocks and beat the market average is misleading.

You mention AAPL as an example, but how idiot proof was that pick prior to the second coming of Jobs and the emergence of the iPod? 10+ years ago I owned various Macintosh products and believed them to be a superior product. However, at that time Apple was a niche player to consumers, with only a strong presence in education and design. To buy AAPL over MSFT 10 years ago would have been gambling, no?

 

cthree, I'm not here trying to make enemies. Many published studies/papers/books have demonstrated the long term "strength" of index fund investing. If it was as simple as you suggest, why aren't there countless books advocating the same?

To expand this simulation, how much work is it to go beyond just the single 10-yr time horizon, and build rolling 10-year, or shorter, periods?

 

Are you making a point or just picking apart mine?

 

couldnt u beat the market by just buying the individual stocks held in these index/mutual funds by yourself? you would not be paying the expense fees. same exact risk, no expense...

"Wide diversification is only required when investors do not understand what they are doing."

financial advisors use the lack of knowledge to peddle financial products to their clients. instead of the client buying their own bluechips, the clients let their "advisor" buy funds which package the same stocks into 1 financial instrument. sends the client a thick packet of paper every year, that the client will never read, and charges 2% for "managing"

 

Search amazon for "making money in the stock market" and tell me again there are no books on how to pick stocks to get a better than average return. If you want to contribute something of value to the discussion what don't you do even the most minimal of checking on the things you say rather than make broad assumptive generalizations and then tell me to go prove you wrong?

I don't know. I've invested about 6 hours of time researching and modeling the information I presented and it's as accurate as necessary to make the point I'm putting forward. All of the data is out there on the Internet if you want to take the time to go get it or even help contribute to building a model which is more accurate and more practical than the one I presented.

I'm not trying to say that the script I wrote is some kind of absolute stock picking machine. What I offer should be enough for you to take pause and reconsider the absolute certainty that buying an index fund is the best way to invest your money. If you want to take that further and develop something which is analytical rather than a demonstration then I'm always game to improve my strategies and understanding of the market but that is not what I started out to do.

I made the point in vivid living color. Click the refresh button over and over and see just how badly the index compares with its components. 50% of the weight of the S&P500 is in the top 50 stocks leaving 450 to make up the second 50%. Buying the index is taking the strategy that you weight your investments on the basis of market cap buying more stock in companies with larger market caps than those with smaller market caps. This makes no sense, look at the unweighted RSP as compared to the weighted SPY:



Almost twice the return by turning off the weighting alone. Reduce the number of stocks from 500 to 5, even randomly selected, and you do even better.

 

most vanguard index funds have expense ratios of 20bps or less. even cheaper are some exchange traded funds (ETF) that are basically publically traded baskets of the underlying securities. one would need a lot of capital to replicate an index themselves without getting killed by transaction costs.

 

This is great stuff guys! I love the debate.