Why do people suggest buy and hold large index funds?

Feb 21, 2021 64 Comments

Even if someone wants to passively invest, buying and holding the same thing forever doesn't seem optimal. You would likely have more success by investing more targeted funds that are focused on tech stocks, like QQQ, SMH, SKYY, that are trending up against the market over the last several years at least. Sure, the market could change eventually, but so too can you change your investments. What you gain against the market in the interim will more than make up for whatever you might lose if one day tech starts to underperform, before you have the chance to rebalance. Fundamental changes in the market don't happen overnight and without warning, so it is much more plausible to time the market on an annual basis than it is on a daily or monthly basis like shorter-term traders do.

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TOP 64 Comments
  • You know S&P 500 is not actually 'passive', its just a momentum strategy. The problem with big funds now days is that there are too many 'passive' investors. Shitty companies inside S&P 500 got their shareholders for free through these funds. At some point it would stop be sustainable.
    Feb 21, 2021 9
    • But base on your strategy, if you bought qqq before 2000 and then it crashes, you would rebalance qqq to voo in 2001 since qqq is now underperforming right? Are you going to rebalance every year depending on which ETF is up most? Have you backtested your strategy? If it's so easy, dont you think hedgefunds would have arbitraged the stratrgy to hell?
      Feb 22, 2021
    • Google
      DRBN35

      Go to company page Google

      DRBN35
      Wrong, S&P500 is passive + momentum. Momentum is not the opposite of passive.
      Mar 7, 2021
  • Because it's meant to be a lazy, multi-decade, fire-and-forget position. Minimum effort, safe enough with the "too big to fail" government policies, decent returns. Makes for the best possible middle income retirement investment.

    If you're bringing up these points you're beyond that advice. It is meant for the average Joe that would know no better than to blow his money on whatever hype is going on.
    Feb 21, 2021 7
    • OP
      Tesla - Are you seriously trying to make the case that SPY is a total market fund? It's 500 stocks out of 8800 in the whole world. I could argue you've bought into the hype of megacap stocks but you have no proof they'll continue to outperform the broader marker. And guess what, that's fine, that's why you can go and review your investments' performance ONCE A YEAR and if your fund isn't the top fund anymore then buy the one that is. These things don't oscillate on a yearly basis so you are not going to be stuck with not-the-best ETF for long even if the market does change. Sorry to blow up your revisionist history about the QQQ but between 10 years ago and 5 years ago (Feb 2011 to Feb 2016) it vastly outperformed the SPY.
      Feb 21, 2021
    • Marsbound, one cardinal sin you are doing is presuming trailing returns and past performance will somehow continue into the future in 10/20 years. The idea of a broad-based, well diversified index is to provide risk adjusted returns over long term at really low cost! Switching out between funds based on their recent run is again a different way of timing the market. Over 20 years investments aren't about intellectual ability, they are all about your temperament and mental fortitude. You will do much better by picking an index with low volatility if you decide to go all in on equities.
      Mar 2, 2021
  • New
    nskakav

    New

    nskakav
    If you really want to know the answer then backtest it. Choose your investment horizon. Say, 70 years (I know you must be young and just starting your career)

    Now go back 70 years to 1951 and simulate your strategy of buying the highest growth stocks/index funds for the year at the end of each year vs a portfolio holding VTI.

    The portfolio using the strategy would be completely broke long before the end of the 70 years but the portfolio holding VTI would hold massive wealth.

    Or don’t backtest and just do it and learn the hard way by forward testing it.
    Feb 22, 2021 2
    • OP
      Completely broke, that’s an interesting observation, surely you must have already done this backtest in order to make it, no? Please tell us what year it was that your investments lost 100% of their value and what you were holding.
      Feb 22, 2021
    • New
      nskakav

      New

      nskakav
      I see you’ve decided to learn the hard way then. Good luck
      Feb 22, 2021
  • Most of us are lazy enough to rebalance the sector-targeted etfs, that’s why it’s recommended to just contribute consistently to a large fund like VOO or VTSAX and chill.

    Just contributing more to that funds as your income grows also grows your investment good enough when you retire
    Feb 21, 2021 6
    • OP
      nskalav Can you at least try not to blatantly revise history when coming up with a hypothetical scenario that maybe happsne once every 20 years? In the year 2000 QQQ opened at 96.2 and closed at 56.6, a loss of 38%. The SPY lost 12%. So you've lost 25% that one year, out of 20 years, but you would have made up for it many times over by using the momentum strategy for the next 20 years. And that's before we factor in whatever gains you got in 1997-99 from being in the QQQ during those years. If you have to resort to absurd cherry-picking with fake numbers then it just reinforces that there's not much substance to the index fund approach.
      Feb 21, 2021
    • New
      nskakav

      New

      nskakav
      Dude relax. It’s not absurd cherry-picked fake numbers. QQQ lost 81.08% peak to trough. It didn’t bottom out until 2002. There was again 50% drawdown in 2008. Zoom out further and you’ll see these events occur every 10-20 years. That’s means 3-6 of these crashes in a 60 investment horizon.

      If you’re so certain of your approach then do it. Good luck recovering from 50%+ portfolio drawdowns 3-6 times over in your life then magically making it back with your superior multiple times beating portfolio selection.
      Feb 22, 2021
  • Your time horizon is too narrow. Passive funds are recommended for time windows of 20-40 years. What has nasdaq gone through in the last 20 years? Go take a look
    Feb 21, 2021 5
    • Correlation of risk. Uncorrelated volatility is what produces efficient portfolios. Hence your last statement about averaging out scenarios in favor of QQQ is baseless.
      Feb 22, 2021
    • OP
      Correlation of risk is just an abstract concept if QQQ outperforms VTI on both bull and bear markets, as has been the case. The whole argument hinges on “what if this one obscure unprecedented edge case happens” which is totally specious and a completely irrational way to think about investing. I mean in that case you might as well buy treasury notes or something like that.
      Feb 22, 2021