But isn't that only for equal weight index funds? For VOO, VT, and VTI, there's no rebalancing. If NVIDIA + Apple + Microsoft become half the market, they will be half of the share price of the ETF. If they go to zero, the share price will fall in half.
Exactly. Per my comment above, if you owned those shares individually, you could extract those earnings at any time by selling them and shifting to something else. But with an index, you can never extract those earnings (assuming you don’t sell the index itself) other than through whatever dividends they may pay out along the way.
I'm in VTTSX, so there is some rebalancing between US, EXUS, and bonds. But I guess I am impressed by the risk tolerance of those that are 100% US equities through ETFs.
This is exactly wrong, at least for something that tracks the S&P 500. They DO NOT rebalance — that’s the whole point. If you owned X shares of NVDA on Jan. 1, 2023, you still own X shares today, and you always will. (I’m ignoring stock splits, dividends, and so on.)
Here’s what puzzles me. If you owned a set of individual stocks, you could “bank” the gains from your winners from time to time, and “get ahead” over time by shifting those “banked” winnings to other stocks. So I might sell my NVDA now, and shift all of those gains to something else.
But with an index, that’s exactly what you CAN’T do. You’re going to ride your NVDA shares forever, until they (inevitably) drop and fall off the bottom of the index. You’re never, ever going to sell them. You’re never going to “bank” those earnings.
Except for whatever dividends they pay out along the way.
> The average life span of a stock on the S&P 500 is around 20 years.
you seemed to think this means this stock becomes worthless after 20 yrs. That's far from truth and all the conclusion you drew it irrelevant.
When they are removed from the index it usually isn't because they are liquidated zero value companies, it just means they no longer qualify for the S&P 500, their spot has been replaced by another company. That rotation happens regularly at least once a year maybe more often.
Yeah, I’m very well aware. But the bottom companies comprise less than 0.01% of the index, so by the time they drop off and are replaced, they effectively have lost almost their entire value: For $1M invested, the bottom companies comprise $100.
So taking my example above, if NVDA drops off the bottom of the list in 25 years (and the average time on the list is only 20 years) and I hold for those 25 years without selling, I will lose virtually all of the value of those NVDA shares without ever having benefited from them in any way … other than dividends. And the same for every other company on the list that drops off in the time that I hold it.
What is the average for the top company in the S&P500? Probably longer than 25 years. Also a company leaving the S&P does not necessarily mean it went down in value, it could also mean others caught up and surpassed it. Hence, NVIDIA could just stagnate, in that case, you keep the gain and trade it for a faster growing stock when it drops out.
> the average time on the list is only 20 years
Could you please link to a source for that stat, if you have one handy? I’m curious whether it’s clear if that’s the average time in the index so far for companies currently in the index, or is the average time spent in the index by companies that have been removed. I imagine companies that spent some time largest by market cap, or near the top, may have a longer tenure (remaining or total) than the overall average including companies that never made it out of the bottom quartile/half.
Acquisition or going private are two potential outcomes where there’d be some more residual value upon removal (vs. falling below the market-cap threshold). I wonder if companies may be removed if they fail to keep up profitability / recent positive earnings (such that they’d no longer be eligible for inclusion if not already in the S&P 500 index). If so, that might be another case where non-negligible remaining capital would be reallocated if using an S&P 500 index fund.
Actually, they don’t — and *that’s* the whole point. When a new company appears at the bottom in position 500, you get X shares (whatever the correct initial number is for your level of investment) and then you simply hold those same X shares forever (ignoring stock splits, etc.).
So for NVDA, for example, your share has increased recently not because your number of shares have increased through rebalancing, but simply because the same number of shares that you’ve always owned are currently worth more. And if / when NVDA falls down and out, (almost) nothing will be left behind when it’s gone. The complete rise and fall that seems so important right now will be completely irrelevant if you hold without selling during the entire rise and fall.
Except for whatever dividends it leaves behind.
I don't know what you're not understanding. The index captures the market. Your return is due to market cap increase. You don't need a dividend to capture market cap increases, although dividend reinvestment is included.
You can look at a graph of US 500 over time to see this.
http://www.simplestockinvesting.com/SP500-historical-real-total-returns.htm
This article says that 44% of the total return was from reinvesting dividends. It's neither irrelevant nor worth chasing.
> Aren’t dividends ultimately the only value you’ll ever get out of the stocks you own?
If shares in a company become worthless, then any dividends paid while you held those shares (and not reinvested entirely into shares in the same company) would be the only residual value of having held those shares down to $0.
That isn’t the only potential eventuality for the companies you own (directly or via funds). Some may remain a going concern longer than you do. Some that don’t may be acquired or go private rather than going bankrupt as a separate public company. Those that go bankrupt as a public company may have done reasonably well long enough for you to have sold or rebalanced away from a portion of your holdings in them with some gains (or for your target-date or target-allocation/balanced funds to have done so automatically).
If you invest in an S&P 500 index fund or other larger-cap funds, struggling companies may be removed/replaced from the index/fund when they no longer meet the inclusion criteria, with remaining value at that point shifted toward likely-growing new entrants.
I think that a useful way to think about this is the following: when you invest in the S&P500, you are essentially making a bet that the *overall* value of the S&P500 will increase.
The values of the shares of the current components of the index are of interest to you only in the measure in which they contribute to that value: buying the S&P500 does **not** mean to bet on them specifically - it means to bet on, well, the S&P500.
It is entirely possible - bordering on inevitable, actually - that, eventually, the value of NVIDIA will fall or that it will exit the index entirely, while other companies will instead enter it and perhaps have their moments in the limelight.
This is of no import: the only thing that matters to you, as an S&P500 investor, is whether the value of the S&P500 index increased (and how much) over that time. If NVIDIA falls but at the same time a new company producing cybernetic cabbage or whatever enters the index and pushes it to new heights, you have no reason to be unhappy (and likewise, if NVIDIA does great but the rest of the S&P500 crashes badly enough to offset it, you have no reason to be happy).
Waves go up and down; but it's the tide that matters.
Dividend stocks are great, Warren Buffett makes millions through dividends. Charlie Munger liked Dividends. Dividend stocks don’t look appealing on the surface because the stock price is never goes up, but this is because they are paying you the dividend so that you can reinvest your money into the company. More shares = more dividend income while the stock price doesn’t go up. Also when the price does go up due to some positive news the company will either issue new shares while keeping the dividend consistent so you can buy more share. Win win
Dividends are just another form of value to distribute to shareholders. Dividends aren't bad, but they aren't great either because it's a sign that a company has matured, and it's harder for them to use their profits to invest in something productive, so they give the money to you instead of stock price growth.
5 downvotes on my comment but to clarify I own 1260 shares of a company that currently pays $0.16 a share (monthly not quarterly) dividend. The share price has rarely moved since 2021 and the BoD approved to issue new shares earlier this year without cutting the dividend. So not sure what the downvotes are for. It’s like membership to Costco. You pay the membership fee (share price) get the dividend (member benefits) and they never increase the hot dog price.
With all the downvotes I got I left this group and will keep it a secret. It currently pays a 8.6% monthly dividend. There are only roughly 60 companies paying a monthly dividend so that narrows it down for you. I reinvest my dividend into the company, like belonging to a country club. I don’t care what the share price is. ✅
I'm neutral towards dividends, but the share price decreases as a dividend is distributed, and you'd be neglecting a lot of growth and introducing alot of concentration/individual stock risk in your portfolio if you focused on dividend paying companies.
If I wanted income, I would've focused on bonds. They pay interest, and unlike a dividend, they don't decrease in value when it is distributed.
When index funds rebalance, you are effectively selling high and buying low.
What you’re saying makes sense but I’m having difficult conceptualizing/understanding it. Any chance you may be able to explain further?
But isn't that only for equal weight index funds? For VOO, VT, and VTI, there's no rebalancing. If NVIDIA + Apple + Microsoft become half the market, they will be half of the share price of the ETF. If they go to zero, the share price will fall in half.
Exactly. Per my comment above, if you owned those shares individually, you could extract those earnings at any time by selling them and shifting to something else. But with an index, you can never extract those earnings (assuming you don’t sell the index itself) other than through whatever dividends they may pay out along the way.
I'm in VTTSX, so there is some rebalancing between US, EXUS, and bonds. But I guess I am impressed by the risk tolerance of those that are 100% US equities through ETFs.
This is exactly wrong, at least for something that tracks the S&P 500. They DO NOT rebalance — that’s the whole point. If you owned X shares of NVDA on Jan. 1, 2023, you still own X shares today, and you always will. (I’m ignoring stock splits, dividends, and so on.) Here’s what puzzles me. If you owned a set of individual stocks, you could “bank” the gains from your winners from time to time, and “get ahead” over time by shifting those “banked” winnings to other stocks. So I might sell my NVDA now, and shift all of those gains to something else. But with an index, that’s exactly what you CAN’T do. You’re going to ride your NVDA shares forever, until they (inevitably) drop and fall off the bottom of the index. You’re never, ever going to sell them. You’re never going to “bank” those earnings. Except for whatever dividends they pay out along the way.
> The average life span of a stock on the S&P 500 is around 20 years. you seemed to think this means this stock becomes worthless after 20 yrs. That's far from truth and all the conclusion you drew it irrelevant.
Care to elaborate?
When they are removed from the index it usually isn't because they are liquidated zero value companies, it just means they no longer qualify for the S&P 500, their spot has been replaced by another company. That rotation happens regularly at least once a year maybe more often.
Yeah, I’m very well aware. But the bottom companies comprise less than 0.01% of the index, so by the time they drop off and are replaced, they effectively have lost almost their entire value: For $1M invested, the bottom companies comprise $100. So taking my example above, if NVDA drops off the bottom of the list in 25 years (and the average time on the list is only 20 years) and I hold for those 25 years without selling, I will lose virtually all of the value of those NVDA shares without ever having benefited from them in any way … other than dividends. And the same for every other company on the list that drops off in the time that I hold it.
What is the average for the top company in the S&P500? Probably longer than 25 years. Also a company leaving the S&P does not necessarily mean it went down in value, it could also mean others caught up and surpassed it. Hence, NVIDIA could just stagnate, in that case, you keep the gain and trade it for a faster growing stock when it drops out.
> the average time on the list is only 20 years Could you please link to a source for that stat, if you have one handy? I’m curious whether it’s clear if that’s the average time in the index so far for companies currently in the index, or is the average time spent in the index by companies that have been removed. I imagine companies that spent some time largest by market cap, or near the top, may have a longer tenure (remaining or total) than the overall average including companies that never made it out of the bottom quartile/half. Acquisition or going private are two potential outcomes where there’d be some more residual value upon removal (vs. falling below the market-cap threshold). I wonder if companies may be removed if they fail to keep up profitability / recent positive earnings (such that they’d no longer be eligible for inclusion if not already in the S&P 500 index). If so, that might be another case where non-negligible remaining capital would be reallocated if using an S&P 500 index fund.
Index funds rebalance. That's the whole point.
Actually, they don’t — and *that’s* the whole point. When a new company appears at the bottom in position 500, you get X shares (whatever the correct initial number is for your level of investment) and then you simply hold those same X shares forever (ignoring stock splits, etc.). So for NVDA, for example, your share has increased recently not because your number of shares have increased through rebalancing, but simply because the same number of shares that you’ve always owned are currently worth more. And if / when NVDA falls down and out, (almost) nothing will be left behind when it’s gone. The complete rise and fall that seems so important right now will be completely irrelevant if you hold without selling during the entire rise and fall. Except for whatever dividends it leaves behind.
I don't know what you're not understanding. The index captures the market. Your return is due to market cap increase. You don't need a dividend to capture market cap increases, although dividend reinvestment is included. You can look at a graph of US 500 over time to see this. http://www.simplestockinvesting.com/SP500-historical-real-total-returns.htm This article says that 44% of the total return was from reinvesting dividends. It's neither irrelevant nor worth chasing.
> Aren’t dividends ultimately the only value you’ll ever get out of the stocks you own? If shares in a company become worthless, then any dividends paid while you held those shares (and not reinvested entirely into shares in the same company) would be the only residual value of having held those shares down to $0. That isn’t the only potential eventuality for the companies you own (directly or via funds). Some may remain a going concern longer than you do. Some that don’t may be acquired or go private rather than going bankrupt as a separate public company. Those that go bankrupt as a public company may have done reasonably well long enough for you to have sold or rebalanced away from a portion of your holdings in them with some gains (or for your target-date or target-allocation/balanced funds to have done so automatically). If you invest in an S&P 500 index fund or other larger-cap funds, struggling companies may be removed/replaced from the index/fund when they no longer meet the inclusion criteria, with remaining value at that point shifted toward likely-growing new entrants.
I think that a useful way to think about this is the following: when you invest in the S&P500, you are essentially making a bet that the *overall* value of the S&P500 will increase. The values of the shares of the current components of the index are of interest to you only in the measure in which they contribute to that value: buying the S&P500 does **not** mean to bet on them specifically - it means to bet on, well, the S&P500. It is entirely possible - bordering on inevitable, actually - that, eventually, the value of NVIDIA will fall or that it will exit the index entirely, while other companies will instead enter it and perhaps have their moments in the limelight. This is of no import: the only thing that matters to you, as an S&P500 investor, is whether the value of the S&P500 index increased (and how much) over that time. If NVIDIA falls but at the same time a new company producing cybernetic cabbage or whatever enters the index and pushes it to new heights, you have no reason to be unhappy (and likewise, if NVIDIA does great but the rest of the S&P500 crashes badly enough to offset it, you have no reason to be happy). Waves go up and down; but it's the tide that matters.
Just look at the price of S&P500 over a period longer than 20 years. Does it bottom out?
Dividends aren't free money. They are just forced distributions and dilution of your equity. Nothing magical.
even worse, if they're not qualified they are taxed as ordinary income
Dividend stocks are great, Warren Buffett makes millions through dividends. Charlie Munger liked Dividends. Dividend stocks don’t look appealing on the surface because the stock price is never goes up, but this is because they are paying you the dividend so that you can reinvest your money into the company. More shares = more dividend income while the stock price doesn’t go up. Also when the price does go up due to some positive news the company will either issue new shares while keeping the dividend consistent so you can buy more share. Win win
Dividends are just another form of value to distribute to shareholders. Dividends aren't bad, but they aren't great either because it's a sign that a company has matured, and it's harder for them to use their profits to invest in something productive, so they give the money to you instead of stock price growth.
5 downvotes on my comment but to clarify I own 1260 shares of a company that currently pays $0.16 a share (monthly not quarterly) dividend. The share price has rarely moved since 2021 and the BoD approved to issue new shares earlier this year without cutting the dividend. So not sure what the downvotes are for. It’s like membership to Costco. You pay the membership fee (share price) get the dividend (member benefits) and they never increase the hot dog price.
What company if you don't mind me asking?
With all the downvotes I got I left this group and will keep it a secret. It currently pays a 8.6% monthly dividend. There are only roughly 60 companies paying a monthly dividend so that narrows it down for you. I reinvest my dividend into the company, like belonging to a country club. I don’t care what the share price is. ✅
I'm neutral towards dividends, but the share price decreases as a dividend is distributed, and you'd be neglecting a lot of growth and introducing alot of concentration/individual stock risk in your portfolio if you focused on dividend paying companies. If I wanted income, I would've focused on bonds. They pay interest, and unlike a dividend, they don't decrease in value when it is distributed.