You can’t buy the S&P 500, at least not directly. Instead, you can buy funds that try to match the performance of the S&P 500 (while charging a small fee), like VFNIX and VOO.
VTSAX by contrast, doesn’t track the S&P 500, but this isn’t necessarily a bad thing. From the Vanguard website,
Vanguard Total Stock Market Index Fund is designed to provide investors with exposure to the entire U.S. equity market, including small-, mid-, and large-cap growth and value stocks.
In other words, it’s more diversified than an S&P 500 fund.
Yes, right, so to continue this line of thought: since more diversified means less risk, Gwern would want to buy VTSAX if he needs to spend that money in a relatively short time horizon. If this isn’t the reason, though, from what I gathered from a personal finance book I read years ago, funds tracking S&P500 always outperformed funds tracking the entire U.S. equity market over long periods (is this actually true?). So I was curious about why Gwern made such a choice in case the reason I hypothesized (he is investing money he potentially needs shorter-term) was wrong and there are actually good reasons to buy funds tracking the total US equity market even when saving long term.
This discussion is mostly irrelevant in practice, since the two funds track each other extremely well.
Even if it’s true that the S&P500 has beaten the overall market in the past, I doubt it’s statistically significant. Theoretically I can’t imagine a good reason why the optimal investment answer would be “pick roughly the top 500 companies, but not exactly those, but something like that picked by a committee of people you don’t know, in proportion to their market cap.” VTSAX just seems simpler as it tries to approximate “pick every company in proportion to their market cap.” This is also what the one mutual fund theorem in portfolio theory says one should do (if one limits oneself to US stocks only), so it has solid theoretical basis, unlike the S&P500.
I haven’t heard that claim before. My understanding was that such a claim would be improbable or cherrypicking of some sort, as a priori risk-adjusted etc returns should be similar or identical but by deliberately narrowing your index, you do predictably lose the benefits of diversification. So all else equal (such as fees and accessibility of making the investment), you want the broadest possible index.
You can’t buy the S&P 500, at least not directly. Instead, you can buy funds that try to match the performance of the S&P 500 (while charging a small fee), like VFNIX and VOO.
VTSAX by contrast, doesn’t track the S&P 500, but this isn’t necessarily a bad thing. From the Vanguard website,
In other words, it’s more diversified than an S&P 500 fund.
Yes, right, so to continue this line of thought: since more diversified means less risk, Gwern would want to buy VTSAX if he needs to spend that money in a relatively short time horizon. If this isn’t the reason, though, from what I gathered from a personal finance book I read years ago, funds tracking S&P500 always outperformed funds tracking the entire U.S. equity market over long periods (is this actually true?). So I was curious about why Gwern made such a choice in case the reason I hypothesized (he is investing money he potentially needs shorter-term) was wrong and there are actually good reasons to buy funds tracking the total US equity market even when saving long term.
This discussion is mostly irrelevant in practice, since the two funds track each other extremely well.
Even if it’s true that the S&P500 has beaten the overall market in the past, I doubt it’s statistically significant. Theoretically I can’t imagine a good reason why the optimal investment answer would be “pick roughly the top 500 companies, but not exactly those, but something like that picked by a committee of people you don’t know, in proportion to their market cap.” VTSAX just seems simpler as it tries to approximate “pick every company in proportion to their market cap.” This is also what the one mutual fund theorem in portfolio theory says one should do (if one limits oneself to US stocks only), so it has solid theoretical basis, unlike the S&P500.
I didn’t know this, now it makes much more sense, thank you.
I haven’t heard that claim before. My understanding was that such a claim would be improbable or cherrypicking of some sort, as a priori risk-adjusted etc returns should be similar or identical but by deliberately narrowing your index, you do predictably lose the benefits of diversification. So all else equal (such as fees and accessibility of making the investment), you want the broadest possible index.