[zAy0LfpBZLC8mAC]

(Index) funds solve a problem that we shouldn't really have anymore.

The problem is that (semi) manually trading securities is inherently expensive.

Funds solve that problem by massively reducing the number of transactions that are required: 1000 people investing in a fund investing in 1000 companies needs 2000 transactions instead of the 1000000 transactions needed when 1000 people invest in 1000 companies directly.

But there really is no fundamental reason anymore why you shouldn't be able to just buy small numbers of shares from a thousand companies via electronic systems. A million transactions is not really a problem for modern IT, nor is managing 1000 positions in your account.

Yes, there are some more practical problems (the valuation of individual stocks being too high for small investors to buy even a single one, preventing front running on index changes, tax refunds, ...) - but I would think all of those should be possible to solve in a way that is both economically feasible and has the individual investor holding the actual stock to prevent those accumulations of power. And you still could have the possibility to delegate your voting rights to some organization you trust--but that could be decoupled from the investment "product" or account itself, plus you wouldn't be required to delegate the power for all your investments.

Or we could just make laws that mandate that funds must delegate voting rights to their investors, i.e., make it as if they were holding the stocks directly in that regard?

[dumb_troll]

What about the problem that retail investors necessarily don't have good insights about individual companies (or stock pickers) but still want to benefit from economic growth?

[zAy0LfpBZLC8mAC]

Yeah, what about that? They get the same overall investment strategy as an index fund, just without the concentration of power?!

[mruts]

You would have to trade constantly. Moreover, most people probably don’t have the capital. You can’t buy a fraction of a stock, and since the S&P is market cap weighted you would need a lot of stock in order to do anything like the S&P 500

[zAy0LfpBZLC8mAC]

> You would have to trade constantly.

Really, you don't. If you want to track a market cap weighted index, you only need to trade when the index composition changes, which isn't that often.

But also, that's not exactly something that couldn't be automated, is it? That could be a service offered by banks: automatically keeping your portfolio matched to a particular index.

The point isn't that you should be doing the work of a fund yourself, the point is that you should directly own the stocks. For one because that means you have the voting rights, but also because that would make you less dependent on any particular company. If you are invested in some company's S&P500 ETF, the only way to switch to a different company managing your S&P500 investment is by selling the old one and buying the new one, which causes transaction costs and can have massive tax consequences. If it was just your bank managing the stocks held by you, you could just transfer them to a different bank and have them take over the management.

(And also, it would allow minimally "active" investing even within a passive framework: If your bank is managing your portfolio for you, it would be much easier to, say, exclude a particular stock. It would technically be trivial to implement "S&P500, but without Facebook", say.)

> Moreover, most people probably don’t have the capital. You can’t buy a fraction of a stock, and since the S&P is market cap weighted you would need a lot of stock in order to do anything like the S&P 500

That is one of those things that I meant by "practical problems". If you think about it, that isn't really a fundamental problem. There is no fundamental reason why stock ownership has to be organized as "shares" that represent a fixed, relatively large, share of the company. We could in principle move to a model where you can hold more or less arbitrarily small pieces of a company, including arbitrarily small pieces of voting rights. Why shouldn't it be possible to just buy 0.00000000687 pieces of Berkshire Hathaway A for a cent or so, to have legal ownership of that piece, and to have the voting rights for that piece? None of that is exactly difficult to do with computers.

There were practical reasons why doing things the way we do them made sense, back when shares were physical pieces of paper that you moved around physically. But it really doesn't make a whole lot of sense anymore given our current technology.

[mcguire]

Tracking the index on your own would be more than a full time job. You could do it automatically, but that just reinvents the fund

The S&P500 had 500 stocks. Do you want to vote ~1.5 times a day?

[zAy0LfpBZLC8mAC]

> Tracking the index on your own would be more than a full time job. You could do it automatically, but that just reinvents the fund

That reinvents funds ... without the problem of accumulating all the power in a few hands, which was exactly my point?

> The S&P500 had 500 stocks. Do you want to vote ~1.5 times a day?

No, and why would I have to? For one, many index funds don't vote on many stocks either. But more importantly, the point is to unbundle voting rights from the portfolio management aspect. Just as that doesn't mean that you have to manually track an index, it doesn't mean you have to manually vote either, does it? You can just delegate it to some group that you think represents your interests, and you could do so selectively. If some group wants to get some particular company to change something and you support that, you could just delegate the voting rights for that one company to that group.

[foolsgold]

That's like saying that you could launch your own space station and live in orbit, but you'd just be recreating NASA.

I worked for Vanguard and worked with the people who run the index funds, it's just a little harder than it looks.