Comments on: How stock-market indices underperform

By: Duncan

Duncan — Tue, 07 Apr 2009 12:47:52 +0000

Presumably the reason for this is that for companies dropping out and coming into the index an index fund is basically forced to buy dear and sell cheap.

By: Brian Slesinsky

Brian Slesinsky — Mon, 06 Apr 2009 16:22:12 +0000

Perhaps the higher returns are due to less diversification? If some stocks drop out and no new stocks are added, over the time it concentrates on fewer, older companies.

By: Confused

Confused — Mon, 06 Apr 2009 15:58:56 +0000

As I understand it, ‘survivorship bias’ occurs when a firm fails (i.e. delists, goes into bankruptcy, essentially has zero equity). The idea that an index suffers from ‘survivorship bias’ is true in that regard, but typically don’t firms get dropped long before they fail?

More to the point, what are these indices ‘underperforming’? My impression is that a firm is dropped from the index when their business is no longer representative of the economy (or whatever conceptual idea that index is shooting for). Practically, these are probably value stocks – and as we know, value stocks outperform. So sure, hold the ‘original’ index – but my guess is that the ‘original index’ will overweight value.

By: Teresa Lo

Teresa Lo — Mon, 06 Apr 2009 14:25:15 +0000

Maybe they made “real” companies back then.