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The problem with the index example, is that when large components like Bombardier, Nortel, Air Canada (both before and since bankruptcy) fail, they drag the index down with them. Smaller companies too like Loblaws and currently energy stocks. Not sure who the New Giants are who compensated for these very large losses.

Investing in an index fund may be suitable for those starting out with insufficient funds to build their own diversified (but not over-diversified) portfolio. You have to be prepared for mediocre to low returns long term.
 

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In fact the whole experience with NT just shows how amazing indexing is. Look at XIU, the first index ETF in Canada. In its early days, pretty much right after it came into existence, Nortel dominated the index and was a huge % of XIU.

You might think this means that XIU was doomed. Hardly! In fact the XIU return since inception is 6.5% annualized, a perfectly solid return, probably greater than what most Canadian equity investors got over the last 20 years.

That's because the index does adapt and change over time. Poor performers become minor weights, and new top performers become top weights that drive the performance.

when large components like Bombardier, Nortel, Air Canada (both before and since bankruptcy) fail, they drag the index down with them. . . Not sure who the New Giants are who compensated for these very large losses.
What happens is that as large weights crash, they become more minor and less influential in the index. Other stocks rise (in relative weight) to take their place. It's somewhat of a natural evolution between winners and losers.

For example, Bombardier was replaced by CNR as the top weight in 2003. As you know, CNR has performed spectacularly ever since. So yes, BBD.B brought some losses, but they were quickly replaced by the huge gains from CNR.

So we see that the index does adapt and reposition itself over time, grabbing onto the new best performers. Now here's the question... do individual stock pickers do this as effectively?

I would say they don't. Many people stubbornly hold onto stocks, even as they get pounded into nothing.

The index also adds new potential up and comers. The TSX index added SHOP, WCN, DSG, CSU and many other stocks which turned out to be great success stories which contribute to the index gains.
 

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So we see that the index does adapt and reposition itself over time, grabbing onto the new best performers. Now here's the question... do individual stock pickers do this as effectively?

I would say they don't. Many people stubbornly hold onto stocks, even as they get pounded into nothing.

The index also adds new potential up and comers. The TSX index added SHOP, WCN, DSG, CSU and many other stocks which turned out to be great success stories which contribute to the index gains.
While the index does provide protection it also limits gains so the replacement protection comes at a potential cost.

On the Nortel side the index could have saved your bacon, unless of course you're watching like hawk and/or had a stop loss in place.

On the flip side consider someone who bought a high percentage of SHOP in Dec 2018 dip. How many years of index investing with the same amount of money would it take to make those kind of gains SHOP has had in under two years?
 

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While the index does provide protection it also limits gains so the replacement protection comes at a potential cost.

On the Nortel side the index could have saved your bacon, unless of course you're watching like hawk and/or had a stop loss in place.

On the flip side consider someone who bought a high percentage of SHOP in Dec 2018 dip. How many years of index investing with the same amount of money would it take to make those kind of gains SHOP has had in under two years?
Well sure, and hedge funds (and active managers) claim to do all the above. They claim to ride hot new stocks for gains, and they claim to get out of bad stocks. But we also know from the statistics available on active managers, that they don't do this very well.

Look at CMF for instance. There wasn't even a single mention of SHOP until very recently. We have a lot of experienced investors and stock pickers here, yet just about nobody was in SHOP.

In fact, despite all the supposed hot-shot investors around here, it seems that nobody was even in tech stocks! For many years now, Canadian tech has blown away all other returns. Why is everyone always discussing energy? Why were people not buying tech?

How about all the individual CMF stock pickers. Sure, BCE and FTS are great stocks, but how come none of us individual stock pickers (including me) had any significant positions in tech? We missed out on years of big returns.

I think this shows that in practice, active investors really are not good at doing these "ideal" things. The constant discussions and focus on energy stocks really proves it. People get some idea in their head (like when energy was once hot) and then keep investing like that.

Nobody is actually looking for the new up and comers. Nobody at CMF got into SHOP early, and everyone including me missed the huge performance of Canadian tech / XIT.
 

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Look at CMF for instance. There wasn't even a single mention of SHOP until very recently. We have a lot of experienced investors and stock pickers here, yet just about nobody was in SHOP.

In fact, despite all the supposed hot-shot investors around here, it seems that nobody was even in tech stocks! For many years now, Canadian tech has blown away all other returns. Why is everyone always discussing energy? Why were people not buying tech?

How about all the individual CMF stock pickers. Sure, BCE and FTS are great stocks, but how come none of us individual stock pickers (including me) had any significant positions in tech? We missed out on years of big returns.
Not everyone here posts all the stocks or ETFs they own so I can't comment on who owns SHOP or something like XIT.

I was just pointing out that index ETFs are a "safe middle ground" with both pros and cons. Even the 5/6/x pack people have enjoyed better gains than a pure index approach, well for the most part. :)
 

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So OP has $200k. He invests it in an index that has 30% of a Nortel like stock. He doesn't re-invest in more of the index. Just hangs on until the stock is worthless. How does he make out?
He makes out fine, because the index adapts over time. New top stars become the new highest weights. How else do you explain the 6.5% CAGR performance of XIU, despite starting at a point where NT was a whopping 24% of the index?
 

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So OP has $200k. He invests it in an index that has 30% of a Nortel like stock. He doesn't re-invest in more of the index. Just hangs on until the stock is worthless. How does he make out?
You didn't read the article did you ... Did the index become worthless with Nortel down?
 

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I did until I realized it was not relevant. And who said the index became worthless?

Why not consider my example. You buy 60 stocks and never any more. One of them represents 30% of your portfolio. After a few years, that stock drops to zero. The other 70% are supposed to provide you with a good market return, say 8% pa on average. Some of them do well, some not. When would the portfolio recover? 1 yr, 10 yrs, 100 yrs? Do the Math.
 

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I did until I realized it was not relevant. And who said the index became worthless?

Why not consider my example. You buy 60 stocks and never any more. One of them represents 30% of your portfolio. After a few years, that stock drops to zero. The other 70% are supposed to provide you with a good market return, say 8% pa on average. Some of them do well, some not. When would the portfolio recover? 1 yr, 10 yrs, 100 yrs? Do the Math.
About 7.5 years. Not bad for a 30% permanent loss. A globally diversified portfolio would not have 30% in one stock. Not even 30% in one sector.

Holding the index and individual stocks are not mutually exclusive. One could start with a core index and then add some dividend players or value stocks, etc to further tilt in the direction one wants to. But for most investors, it pays to start with the index. In the case of 4 stocks, if one crashes, the survivors may not be able to do the heavy lifting like the rest of the index did for Nortel.
 

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For what it's worth and with thanks to Morningstar, it might be worthwhile looking at what happened through the dot-com period with a lot of help from Nortel. By taking the safe route and buying an index fund, you could make zero return over ~7 years? That's what it looks like to me. Financials were main reason for recovery.

20296
 

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...Financials were main reason for recovery.
That proves the value of diversification. In the aughts financials carried the index; tech has been doing so since 2008.

I believe there have been changes to the index since those years. Now XIC for example is called "capped composite", mitigating the risk of a single stock imploding.
 

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Of course the 7 year break even period is only related to what you bought at the peak.
And related to just when you might have sold. Many would have bailed and lost their shirts.

Those that held individual stocks (like Nortel) may have bailed out of that one stock early and actually made money over those 7 years. I can't recall exactly, But I think we sold our Nortel at just under a $100. At $60 our FS brokerage was telling us to buy! Another reason we went DIY!
 
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