Last Updated Jan 27, 2010 2:45 PM EST
One of the two flaws of the S&P 500 index funds that I pointed out was what I called the Google Effect:
On March 23, 2006, Standard & Poor's announced Google was being admitted to the S&P 500 index. It made the announcement after the stock market had closed that day. Now, just because the stock market is closed doesn't mean people can't trade stocks. Thanks to a Wall Street invention called after-hours trading, it's possible to buy and sell stocks after the market closes. And in after-hours trading, Google went up a whopping 7.3 percent that night. That's because investors knew that all of the many large S&P 500 index funds had to go out and buy Google pronto. Demand for the stock drove the price higher.Last night, the following occurred as Standard and Poor's admitted Berkshire Hathaway to the S&P 500 index: Berkshire admitted to S&P 500 Index.
Berkshire shares jumped 8.2 percent to $73.61 in after-hours trading Tuesday.If you own an S&P 500 index fund, you'll be buying a stock at a premium due to its admission to the index. If you own a total index fund, you owned it before this increase, and still do. And if you owned Berkshire Hathaway directly, the news is all good.
The Google Effect is alive and well. Tip of my hat to Jack Bogle for also giving investors a total index fund.
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