I want to track an index for my savings, but I wasn't able to find in my country (Argentina, if it matters) an Index Fund that's cheap, has a low tracking error and that I can expect won't be dissolved on the mid term.

So, even if it's a bit more work, I'd like to give a try at building an index tracking portfolio.

Any literature references? The most frequent advice is to limit to around 5 stocks, but how should I choose them?

Assuming I'll add new saving funds monthly, should I use them to rebalance the portfolio, or always purchase at the same propotion?

How do I balance? By productive area? or by the representation of the stock chosen inside the index? How do I handle changes in the composition of the index?

How do I measure the performance of my portfolio, if I'm constantly adding funds to it?

  • What index or indexes do you want to track? – Rick Goldstein Apr 16 '19 at 21:24
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    Owning 5 stocks isn't an index. It's a small, undiversified portfolio. Owning 5 ETFs is a different story. In order to determine what stocks to buy, you have to determine what you are trying to emulate. – Bob Baerker Apr 16 '19 at 21:26
  • @RickGoldstein I'd like to start tracking MERVAL, as it's the easiest I have access from Argentina. – xvan Apr 16 '19 at 21:30
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    @BobBaerker, that's obvious, but the extra volatility of not having all the stocks inside an index doesn't offset the operation costs of managing several stocks. The issue is choosing the reduced amount of stocks that best tracks the whole index performance. – xvan Apr 16 '19 at 21:35
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    5 stocks can't accurately track a major index except by random coincidence. If you want to get closer to index performance, get historical data for all index components and then determine correlation number for each to index. You've asked a lot of questions and they don't have simple answers (allocation, rebalancing, composition changes, etc.) nor can they be answered because you haven't yet figured out your pseudo index. Don't know about Argentina but in US, operational cost (commissions?) is very low and even free. – Bob Baerker Apr 16 '19 at 21:51

There's a few problems with your approach (some mentioned in the comments):

  1. 5 stocks won't be enough to replicate an index.
  2. Price-weighting is an obsolete index approach, so it's not worth trying to replicate such an index. Generally, capitalization-weighting is the most common/representative/cheapest.
  3. Investing only in Argentinean stocks would be very risky for a US investor. It's even more risky if you also live and work in Argentina.
  4. If fees are indeed 10% per year, you're unlikely to get any returns after fees. Even a regular bank account sounds like a better risk/return option compared to that.

With those fees, you might be better off transferring your money to a US or EU account, and investing in a low-cost, global portfolio there, even if you have to pay for international wires every year or so.

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