Only if the other 87% beats the market.
Jack Bogle warning on index fund investing
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I thought the whole point of good investing is to be well diversified all the time so that you can whether a downturn well. And well diversified to me means limiting risk. Oh well, what do I know.
Perhaps I'm missing something, but exactly how can you be more diversified than owning a tiny piece of the entire bloody market?
foxfirev5
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I am even more convinced that nobody knows nothing.
RetiredAt55.5
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Yes, in fact as of July 2016, about 1/3 of VANGUARD's assets are actively managed (ref: Bloomberg article: https://www.bloomberg.com/news/articles/2016-07-11/vanguard-the-unlikely-savior-of-active-management )
From the article: "While such funds remain the firm's bread-and-butter, assets under active management at Vanguard now total around $1 trillion."
I'd like to encourage enlightened, smart, diligent individual (and institutional) investors into the market even though most of my money is in index funds. Those folks out there really looking for value are helping me and everyone else who indexes.
I'm with you Bwe! You are one of those folks on this forum that convinced
me a few years back to go with VWIAX. At 6% return I'm happier than a pig in poop. I have some other dollars to invest but wonder if I should find another fund. Just thinking.
Fedup
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I'm not worry either, the FED and the plunge protection unit will save me.
As long there are at least a handful of reasonably intelligent actors (could even be robots) buying individual shares of any company, and they are acting independently, we will have a market functioning reasonably well.
So even at 99% indexing I'm pretty sure it is still a viable approach.
So even at 99% indexing I'm pretty sure it is still a viable approach.
mathjak107
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most popular index funds are weighted and not diversified at all .
just 9 stocks account for 30% of the moves of all 500 in the s&p 500. 18 stocks represent 51% of the move of the s&p 500 .
since the s&p 500 dominates the wilshire 5000 all 4982 stocks can be moved by just 18 stocks . . that is far from really being diversified .
2000 saw the s&p dominated by technology and it got hammered for it .
they can also be very over lapping if you don't watch the index's you buy .
someone on another forum took a look in to this and a popular vanguard combo was not very pretty . voo-vo-vb is a very popular s&p500-midcap-small cap combo .
"VOO vs. VO = 229 overlapping constituents (45% of VOO's holdings, 67% of VO's holdings) <-- this is pretty bad
VO vs. VB = 20 overlapping constituents (6% of VO's holdings, 1% of VB's holdings) <-- not bad
VOO vs. VB = 28 overlapping constituents (6% of VOO's holdings, 2% of VB's holdings) <-- not bad, but kind of weird, right?
IVV vs. IJH = 0 overlapping constituents
IJH vs. IJR = 0 overlapping constituents
IVV vs. IJR = 0 overlapping constituents "
so it can be very important to buy the right index's when you combine things .
by the way a total market fund is structured terribly from an investment standpoint .
there is barely any difference in return , usually less than 1% because the index used is not the best for investing .
while 10% goes to mid-caps and 10% small caps , 7% goes in to small and mid-cap growth . only 3% goes to value .
over time growth has done worse than the s&p 500 while value has beaten it over and over .
value investing gets 3% so the 7% in growth undoes the good the value side brings to the party .
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mickeyd
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As for me, I'm sticking with indexing. My hope is that many of you folks will bail out of index funds at the "right time" so that the magic figure stays below the critical point.
That's my plan. I'm sticking to it.
That's my plan. I'm sticking to it.
Texas Proud
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I guess you have not taken a course in portfolio analysis...
The math is that once you get to about 30 stocks adding another will have very little impact on diversification... adding a hundred also has little impact...
Here are a couple of quotes from Wiki about it....
There is no magic number of stocks that is diversified versus not. Sometimes quoted is 30, although it can be as low as 10, provided they are carefully chosen. This is based on a result from John Evans and Stephen Archer.[5] Similarly, a 1985 book reported that most value from diversification comes from the first 15 or 20 different stocks in a portfolio.[6] More stocks give lower price volatility.
An empirical example relating diversification to risk reduction
In 1977 Edwin Elton and Martin Gruber[14] worked out an empirical example of the gains from diversification. Their approach was to consider a population of 3,290 securities available for possible inclusion in a portfolio, and to consider the average risk over all possible randomly chosen n-asset portfolios with equal amounts held in each included asset, for various values of n. Their results are summarized in the following table. The result for n=30 is close to n=1,000, and even four stocks provide most of the reduction in risk compared with one stock.
In 1977 Edwin Elton and Martin Gruber[14] worked out an empirical example of the gains from diversification. Their approach was to consider a population of 3,290 securities available for possible inclusion in a portfolio, and to consider the average risk over all possible randomly chosen n-asset portfolios with equal amounts held in each included asset, for various values of n. Their results are summarized in the following table. The result for n=30 is close to n=1,000, and even four stocks provide most of the reduction in risk compared with one stock.
https://en.wikipedia.org/wiki/Diversification_(finance)
OldShooter
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Wow.
I don't doubt any of it, but the S&P SPIVA data tells me that passively investing in a statistically large number of stocks will allow me to beat something like 90% of active managers over the long term. IOW, the statement that "a total market fund is structured terribly from an investment standpoint" may be true in some theoretical world but the fact is that it works. That, and the fact that it is impossible to identify winning managers in advance (S&P Persistence) is really all I need to know.
Re small cap and value stocks, Fama and French have modeled the history quite nicely but I think they would be the first to point out that the effect has historically shown up reliably only over long periods, like decades. Further, their analysis can say nothing about the future. IMO it is entirely possible that the small and value premiums will decline or disappear in the future as more and more investors tilt their portfolios on the assumption that past performance predicts future results.
So, @mathjack, you may simply be "Skating where the puck was." A decade or so in the future, you might start to know.
If you like this game, though, you should look carefully at the DFA "Component" equity funds. They are pretty much designed to be tools for the tilt-game player. I have a hard copy of their "A Look at Dimensional's Investment Portfolios" that describes the funds and I also found that brochure here: http://www.ufpartners.com/wp-content/uploads/2015/10/Dimensional_Investment_Portfolios.pdf
ERD50
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Not sure what your point is. Which 9 stocks? Which 18 stocks? I don't think we know ahead of time, do we?
That's why I like an index that holds lots of stocks.
-ERD50
Montecfo
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Think about it this way: If everyone's only investment is SP500 index, then you really just own a large single stock.
You would have to own disproportionate shares of those stocks, or stocks outside of the index, to be truly diversified.
Montecfo
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As with most things, it depends. Active management works best in less liquid markets and more specialized markets such as international, emerging markets and bonds.
Indexing works best in large highly liquid, less specialized markets.
I view indexing and active management as tools, and try to choose the right tool for the job.
Fedup
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I have money in both. So either way, I'm doomed. Depends on which side you wake up on.
mathjak107
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you can easily look up the stocks . the point is in a cap weighted index you are not very diversified . watch what would happen to the index if fang faltered .
ERD50
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Are you saying the 9 and 18 largest holdings? Sure, I can look those up easily enough. But you said something about the 9 and 18 accounting for 30% and 51% "of the moves".
I'm not sure that's the same list. Could be the middle/smaller stocks move more than the largest ones, and therefore make up "more of the move"?
-ERD50
Not sure I understand. If you mean you have a tiny portion of assets in one index fund, probably too much cash. If you mean that all your assets are in tiny slivers of all markets thru indexes, I think 100% of assets in stocks is too risky - vs. some cash and hard tangible assets.
Does that say active management of the less liquid markets is better than an index of those same markets? Or that it's closer to an index but not better?
ERD50
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Tacking on to my previous post - if you meant weighting, that doesn't add up either. From:
SPDR® S&P 500 ETF (SPY) Top Portfolio Holdings
Columns get skewed, but that's ~ 18% and 27% for the top 9 and 18. Not 30% and 51%.
Is that what you mean, or something else?
ERD50
OldShooter
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Actually, @Montecfo's statements are OWTs. If you study the original William Sharpe paper (easy/only three pages: https://web.stanford.edu/~wfsharpe/art/active/active.htm) and/or carefully watch Kenneth French's 5-minute video explanation (https://famafrench.dimensional.com/videos/is-this-a-good-time-for-active-investing.aspx) you will understand.
IMO where these statements come from is a misunderstanding. If an index contains all of the stocks that a group of active managers are trading, then their results will always be the index average less their costs. It is also very, very close to being true when the index contains substantially all of the stocks they are trading, as illustrated by the semiannual S&P SPIVA results.
I read one article the other day where the author was bashing indexing by pointing out that active managers would soundly beat the S&P whenever emerging market stocks were strong. Well, duh. The S&P is the wrong measuring stick for active investors who are not investing in the S&P. So that kind of thing is one source of the OWTs.
Another thing that is happening (the hucksters are endlessly clever) is the emergence of ETFs with "index" in their names but which are basically sector funds. Such a narrow "index" will outperform active managers who trade strictly using the stocks in the index (back to Sharpe!) but those managers are highly unlikely to limit themselves to a goofy little sector index. So when the active managers beat the South China Sea Emerging Markets Index ETF and start thumping their chests, you can be sure that they are not investing strictly in the stocks in that (fictional) index. So that is another source of the OWTs.
Mathematically speaking, Sharpe is precisely correct only if the "market average" is the average of all investable stock and the "active managers" list is all active managers. As people diverge from that it becomes easier and easier to find cases where the managers on average outperform an index simply by deliberately choosing the wrong index as a standard or by surreptitiously going off-reservation and trading in stocks that are not in the index.
So my takeaway is to use total market funds, Russell 3000, Wilshire 5000, ACWI, etc. and be confident that I will beat 90% of the active managers in the US or the world. That's good enough for me.
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Montecfo
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It depends on the market, and the manager. Obviously you want to choose managers with a solid track record. Indexes will generally beat poor managers even in less efficient markets.
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