100% Equity vs Equity/Bond

jdw2000

Pincher wrote: »

In the end, a fund is a collective investment, in competition with other funds. Whether it's passive or not, it's still a zero sum game. Even for the dividend, you have to pay what the other guy will pay.

E.g. a share pays 10p dividend, so you are happy to pay £5 for the share, but of course some rude yield chaser will come along and pay £5.01 for it, so if you want it, you have to offer more.

A tracker fund does not compete with other funds. It grows as the market grows.

Eco_Miser

jdw2000 wrote: »

A tracker fund does not compete with other funds. It grows as the market grows.

It also has to buy the underlying shares whenever subscribers add new money, and when a new company is added to the index; and sell when subscribers withdraw money, or a company falls out of the index. In all these cases each fund is in direct competition for the best price with other funds following the same index, and with funds following a different, overlapping index, and with active funds and individual investors.

Linton

jdw2000 wrote: »

The gains you are referring to are called "beta" gains. Where everyone gains together as the market grows. Passive investors are pure beta gainers/losers depending on what the market does.

There are also those who, in addition to their beta gains/losses, try to get a little more out of the market with additional trading. This is active investing. And these gains/losses are called "alpha".

The alpha gains of active investors are always at the expense of other active investors.

Passive's are only pure beta plays because of the definition of beta. Alpha/beta is just a way of modelling share returns, it may or may not say anything useful about reality. Using the model to prove that passive investing isnt zero sum unlike active investing is merely stating a tautology that is inherent in the definitions. And of course "active" investing covers many different strategies any of which may or may not be zero sum games.

One of the problems of alpha/beta is that there isnt just one market, there are a large number of different but correlated markets. For a start, perhaps "the market" should be that of all investments, not just shares. Some investors, particularly small ones, can happily move between shares, bonds, gold, derivatives etc. Both the bond and derivatives markets are significantly larger than the equity market.

But looking at shares, the price depends on the numbers which people want to buy compared with the numbers that people want to sell. Some people buy shares because they want long term growth, some buy shares because they think there is a quick buck to be made, others buy shares for income or because they happen to work for the company. There are similarly many reasons why people sell shares. The tracker just tracks how the average unit of currency is used for buying equities. An interesting thing to know perhaps, but not necessarily a good guide to choosing investments that meet your needs. You, as a small investor, aren't average.

jdw2000

Eco_Miser wrote: »

It also has to buy the underlying shares whenever subscribers add new money, and when a new company is added to the index; and sell when subscribers withdraw money, or a company falls out of the index. In all these cases each fund is in direct competition for the best price with other funds following the same index, and with funds following a different, overlapping index, and with active funds and individual investors.

None of that means that if "Tracker Fund X" makes £100 then "Tracker Fund Y" must have lost £100. That is what a "zero sum game" means, and that's not how passive tracker funds work.


Whereas that is exactly how active investing works. If BowlHead, of this Parish, makes £100 in active trading, then he does so at the expense of Dunston (or whomever plays the active game with him).

jdw2000

Linton wrote: »

Passive's are only pure beta plays because of the definition of beta. Alpha/beta is just a way of modelling share returns, it may or may not say anything useful about reality. Using the model to prove that passive investing isnt zero sum unlike active investing is merely stating a tautology that is inherent in the definitions. And of course "active" investing covers many different strategies any of which may or may not be zero sum games.

One of the problems of alpha/beta is that there isnt just one market, there are a large number of different but correlated markets. For a start, perhaps "the market" should be that of all investments, not just shares. Some investors, particularly small ones, can happily move between shares, bonds, gold, derivatives etc. Both the bond and derivatives markets are significantly larger than the equity market.

But looking at shares, the price depends on the numbers which people want to buy compared with the numbers that people want to sell. Some people buy shares because they want long term growth, some buy shares because they think there is a quick buck to be made, others buy shares for income or because they happen to work for the company. There are similarly many reasons why people sell shares. The tracker just tracks how the average unit of currency is used for buying equities. An interesting thing to know perhaps, but not necessarily a good guide to choosing investments that meet your needs. You, as a small investor, aren't average.

We're talking about shares only, I think. Alpha gains are made at the expense of active investors only.

Linton

jdw2000 wrote: »

We're talking about shares only, I think(1). Alpha gains are made at the expense of active investors only(2).

1) My point is that the definition of "The Market" is somewhat arbitrary. You can define markets that are supersets, or subsets of the global equity market based on sector, geography, high vs low income etc etc. Some of these subsets could have very different alpha/beta characteristics to those of the globa average. In a sense each individual investor could define a market as they may have a preference for investments compatible with their objectives.

As far as I can see you cant invest in a true global equity tracker - all the indexes seem to significantly down-play China.

2) You are merely restating the definition of alpha/beta in what is a mathematical model. Use Linton's gamma/delta model and you can "prove" that anyone who doesnt hold my portfolio is indulging in a zero sum game.

jdw2000

Linton wrote: »

1) My point is that the definition of "The Market" is somewhat arbitrary. You can define markets that are supersets, or subsets of the global equity market based on sector, geography, high vs low income etc etc. Some of these subsets could have very different alpha/beta characteristics to those of the globa average. In a sense each individual investor could define a market as they may have a preference for investments compatible with their objectives.

As far as I can see you cant invest in a true global equity tracker - all the indexes seem to significantly down-play China.

2) You are merely restating the definition of alpha/beta in what is a mathematical model. Use Linton's gamma/delta model and you can "prove" that anyone who doesnt hold my portfolio is indulging in a zero sum game.

Well, the "market" we are talking about is the global stock market. The market us made up of all the shares held. These share holders can be divided into two sets (for the purposes of this discussion): active and passive investors.

Whatever "extra" wins/losses an active investor receives, an other active investor must lose.


Passive investors are not affected by the wheeling and dealing of active investors. Active investors only impact on each other.

ischofie1

Way back at post No 3 a link is posted for a Vanguard tool that shows returns over the last 30 years for selectable percentages of equities/bonds/cash.
I tend to prefer direct property as my diversifier rather than bonds.
Does anyone know if such a tool exists that also brings direct property in the play?


Thanks in advance.

Linton

jdw2000 wrote: »

Well, the "market" we are talking about is the global stock market. The market us made up of all the shares held. These share holders can be divided into two sets (for the purposes of this discussion): active and passive investors.

Whatever "extra" wins/losses an active investor receives, an other active investor must lose.


Passive investors are not affected by the wheeling and dealing of active investors. Active investors only impact on each other.

By investing "in the global stock market" you seem to be rejecting the possibility that particular subsets of that market may out-perform others for significant periods of time.

You seem to be assuming that there are two only modes of operation, one buying in line with market cap and holding and the other short term trading. The first adopted by passive funds and the second by active funds. There are many other things a fund can do...

- buy and hold according to some other criteria
- buy and sell to maintain the allocation (like the VLS series and multi asset funds). Does this make VLS active?
- modify the strategy in line with market conditions.
- invest in those companies which satisfy fundamental financial or business criteria
- focus on particular sectors using expert industry knowledge
etc etc

dunstonh

I tend to prefer direct property as my diversifier rather than bonds.
Does anyone know if such a tool exists that also brings direct property in the play?

The tool would be useless as property has not gone up by a single uniform amount over the years. Would you measure property in London or somewhere up North or in Wales or N.Ireland? Would you measure residential property or commercial property?

What rental yields would you use? These are not consistent as you could be an astute landlord who knows how to get properties cheaper or have building skills which are not costed into the modernisation or you could be a complete newbie who ends up with a really poor yield.

Also, looking at property, it is highly unlikely that the next 30 years will look anything like the last 30. 1970-2008 saw lending deregulation and easy access to credit. 2009-2016 has seen a tightening up on credit availability but all time historic lows on cost of borrowing. London and parts of SE are partly valued internationally rather than locally so now include some currency fluctuations in the mix. You also have new taxation on landlords.

So any backward looking model is going to be pretty useless when it comes to direct property.

Even for indirect property, like property funds, it isnt that great as you would have to go back about 25 years for property funds to show a loss prior to the credit crunch.