100% Equity vs Equity/Bond

bowlhead99

jdw2000 wrote: »

Well, the "market" we are talking about is the global stock market. The market us made up of all the shares held.

Usually the makers of the indices define it differently for convenience, such as only including stocks with a certain level of liquidity or looking at the market cap of shares available in free float to international investors (thus Linton's comment about China being under-weighted because the shares of many companies listed in Shanghai or Shenzhen are ignored even though they are a massive proportion of what domestic Chinese individuals would hold).

So they cut out whatever asset classes or regions or criteria that they don't want to track, from what they invest in, and then they invest on the criteria that fits their own definitions.

An investor in UK FTSE All-Share has chosen to ignore all the shares listed on AIM and all the shares listed in all countries that are not the UK. An investor in a US tracker has chosen to ignore shares not listed in US, and those holdings which are easily available in US but which are only there via depositary receipts rather than underlying shares (such as BP for example). An investor in the FTSE all-world is ignoring small caps, and any large but-hard-to-access Chinese companies, and any investment options which are not shares at all (such as bonds), but could include preference shares if large enough, even though they may have bond-like characteristics by paying a fixed annual amount ahead of equities.

So lots of things are eliminated from a "passive portfolio", by defining up front what criteria you might want. For example you could define that a share only qualifies for inclusion if it pays dividends and then call it a "smart beta" index, but it's still an up front decision on what you want to invest in.

These share holders can be divided into two sets (for the purposes of this discussion): active and passive investors.

Passive if they follow the index that was defined up front. But what if I decide to passively follow the Dow Jones Industrial Average, with my allocation based on a ratio of the share prices, rather than the ratio of the market caps. Or similarly the Nikkei?

If I did that by slavishly following the index, surely that is passive, as I am not making investment decisions. But what if I decided my own portfolio strategy that just happened to follow the rules of DJIA by coincidence? Am I now an active investor because I don't officially follow an index, only accidentally? I suppose you could call it a "closet tracker". But what it is tracking is not a cap-weighted index, so does that mean it's active?

How about if I followed an "equal weight" instead of "cap weighted" index? Again you might say it's "active" but that's only because of how you decided what the "standard" index should be and arbitrarily decided that everything that was not that, was active, and thereby riskier, so when it beats your definition of "the passive index", you could say I only won "by taking more risk"

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

No, whatever extra wins/losses an active investor receives, another active or passive investor must lose

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

No, *any* investors' decisions (such as Linton choosing to buy $600 Samsung Electronics to $600 Apple in an equal weighted index on 1 Jan ) will affect both the returns of me (buying one share of every company on the planet on 1 Jan and getting a ratio that differs from $600:$600) and you (buying enough excess Apple over Samsung to represent Apple's ratio of market cap to Samsung's).

All three of us go and buy our shares on 1 Jan and all that activity drives the price.

The difference is that I can go and place my order without looking at the price list (sounds passive to me); Linton can place his order for equal weights at prevailing prices without asking how many shares he is going to get(sounds passive to me); while you have to find out the relative prices and values and buy some hyper specific value/quantity to match the capitalisation ratios that were in existence before you placed your order (sounds like you are doing more work than either of us).

If a fourth person then comes and buys shares in Samsung and no shares in Apple because he feels that the hoo-hah over exploding Galaxy Notes has been over-blown by the media, then his actively researched decision affects ALL of us.

Actually it could affects the value of your portfolio the most, because that new market activity will negatively affect Apple's share price - and you may be the one with the largest investment in Apple relative to Samsung and indeed relative to all other shares and bonds, because your index told you to buy more Apple than anything else on the planet.

So the idea that the active investor coming in is onlyj going to take value off me and Linton is baloney; he takes it off everyone. You are not "protected" by saying that you think your index is the most logical way to structure your portfolio and that the two of us are gamblers trapped in a zero sum game.

Malthusian

ischofie1 wrote: »

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?

It would be possible for the tool to incorporate the data from a property index such as the Halifax House Price Index, but it would as Dunstonh says be pointless because it is impossible to buy a tiny percentage share in every single house in the country, as you can with bonds and shares.

Someone who had invested in global equities or bonds over the past 30 years could reasonably expect returns in line with those shown in Vanguard's graph, if they had diversified sensibly (e.g. by investing in a Vanguard tracker). Someone invested in residential property could not - their returns could be anything.

seacaitch

It's worth remembering there is no such thing as a passive investor. Instead, there is a spectrum of activity from highly active to inactive, but every investor makes active decisions; many so-called passive investors will be rather more active than they realise and most will be more active than they ever intend.


The CAPM Market Portfolio is not something that's investable and there are no close proxies for it. Therefore, every so-called passive portfolio involves the investor making active decisions on what exactly they will choose to invest in. We see this in the endless discussions over exactly what indexes to track and what weightings to give each of these indexes within the portfolio. All active decisions. Few if any of these resultant portfolios will bear any resemblance to the CAPM Market Portfolio.


Most investors change their portfolio construction over time, for various and endless reasons: to reduce or boost home bias; to alter geographic weightings in response to a changing world; to cater for changing personal circumstances; to reduce perceived risk or volatility over time as the investor ages; to replace existing products with newer products perceived to have some advantage. Again, all active decisions. Even when the investor tries not to change their portfolio and remain as inactive as possible, their product provider is busy making active decisions and changing it for them: selling securities which have been ejected from the narrow (w.r.t. the Market Portfolio) index they track; buying securities that have entered the index; wholesale changes to the portfolio that the investor's fund-of-fund index tracker provider decides to make as they once again change their Market Portfolio proxy. No shortage of activity with these so-called passive products.


So-called passive investing also involves making endless timing decisions that affect an investor's returns; some of these the investor has no control over, such as when they happen to be born and the demographics therein, which determines the investment opportunity sets they experience during their investment lifetime. Others they do have some control over: when in their lifetime do they begin investing; what is their earnings profile throughout their working life - lumpy or sustained - and hence when do they perform the bulk of their investing, which will determine asset valuations at purchase and hence impact future returns; over what timeframe do they invest and to what extent do they dollar cost average vs lump sum; how and when do they divest. These are all active decisions.

The above are some of the reasons why many so-called passive investors will be more active than they realise. But the great big elephant in the room is that we also know that most so-called passive investors will be more active than they ever intend because they cannot but help themselves from attempting major timing calls. Retail flows into index products mirror those of active products: inflows rise dramatically after periods of strong performance and outflows rise dramatically after periods of weak performance. We know that retail investors are on average horrific market timers, and as a result the average retail investor achieves nothing like the market return they'd hoped to achieve.

"Passive" has become a highly sellable brand, hence the clamour of product providers falling over themselves to mine this rich seam. Investors are very sensible to minimise the fees they pay to managers but they should also be careful not to blindly fall for evangelical nonsense surrounding so-called passives and to understand exactly what it is they're buying (and what they're not buying, to whit the CAPM Market Portfolio), and most importantly realise that they themselves - the investor - is still by far the weakest link in the chain.

dunstonh

It's worth remembering there is no such thing as a passive investor. Instead, there is a spectrum of activity from highly active to inactive, but every investor makes active decisions; many so-called passive investors will be rather more active than they realise and most will be more active than they ever intend.

Indeed. VLS has a management decision to run very rigid allocations that rarely change but use passives as underlying investments. L&GMI also use passives as underlying investments but have more fluid allocations and a wider selection of areas that allow management decisions.

In fact, deciding to invest in of these is a management decision.

When using single sector passives, the amounts you put into each sector and which sectors you use is a management decision.

jamesd

dunstonh wrote: »

Nothing really looks attractive at the moment. cash, bonds, equity all looks a bit poor. That is why bonds are still being used.

That's not quite true if you don't constrain things to traditional investments. P2P looks very interesting at the moment and it made it really easy for me to decide to cut my own equity holdings without increasing my bond fund holdings. Even in traditional investments there are differences between the various equity markets in level of attractiveness.

jamesd

jdw2000 wrote: »

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

One of the easier wins in the active investing field is buying shares before the trackers are forced to buy them as a share enters an index. And selling before leaving. It's the tracker customers who are paying for that.

One of the active decisions that "passive" vehicles make is if and when to buy or sell in advance to reduce the losses their customers suffer to such front running. Another one is whether to do stock lending, who to be willing to lend to and who gets the profits, if any. Also, if the stock lending is for shorting, as it usually is, they are choosing to have some of their customers benefit at the expense of others. The ones selling in that case, who will get a lower price aided in getting that lower price by their fund manager. Meanwhile the ones buying will get a lower price and be advantaged.

Trackers buy or sell on the market and they are even more vulnerable to its shifts than actives because they have less control over what to buy or sell and when.

ischofie1

dunstonh wrote: »

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.

Sorry Dunstonh I wasn't clear.
When I said direct property I actually meant a direct property fund rather than individual property ownership.
The property fund I hold is Standard Life Property Pension Fund (code FM) which is UK property.
I was looking for something as slick as with link on post 3 be I can understand it not being possible with it being UK based.


Regards.

grey_gym_sock

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.

i think some posts are making passive investing look more complicated than it actually is.

in a sense, it's true that nobody is purely passive. there is an active decision in selecting your overall equities/bonds allocation. there are some limited active decisions taken by the managers of VLS. and so on.

however, the basic idea of passive investing in equities is pretty simple: buy the same percentage of the available shares in all available companies.

as others have said, some types of chinese shares are currently excluded because they are not (fully) available to buy for non-chinese investors.

also, most indexes are based on the "free float" of a company's shares, excluding big shareholdings, again since such holdings are not really available to buy. this can affect companies in any country; the big shareholders could a government, another company, or individuals.

these details make the implementation more complicated, but they are really about trying to stick to the same basic idea, of buying the same percentage of available shares in all companies.

IMHO, by that definition, there are some perfectly good global equity trackers in existence.

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.

what makes the alpha/beta definition relevant is the combination of 2 features:

a) if you can invest purely in beta, you will get precisely average returns;

b) it is practical, without having any special skills, and at very low cost, to invest in something very close to pure beta.

this is a pretty extraordinary result, compared to other fields of endeavour.

suppose i have no skills at running a marathon. is there a way for me to get an average placing in a marathon, reliably, and without putting in more than minimal effort in training?

can i get a mid-placing in a chess tournament, without studying hard at chess, and despite having very limited ability?

your gamma/delta definitions will only be interesting if there is a practical, low-cost, low-skill way to invest in pure gamma (and if pure gamma gives as good results as pure beta).

jamesd wrote: »

One of the easier wins in the active investing field is buying shares before the trackers are forced to buy them as a share enters an index. And selling before leaving. It's the tracker customers who are paying for that.

that is taking advantage of a flaw in big-cap indexes. total market indexes avoid this problem, and a total market index is truer to the basic idea of buying the same percentage of every share.

big-cap indexes may be good enough, if that's all that's available, despite this flaw. you could estimate the returns lost due to it, and compare that to the higher costs of using an actively managed big-cap fund instead.

Trackers buy or sell on the market and they are even more vulnerable to its shifts than actives because they have less control over what to buy or sell and when.

a pretty meaningless statement. nobody has control of share prices.

StellaN

When I started this thread it was because until now my SIPP & S&S Isa's have always been invested in 100% Equity (active funds). These funds were selected in a pretty random way and were recommended in various articles etc. Although I'm quite happy with the returns so far I have nothing to compare this with? Therefore, although I own my own home and an apartment in Spain and have enough cash in case of emergencies set by, I am retired and approaching my 59th Birthday, so I feel I should now lower the risk level of my portfolio.

As I mentioned in my OP I am thinking of investing in the following and would appreciate any comments/views so I can do some further research?

60% - Global Equity All World Equity Tracker (Fund or ETF) Vanguard, HSBC or L&G
10% - Strategic Bond (Axa Framlington Managed Income ACC) - OR SIMILAR
10% - High Yield Bond (Schroder Monthly High Income Acc) - OR SIMILAR
10% - UK Corporate Bond (Newton Long Corporate Bond) - OR SIMILAR
10% - Global Property (Backrock Global Property Securities - OR SIMILAR

I do thank you all in advance for your input and would really welcome your comments/input on whether I am heading in the right direction regarding Asset Class Allocation?

jdw2000

grey_gym_sock wrote: »

suppose i have no skills at running a marathon. is there a way for me to get an average placing in a marathon, reliably, and without putting in more than minimal effort in training?

can i get a mid-placing in a chess tournament, without studying hard at chess, and despite having very limited ability?

I've ran two marathons. I don't spend money on all the paraphernalia and the only training I ever did was a run each Sunday (and I'd skip a fair few of those!). I got perfectly respectable times too - 4:20hrs and 4:30hrs.

Would be nice if my VLS is doing the same!