100% Equity vs Equity/Bond

jamesd

jamesd wrote: »

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.

grey_gym_sock wrote: »

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

Nobody controls the price but trackers have to buy and sell when their customers buy and sell within a short time of that. Active funds don't. In the middle of a takeover fight? Tracker buys, active might decide it's more sensible to wait for the price to become sane again.

grey_gym_sock wrote: »

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.

It's not a flaw just in big-cap indexes, it's a flaw in any index with varying composition that can be predicted in advance with half-decent reliability, however big or small the component firms or countries that are moving into or out of the index are.

I'm, not sure I know of any real total market index trackers. Becomes costly to buy and sell the required amounts of the smaller companies in the index at the required times. Though the not quite real ones can be reasonable enough.

Linton

StellaN wrote: »

.....

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

........

Looks sensible overall to me.

A strategic Bond Fund will adjust the bonds in which it invests in line with its assessment of market conditions. So it could be argued that there isnt a lot of point in you changing its allocation by adding two specific bond funds. On the other hand the AXA fund seem to be relatively highly invested in Gilts which may not be the best investment at the moment.

grey_gym_sock

jamesd wrote: »

Nobody controls the price but trackers have to buy and sell when their customers buy and sell within a short time of that. Active funds don't. In the middle of a takeover fight? Tracker buys, active might decide it's more sensible to wait for the price to become sane again.

i don't think it's at all obvious that one should avoid holding shares which are in the middle of a takeover fight. you suggest it's a bad idea to buy in that situation; but do you think one should also automatically sell if one is already a holder?

volatility is greater in a bid situation: the price could jump if there's a higher bid, or fall back if all bids are rejected. but so what, if it's a small part of a very diversified portfolio, as it should be in a mainstream passive fund? such a fund may even usually contain a few shares where there's a bid situation; some of them will make quick gains, others quick losses, but it will all even out.

i've heard that some hedge funds have a strategy of buying into bid situations, because they believe the returns are on average (after taking the gains and losses together) better than average. which would make sense: expected returns ought to be higher, to compensate for the higher volatility. (this doesn't imply it's a good idea to invest in hedge funds. some of them probably have sensible strategies, but it still won't be worth paying their excessive management charges.)

now, if you have already decided to run a more concentrated active portfolio/fund, you may indeed be inclined to sell in a bid situation, because the volatility of a single holding may have a noticeable effect on the volatility of your whole portfolio. which rather illustrates the dangers of running a concentrated portfolio, to my mind ...

It's not a flaw just in big-cap indexes, it's a flaw in any index with varying composition that can be predicted in advance with half-decent reliability, however big or small the component firms or countries that are moving into or out of the index are.

I'm, not sure I know of any real total market index trackers. Becomes costly to buy and sell the required amounts of the smaller companies in the index at the required times. Though the not quite real ones can be reasonable enough.

you're right: it's a flaw in any index which can be front run. big-cap was just an example that sprung to mind.

total market indexes are more common for the US market. for instance, vanguard's US equity index fund follows one. "total market" doesn't necessarily means they buy all the smallest shares; they probably use sampling. but it avoids the front-running issue.

for the UK, i think the nearest you can get to total market is the FTSE all-share index, which covers the biggest 98% of the total market (IIRC, that's in the index definition: they stop adding shares when it reaches 98% coverage). that is good enough: i.e. it can be (and, i expect, is) front run, but the companies being added/removed from the index are so small a part of it that the effect on returns will be insignificant.

a FTSE 100 tracker will lose a bit more to front running. perhaps enough that you'd be better off buying a all-share tracker instead.

alternatively, if you combine a FTSE 100 tracker with a FTSE 250 tracker, and overweight the latter (relative to market caps), you will probably be gaining from the front running (if my assumption, that there are more automatic buyers for shares in the FTSE 100 than for shares in the FTSE 250, is correct). so this is not all bad for passive investors.

front running can be a more significant issue for small-cap indexes, because the shares being added to / removed from the index may represent a bigger percentage of the value of the whole index. there are methods to mitigate this when setting the rules for index construction.

but then, if you're going for small cap specifically, you're not going for the plain vanilla passive investing. simple passive investing uses (ideally) total market indexes, or (if that's not practical) big-cap or big- and mid-cap indexes. if you go for the more advanced options, there is more to think about.

grey_gym_sock

jdw2000 wrote: »

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!

oh dear, that destroys my analogy ... perhaps i should have said the 100m, instead of marathons.

investing is a marathon, not a sprint, right?

grey_gym_sock

Linton wrote: »

A strategic Bond Fund will adjust the bonds in which it invests in line with its assessment of market conditions. So it could be argued that there isnt a lot of point in you changing its allocation by adding two specific bond funds. On the other hand the AXA fund seem to be relatively highly invested in Gilts which may not be the best investment at the moment.

OTOH, out of 30% in bonds overall, that is still less than 10% in gilts. which is hardly excessive.

an alternative approach would be to ditch the strategic bond fund, and add a gilts fund instead. for a gilts-only funds, you might as well use a cheap tracker fund (e.g. vanguard have one), because there is very little chance for an active manger to add value when only holding gilts.

fairleads

jdw2000 wrote: »

When an active investor gains, it is at the expense of (an)other active investor(s). Not true, both make profit on a rising market.
Active investing is a zero sum game! #MonevatorWisdom

There is very little wisdom in Monevator, only time worn dogma/cliches.

jdw2000

We've already discussed that both active and passive make a profit on a rising market (beta gains).

But outside of that, any actively achieved gains (alpha) are at the expense of other active investors.

Anyone who doubts this should take it up with Monevator:

http://monevator.com/is-active-investing-a-zero-sum-game/

bowlhead99

jdw2000 wrote: »

But outside of that, any actively achieved gains (alpha) are at the expense of other active investors.

No, any gains from not following your index are at the expense of people who followed your index, as well as being at the expense of all other people who also disregarded your index but didn't choose to make the same successful purchases and sales.

If I make a successful trade that you do not make, please don't make the mistake of thinking I am only taking money off the table from other active investors. I have taken it from you too.

Anyone who doubts this should take it up with Monevator:

http://monevator.com/is-active-investing-a-zero-sum-game/

Why should we take it up with Monevator? They are not here.

Why not take it up with you, who fell upon Monevator as something easy to understand as a newbie investor, and have probably not yet heard all the other competing arguments, but are convinced that they are right, because being lazy and agreeing with a competently-written blog is easy?

If you 'know' a position is right, you should be able to defend it, and if you cannot, you should believe it is fallible.

It is like saying, "The book of Genesis is supposed to be taken literally, and also it is a great idea for everybody if we build a wall between Mexico and the USA, anyone who doubts those things should take it up directly with the Pope or Trump."

But that's not how it works. You don't get to come to my door, tell me I am a sinner, and then say if I don't believe I'm a sinner I have to go to church and take it up with a priest. Either the priest can come here himself, or you who claim that he is right can articulate why he is right and field my arguments yourself.

jdw2000

I don't actually have strong feeling either way about whether or not active investing (or investing in general) is a zero sum game. I don't think a zero sum game is a dirty concept. We are all adults and we can choose to do with our money what we wish. I'm partial to a bit of Poker, and you can't get more of a zero sum game than that!

I think the real issue with active funds are the charges. And it's when these are factored in that many active investors don't do any better than passive investors.

Vanguard have this to say:

"Investment markets are effectively a zero-sum
game, with every outperforming pound being
balanced by a pound that lags the benchmark.
The unpredictable nature of markets and the lack
of performance persistency among funds mean
that selecting an investment that outperforms
consistently is extremely difficult. Moreover,
the chances of success are further reduced by
the impact of costs. This impact is likely to be
magnified by frequent trading in pursuit of the
latest top-performing fund or asset class.
Index funds typically carry lower charges than
their active counterparts. At the same time, the
distribution of returns from index funds tends to
be narrower, with fewer instances of significant
out- or underperformance. Considering all of these
factors, we believe that setting a long-term asset
allocation based on pre-agreed investment goals,
and achieving this allocation through low-cost
funds, is likely to be the most successful approach
for the vast majority of investors."

https://www.vanguard.co.uk/documents/adv/literature/zero-sum-game-2013.pdf

Eco_Miser

jdw2000 wrote: »

But outside of that, any actively achieved gains (alpha) are at the expense of other active investors.

Anyone who doubts this should take it up with Monevator:

http://monevator.com/is-active-investing-a-zero-sum-game/

You will notice that plenty of people did exactly that.

I read that article, but didn't make a comment, not because I agreed with it, but because I didn't think I could structure a elegantly reasoned rebuttal that would contribute to the debate.

Passive investors obtain the market return (beta), but that return, in particular the change in valuation, is influenced by the activity of the active investors.


You should also note that The Investor (founding contributor to Monevator) is an active investor who doesn't actually practice what he preaches. That doesn't stop the blog being useful and informative, but it should tell you that things are not as clear cut as you seem to believe.