Vanguard investing options in market downturn

bostonerimus

Raymond2016 wrote: »

Hi all,

I have an account for online investing with Vanguard. If I wanted to invest in a fund that would do well in the event of an equity market downturn, would something like the fixed income bonds be appropriate? I was thinking about something like US Government bond index fund? I appreciate markets are unpredictable and bond funds will not rise as well/may drop in an up going market...just wondered on thoughts about these Vanguard fixed income funds?

Well shorting the market before the downturn will see you do very well, but that is for the gamblers among us.

You need to stay diversified so you can weather ups and downs across the economy. So rather than looking for something that will do well in an equity downturn develop a diversified portfolio that has a good chance of long term success.

MaxiRobriguez

Shorting is inappropriate for DIY investors.

At least by picking a stock like Kier you can only lose the money you put in originally.

iglad

Sailtheworld wrote: »

Can you tell me five FTSE100 companies that will underperform the index in 2020? Let's review at the end of 2020.

Lloyds TSB
RBS
Barclays
M & S
Centrica

Sailtheworld

Thrugelmir wrote: »

Didn't realise that we were in a downturn currently.

Companies get relegated and promoted to the index on a quarterly basis. Not that I follow the FTSE 100 companies very closely on a day by day basis. Prefer to go fishing elsewhere.

There doesn't need to be a downturn for a company to under perform its index.

If the FTSE100 isn't your bag why don't you tell me 5 companies that will underperform the place you go fishing in 2020. You said it's easy and the vast majority underperform their index.

Sailtheworld

iglad wrote: »

Lloyds TSB
RBS
Barclays
M & S
Centrica

Thanks. I'll bookmark this thread.

sendu

Sailtheworld wrote: »

If the FTSE100 isn't your bag why don't you tell me 5 companies that will underperform the place you go fishing in 2020.

I'm not sure this is even practically relevant. The FTSE100 obviously has 100 companies in it, other indexes have hundreds or even thousands of companies in them. It would be prohibitively expensive/impossible to buy all companies in the index in the correct weighting, except for 5 of them.

If someone wants to try and beat an index, what they will actually do is pick 5 winners, not 5 losers, and take on the concentration risk.

And this is where individual retail clients actually can stand a chance of doing much better than passive index trackers or even active funds managed by "star" managers. They don't have any limits imposed on them and can take crazy risks with most of their investment tied up in 1 or 2 companies. If they get lucky and pick well, they're going to do well above average. Assuming a buy and hold strategy, their luck will last as long as the companies they choose keep doing well.

One would imagine that on a long enough time scale, and in aggregate, such investors would still revert to the average performance. I'm not aware of any studies that have really looked at this though.

Sailtheworld

sendu wrote: »

I'm not sure this is even practically relevant. The FTSE100 obviously has 100 companies in it, other indexes have hundreds or even thousands of companies in them. It would be prohibitively expensive/impossible to buy all companies in the index in the correct weighting, except for 5 of them.

I completely agree. I'm just calling out one of the board's wise owls who has told me (a) the vast majority of companies underperform their index and (b) it's dramatically easier to pick losers than winners.

I'm wondering if Vanguard have heard about this because we'd all be considerably richer if they'd come up with a FTSE100 tracker minus 5-10 of next year's 'obvious' dogs.

Prism

Sailtheworld wrote: »

I completely agree. I'm just calling out one of the board's wise owls who has told me (a) the vast majority of companies underperform their index and (b) it's dramatically easier to pick losers than winners.

I'm wondering if Vanguard have heard about this because we'd all be considerably richer if they'd come up with a FTSE100 tracker minus 5-10 of next year's 'obvious' dogs.

Your example above is too short a timescale but over the long term its true. Here is a publication of a US study that states that only 4% of companies in the US have created most of the gains over the last 100 years or so. They are the ones that have pushed both themselves and the index's higher., The others have all underperformed and have returned roughly the same as bonds. Now whether you can make much use of that idea is another matter however this report is quoted by Terry Smith and James Anderson. In general Fundsmith tries to avoid the losers and Scottish Mortgage tries to pick the winners. Different slants on the same theory.

MaxiRobriguez

Finding the dogs before they become obvious dogs (and have thus lost most of their value anyway) takes effort, research and money, which impacts on the ability to attract new investors either by higher management costs or by poor decision making, and that is before considering the constraints that funds will need to operate within.

As the fund can generate better returns for itself by simply growing the customer base rather than the underlying performance it might make more sense for them to reduce cost by going passive rather than charge more, given there's a wide belief nowadays that fund managers can't beat indexes.

Sailtheworld

Prism wrote: »

Your example above is too short a timescale but over the long term its true. Here is a publication of a US study that states that only 4% of companies in the US have created most of the gains over the last 100 years or so. They are the ones that have pushed both themselves and the index's higher., The others have all underperformed and have returned roughly the same as bonds. Now whether you can make much use of that idea is another matter however this report is quoted by Terry Smith and James Anderson. In general Fundsmith tries to avoid the losers and Scottish Mortgage tries to pick the winners. Different slants on the same theory.

It's not the truth of the matter I have an issue with but the assertion that this makes it easy to pick the losers (or winners). Unless it's a truth known only to a select few it doesn't add value.

It's easily demonstrated too by a quick Google. Dow Jones research from earlier this year..

64% of large cap funds underperformed the S&P over 1 year, 85.1% over 10 years and 91.6% over 15 years.