S&P 500 - sensible or silly?

eskbanker

* gets popcorn *

Another_Saver

eskbanker said:

* gets popcorn *

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Just wait til I get started on how the FTSE 250.

Going back to the OPs question, investing is never silly, market timing rarely works, over the long run the effects of buying at a bad time wear off (S&P500 since 1929 6% real total return, S&P500 since 1934 7% real total return)
But the US is in Dot Com bubble valuation territory and rest of the world isn't, and either way the US is 57% of the global market and both it and the rest of the global market are very correlated anyway so I'd go with a whole world equity index tracker like Vanguard's FTSE global all cap or HSBC FTSE all world or iShares Core MSCI world etf over a US specific.
One of the main reasons people give for liking the US is the big weighting of tech. The problem with tech is that it's really just consumer, media and industrial companies that are categorised into the tech sector to push their stock price up to lower their cost of capital. Just like cars, airlines, rail, telephones and radios before it, modern tech companies are incredibly capital intensive and it's very hard to make money out of it (Buffett has spoken about it, I think Bogle too). Also, all sectors make technological evolutions all the time and benefit from making money out of them rather than trying to capitalises on them directly. Real technological evolutions are not limited to what the global tech sector can sell. The index fund was a disruptive technology, dimpled golf balls, raked wingtips, phone screen protectors, the things they put on the ends.of shoelaces, the Wellington boot, nylon, bleach, penicillin, Viagra, latex, aluminium can etc. These are all technologies, plenty of money was made from them but the real economic benefits were felt by the consumer, often years later, rarely by whoever put up the capital. Netflix didn't have to provide the capital for fiber broadband, Apple didn't have to build all their customers mobile masts, Adobe didn't have to buy their customer's computers. Tesla for example, are having to build the world's biggest and most advanced factories to build and develop the world's best cars, and build the world's biggest charging network, the only free ride Tesla get is that the auto industry lobbied governments to build roads back in the 1920s, whereas rail investors had to pay for the line themselves (and rail has never recovered from its own bubble in the 1840s). So betting on tech is really just funding a new and young sector. The real benefit of new tech is had by the consumer.

FloraandFauna

<raises tentative hand>

My vanguards did extraordinarily well the other day, but despite reports of more stock market rises they fell back slightly yesterday. Would this be the currency issue you were talking about? £ up against the $?

Thrugelmir

Possibly. What are the funds you are holding? 

FloraandFauna

The LS100. I say 'funds' plural, because I hold one in an ISA, and one in a SIPP.

Thrugelmir

Then you will have currency exposure. Nor do your holdings mirror the actual market indexes. While markets may rise on any given day. You may not hold the stocks that account for the net gain (or indeed loss). While the S&P 500, for example,  maybe up. This could consist of 320 risers and 180 fallers. 

FloraandFauna

Oh, that's interesting. I thought a tracker fund literally held a bit of 'everything' listed in the relevant market(s).

Although, I suppose even if they did, actual amounts in each company would be bought in some sort of ratio (0.01 of company size to mirror the market?) so you wouldn't have exactly the same £value, or number of shares, in each (although you'd have to keep fiddling daily to retain that order). If you bought an equal amount in each, you would have a much greater proportional stake in smaller companies, and so in reality be betting on them winning?

So if bought in a ratio, the larger companies' gains or losses would still overshadow the smaller ones, so your explanation would still hold true even if the fund WAS a bit of absolutely everything.

Forgive all the thinking out loud! I'm off to google "how do index tracker managers choose which companies to include" 

Alexland

FloraandFauna said:

Oh, that's interesting. I thought a tracker fund literally held a bit of 'everything' listed in the relevant market(s).

They generally do but of course the VLS range are not trackers - they are constructed funds which use trackers but the proportions have been decided by the fund manager such as the UK bias so do not match the weighted capitalisation of the markets. Still the strengthening of the pound in the last few days will have offset some of the gains you will have made from the improvements in your global equities.

Sailtheworld

 "Currency diversification" isn't a good thing it's just another unknowable risk. Over the (very) long-run though currency movements tend to become negligible between developed markets.

Currency risk isn't unknowable. It's a known risk and diversification reduces exposure to a single currency.

I'm not clear what Sailtheworld means by this but this is not how hedging works. Hedging allows an investor to buy an asset in a different currency as if it were denominated in the investor's home currency, that's it.

That's just a transaction. Swapping some £ for $ to buy an asset in $.

Forward buying $ with a plan to buy the asset in the future is more analogous to a hedge.

Another_Saver

Sailtheworld said:

 "Currency diversification" isn't a good thing it's just another unknowable risk. Over the (very) long-run though currency movements tend to become negligible between developed markets.

Currency risk isn't unknowable. It's a known risk and diversification reduces exposure to a single currency.

Which has no effect on someone who intends to stay in their home country for life (globalisation asked me to hold its beer). Currency risk is unknowable because currency movements are unpredictable. It is a known risk but how it will affect returns is unknowable. To think in terms of currency exposure really isn't investing, you should be be thinking in terms of what you own and how much you think it can return between now and judgement day. For a "citizen of the world" or someone with a more international lifestyle or consumer behaviour, currency diversification makes sense. If you're going to live, work and retire in the UK I don't see how it is materially relevant.

I'm not clear what Sailtheworld means by this but this is not how hedging works. Hedging allows an investor to buy an asset in a different currency as if it were denominated in the investor's home currency, that's it.

That's just a transaction. Swapping some £ for $ to buy an asset in $.

Forward buying $ with a plan to buy the asset in the future is more analogous to a hedge.

... I don't think we're disagreeing, I think in my earlier post I was unclear what you meant.

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