burnt out nurse and investing newbie

JohnWinder

That's a true enough account of a heterogenous market, but like cake ingredients they all come together to make different cakes which in aggregate is the market cake. And we want our fair share of the cake (less costs), and we'll get it with well diversified index funds.

Alexland

bluefukurou said:

Once you start saying the market is too heavy weighted on these few stocks, you are saying you know better than the market.

Does the market care if my portfolio has adequate diversification? What level of correlation and resulting beta does it think I want to achieve? If more people buy red cars does that mean I must too?
The market is driven by participants pursuing their own objectives getting over excited about whatever looks hot until valuations can no longer be justified then becoming really down about the whole thing before doing it all over again with a different twist. I am not against passive and use it a lot as it delivers a fairly good result over the long term but I am not a vegetable accepting whatever Lars Kroijer says as I have my own objectives to consider.

JohnWinder

At the risk of de-railing this thread, you raise an interesting matter (one's objectives, and meeting them) which deserves some exploration. Perhaps you can help.

One of the passive approaches is: firstly, determine you own beliefs and attitudes regarding indexing (allowing room for a bit of satellite actives maybe; dong a bit of market timing maybe; having some home bias maybe); secondly, have an asset allocation to match your risk tolerance; lastly, be disciplined and stay the course.  It works without any mention of having your own objectives, I think because the assumption is: 'I want the highest return I can get or need for the risk I'm prepared to take'. It's about accepting whatever the market returns, because the fundamental belief is that you probably can't beat the market. My dream might be 6%/year return, but I shouldn't do anything to chase that if it compromises my three principles of passive investing.

Without preempting anyone's responses, someone could say 'China (or tobacco, nuclear power, oil etc) sucks, so they're never getting any of my investing money'. That's ok, but is it an objective?  So what might be one's own investing objectives?

AlanP_2

My objective is to have enough money to do what we want when we retire.

I have worked out what I think that requires in monetary terms and the asset allocation and investment plan I will use will hopefully achieve that.

I have two benchmarks that I will use:

1) Average returns over 3-year periods that matches or exceeds CPI+5%.

2) Average returns over 3-year periods that matches or exceeds the return from the core investments into a couple of global multi-asset funds. 


If I beat Benchmark 1 then the plan will definitely work and in fact we will be increasing net wealth so building up an increased buffer against multi-year poor returns, inflation and possible care costs further down the line.

If I beat Benchmark 2 then the actively managed components of the portfolio are "adding value". If they aren't then a change of approach will be necessary.

JohnWinder

Thanks. Clear enough. Re #1, I see from that that there are different ways of looking at 'investing objectives'. Mine might be 'To get whatever the market gives (less minimised costs) - so indexing only. I then monitor progress towards having enough for the 4% rule, and if progress is poor I get a second job, or spend less, or retire later; I don't view the monitoring as an investing objective, although AN objective is to retire with enough so I guess it's part of it.

My limited investing objective leaves no chance for disappointment, just another year at work!

AlanP_2

My limited investing objective leaves no chance for disappointment, just another year at work!

That would be a disappointment for me 

Alexland

JohnWinder said:

One of the passive approaches is: firstly, determine you own beliefs and attitudes regarding indexing (allowing room for a bit of satellite actives maybe; dong a bit of market timing maybe; having some home bias maybe); secondly, have an asset allocation to match your risk tolerance; lastly, be disciplined and stay the course.  It works without any mention of having your own objectives, I think because the assumption is: 'I want the highest return I can get or need for the risk I'm prepared to take'. It's about accepting whatever the market returns, because the fundamental belief is that you probably can't beat the market. My dream might be 6%/year return, but I shouldn't do anything to chase that if it compromises my three principles of passive investing.

With passive managing risk always seems to come down to what proportion of non-equities you are going to hold because of course your equities must be market cap weighted or you are trying to be too clever and will likely underperform. Not allowing too much money get concentrated into a small number of similar companies with similar characteristics which have done well at this point in the cycle is about managing risk not attempting to outperform the market. Will such a strategy perform better? Who knows, who cares it's about being comfortable with the portfolio you hold which is critical to staying the course during the bad times.

bluefukurou

Alexland said:

bluefukurou said:

Once you start saying the market is too heavy weighted on these few stocks, you are saying you know better than the market.

Does the market care if my portfolio has adequate diversification? What level of correlation and resulting beta does it think I want to achieve? If more people buy red cars does that mean I must too?
The market is driven by participants pursuing their own objectives getting over excited about whatever looks hot until valuations can no longer be justified then becoming really down about the whole thing before doing it all over again with a different twist. I am not against passive and use it a lot as it delivers a fairly good result over the long term but I am not a vegetable accepting whatever Lars Kroijer says as I have my own objectives to consider.

The market is indifferent. It doesn't care about your objectives. If the evidence shows that red cars are safer, more efficient, etc, then yes, it would perhaps be a good idea to buy a red one, but certainly not because more people are buying them. The 'participants pursuing their own objectives' mostly fail, this includes professionals. Over the long term, I believe index funds perform far better than 'fairly good.'

It's great that you have your own objectives and I hope you meet them. The reason I posted though was because of the OP's desire to understand if they are doing the right thing or not. Therefore, IMO, somebody in the OP's position would be best advised to buy low-cost, index funds. It's not just Lars Kroijer though is it. It's John Bogle, Warren Buffett, Burton Malkiel, many other respected and knowledgeable people, a mountain of academic research, etc.

JohnWinder

Alexland said:

... Not allowing too much money get concentrated into a small number of similar companies with similar characteristics which have done well at this point in the cycle is about managing risk not attempting to outperform the market. .... it's about being comfortable with the portfolio you hold which is critical to staying the course during the bad times.

I agree with your conclusion,'staying the course' is important; and I wouldn't want to challenge your view of the world since it seems well enough informed.

One can view such a strategy as an attempt to reduce risk by reducing volatility as you say, rather than hoping it gives a higher return. That's an interesting twist on the reason to passively invest, namely 'to get the market return, and be hit over the head by its risk'; you've changed it to 'suffering less risk than the market, but accepting lower returns'.  Unfortunately, for me, that still means one is making some judgements about the market, and thus an active element comes into it akin to guessing (albeit with some analytic basis). If that approach seems not improve returns compared to the market, as per SPIVA, do we have any evidence that it reduces volatility?

SPIVA results suggests there's no reason to think the strategy you describe will get better than market returns, so we'd be looking at below market returns (or the rare chance of identical returns). So if the strategy you describe is about 'attempting to reduce risk, but accepting lower than market returns', one might as well simply hold more bonds and less stocks. I can't decide whether that or 'your' strategy is likely to give better risk adjusted returns, but yours is not so much 'set and forget' but needs some careful consideration for readjustments. Sounds tricky.

Prism

bluefukurou said:

Alexland said:

bluefukurou said:

Once you start saying the market is too heavy weighted on these few stocks, you are saying you know better than the market.

Does the market care if my portfolio has adequate diversification? What level of correlation and resulting beta does it think I want to achieve? If more people buy red cars does that mean I must too?
The market is driven by participants pursuing their own objectives getting over excited about whatever looks hot until valuations can no longer be justified then becoming really down about the whole thing before doing it all over again with a different twist. I am not against passive and use it a lot as it delivers a fairly good result over the long term but I am not a vegetable accepting whatever Lars Kroijer says as I have my own objectives to consider.

The market is indifferent. It doesn't care about your objectives. If the evidence shows that red cars are safer, more efficient, etc, then yes, it would perhaps be a good idea to buy a red one, but certainly not because more people are buying them. The 'participants pursuing their own objectives' mostly fail, this includes professionals. Over the long term, I believe index funds perform far better than 'fairly good.'

It's great that you have your own objectives and I hope you meet them. The reason I posted though was because of the OP's desire to understand if they are doing the right thing or not. Therefore, IMO, somebody in the OP's position would be best advised to buy low-cost, index funds. It's not just Lars Kroijer though is it. It's John Bogle, Warren Buffett, Burton Malkiel, many other respected and knowledgeable people, a mountain of academic research, etc.

I think it is worth adding that of that list only Lars recommends the full take the market as it comes method of index investing with his recommendation of a world index fund. The others either suggest much less diverse selective allocations to a single country, the US in most cases, or custom portfolios of different ETFs and weightings. The low cost thing is there but the diversification is not. There is index investing and then index investing with some pretty big choices.