Global Muliti Assett Fund/Global Index tracker, difference?

eskbanker

Billycock said:

Newbie here, would I be correct in thinking for example, that Vanguard LifeStrategy funds are multi asset funds? Barring LS100 of course. 

Yes - there's a Monevator summary of prominent players linked from the first reply on the thread....

dunstonh

Billycock said:

Newbie here, would I be correct in thinking for example, that Vanguard LifeStrategy funds are multi asset funds? Barring LS100 of course. 

Given recent threads, are you sure thats not a leading question

Yes is the answer

JohnWinder

Thrugelmir said:

DrSyn said:

So it seemed reasonable to me to point the OP in  the direction of the two global indexes that they most likely had heard of and would find easily.

That's how bubbles form. 

If you throw endless money, or just enough, at a limited selection of stocks you can get a bubble. If you throw endless money at an index fund that holds large, medium, small and micro cap stocks in cap weighting, then they all go up in proportion to their cap weighting. That latter would be a different sort of a bubble, an equities bubble rather than a tech stock bubble or a mining stocks bubble. And the bubble ought not collapse because those index investors are buy and hold, long term investors who don't sell at the first, second or last sign of trouble. They're there to get their (three 'theres'!) share of economic growth over the long term; the speculative ups and downs of the market value are of no concern to them because over the long term they produce nothing. The only thing producing an equity return, long term (allowing speculative valuations to cancel out), is the earnings of the businesses you invest in. Get your share with an index fund (minus costs), or hand some of it over to someone else in higher costs and their out-performance at your expense.

Thrugelmir

JohnWinder said:

Thrugelmir said:

DrSyn said:

So it seemed reasonable to me to point the OP in  the direction of the two global indexes that they most likely had heard of and would find easily.

That's how bubbles form. 

If you throw endless money, or just enough, at a limited selection of stocks you can get a bubble. If you throw endless money at an index fund that holds large, medium, small and micro cap stocks in cap weighting, then they all go up in proportion to their cap weighting.

Same result. Money invested without thought drives prices upwards with no reference to underlying fundamentals ultimately peaking and bursting. That's the nature of markets. 

Over a 5 month period more money was invested in global equity funds in the US than the previous 12 years combined. Speculation rather than investing I'd say. 

The inclusion of Tesla into the S&P 500 (and correspondingly global equity trackers) highlights the downsides of index investing. Much of the best return is made in the run up. Very different markets to trade in compared to even a decade ago. 

 

bluefukurou

DrSyn said:
I suggest a newbie investor get a Global Mult Asset Fund with a share/other asset split that they are comfortable with. That will allow them to sleep at night and stay invested when the markets fall, as they do sometimes.

This. As long as people make sure to keep fees low, they will do just fine. Personally, I'd prefer a two or three fund portfolio with global equities and either home bonds, or global bonds if you wish to be more adventurous, but a suitable multi asset fund would also be fine.

JohnWinder

Thrugelmir said:

JohnWinder said:

Thrugelmir said:

If you throw endless money, or just enough, at a limited selection of stocks you can get a bubble. If you throw endless money at an index fund that holds large, medium, small and micro cap stocks in cap weighting, then they all go up in proportion to their cap weighting.

Same result. Money invested without thought drives prices upwards with no reference to underlying fundamentals ultimately peaking and bursting. That's the nature of markets. 

Over a 5 month period more money was invested in global equity funds in the US than the previous 12 years combined. Speculation rather than investing I'd say. 

The inclusion of Tesla into the S&P 500 (and correspondingly global equity trackers) highlights the downsides of index investing. Much of the best return is made in the run up. Very different markets to trade in compared to even a decade ago. 

 

Firstly, well secondly, you won't find me suggesting SP500 - go all cap instead as it's more diversified, then you acquire Tesla when it's a tiddler.

And firstly, the last 12 months of inflow to US funds wasn't all to index funds. A lot was stock picking. That's the active investors forming bubbles, not the indexers, and it's only the active investors who can get hurt as the indexers are there for the long term share of company earnings not the speculative component of stock prices.

underground99

JohnWinder said

And firstly, the last 12 months of inflow to US funds wasn't all to index funds. A lot was stock picking. That's the active investors forming bubbles, not the indexers, and it's only the active investors who can get hurt as the indexers are there for the long term share of company earnings not the speculative component of stock prices.

The active investors pile on to a stock they like, increasing its price and market cap to some unsustainable level which may be out of whack with its fundamentals (e.g. what you describe as long term share of company earnings) in the context of the valuations of other things that could have been bought instead. This we call a 'bubble' in that stock or sector.

The index investor putting new money in their portfolio allocates their money in line with whatever the company and sector market caps are at the point in time, presuming that the efficient market makes all stock prices correct and that they should put most of their money into the things that have the largest capitalisations.

If company or sector A is in a temporary 'bubble' territory it may be twice the relative market cap of company or sector B, and the index investor who believes that "it's only the active investors who can get hurt" will diligently follow the index and dutifully put two thirds of their money into the bubbled stock or sector A rather than only putting half their money into the bubbled stock or sector or trying to avoid the bubbled stock or sector. They have to follow whatever the weight of market valuations tells them to do, so they deliberately put relatively more of their money into the bubble and relatively less into the non-bubble stocks or sectors.

Eventually the bubble will burst because the long term realistic prospects for the share of company earrings from the bubble stock or sector did not support its lofty valuations.

This bursting of the bubble will hurt those active investors who had gone for the bubble company A to the exclusion of company B ; meanwhile the active investors who had gone 50:50 A:B will lose on A while their B does relatively better ; meanwhile the active investors who had gone for company B to the exclusion of bubble company A will feel vindicated that their hunch paid off.

When the bubble bursts, the index investors who invested new money during the bubble will get the 'market' return, ie the return that came from allocating two thirds of their money to the bubbled stock A and one third to the non bubbled stock B. They will look at their personal return from investing in the cap-weighted tracker at the peak of the bubble to the trough and see that they have obtained about same % loss as the index over the timeframe. As their loss is no worse than the index (other than the nominal fees) they will be satisfied they achieved their objectives.

Satisfied that they achieved their objective, they will brush off the loss and go about their day. They'll say that, "it's only the active investors who can get hurt as the indexers are there for the long term share of company earnings" and feel their large loss sustained from the bubble bursting was a decent result; no worse than the weighted average of all free float investor equity capital.

Their loss was caused by investing the greatest proportion of their money into the companies with highest market caps during the market conditions that had inflated the value of stocks like company A to a price out of whack with the 'long term share of company earnings' that they sought to benefit from.

They will be satisfied that they didn't do as badly as the muppets who went all-in on bubble stock A, because they (the index investor following market cap) only put relatively more into bubble stock A than stock A's fundamentals deserved, rather than going all in. 

Still - given there is a whole other cohort of investors who only put the amount into company A that was justified by its fundamentals, and another cohort who avoided it altogether - it seems like "only active investors can get hurt by a bubble being formed" is scant comfort when you just lost 50% of your investment by putting relatively more of your money into those stocks which had been inflated to bubble prices.

Bobziz

If you're picking individual stocks then I can see that you could easily avoid bubbles, but I wonder, and have no idea, how many funds have at least 1 bubble stock in them ?

JohnWinder

 Nice analysis. I need to edit my post with a warning: 'but read below'. I'd over-simplified the analysis, in my own mind, and missed that detail.

Briefer, but less clearly, we could say that the index investor suffers from a bubble when they do their (market non-timing) buying at bubble prices, and similarly when they do their planned selling at 'anti-bubble' times (when P/E ratios are badly depressed).

Truly, that will be the nature of (non-timed) buying/selling the market at cap weighting.

The only defenses I can raise are firstly one of quantity. Currently the biggest share in a global index is at about 3.5% of total, as is the second. A crazy bubble in your one, or even two of those which put their P/E ratio to 40 instead of 20 would require the index fund buyer to pay 'only' ~7% more than otherwise (I think! and bad enough).

The second defense is that over a 55 year investment with money trickling in during the first 30 years, similar amounts should hit the market at both bubble and 'anti-bubble' times, ameliorating the bubble 'damage'. And the longer the investment period, the more impact the companies' earnings plus growth in earnings will determine the overall return, and the less the speculative component of market prices will.

Still, it is a problem to be faced (whether I recognised it or not). What to do? I can't see what to do, because active fund managers study these prices, P/E ratios etc constantly, in their thousands all over the world, trying to pick stocks, assess price accuracy and time the market. We've seen from SPIVA that most of the funds can't do it well enough to beat the index funds after periods of about 3 years. With uncommon exceptions which we can't identify in advance, it seems one needs luck to do it successfully long term. Choosing that approach suits some people's outlook, others are less risk takers.

Thanks for taking this a bit further.

coyrls

Bobziz said:

If you're picking individual stocks then I can see that you could easily avoid bubbles, but I wonder, and have no idea, how many funds have at least 1 bubble stock in them ?

I wouldn't assume that it's easy; you need to be able to tell the difference between a bubble and a justifiable rise in prices.  If you sold any shares that start to increase at a rate greater than the average, you would have terrible returns.