Timing the market

[Deleted User]

MarkCarnage said:

Deleted_User said:

JohnWinder said:

There has been various work showing that in practice owning a relatively small number of stocks (up to 30 or at most 50) will provide c90% of diversification benefit....however that is only against that particular universe benchmark within equities.

I'd be interested to see that research, firstly to learn how one quantifies the benefit of diversification but also to see how it stacks up against Bernstein's assertion that 50 stocks just doesn't cut it (unquantified). http://www.efficientfrontier.com/ef/900/15st.htm

It all comes down to stock pickers figuring out the optimum portfolio size and a lot of assumptions.  Managing a 50 stock portfolio is tough. The whole thing is mute now with ETFs giving you the whole world for the price of a few basis points. 

But even if its just 30 stocks, modern stock pickers would try to cover key sectors. 

Managing a 50 stock portfolio is tough, but probably less tough than managing a 200 stock portfolio if you know your holdings well. Most successful active managers run fairly concentrated portfolios, have low turnover and relatively long holding periods, and accept that there will be times when their performance is very different from the market. If you want passive, I agree that you can get that very cheaply now even on a global basis. I think it's moot not mute you mean though.....:) 
Not all stock pickers will attempt to cover 'key' sectors. If they fundamentally don't like them they won't hold them is my experience of several successful managers. 

When I was talking about 50 stock portfolios being tough to manage, I was referring to competent retail investors.  Sorry wasn’t clear. Modern fund managers can manage lots as in any case its typically done by software.  

Yes, professional managers take bets, exclude sectors due to factors/models they use or even run sector  specific funds. And like mentioned above, most funds fail to achieve alpha (or Jensen alpha) over meaningful periods of times like a couple of decades.  Even in any given year most of them won’t show risk-adjusted outperformance.  Passive investment completely taking over would be a theoretical problem if most investors  did it but isn’t one in the real world because they don’t. 

Back to the topic… I am questioning that active bets, such as getting rid of technology and massively outweighing UK and Japan over US is good for “wealth preservation”.  

Thrugelmir

Deleted_User said:

MarkCarnage said:

Deleted_User said:

JohnWinder said:

There has been various work showing that in practice owning a relatively small number of stocks (up to 30 or at most 50) will provide c90% of diversification benefit....however that is only against that particular universe benchmark within equities.

I'd be interested to see that research, firstly to learn how one quantifies the benefit of diversification but also to see how it stacks up against Bernstein's assertion that 50 stocks just doesn't cut it (unquantified). http://www.efficientfrontier.com/ef/900/15st.htm

It all comes down to stock pickers figuring out the optimum portfolio size and a lot of assumptions.  Managing a 50 stock portfolio is tough. The whole thing is mute now with ETFs giving you the whole world for the price of a few basis points. 

But even if its just 30 stocks, modern stock pickers would try to cover key sectors. 

Managing a 50 stock portfolio is tough, but probably less tough than managing a 200 stock portfolio if you know your holdings well. Most successful active managers run fairly concentrated portfolios, have low turnover and relatively long holding periods, and accept that there will be times when their performance is very different from the market. If you want passive, I agree that you can get that very cheaply now even on a global basis. I think it's moot not mute you mean though.....:) 
Not all stock pickers will attempt to cover 'key' sectors. If they fundamentally don't like them they won't hold them is my experience of several successful managers. 

Back to the topic… I am questioning that active bets, such as getting rid of technology and massively outweighing UK and Japan over US is good for “wealth preservation”.  

Then provide some substantive reasoning. Counter the investment mangers line of thinking. 

Linton

BritishInvestor said:

MarkCarnage said:

Deleted_User said:

JohnWinder said:

There has been various work showing that in practice owning a relatively small number of stocks (up to 30 or at most 50) will provide c90% of diversification benefit....however that is only against that particular universe benchmark within equities.

I'd be interested to see that research, firstly to learn how one quantifies the benefit of diversification but also to see how it stacks up against Bernstein's assertion that 50 stocks just doesn't cut it (unquantified). http://www.efficientfrontier.com/ef/900/15st.htm

It all comes down to stock pickers figuring out the optimum portfolio size and a lot of assumptions.  Managing a 50 stock portfolio is tough. The whole thing is mute now with ETFs giving you the whole world for the price of a few basis points. 

But even if its just 30 stocks, modern stock pickers would try to cover key sectors. 

Managing a 50 stock portfolio is tough, but probably less tough than managing a 200 stock portfolio if you know your holdings well. Most successful active managers run fairly concentrated portfolios, have low turnover and relatively long holding periods, and accept that there will be times when their performance is very different from the market. If you want passive, I agree that you can get that very cheaply now even on a global basis. I think it's moot not mute you mean though.....:) 
Not all stock pickers will attempt to cover 'key' sectors. If they fundamentally don't like them they won't hold them is my experience of several successful managers. 

"Most successful active managers"

I wasn't aware that there were many - Peter Lynch was definitely one. Have there been any since?

Define "successful".  Basing it on alpha is not very meaningful when a fund is not competing with an index.  Woodford was an extremely successful fund manager in his Invesco days as he stuck to his remit despite the attractions of the market.

I would define a successful fund manager as one whose fund meets its stated objectives.  How it performs aganst an index is irrelevent unless that is included in the objectives.

Linton

Deleted_User said:

MarkCarnage said:

Deleted_User said:

JohnWinder said:

There has been various work showing that in practice owning a relatively small number of stocks (up to 30 or at most 50) will provide c90% of diversification benefit....however that is only against that particular universe benchmark within equities.

I'd be interested to see that research, firstly to learn how one quantifies the benefit of diversification but also to see how it stacks up against Bernstein's assertion that 50 stocks just doesn't cut it (unquantified). http://www.efficientfrontier.com/ef/900/15st.htm

It all comes down to stock pickers figuring out the optimum portfolio size and a lot of assumptions.  Managing a 50 stock portfolio is tough. The whole thing is mute now with ETFs giving you the whole world for the price of a few basis points. 

But even if its just 30 stocks, modern stock pickers would try to cover key sectors. 

Managing a 50 stock portfolio is tough, but probably less tough than managing a 200 stock portfolio if you know your holdings well. Most successful active managers run fairly concentrated portfolios, have low turnover and relatively long holding periods, and accept that there will be times when their performance is very different from the market. If you want passive, I agree that you can get that very cheaply now even on a global basis. I think it's moot not mute you mean though.....:) 
Not all stock pickers will attempt to cover 'key' sectors. If they fundamentally don't like them they won't hold them is my experience of several successful managers. 

Back to the topic… I am questioning that active bets, such as getting rid of technology and massively outweighing UK and Japan over US is good for “wealth preservation”.  

Perhaps because the manager like many other people believes that much of US Tech could be overvalued compared with the more subdued markets elsewhere.  Wealth Preservation as I want it is about avoiding medium and long term losses with no requirement for growth much beyond inflation.   If you dont need the long term gains that the current price of Tech investments may justify why take the risk?  Any unnecessary risk that jeopardises meeting the  objectives of WP funds is counter-productive.

MK62

Diplodicus said:

Deleted_User said:

Prism said:

Diplodicus said:

MK62 said:

.....but then, collectively, they haven't diversified anything.....collectively they still hold the same investments, so how could they get a better collective return?

They cannot, by any sample. Even if every investment were diversified through every investor, it would not improve the collective return. No free lunch.

You seem focused on return. Overall return is not the most important factor for many people. Diversification reduces the risk by bringing the return closer to the average.

Its more than that.  Diversification reduces risk AND improves compounded returns. Smoothing returns makes you wealthier.  Here is an example. 

https://www.cfasociety.org/calgary/Documents/Professionals_3.%20The%20Benefits%20of%20Diversification.pdf

Having had a look at the paper (and struggling with the equations), two requests: 

"Where the magic happens" is already behind the link. It says at  p5. In section 2b, we explained that volatility reduces an asset’s compounded return. Tried google but it did not take me there. The link starts at 3a. Could you provide a link to 2b, please? It may be a failure of my imagination but I don't yet understand in logic why it should be so. 

Nonetheless, I do know of certain patterns where diversification and rebalancing works, and the paper has found one such example in the performance of Russell1000 and 10yr US Treasury Bonds 1990/2014. But does anyone have the periodic and compounded return of each from 2014 to now? Because I'm pretty sure if the example was continued, the results and the conclusions would be turned on their heads. 

Neither rebalancing nor diversification are a panacea for all investment strategies/planning.......there are plenty of examples where neither worked or would have worked relative to doing nothing. That said, with most of these investment theories and strategies it's all about probabilities of outcomes......so, the crux of this is - are you more or less likely to achieve your investment goals by diversifying and/or rebalancing? (and even that question is loaded, as there is no universal investment goal).

BritishInvestor

Linton said:

BritishInvestor said:

MarkCarnage said:

Deleted_User said:

JohnWinder said:

There has been various work showing that in practice owning a relatively small number of stocks (up to 30 or at most 50) will provide c90% of diversification benefit....however that is only against that particular universe benchmark within equities.

I'd be interested to see that research, firstly to learn how one quantifies the benefit of diversification but also to see how it stacks up against Bernstein's assertion that 50 stocks just doesn't cut it (unquantified). http://www.efficientfrontier.com/ef/900/15st.htm

It all comes down to stock pickers figuring out the optimum portfolio size and a lot of assumptions.  Managing a 50 stock portfolio is tough. The whole thing is mute now with ETFs giving you the whole world for the price of a few basis points. 

But even if its just 30 stocks, modern stock pickers would try to cover key sectors. 

Managing a 50 stock portfolio is tough, but probably less tough than managing a 200 stock portfolio if you know your holdings well. Most successful active managers run fairly concentrated portfolios, have low turnover and relatively long holding periods, and accept that there will be times when their performance is very different from the market. If you want passive, I agree that you can get that very cheaply now even on a global basis. I think it's moot not mute you mean though.....:) 
Not all stock pickers will attempt to cover 'key' sectors. If they fundamentally don't like them they won't hold them is my experience of several successful managers. 

"Most successful active managers"

I wasn't aware that there were many - Peter Lynch was definitely one. Have there been any since?

Define "successful".  Basing it on alpha is not very meaningful when a fund is not competing with an index.  Woodford was an extremely successful fund manager in his Invesco days as he stuck to his remit despite the attractions of the market.

I would define a successful fund manager as one whose fund meets its stated objectives.  How it performs aganst an index is irrelevent unless that is included in the objectives.

If you can replicate a fund manager's style using cheaply available factor funds, why would you pay the additional expense (and potential style drift risk) of an active fund manager?

Thrugelmir

BritishInvestor said:

Linton said:

BritishInvestor said:

MarkCarnage said:

Deleted_User said:

JohnWinder said:

There has been various work showing that in practice owning a relatively small number of stocks (up to 30 or at most 50) will provide c90% of diversification benefit....however that is only against that particular universe benchmark within equities.

I'd be interested to see that research, firstly to learn how one quantifies the benefit of diversification but also to see how it stacks up against Bernstein's assertion that 50 stocks just doesn't cut it (unquantified). http://www.efficientfrontier.com/ef/900/15st.htm

It all comes down to stock pickers figuring out the optimum portfolio size and a lot of assumptions.  Managing a 50 stock portfolio is tough. The whole thing is mute now with ETFs giving you the whole world for the price of a few basis points. 

But even if its just 30 stocks, modern stock pickers would try to cover key sectors. 

Managing a 50 stock portfolio is tough, but probably less tough than managing a 200 stock portfolio if you know your holdings well. Most successful active managers run fairly concentrated portfolios, have low turnover and relatively long holding periods, and accept that there will be times when their performance is very different from the market. If you want passive, I agree that you can get that very cheaply now even on a global basis. I think it's moot not mute you mean though.....:) 
Not all stock pickers will attempt to cover 'key' sectors. If they fundamentally don't like them they won't hold them is my experience of several successful managers. 

"Most successful active managers"

I wasn't aware that there were many - Peter Lynch was definitely one. Have there been any since?

Define "successful".  Basing it on alpha is not very meaningful when a fund is not competing with an index.  Woodford was an extremely successful fund manager in his Invesco days as he stuck to his remit despite the attractions of the market.

I would define a successful fund manager as one whose fund meets its stated objectives.  How it performs aganst an index is irrelevent unless that is included in the objectives.

If you can replicate a fund manager's style using cheaply available factor funds, why would you pay the additional expense (and potential style drift risk) of an active fund manager?

Replicating a style is easy. Choosing the right investments another matter. 

Linton

BritishInvestor said:

Linton said:

BritishInvestor said:

MarkCarnage said:

Deleted_User said:

JohnWinder said:

There has been various work showing that in practice owning a relatively small number of stocks (up to 30 or at most 50) will provide c90% of diversification benefit....however that is only against that particular universe benchmark within equities.

I'd be interested to see that research, firstly to learn how one quantifies the benefit of diversification but also to see how it stacks up against Bernstein's assertion that 50 stocks just doesn't cut it (unquantified). http://www.efficientfrontier.com/ef/900/15st.htm

It all comes down to stock pickers figuring out the optimum portfolio size and a lot of assumptions.  Managing a 50 stock portfolio is tough. The whole thing is mute now with ETFs giving you the whole world for the price of a few basis points. 

But even if its just 30 stocks, modern stock pickers would try to cover key sectors. 

Managing a 50 stock portfolio is tough, but probably less tough than managing a 200 stock portfolio if you know your holdings well. Most successful active managers run fairly concentrated portfolios, have low turnover and relatively long holding periods, and accept that there will be times when their performance is very different from the market. If you want passive, I agree that you can get that very cheaply now even on a global basis. I think it's moot not mute you mean though.....:) 
Not all stock pickers will attempt to cover 'key' sectors. If they fundamentally don't like them they won't hold them is my experience of several successful managers. 

"Most successful active managers"

I wasn't aware that there were many - Peter Lynch was definitely one. Have there been any since?

Define "successful".  Basing it on alpha is not very meaningful when a fund is not competing with an index.  Woodford was an extremely successful fund manager in his Invesco days as he stuck to his remit despite the attractions of the market.

I would define a successful fund manager as one whose fund meets its stated objectives.  How it performs aganst an index is irrelevent unless that is included in the objectives.

If you can , why would you pay the additional expense (and potential style drift risk) of an active fund manager?

And if you cant replicate a fund manager's style using cheaply available factor funds? How on earth do you encapsulate a style into relative proprtions of Momentum, Value, Size etc?  Does it make best sense to buy one active fund that meets your objectives or 6 passive funds whose relative proportions requires calibration? The latter surely is active management, and an extremely inefficient way of doing it.


However "style" is not the main issue, but rather meeting requirements.  The range of passive index funds available to UK investors is too limited to do anything much more complicated than a long term global investment with a 20 year time frame.  There are many things that one may wish to do for which the basic tools are not available.

Prism

BritishInvestor said:

Linton said:

BritishInvestor said:

MarkCarnage said:

Deleted_User said:

JohnWinder said:

There has been various work showing that in practice owning a relatively small number of stocks (up to 30 or at most 50) will provide c90% of diversification benefit....however that is only against that particular universe benchmark within equities.

I'd be interested to see that research, firstly to learn how one quantifies the benefit of diversification but also to see how it stacks up against Bernstein's assertion that 50 stocks just doesn't cut it (unquantified). http://www.efficientfrontier.com/ef/900/15st.htm

It all comes down to stock pickers figuring out the optimum portfolio size and a lot of assumptions.  Managing a 50 stock portfolio is tough. The whole thing is mute now with ETFs giving you the whole world for the price of a few basis points. 

But even if its just 30 stocks, modern stock pickers would try to cover key sectors. 

Managing a 50 stock portfolio is tough, but probably less tough than managing a 200 stock portfolio if you know your holdings well. Most successful active managers run fairly concentrated portfolios, have low turnover and relatively long holding periods, and accept that there will be times when their performance is very different from the market. If you want passive, I agree that you can get that very cheaply now even on a global basis. I think it's moot not mute you mean though.....:) 
Not all stock pickers will attempt to cover 'key' sectors. If they fundamentally don't like them they won't hold them is my experience of several successful managers. 

"Most successful active managers"

I wasn't aware that there were many - Peter Lynch was definitely one. Have there been any since?

Define "successful".  Basing it on alpha is not very meaningful when a fund is not competing with an index.  Woodford was an extremely successful fund manager in his Invesco days as he stuck to his remit despite the attractions of the market.

I would define a successful fund manager as one whose fund meets its stated objectives.  How it performs aganst an index is irrelevent unless that is included in the objectives.

If you can replicate a fund manager's style using cheaply available factor funds, why would you pay the additional expense (and potential style drift risk) of an active fund manager?

I have certainly thought about that and decided in most cases its too difficult and the results wouldn't be accurate. For example to replicate Fundsmith you could split between

Healthcare medical devices - no pharma or insurance
Technology software - no hardware or telecoms
Consumer staples
Consumer disc - luxury brands only

Or for a macro based multi asset like Capital Gearing Trust, which does use passive funds, you would need to be agile and know when to move in and out of various markets, gold, property and bond types.

For smaller companies you would need to do significant research at the company level - besides, passive index funds are not available for small companies.

BritishInvestor

Prism said:

BritishInvestor said:

Linton said:

BritishInvestor said:

MarkCarnage said:

Deleted_User said:

JohnWinder said:

There has been various work showing that in practice owning a relatively small number of stocks (up to 30 or at most 50) will provide c90% of diversification benefit....however that is only against that particular universe benchmark within equities.

I'd be interested to see that research, firstly to learn how one quantifies the benefit of diversification but also to see how it stacks up against Bernstein's assertion that 50 stocks just doesn't cut it (unquantified). http://www.efficientfrontier.com/ef/900/15st.htm

It all comes down to stock pickers figuring out the optimum portfolio size and a lot of assumptions.  Managing a 50 stock portfolio is tough. The whole thing is mute now with ETFs giving you the whole world for the price of a few basis points. 

But even if its just 30 stocks, modern stock pickers would try to cover key sectors. 

Managing a 50 stock portfolio is tough, but probably less tough than managing a 200 stock portfolio if you know your holdings well. Most successful active managers run fairly concentrated portfolios, have low turnover and relatively long holding periods, and accept that there will be times when their performance is very different from the market. If you want passive, I agree that you can get that very cheaply now even on a global basis. I think it's moot not mute you mean though.....:) 
Not all stock pickers will attempt to cover 'key' sectors. If they fundamentally don't like them they won't hold them is my experience of several successful managers. 

"Most successful active managers"

I wasn't aware that there were many - Peter Lynch was definitely one. Have there been any since?

Define "successful".  Basing it on alpha is not very meaningful when a fund is not competing with an index.  Woodford was an extremely successful fund manager in his Invesco days as he stuck to his remit despite the attractions of the market.

I would define a successful fund manager as one whose fund meets its stated objectives.  How it performs aganst an index is irrelevent unless that is included in the objectives.

If you can replicate a fund manager's style using cheaply available factor funds, why would you pay the additional expense (and potential style drift risk) of an active fund manager?

I have certainly thought about that and decided in most cases its too difficult and the results wouldn't be accurate. For example to replicate Fundsmith you could split between

Healthcare medical devices - no pharma or insurance
Technology software - no hardware or telecoms
Consumer staples
Consumer disc - luxury brands only

Or for a macro based multi asset like Capital Gearing Trust, which does use passive funds, you would need to be agile and know when to move in and out of various markets, gold, property and bond types.

For smaller companies you would need to do significant research at the company level - besides, passive index funds are not available for small companies.

I think the first question is "why would I want to replicate a fund manager's style?" History has shown us that small-cap value has outperformed (outperform obviously means different things to different people), so you'd think a rational investor (on the assumption that factor timing isn't possible) would tilt to these factors over the long term assuming he didn't want to take "boring" broad market exposure.

Fundsmith is not a small-cap value investor, so using the above reasoning, I'm not sure why his style would be appealing over the long term.


"For smaller companies you would need to do significant research at the company level - besides, passive index funds are not available for small companies."

Depends how small, but there are funds that follow MSCI World Small Cap Index. But again I would question what a small cap tilt alone would bring (in the absence of a tilt to value/quality etc).