Timing the market

MarkCarnage

The 'risk' in deviating from the index is true if the aim is to track that index, or have some bounded range (let's not call it tracking error please), from that index. In an equity fund, many managers seek to bound that relative risk for career or business reasons. 

A fund where the main 'mission' is preserving then growing wealth will not and should not care about how different it is from a particular index weighting. Nor are they return maximisers with no regard for short term volatility. 

Therefore I think this is a pointless argument in the context of WP funds. 

My portfolio 'barbells' between WP and 100% global equity, with a few satellites into more specialist assets, or for income. Whether I hold them in ISA, SIPP, SIPP Drawdown or GIA is dependent on what I want from each of these and the tax treatment. 

[Deleted User]

To me, following market cap weightings is fairly pointless unless you simply want to follow the market....in which case just buy an index fund and be done with it. If you wanted to avoid the more volatile sectors of a market, I see nothing wrong with that in itself - you might forego larger gains by doing so, but at the same time avoid larger drops.....pretty much what I'd expect a fund, with the main aim of wealth preservation, to do......I don't see how doing so would necessarily increase risk.

You don’t need to follow the exact cap weightings but cutting out sectors and regions equates to taking bets.  

You don’t know what you will forego and avoid.  Someone avoiding US and Technology in 2010 would have foregone all growth in the next decade.  Could have been worse.  Diversification is the “free lunch”.  By cutting out whole sectors you are reducing diversification and increasing  risk. 

AlanP_2

Deleted_User said:

To me, following market cap weightings is fairly pointless unless you simply want to follow the market....in which case just buy an index fund and be done with it. If you wanted to avoid the more volatile sectors of a market, I see nothing wrong with that in itself - you might forego larger gains by doing so, but at the same time avoid larger drops.....pretty much what I'd expect a fund, with the main aim of wealth preservation, to do......I don't see how doing so would necessarily increase risk.

You don’t need to follow the exact cap weightings but cutting out sectors and regions equates to taking bets.  

You don’t know what you will forego and avoid.  Someone avoiding US and Technology in 2010 would have foregone all growth in the next decade.  Could have been worse.  Diversification is the “free lunch”.  By cutting out whole sectors you are reducing diversification and increasing  risk. 

Risk of what?

Prism

Deleted_User said:

To me, following market cap weightings is fairly pointless unless you simply want to follow the market....in which case just buy an index fund and be done with it. If you wanted to avoid the more volatile sectors of a market, I see nothing wrong with that in itself - you might forego larger gains by doing so, but at the same time avoid larger drops.....pretty much what I'd expect a fund, with the main aim of wealth preservation, to do......I don't see how doing so would necessarily increase risk.

You don’t need to follow the exact cap weightings but cutting out sectors and regions equates to taking bets.  

You don’t know what you will forego and avoid.  Someone avoiding US and Technology in 2010 would have foregone all growth in the next decade.  Could have been worse.  Diversification is the “free lunch”.  By cutting out whole sectors you are reducing diversification and increasing  risk. 

On another measure if you cut out the more volatile and cyclical aspects of the market you are reducing risk. Less diversification vs more predictable returns. Impossible to put a number on it but I wouldn't say it definitely adds risk to do it. 

[Deleted User]

Prism said:

Deleted_User said:

To me, following market cap weightings is fairly pointless unless you simply want to follow the market....in which case just buy an index fund and be done with it. If you wanted to avoid the more volatile sectors of a market, I see nothing wrong with that in itself - you might forego larger gains by doing so, but at the same time avoid larger drops.....pretty much what I'd expect a fund, with the main aim of wealth preservation, to do......I don't see how doing so would necessarily increase risk.

You don’t need to follow the exact cap weightings but cutting out sectors and regions equates to taking bets.  

You don’t know what you will forego and avoid.  Someone avoiding US and Technology in 2010 would have foregone all growth in the next decade.  Could have been worse.  Diversification is the “free lunch”.  By cutting out whole sectors you are reducing diversification and increasing  risk. 

On another measure if you cut out the more volatile and cyclical aspects of the market you are reducing risk. Less diversification vs more predictable returns. Impossible to put a number on it but I wouldn't say it definitely adds risk to do it. 

Not really.  As long as two highly volatile products are negatively correlated and you have half in each, the outcome is smooth.  

Not having Europe in the 70s or 00s translated to loss of capital.  Not having US and technology in the 90s and 10s was bad. At other times energy provided most of the growth.  

Having everything translated to solid growth in every one of these decades. 

If one is thinking in terms of weeks he might feel differently but nobody should.  

[Deleted User]

AlanP_2 said:

Deleted_User said:

To me, following market cap weightings is fairly pointless unless you simply want to follow the market....in which case just buy an index fund and be done with it. If you wanted to avoid the more volatile sectors of a market, I see nothing wrong with that in itself - you might forego larger gains by doing so, but at the same time avoid larger drops.....pretty much what I'd expect a fund, with the main aim of wealth preservation, to do......I don't see how doing so would necessarily increase risk.

You don’t need to follow the exact cap weightings but cutting out sectors and regions equates to taking bets.  

You don’t know what you will forego and avoid.  Someone avoiding US and Technology in 2010 would have foregone all growth in the next decade.  Could have been worse.  Diversification is the “free lunch”.  By cutting out whole sectors you are reducing diversification and increasing  risk. 

Risk of what?

Risk of losing money over a meaningful period of time. 

AlanP_2

Deleted_User said:

AlanP_2 said:

Deleted_User said:

To me, following market cap weightings is fairly pointless unless you simply want to follow the market....in which case just buy an index fund and be done with it. If you wanted to avoid the more volatile sectors of a market, I see nothing wrong with that in itself - you might forego larger gains by doing so, but at the same time avoid larger drops.....pretty much what I'd expect a fund, with the main aim of wealth preservation, to do......I don't see how doing so would necessarily increase risk.

You don’t need to follow the exact cap weightings but cutting out sectors and regions equates to taking bets.  

You don’t know what you will forego and avoid.  Someone avoiding US and Technology in 2010 would have foregone all growth in the next decade.  Could have been worse.  Diversification is the “free lunch”.  By cutting out whole sectors you are reducing diversification and increasing  risk. 

Risk of what?

Risk of losing money over a meaningful period of time. 

That can have different meanings dependent upon context. Real loss of money i.e. pot goes down in value or loss compared to ANO selection of assets? 

Also, it is just one risk, and may not be the one the individual wants to mitigate.

Take for example someone who wants to buy a property in 4 years time and is building a deposit.

Using your logic they should invest in global equities as per market cap, and maybe have some bonds, precious metal, commercial property, infrastructure etc. funds as well to make sure they haven't cut out any whole sectors.

They then have a real risk that, if markets fall, they could miss their target and have to delay their house purchase. They could mitigate this risk by keeping it all in cash accepting that they are likely to lose money over a meaningful period of time (to inflation) but have a much greater chance of hitting their target.

Your approach does not allow for individual context

[Deleted User]

AlanP_2 said:

Deleted_User said:

AlanP_2 said:

Deleted_User said:

To me, following market cap weightings is fairly pointless unless you simply want to follow the market....in which case just buy an index fund and be done with it. If you wanted to avoid the more volatile sectors of a market, I see nothing wrong with that in itself - you might forego larger gains by doing so, but at the same time avoid larger drops.....pretty much what I'd expect a fund, with the main aim of wealth preservation, to do......I don't see how doing so would necessarily increase risk.

You don’t need to follow the exact cap weightings but cutting out sectors and regions equates to taking bets.  

You don’t know what you will forego and avoid.  Someone avoiding US and Technology in 2010 would have foregone all growth in the next decade.  Could have been worse.  Diversification is the “free lunch”.  By cutting out whole sectors you are reducing diversification and increasing  risk. 

Risk of what?

Risk of losing money over a meaningful period of time. 

That can have different meanings dependent upon context. Real loss of money i.e. pot goes down in value or loss compared to ANO selection of assets? 

Also, it is just one risk, and may not be the one the individual wants to mitigate.

Take for example someone who wants to buy a property in 4 years time and is building a deposit.

Using your logic they should invest in global equities as per market cap, and maybe have some bonds, precious metal, commercial property, infrastructure etc. funds as well to make sure they haven't cut out any whole sectors.

They then have a real risk that, if markets fall, they could miss their target and have to delay their house purchase. They could mitigate this risk by keeping it all in cash accepting that they are likely to lose money over a meaningful period of time (to inflation) but have a much greater chance of hitting their target.

Your approach does not allow for individual context

That’s not my logic.  We are in a pension forum. Your scenario is very different. 

MK62

Deleted_User said:

To me, following market cap weightings is fairly pointless unless you simply want to follow the market....in which case just buy an index fund and be done with it. If you wanted to avoid the more volatile sectors of a market, I see nothing wrong with that in itself - you might forego larger gains by doing so, but at the same time avoid larger drops.....pretty much what I'd expect a fund, with the main aim of wealth preservation, to do......I don't see how doing so would necessarily increase risk.

You don’t need to follow the exact cap weightings but cutting out sectors and regions equates to taking bets.  

You don’t know what you will forego and avoid.  Someone avoiding US and Technology in 2010 would have foregone all growth in the next decade.  Could have been worse.  Diversification is the “free lunch”.  By cutting out whole sectors you are reducing diversification and increasing  risk. 

TBH it sounds to me like you want to back every horse in the race, and consider skipping one or two to be "taking a bet" they won't win.....of course, the latter would be true, but the former is still "taking bets" as well....if "taking bets" is the analogy you want to use.
Someone skipping the US and/or tech back in 2010 would not have foregone all growth over the next decade.....they would have foregone growth in just those sectors......but the reverse is also true - diversifying across all sectors means capturing the performance in the best performing sectors, but it also means capturing the performance in the worst too. 

[Deleted User]

The benefits of diversification are investing basics.  Particularly so for someone wanting to preserve wealth.  Its maths. Try Asset Allocation by Rick Ferri.