When would you choose a fund with 80-100% equities over an all-world index?

Malthusian

GeoffTF said:

HamOnBeans said:

My thinking is that a fund with 80% equities is already very much impacted by dips in the stock market which is why it's recommended to invest over the long-term. If I’m going to be investing for at least 10 years then wouldn’t I be better off in an all-world index tracker instead? I’m fairly new to this but I’m not really seeing what the bonds and higher fees in the managed fund are doing for me right now.

20% bonds will soften the falls, particularly large ones. It took a lot more than 10 years to recover from the 1929 crash.

I'm open to correction but I don't think anyone really knows how long it took to recover from the 1929 crash, in the same way that we know how long it took to recover from the 2000 crash and 2008 crash (c. 6 years), because the only data available is from price return indices which ignore reinvested dividends. But it was probably about half a decade again, not more than 10 years.

The time it took an investment portfolio to recover from the Great Depression that was diversified by modern standards would be rather academic anyway, as almost nobody "bought the index" in the 20s. Individual investors' experiences varied wildly in a way they wouldn't today.

In any case, whether the record is 6 years or 7 years or even 10, it will be broken eventually. There is no guarantee as to how long it will take for a diversified investment to deliver a positive return. The only thing we can say that it will eventually in the absence of total global economic meltdown (in which case whether you invest or keep your money in cash won't matter).

For the same reason 100% equities is not guaranteed to beat 80% equities over any time period, no matter how long. All we know is that it should eventually.

The most likely reason for a 100% equities fund to underperform an 80% equities fund over a 10+ year period is if you panic when your investment falls 40% or more and decide to "reduce risk" when markets have already fallen, or even cash in completely.

Everyone thinks they won't panic (or merely have sleepless nights) when markets are falling and nearly all of them are wrong, that's why markets fall in the first place.

RogerIrvine

How is diversification a "free lunch.", Thrugelmir?

JohnWinder

Someone has tried to determine how long it took US stocks to recover from 1929: about 15 years (with caveats): https://www.bogleheads.org/forum/viewtopic.php?t=36732
the post by nisiprius. 

Alexland

In addition to dividends I understand there was deflation after the wall street crash so the investor would have recovered their spending power faster. One estimate is that it only took 4-5 years.
https://www.nytimes.com/2009/04/26/your-money/stocks-and-bonds/26stra.html

JohnWinder said:

the post by nisiprius. 

Maybe but that's including a later drop around 1937. We have seen similar more recently where markets had only just recovered from the dot com crash before the financial crisis occurred.
Anyway most investors drip feed into the markets both before and perhaps after a crash so looking at the drop after a crash in isolation isn't usually reflective of most people's overall investing experience. 

Prism

Malthusian said:

GeoffTF said:

HamOnBeans said:

My thinking is that a fund with 80% equities is already very much impacted by dips in the stock market which is why it's recommended to invest over the long-term. If I’m going to be investing for at least 10 years then wouldn’t I be better off in an all-world index tracker instead? I’m fairly new to this but I’m not really seeing what the bonds and higher fees in the managed fund are doing for me right now.

20% bonds will soften the falls, particularly large ones. It took a lot more than 10 years to recover from the 1929 crash.

I'm open to correction but I don't think anyone really knows how long it took to recover from the 1929 crash, in the same way that we know how long it took to recover from the 2000 crash and 2008 crash (c. 6 years), because the only data available is from price return indices which ignore reinvested dividends. But it was probably about half a decade again, not more than 10 years.

The time it took an investment portfolio to recover from the Great Depression that was diversified by modern standards would be rather academic anyway, as almost nobody "bought the index" in the 20s. Individual investors' experiences varied wildly in a way they wouldn't today.

In any case, whether the record is 6 years or 7 years or even 10, it will be broken eventually. There is no guarantee as to how long it will take for a diversified investment to deliver a positive return. The only thing we can say that it will eventually in the absence of total global economic meltdown (in which case whether you invest or keep your money in cash won't matter).

For the same reason 100% equities is not guaranteed to beat 80% equities over any time period, no matter how long. All we know is that it should eventually.

The most likely reason for a 100% equities fund to underperform an 80% equities fund over a 10+ year period is if you panic when your investment falls 40% or more and decide to "reduce risk" when markets have already fallen, or even cash in completely.

Everyone thinks they won't panic (or merely have sleepless nights) when markets are falling and nearly all of them are wrong, that's why markets fall in the first place.

The 2000 example you can see with reinvested dividends using Trustnet charting. You can also add CPI into the graph to see real return. So for for example it took MCSI world 10 years to recover from the 2000 crash (it almost recovered before 2007 but not quite) and around 14 years to catch up with inflation.

Thrugelmir

RogerIrvine said:

How is diversification a "free lunch.", Thrugelmir?

Have you ever read the fable of the hare and the tortoise? 

coastline

Alexland said:

In addition to dividends I understand there was deflation after the wall street crash so the investor would have recovered their spending power faster. One estimate is that it only took 4-5 years.
https://www.nytimes.com/2009/04/26/your-money/stocks-and-bonds/26stra.html

JohnWinder said:

the post by nisiprius. 

Maybe but that's including a later drop around 1937. We have seen similar more recently where markets had only just recovered from the dot com crash before the financial crisis occurred.
Anyway most investors drip feed into the markets both before and perhaps after a crash so looking at the drop after a crash in isolation isn't usually reflective of most people's overall investing experience. 

Here's a chart from December 2020 with a decent data source. Clearly you can see there's been three periods in the last century where the markets have gone sideways for long periods.
From the peak in 1929 to the next peak looks to be the late 1930's so quicker recovery than suggested. What's worth noting is the rally from 1921 to 1929. That's huge and probably the biggest in history . Others are near two decades 1950-1970 and 1980-2000. Is it all random or are they cycles.? I don't know but I'm entertained by the stuff. Here we have broken clear around 2013 so into the 2030's before it ends ? There again we're talking real returns so the markets could still be going up but so is inflation.

 FGg7rdIXMAsRMQq (900×510) (twimg.com)

Black line is the yield 1928 -1931 

FIMfvpAVgAIkR6f (730×591) (twimg.com)

Bonds in recent years

FIOyrNMVcAAH-bG (680×429) (twimg.com)