Passive investments vs. diversification

coastline

Much has happened over the last 5 years but the HSBC MSCI World tracker sits 73rd in the table with a 72% return . Not the best but we need to compare like with like . Strip out the Tech, Smaller, etc and the tracker sits in the top quartile ? Not bad without any research needed.

Top Quartile Funds | Trustnet

There's always been a heavyweight issue . It'll be in the FTSE 100 if you look.

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sp500_top5_historical_weights.png (687×395) (ofdollarsanddata.com)

For much of the last 100 years the US market has represented 50% and over. Nothing new ?
Note the brown shaded area of Japan in the 1980-1990 period. Up there with the US at the time.

Historical Country Market Cap Weightings per year? - Bogleheads.org

Japan in the 1980's hit P/E extremes of 50 and more before the slump. Note the US valuations are very modest. Even today the US is on a forward P/E of 17 which is nowhere near. Might have to come down a bit if earnings are hit with recession and inflation . We shall see. ?
Go with the flow I say. End of the day as the money flowed out of Japan it found another home ? As a DIY investor you need to find this sector or region. Ain't easy. 

FFzbkpEakAA3nhT (549×498) (twimg.com)

bostonerimus

I think we are talking about asset allocation here rather than some particular investing style ie the potential issues with having a cap weighted portfolio. If you want some small cap in your "passive portfolio" then add a small cap index tracker. I diversified a little geographically by combining domestic and international trackers, but beyond that I didn't seek to overweight any particular sectors. I kept a basic 4 fund portfolio and it worked out well enough. But if you want to add mid and small caps go for it. I have now idea how that will perform relative to staying cap weighted across the portfolio. I can say that keeping costs down and reducing your spending and investing more should get more emphasis.

EdSwippet

Millyonare said:

Almost all stockmarkets around the world are a heap of junk. They suffer from low liquidity (like Italy), strict barriers (like China), aging companies (like Japan), or firms are frantically bailing out (like the UK).

The US delivers extremely high liquidity, very low barriers to trade, constantly refreshed with exciting new companies, and everyone wants to ring the bell in New York. The US has, in effect, become the world's stockmarket. It's the only one that really matters (for now).

Gosh, yes. Absolutely spot-on! Why bother with stocks from such worthless companies as Nestle, Toyota, Novartis, HSBC, Shell, BP, Samsung, RBC, TD, Diageo, Siemens, Unilever, Mitsubishi, Sony, Daimler, Honda, VW, Canon, Hitachi, ...

adindas

EdSwippet said:

Millyonare said:

Almost all stockmarkets around the world are a heap of junk. They suffer from low liquidity (like Italy), strict barriers (like China), aging companies (like Japan), or firms are frantically bailing out (like the UK).

The US delivers extremely high liquidity, very low barriers to trade, constantly refreshed with exciting new companies, and everyone wants to ring the bell in New York. The US has, in effect, become the world's stockmarket. It's the only one that really matters (for now).

Gosh, yes. Absolutely spot-on! Why bother with stocks from such worthless companies as Nestle, Toyota, Novartis, HSBC, Shell, BP, Samsung, RBC, TD, Diageo, Siemens, Unilever, Mitsubishi, Sony, Daimler, Honda, VW,Canon, Hitachi, ...

It does not matter which countries, even in the US you could still find dynasour companies, which does not move. Throw your money over there then your money is dead doing nothing.

Example : General Electric US. It used to be very popular in the US.

I remember an analyst call this sort of company as "the fallen angel". It is the duty of investors to identify and avoid that sort of companies.

JohnWinder

It is the duty of investors to identify and avoid that sort of companies.

Yes it is, but also the sort of companies that do ‘just OK’ but below the market average. But how we do that, and don’t include any method the 99% of active fund managers who can’t sustainably beat the market use, because we know those strategies don’t work long term?

bostonerimus

adindas said:

I remember an analyst call this sort of company as "the fallen angel". It is the duty of investors to identify and avoid that sort of companies.

I have never bothered about identifying such companies as the vast majority of my investments are index trackers and such companies will be a small percentage of what I own. The OP's thread title should be "Passive investing and diversification". Use index trackers to build a low cost, diverse portfolio and managed it pretty passively - maybe set some allocation threshold where you rebalance when your portfolio diverges from your plan. Don't try to be smart or guess the direction of the markets and don't worry about fallen angels, devils, bulls, bears or bouncing dead cats.

JohnWinder

Ideally, I want some very well diversified investment, and having no more than 1% invested in a single company,

Several companies represent >1% of that fund, the usual suspects including Tesla at 1.1%. It’s hard to imagine there’s a fund which sells out of Alphabet, Amazon and Apple when they hit 1% (and not regret it since they’re now about 3%). Tesla has been in your fund for maybe 10 years, running up from being the tiniest of its three thousand stocks. You’re a long term investor, if Tesla falls by 90% you’re just back to where you were with it 10 years ago. That result would be tragic if we were reliable stock pickers but just got that one wrong; but we’re not, and in a diverse fund held long term it just doesn’t seem to matter that much. You can search for the perfect, but don’t let that get in the way of the good enough.

sebtomato

bostonerimus said:

The OP's thread title should be "Passive investing and diversification". Use index trackers to build a low cost, diverse portfolio and managed it pretty passively 

My point was: passive investing is about investing in index trackers, but index trackers are poorly diversified if you look at the concentration in a few companies and regions.

Yes, you can create your own portfolio of various trackers, as I have done, instead of having a world one, but then it's not really passive anymore, since it's based on my judgement (e.g. 40% US, 20% UK etc).

InvesterJones

sebtomato said:

bostonerimus said:

The OP's thread title should be "Passive investing and diversification". Use index trackers to build a low cost, diverse portfolio and managed it pretty passively 

My point was: passive investing is about investing in index trackers, but index trackers are poorly diversified if you look at the concentration in a few companies and regions.

Yes, you can create your own portfolio of various trackers, as I have done, instead of having a world one, but then it's not really passive anymore, since it's based on my judgement (e.g. 40% US, 20% UK etc).

I can't agree with the first point - you can passively invest in funds which do not aim to represent the same weighting as an index.

And the second point applies as much to your decision to not have an index weighted funds as it would if you decided to follow index weighting - making that choice is a choice - I don't really see that the same as active investing.

bostonerimus

sebtomato said:

bostonerimus said:

The OP's thread title should be "Passive investing and diversification". Use index trackers to build a low cost, diverse portfolio and managed it pretty passively 

My point was: passive investing is about investing in index trackers, but index trackers are poorly diversified if you look at the concentration in a few companies and regions.

Yes, you can create your own portfolio of various trackers, as I have done, instead of having a world one, but then it's not really passive anymore, since it's based on my judgement (e.g. 40% US, 20% UK etc).

Investing passively isn’t just about using indexes it’s also how you manage your investments. The development of a portfolio is active as you have to make decisions about where to put your money. If you think cap weighted indexes area a good route then you have taken a step down the passive road. A world wide equity index will have a majority of its money in the US and also have large holdings in the likes of Apple, but you might add a local mid or small cap index and you should have some bond allocation and some cash and some real estate too. You must then choose how to manage your finances ie be active and trade or be passive. Right now I’m retired and most of my money is in domestic and international trackers and I manage them entirely passively not even rebalancing. 

The likes of Fundsmith are far less diversified that holding a world tracker, but practically speaking once you are up to 30 or more stocks in a fund it’s sufficiently diversified as long as there isn’t some bias to the choice which is why I stay away from funds like Fundsmith

So I would use index trackers or something like VLSxx to build a portfolio and then manage it passively ie ignore it other than to make regular deposits