Passive investments vs. diversification

fizio

I also invest via index funds but have my own mix of indexes to get some diversification eg uk, us, s&p, smaller companies, real estate, emerging markets etc

Whether I am doing any better than just sticking it all in a single balanced global tracker is another question..

Linton

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 think the issues are rather more subtle than saying an index tracker is poorly diversified.  I believe that, assuming a high level of  diversification, all portfolio allocations will provide the same performance given sufficient time.  So why have an allocation different to an index tracker?

The answer is that my timescales, sadly, are more medium than long term.  I cant afford the risk of indexes to temporarily wander off into never never land far removed from the reality of fundamentals such as we saw in the tech boom/bust of the early 2000's and arguably from the 2008 crash until recently.

Such behaviour can be  constrained by ensuring that the portfolio allocations are bounded preventing high growth in one area to crowd out opportunities in others.  This strategy will lead to underperformance of the indexes during times of exuberence but should reduce the impact of the subsequent busts.

DannyCarey

Why wouldn't you just have FTSE Global All Cap Index and be done with it?

EthicsGradient

If the thread starter really wants to get this "everything under 1% portfolio", I suggest they start with a global ex-US ETF - eg https://www.londonstockexchange.com/market-stock/0JHR/ishares-msci-acwi-ex-us-etf/overview . The largest constituent of that is Taiwan Semiconductor at 1.85%, so make that 50% of your portfolio, and that's TS at 0.925%.

The largest European stock in the ETF is Nestle at 1.48%, so that's 0.74% of your portfolio; at 3.45% of the Euro Stoxx 600 index, you can hold up to 6% in an ETF for that index and still have it under 1%.

Similarly, the limit for AstraZeneca, the largest LSE share, allows you up to 6% in a FTSE 100 index.

Keeping the largest Japanese stock, Toyota, under 1% allows you up to 15% in a Topix ETF.

For American stocks, start with a Russell 1000 ETF. Take advantage of the weird Dow Jones index, which has a strange weighting that may be something to do with astrology, and you can have 10% in a Russell 1000 ETF, 8% in a Dow ETF, and still have Apple, Microsoft and United Health (which is the largest Dow constituent - I told you it's astrology) all between 0.9% and 1%, with others smaller.

That's a maximum of 50%+6%+6%+15%+10%+8% = 95%. So you just need to fill up the final 5% from a FTSE 250 ETF, and a Russell 2000 ETF (which don't overlap with the others significantly - maybe use more for those, and less than 15% for the Japanese Topix), and you're there - an all stock portfolio, from 8 index ETFs, and no company above 1%. And your US slice is 18% plus whatever you allocate to the Russell 2000 - well under your 45% limit.

bostonerimus

DannyCarey said:

Why wouldn't you just have FTSE Global All Cap Index and be done with it?

If you don't want to use cap weighting as a criterion then you need something else. However, worrying about this sort of stuff has always smacked on naval gazing to me.

Altior

I shared similar concerns to the OP so looked for a vehicle to mitigate to some extent. Of course everything has a compromise of some sort, and I settled on PSRW. It filters on the quality factor, so has a value slant essentially. This means that it won't look amazing when retrospectively compared to vehicles that benefited from the tech/growth boom we've seen over the last decade or so. But quality/value is where I want to be concentrated over the next decade.

The drawbacks are the fees, it's distributing, and is still weighted to around 50% US. Albeit with the type of sector diversity I'm looking for. 

JohnWinder

3000 global large cap stocks, it would be hard to go too far wrong with that. But keep in mind the research that fund investors who move in and out of their funds do worse than the funds themselves do, when you write:

But quality/value is where I want to be concentrated over the next decade.

A tricky bit with a fund like that which so invites comparison with a cap weighted tracker, is: can you stick with it if it underperforms (shouldn’t be by much) for a decade or more; and can you bring yourself to sell it for a cap weighted tracker if it outperforms for 2 decades?

Altior

JohnWinder said:

3000 global large cap stocks, it would be hard to go too far wrong with that. But keep in mind the research that fund investors who move in and out of their funds do worse than the funds themselves do, when you write:

But quality/value is where I want to be concentrated over the next decade.

A tricky bit with a fund like that which so invites comparison with a cap weighted tracker, is: can you stick with it if it underperforms (shouldn’t be by much) for a decade or more; and can you bring yourself to sell it for a cap weighted tracker if it outperforms for 2 decades?

It's not my only holding, but where I am in my investing life cycle means that I'm in the sweet spot for using half my regular income for accumulating. So I expect to contribute to this etf consistently for the next twelve to fifteen years. It still has a fair slice of tech exposure, but only the provably good stuff, theoretically.

I also like that it has history going back to 2007, in fact the data is slightly skewed as the fund began just before the gfc. So there's an indication of how it performs over a full economic cycle.

My judgement is that over the medium to long term, at this point, tech/growth has had its time, and robust balance sheets and earnings is where I prefer to be. I don't have the time or inclination to research these businesses individually and stay on top of all the news affecting them, this etf is the next best thing in my view, and diverse enough for my requirements. In an ideal world it would be accumulating.