Index Fund beginner

InvesterJones

ColdIron said:

That's the nature of global equity index trackers, it goes with the territory. Most indexes are cap weighted and will be dominated by US companies. Of those some of the largest are tech

You could look at active funds or something like the Vanguard Lifestrategy which broadly exchanges US for UK

Lifestrategy doesn't exchange US for UK, it just has a higher UK weighting than a global index. They're still mostly US (~50% of allocation is US, ~20% UK) and therefore still have a few big tech companies in significant proportions (stocks wise).

JohnWinder

pbryd said:

I'm looking at global indexes. But the ones I have seen have a lot of US equities and tech which I'm not too sure about.

If you’re looking at cap weighted, broad indexes, then I’d say ‘no one’ else is sure about them either because few if any people actually know what the future course of US or tech stocks is. Welcome to the informed guessing club. Now for the theory, something to do the Galton, the bull and the wisdom of the crowd.

Everybody in the market, except me the non-thinking passive investor, has some information (understanding, knowledge, insight, experience) which they all bring to the market and this information is used to make buy/sell/hold decisions. So the market price reflects all of the information that is available to all market traders; it is the very best information we have about stock values, as wrong as it may be/is. When someone says ‘there’s too much tech’ or ‘too much US’, they’re saying ‘I have information no one else has, and I can exploit this to my advantage’, or ‘I’ve got this feeling, and I’m prepared to accept lower than market returns in exchange for possibly getting higher than market returns’. They may be saying something else, but I can’t think what it is.

barnstar2077

Personally, I find Pensioncraft's videos are always very informative:

https://www.youtube.com/@Pensioncraft/videos

He sure does love graphs though! :   )

MK62

JohnWinder said:

pbryd said:

I'm looking at global indexes. But the ones I have seen have a lot of US equities and tech which I'm not too sure about.

If you’re looking at cap weighted, broad indexes, then I’d say ‘no one’ else is sure about them either because few if any people actually know what the future course of US or tech stocks is. Welcome to the informed guessing club. Now for the theory, something to do the Galton, the bull and the wisdom of the crowd.

Everybody in the market, except me the non-thinking passive investor, has some information (understanding, knowledge, insight, experience) which they all bring to the market and this information is used to make buy/sell/hold decisions. So the market price reflects all of the information that is available to all market traders; it is the very best information we have about stock values, as wrong as it may be/is. When someone says ‘there’s too much tech’ or ‘too much US’, they’re saying ‘I have information no one else has, and I can exploit this to my advantage’, or ‘I’ve got this feeling, and I’m prepared to accept lower than market returns in exchange for possibly getting higher than market returns’. They may be saying something else, but I can’t think what it is.

..... they might be saying that putting 70% of their retirement portfolio into a single market and currency is too risky for them, and might seek to balance that risk to a more comfortable level (for them)........this might, of course, mean lower returns (or it might mean the opposite too). Whichever way you look at it, having 70% of your wealth in a single market and currency makes you very reliant on that market and currency......some might view that as over reliant, but sat here today, as ever, there's no way to know for sure either way.

Everybody in the market, except me the non-thinking passive investor, has some information

.....but you do have information, and you've evaluated it and come to a conclusion.....

‘I’ve got this feeling, and I’m prepared to accept lower than market returns in exchange for possibly getting higher than market returns’.

There's no doubt some truth in that, but maximising returns is not always the primary or only goal......

JohnWinder

‘they might be saying that putting 70% of their retirement portfolio into a single market and currency is too risky for them,..... having 70% of your wealth in a single market and currency makes you very reliant on that market and currency......some might view that as over reliant,

You’re right, and I’m feeling my way on this a lot, but I’d say you can very largely eliminate the currency risk at very little cost if you can buy a currency hedged fund.
Secondly, and covering a lot of what you wrote, we need to consider returns as they relate to risk ie risk adjusted returns. Everyone in the market is trying to get the best return for the least risk; not necessarily the highest return available as you suggest, but for whatever return they’re ‘aiming’ they want the lowest risk, surely, how could it be any other way? Which is consistent with the observation that higher returning assets carry more risk than lower returning ones. Imagine bonds, with lower risks than stocks, gave us good reason to think they’d offer better returns than stocks; we’d flock to bonds, pushing up their price until the returns fell to a level commensurate with their risk (compared with other assets I suppose).
So, if everyone (traders) are chasing the best return for the least risk,  then the market which is putting 70% of its (equity) money into US stocks must think that that is the optimum to invest in that market for the best risk related return. From that it would follow that it can only be more risky for a UK investor to hold less in US stocks; unless there’s some distorting factors like US investors are dead scared that any foreign stocks they hold might be confiscated by foreign governments, which would be a risk they face and must factor in but not one UK investors face. Or it could be that if US investors hold 70% in US stocks which crash, there is some safeguard or compensation for them that UK investors can’t benefit from. There must be many similar reasons but I don’t know any which are recognised as actual. Perhaps we find it hard to see through old trans-Atlantic rivalries, resentments and biases.

.....but you do have information, and you've evaluated it and come to a conclusion.....

I put into my investing no information about the market. I invest in the whole market indiscriminately, and do so because I want to live off the efforts of other people; they work, produce more than they’re paid, some of the surplus is distributed to the investors or lenders to the businesses they work for. Without investing I have to work for everything I need.

‘I’ve got this feeling, and I’m prepared to accept lower than market returns in exchange for possibly getting higher than market returns’.
There's no doubt some truth in that, but maximising returns is not always the primary or only goal……’

Trying to maximise returns is definitely not an appropriate objective for everyone, but getting the best returns for the risk you’re taking surely is, or you’re just giving low cost money away to other investors. Nothing inherently wrong with that, and noble actually, but who deliberately chooses to do it?

GazzaBloom

pbryd said:

I'm looking at global indexes. But the ones I have seen have a lot of US equities and tech which I'm not too sure about.

Why are you not sure about investing in US companies?

I see many comments where people appear to have an aversion to investing in large US companies. Some based on a view that the US market is over priced, some for no real reason except not wanting to invest in US.

I don;t get it. The S&P500 has been a bedrock of global stock market growth since it's inception, sometimes lagging other regions sometimes beating, but always delivering a long term solid performance.

Companies will rise and fall up and down the index in line with their fortunes, today's leaders (Apple, Microsoft, etc) may not be in the top 10 in 10-20 years time, other companies may rise and take the lead but there will always be a top 500 companies in the US economy and as long as capitalism remains the dominant global economic method then the US market will be sure to thrive, albeit with some jolts and periods of downturn along the way.

The US is a phenomenal territory for businesses to grow in, it has plenty of land, natural resources, legions of human resources, a powerful economy and a governance system that promotes capitalism. I would wager that the US stock market will remain a dominant force for decades to come.

JohnWinder

I don’t think one has to invoke how innovative and big and successful USA and its businesses are to justify investing there. There are good enough reasons with an insurrection, staggering inequality, ratty foreign policy etc to make one think ‘no thanks’. But everyone else in the market has assessed those risks and those bases for good prospects and decided 70% is optimal. Do we know better?

Linton

GazzaBloom said:

pbryd said:

I'm looking at global indexes. But the ones I have seen have a lot of US equities and tech which I'm not too sure about.

Why are you not sure about investing in US companies?

I see many comments where people appear to have an aversion to investing in large US companies. Some based on a view that the US market is over priced, some for no real reason except not wanting to invest in US.

I don;t get it. The S&P500 has been a bedrock of global stock market growth since it's inception, sometimes lagging other regions sometimes beating, but always delivering a long term solid performance.

Companies will rise and fall up and down the index in line with their fortunes, today's leaders (Apple, Microsoft, etc) may not be in the top 10 in 10-20 years time, other companies may rise and take the lead but there will always be a top 500 companies in the US economy and as long as capitalism remains the dominant global economic method then the US market will be sure to thrive, albeit with some jolts and periods of downturn along the way.

The US is a phenomenal territory for businesses to grow in, it has plenty of land, natural resources, legions of human resources, a powerful economy and a governance system that promotes capitalism. I would wager that the US stock market will remain a dominant force for decades to come.

There is no aversion to investing in US companies.  The issue is  the %.  At 40%, US is still the largest geographic area in my portfolio.

Linton

JohnWinder said:

pbryd said:

I'm looking at global indexes. But the ones I have seen have a lot of US equities and tech which I'm not too sure about.

If you’re looking at cap weighted, broad indexes, then I’d say ‘no one’ else is sure about them either because few if any people actually know what the future course of US or tech stocks is. Welcome to the informed guessing club. Now for the theory, something to do the Galton, the bull and the wisdom of the crowd.

Everybody in the market, except me the non-thinking passive investor, has some information (understanding, knowledge, insight, experience) which they all bring to the market and this information is used to make buy/sell/hold decisions. So the market price reflects all of the information that is available to all market traders; it is the very best information we have about stock values, as wrong as it may be/is. When someone says ‘there’s too much tech’ or ‘too much US’, they’re saying ‘I have information no one else has, and I can exploit this to my advantage’, or ‘I’ve got this feeling, and I’m prepared to accept lower than market returns in exchange for possibly getting higher than market returns’. They may be saying something else, but I can’t think what it is.

Some of the problems I see with this argument arise from the observation that market prices are set by those people who trade most often:
1) Most of those people driving market prices are primarily aiming for maximum returns, I am not.
2) Most of the people in the market are short term investors.  That is not me.
3) Regarding "the wisdom of the crowds": https://www.pnas.org/doi/10.1073/pnas.1008636108 argues that it can be undermined by social inflence.  Surely the stock market is a prime example.  Furthermore it is only valid if there is a right answer to the question asked that could be known now.  For example a million people guessing the result of the toss of the coin is no more accurate than one person doing it.  This I would argue applies to a significant extent to the stock market predicting the future.

Why should following the index be most appropriate for meeting my objectives?


For the beginner though there is a major benefit to following the index - it is the least worst option.

coastline

pbryd said:

I'm looking at global indexes. But the ones I have seen have a lot of US equities and tech which I'm not too sure about.

US equities have dominated the global index for decades. Look at the dark blue shaded area it's been that way since 1930 . Over 50% of the index at times just like today. During the 1990's Japan was a leading player shown in the light brown shaded area.

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Japans valuations were extreme at 30-50 times earnings compared to the US . This didn't last and Japan collapsed.

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There's usually a dominating factor in every index and the US is no exception. 25% in the top stocks isn't uncommon.

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This is from last October and you can see without the big guns the SP500 isn't overvalued.

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The SP500 valuations are similar over the last 8 years. Maybe there's tech in there but if the FTSE included a bit of tech it would also be higher rated. ? Not for me to say but I would imagine the majority of investors would go along with the global tracker in it's present regional allocation . Good luck