Which Index funds to invest in?

Eco_Miser

GeoffTF said:

 Alternatively, what is it that worries you about the US having so many companies that make such big profits and keep growing them?

For values of "so many" = 7. 

William Bernstein once said, “When you’ve won the game, stop playing.”  Anyone who was invested in those 7 corporations over the last decade has won the game and should stop playing  before their valuation crashes. It doesn't take share confiscation, just a government antithetical to those particular companies (or their owners/CEOs).

GeoffTF

Linton said:

One should not seek the most efficient risk adjusted return but rather the most appropriate risk and return for one's circumstances.

In theory, you seek the best risk adjusted return and then add a cash holding or leverage up to achieve your desired level of risk. We could introduce the extra complications of bonds and other asset classes, but that would take us off track.

Linton said:

The efficient market hypothesis implies that every stock is currectly priced and so expected future profits should already be priced-in.  Hence all well diversified stable portfolios should produce much the same long term return, at least as far as the market knows.

A small under-weighting of the US will not reduce the diversification much, but it adds extra work and increases complexity. If the investments in question are held outside a tax shelter (or the tax rules suddenly change), you may not have the opportunity to make future changes without incurring a big tax bill. Passive investing has the advantage that it is fire and forget.

Linton said:

One should not base one's investing on predictions of future events.  Just accept you have no idea how things will turn out and neither does anyone else, even the market. Look at the 2000 .com crash.

On that basis, perhaps people should not be under-weighting the US. Perhaps they should just accept that they do not know whether the US will outperform or under-perform. Nobody knows what will happen.

Linton said:

Perhaps the high valuation of US stocks arises from the large number of US-based investors who are wary of "international" investing.  If investors were more evenly spread across the world the results could be rather different and could more closely relate to the economic realities. By some measures the Chinese economy is already larger than that of the US with significantly greater value of exports. This is not reflected in global index funds.

If you do a Google search, you will find that there are a lot of people in the UK and elsewhere who believe that US stocks are overvalued and are under-weighting them. I do not believe that there is any good evidence of market failure. In China, publicly quoted companies are only a tiny percentage of the economy. The are a very much larger percentage of the US economy. It is possible that Trump could make changes that disadvantage foreign investors, but that fear is even greater for China. Similar considerations apply to India and other "Emerging Markets". ("We called them rubbish until that term was invented" is a well known quote.)

GeoffTF

Eco_Miser said:

GeoffTF said:

 Alternatively, what is it that worries you about the US having so many companies that make such big profits and keep growing them?

For values of "so many" = 7. 

William Bernstein once said, “When you’ve won the game, stop playing.”  Anyone who was invested in those 7 corporations over the last decade has won the game and should stop playing  before their valuation crashes. It doesn't take share confiscation, just a government antithetical to those particular companies (or their owners/CEOs).

There are many more than seven US companies making big profits and growing them. People here are talking about under-weighting the whole US market, rather than just the magnificent seven.

Why should I stop playing? There is no chance that I will run out of money. I would incur a huge CGT bill if I sold my equities, and a huge income tax bill if I put the money in the bank. Doing nothing is a lot cheaper.

Linton

Rather than argue point by point,most of what you say can be countered by general comments...

1) What academics call "risk" is very different to how normal investors use that term.  For academics "risk" is a factor of standard deviation which measures short term random variation about a mean. For investors "risk" is the danger of losing a significant amount of your wealth when you need it.

The dangers which can do that are not the ongoing noise, but rather large unpredicted external events - systemic risk.  Large external events may affect all industries across the whole world but there is little that an equi9ty investor can do about that.  On the other hand large external events may particularly affect one country or one industry etc.  You have no pre-knowledge of when it will occur, what the event could be and where it could be focussed.  The best way of protection under those circumstances is to ensure that the affect of whatever happens, bar a global disaster, is limited.

2) For investments that really matter for your future under or over-performance should not be a major concern, but rather actual performance relative to need.

GeoffTF

Linton said:

Rather than argue point by point,most of what you say can be countered by general comments...

1) What academics call "risk" is very different to how normal investors use that term.  For academics "risk" is a factor of standard deviation which measures short term random variation about a mean. For investors "risk" is the danger of losing a significant amount of your wealth when you need it.

The dangers which can do that are not the ongoing noise, but rather large unpredicted external events - systemic risk.  Large external events may affect all industries across the whole world but there is little that an equi9ty investor can do about that.  On the other hand large external events may particularly affect one country or one industry etc.  You have no pre-knowledge of when it will occur, what the event could be and where it could be focussed.  The best way of protection under those circumstances is to ensure that the affect of whatever happens, bar a global disaster, is limited.

2) For investments that really matter for your future under or over-performance should not be a major concern, but rather actual performance relative to need.

We are not disagreeing here. There is a risk that Trump will do something that disadvantages UK investors in the US. The caldera under Yellowstone Park could erupt. The whole of Europe could be engulfed in a catastrophic war. I expect that some people are worried about these possibilities. The Magnificent 7 may not be as magnificent as the market hopes. In my case it does not matter. I have a small UK bias, but that is it. If my US investments disappeared in a puff of smoke, I would not have any trouble paying my bills. Easy come. Easy go. I ride them up. I ride them back down again. Hopefully, the numbers will not be too bad when the music stops.

LHW99

GeoffTF said:

Linton said:

Rather than argue point by point,most of what you say can be countered by general comments...

1) What academics call "risk" is very different to how normal investors use that term.  For academics "risk" is a factor of standard deviation which measures short term random variation about a mean. For investors "risk" is the danger of losing a significant amount of your wealth when you need it.

The dangers which can do that are not the ongoing noise, but rather large unpredicted external events - systemic risk.  Large external events may affect all industries across the whole world but there is little that an equi9ty investor can do about that.  On the other hand large external events may particularly affect one country or one industry etc.  You have no pre-knowledge of when it will occur, what the event could be and where it could be focussed.  The best way of protection under those circumstances is to ensure that the affect of whatever happens, bar a global disaster, is limited.

2) For investments that really matter for your future under or over-performance should not be a major concern, but rather actual performance relative to need.

We are not disagreeing here. There is a risk that Trump will do something that disadvantages UK investors in the US. The caldera under Yellowstone Park could erupt. The whole of Europe could be engulfed in a catastrophic war. I expect that some people are worried about these possibilities. The Magnificent 7 may not be as magnificent as the market hopes. In my case it does not matter. I have a small UK bias, but that is it. If my US investments disappeared in a puff of smoke, I would not have any trouble paying my bills. Easy come. Easy go. I ride them up. I ride them back down again. Hopefully, the numbers will not be too bad when the music stops.

You are lucky for that to be the case.

People with DC pensions are increasingly relying on them, and from what is often said here, do not always have the knowledge of markets themselves, or an IFA to hold their hand.

There is a degree of self-fulfillment with increasing tracker use, as when 60%+ of tracker money continually lands in US stocks (eg the 7) then, naturally, they will increase in price. Whether that increase in price is alined with any increase in value is IMO a moot point.

If there is a sudden emergency affecting the US market, sentiment will turn equally quickly. One way to mitigate is to reduce the US % in a portfolio. As long as the result meets your requirements it may well be a better course to plough. Much like using money for an annuity once you have "won the game", and why the traditional 60 / 40 portfolio may suit more people than one based 100% on a Global market tracker.

GeoffTF

LHW99 said:

There is a degree of self-fulfillment with increasing tracker use, as when 60%+ of tracker money continually lands in US stocks (eg the 7) then, naturally, they will increase in price. Whether that increase in price is alined with any increase in value is IMO a moot point.

If you buy a global tracker, you are allocating your money in the exactly same way as the market as a whole. That should not push up the percentage price of US stocks any more than it pushes up the percentage price other stocks. You do, however, increase demand for global equities in general. If demand increases more than the supply, that will lead to an increase in the price of the market as a whole. Equity market prices typically rise to excessive levels and then crash. They have sometimes taken a long time to recover. Some markets have not recovered at all. Nobody knows what will happen in advance. If you buy equities, you take that risk.

LHW99 said:

If there is a sudden emergency affecting the US market, sentiment will turn equally quickly. One way to mitigate is to reduce the US % in a portfolio. As long as the result meets your requirements it may well be a better course to plough. Much like using money for an annuity once you have "won the game", and why the traditional 60 / 40 portfolio may suit more people than one based 100% on a Global market tracker.

If the US market crashes, you can be sure that the other markets will crash too. The US has outperformed for a long time, and it would not be surprising if a period of underperformance followed. The US market will almost certainly undergo a period of underperformance at some point in the future, but nobody knows when.

100% equities is very risky, which is why most people do not go down that route, particularly as they get older. You can get an idea of what sells best by looking at the Vanguard Target Retirement fund "glide path":

https://www.vanguardinvestor.co.uk/investing-explained/what-are-target-retirement-funds

Nonetheless, an index linked annuity is the prudent option for essential expenditure in retirement.

michael1234

GeoffTF said:

If you buy a global tracker, you are allocating your money in the exactly same way as the market as a whole. That should not push up the percentage price of US stocks any more than it pushes up the percentage price other stocks. You do, however, increase demand for global equities in general. If demand increases more than the supply, that will lead to an increase in the price of the market as a whole.

Is that correct? If we have two stocks whose fundamentals are the same but for whatever reason one's market cap is twice the other, then if most of the new money is global tracker money, then the higher valued stock will continue to rise at twice the rate of the other.

Ditto for entire markets or even groups of markets such as China vs US.

InvesterJones

michael1234 said:

GeoffTF said:

If you buy a global tracker, you are allocating your money in the exactly same way as the market as a whole. That should not push up the percentage price of US stocks any more than it pushes up the percentage price other stocks. You do, however, increase demand for global equities in general. If demand increases more than the supply, that will lead to an increase in the price of the market as a whole.

Is that correct? If we have two stocks whose fundamentals are the same but for whatever reason one's market cap is twice the other, then if most of the new money is global tracker money, then the higher valued stock will continue to rise at twice the rate of the other.

Ditto for entire markets or even groups of markets such as China vs US.

It doesn't alter the percentage, ie it maintains the status quo - if you invested 10% in stock A by market cap weighting your portoflio before, you'll still remain at 10% in stock A after all the market cap weighted inflows. 

michael1234

InvesterJones said:

michael1234 said:

GeoffTF said:

If you buy a global tracker, you are allocating your money in the exactly same way as the market as a whole. That should not push up the percentage price of US stocks any more than it pushes up the percentage price other stocks. You do, however, increase demand for global equities in general. If demand increases more than the supply, that will lead to an increase in the price of the market as a whole.

Is that correct? If we have two stocks whose fundamentals are the same but for whatever reason one's market cap is twice the other, then if most of the new money is global tracker money, then the higher valued stock will continue to rise at twice the rate of the other.

Ditto for entire markets or even groups of markets such as China vs US.

It doesn't alter the percentage, ie it maintains the status quo - if you invested 10% in stock A by market cap weighting your portoflio before, you'll still remain at 10% in stock A after all the market cap weighted inflows. 

Interesting. Nevertheless, it remains the case that investing in trackers does seem to apply an artificial skew if there are lots of folk doing the same thing.