Which Index funds to invest in?

dunstonh

The only skew can come from active investment

Technically, you can argue that any allocation is an active decision, including market cap.
Market cap itself varies on methodology.  
You could have a portfolio of trackers that is all cap.  A portfolio of trackers that is large cap.    A portfolio of trackers that have tilts to different methodologies.

And probably, most of the different methodologies will have periods when they are top and when they are bottom.

Qyburn

GeoffTF said:

There is a risk that Trump will do something that disadvantages UK investors in the US. 

This is the point. Trump has already shown that, on a whim, the US administration can !!!!!! up markets, even though their policies actually hurt the US disproportionately.  That seems to me like  good reason to avoid having too many of your eggs in the US basket.

michael1234

masonic said:

The only skew can come from active investment. 

But isn't an active investment by definition not a skew as it is someone, somewhere has decided to place their hard earned cash into a given company or group of companies? Thus it is a "natural" market decision.

An index tracker is going to buy those stocks come what may. I think that also answers IJ's question about whether this is artificial or not.

China, here I come.

Appreciate your book recommendation - I'll take a look.

masonic

michael1234 said:

masonic said:

The only skew can come from active investment. 

But isn't an active investment by definition not a skew as it is someone, somewhere has decided to place their hard earned cash into a given company or group of companies? Thus it is a "natural" market decision.

An index tracker is going to buy those stocks come what may. I think that also answers IJ's question about whether this is artificial or not.

China, here I come.

Appreciate your book recommendation - I'll take a look.

It depends what you define as a skew. A large number of people deliberately putting their money into a meme stock could be considered a skew, and it wouldn't end well for those late to the trend. Then what about momentum investors? I think it is very hard to define what is natural.

Though to dunstonh's point, choosing one index over a different index could have the same effect, such as a fixation on the S&P500 index over those of other countries. That could have an effect in the global context, although it wouldn't impact the relative valuations within the index.

China and emerging markets in general have much smaller investable markets than their total markets, so may be underrepresented in a global index. Though they could be held separately with a larger allocation. That is perhaps veering further towards active investing.

Linton

InvesterJones said:

Linton said:

Just noticed - the MSCI World Index is now 72% US, ie  2-3 times the whole of the rest of the world put together.  The magnificent 7 represent 23.5% of the index, about 1/3rd of the US component. Does this reflect the real world? Is it a safely balanced portfolio?

It reflects the real risk-return as valued by the consensus of all traders. Is there another measure of 'real world' or 'safely balanced' that you prefer? Remember it's only the equity part of a portfolio - the increased risk of stocks is compensated for by a decreased price for the expected return. Last report I saw from 2024 showed there was more money in fixed income overall than in equities.

I doubt many of the people who piled into Nvidia or Tesla gave any thought to risk nor to the mathematics of whether the price was actually justified. More a matter of a quick buck, FOMO, or following the herd.

 And yes, I also understand that the FI market is significantly larger than that for equities. Bur it is  a different market as equity and FI perform different roles. People who want to invest in FI are not very likely to get over excited about the latest bond issue.

GeoffTF

Linton said:

People who want to invest in FI are not very likely to get over excited about the latest bond issue.

There are people who do. There are some very racy bonds. Subordinated bank debt is popular with some people. They get particularly excited when HL mistakenly allows them to buy an issue that the rules say is forbidden to retail investors.

EthicsGradient

Linton said:

Just noticed - the MSCI World Index is now 72% US, ie  2-3 times the whole of the rest of the world put together.  The magnificent 7 represent 23.5% of the index, about 1/3rd of the US component. Does this reflect the real world? Is it a safely balanced portfolio?

Remember that the "MSCI World Index" is developed countries only (and they don't include South Korea in "developed countries", despite being a country that the USA now uses for high tech inward investment):

The MSCI World Index captures large and mid cap representation across Developed Markets countries. The index covers approximately 85% of the free float-adjusted market capitalization in each country.

MSCI World Index

How to balance with developing economies, China especially, where much of the economy is not in internationally-publicly traded companies, is a debatable topic.

InvesterJones

Linton said:

InvesterJones said:

Linton said:

Just noticed - the MSCI World Index is now 72% US, ie  2-3 times the whole of the rest of the world put together.  The magnificent 7 represent 23.5% of the index, about 1/3rd of the US component. Does this reflect the real world? Is it a safely balanced portfolio?

It reflects the real risk-return as valued by the consensus of all traders. Is there another measure of 'real world' or 'safely balanced' that you prefer? Remember it's only the equity part of a portfolio - the increased risk of stocks is compensated for by a decreased price for the expected return. Last report I saw from 2024 showed there was more money in fixed income overall than in equities.

I doubt many of the people who piled into Nvidia or Tesla gave any thought to risk nor to the mathematics of whether the price was actually justified. More a matter of a quick buck, FOMO, or following the herd.

 And yes, I also understand that the FI market is significantly larger than that for equities. Bur it is  a different market as equity and FI perform different roles. People who want to invest in FI are not very likely to get over excited about the latest bond issue.

I agree with your thoughts about FOMO etc. driving some decisions - but ultimately that means there is someone willing to pay that price for the stock and therefore what its value is. If you believe that there are sufficient crazy people out there to move the global market, and that they won't be there when you are interested in selling, then absolutely makes sense to go against the flow and think you can do better - if sufficient people agree with you then the market caps will adjust accordingly. But until then it really is one saying that one disagrees with the consensus view of the whole market.

While FI does attract a lot of interest from institutions/countries etc. who need a less volatile return than equities, it does play a role in setting valuations of equities - if the risk premium for equities isn't sufficient over FI then it'd be odd to ignore FI. Historically equities have maintained quite a premium however.

Linton

InvesterJones said:

Linton said:

InvesterJones said:

Linton said:

Just noticed - the MSCI World Index is now 72% US, ie  2-3 times the whole of the rest of the world put together.  The magnificent 7 represent 23.5% of the index, about 1/3rd of the US component. Does this reflect the real world? Is it a safely balanced portfolio?

It reflects the real risk-return as valued by the consensus of all traders. Is there another measure of 'real world' or 'safely balanced' that you prefer? Remember it's only the equity part of a portfolio - the increased risk of stocks is compensated for by a decreased price for the expected return. Last report I saw from 2024 showed there was more money in fixed income overall than in equities.

I doubt many of the people who piled into Nvidia or Tesla gave any thought to risk nor to the mathematics of whether the price was actually justified. More a matter of a quick buck, FOMO, or following the herd.

 And yes, I also understand that the FI market is significantly larger than that for equities. Bur it is  a different market as equity and FI perform different roles. People who want to invest in FI are not very likely to get over excited about the latest bond issue.

I agree with your thoughts about FOMO etc. driving some decisions - but ultimately that means there is someone willing to pay that price for the stock and therefore what its value is. If you believe that there are sufficient crazy people out there to move the global market, and that they won't be there when you are interested in selling, then absolutely makes sense to go against the flow and think you can do better - if sufficient people agree with you then the market caps will adjust accordingly. But until then it really is one saying that one disagrees with the consensus view of the whole market.

While FI does attract a lot of interest from institutions/countries etc. who need a less volatile return than equities, it does play a role in setting valuations of equities - if the risk premium for equities isn't sufficient over FI then it'd be odd to ignore FI. Historically equities have maintained quite a premium however.

There isn't a consensus market view, there are conflicting views and those people trading the most with the most money have the most influence.  Hence the market view is very short term. It wont represent the objectives and concerns of long term investors - a long term investor is unlikely to be in the market.

Cus

Deciding to invest based on market caps is to me an active decision similar to  deciding to invest based on other values, such as valuations, earnings, whatever.  I've no issues with that.  My concern is the perceived belief, based on a number of internet investment movements over many years, that investing in market cap based weightings is the default goto and will deliver the best long term results, and that an individual should not engage their own research as how can they beat a market. For many, just being invested is better than historically not being invested and that's a good result of these movements, but I think it's self fulfilling and dangerous.