Which Index funds to invest in?

masonic

Cus said:

I honestly worry about that trend.  For many people this is better than sticking it in a bank account, but I wonder how much distortion this is causing.  I cannot work out why one would happily buy a mag7 as a large part of a market cap index investment that never had paid a dividend but thats another thread.

I like your investment idea for a provider, but either it not worth there while, or the regulatory burden makes it pointless 

It will be active investment that is the origin of the distortion of the Mag 7. Pretty much every fund manager with the US in their remit will be holding a large helping, despite having no requirement to observe market cap weighting. The few who do not (e.g. Premier Milton US Opps) have fallen so far behind in the past couple of years, that they will be struggling.

I too like the idea of an ex-Mag 7 fund, but clearly asset managers do not. Either because they have drunk the cool aid and believe it is a losing strategy, or because they don't believe they'll be able to market it to punters.

Should active money lose faith in the Mag 7, then we know what will happen. Index tracking funds will not prevent or be sheltered from the effects. They are just along for the ride.

talexuser

masonic said:

 The few who do not (e.g. Premier Milton US Opps) have fallen so far behind in the past couple of years, that they will be struggling.

Maybe that explains Fundsmith too?

GeoffTF

SloughSally said:

GeoffTF said:

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.

And eventually a far bigger Inheritance tax bill and money never spent and enjoyed.😂😂😂

Not if the money goes to charity, or you move somewhere where there is no CGT.

masonic

talexuser said:

masonic said:

 The few who do not (e.g. Premier Milton US Opps) have fallen so far behind in the past couple of years, that they will be struggling.

Maybe that explains Fundsmith too?

Perhaps, although Terry has been holding almost 10% each of Microsoft and Meta.

InvesterJones

Cus said:

michael1234 said:

Cus said:

Yes agree, my wording is not what I wanted to purvey, and I am not suggesting people should be actively trying to beat markets as as a benchmark.

I think it would be better if I had said that people assume that there is no better option than to invest based on market caps as the default, and that to think about adjusting based on other factors is pointless as 'you can't beat the market, active managers can't etc etc' so you are only doing yourself a disservice, whereas it's much more nuanced that this, and doesn't take into account many other factors, including designing a personal investment strategy based on your own factors and needs.

I'm not sure if you're an FA or not but I always smile internally when I hear that phrase. The strategy is always to make more money. Sooner, later, regularly, in lump sums but always to make more of the stuff. 

I agree wholeheartedly with everything else.

I wonder if a provider managed to supply a parameterised fund template whether that would work. i.e. Your investment would go into the equities managed by that fund but you could override the allocations. e.g. a "global cap index fund" bought with parameters 0, 0, 0, 0, 0, 0, 0 would mean nothing in the top 7 and that money to be allocated in proportion to the rest of the funds stocks. Very naïve I'm sure... 

Well, I'm certainly not an FA (or anything similar) but I think I know why you said it. There is a trend to default assume that an IFA investment plan cannot be better than a DIY investment plan that the internet movement would suggest (e.g. market cap index).

Imo, the IFA plan would take into account the needs and demands of the individual and design accordingly.  A lot of people don't do this as they don't trust them or have been persuaded that they are not worth it. I don't agree that they should then continually take say 0.5% of a pot, and that adds to the idea that they are not to be relied on.  In fact, that i feel that puts people off as their advice doesn't justify that fee, and it's easier to just go with the internet opinion flow and do what the movement says, (don't question it, see the fund managers who can't beat the index (which to me is misleading), stock pickers etc, you can't do better, easier to just tell yourself you are doing the right thing, stick to market cap trackers)

I honestly worry about that trend.  For many people this is better than sticking it in a bank account, but I wonder how much distortion this is causing. 

That's what some of us have been trying to say: market cap trackers of sufficient coverage cannot cause any distortion, by definition. In fact, they are the only things that do not cause any distortion.

Once again, we're just talking about the equities portion of a portfolio - individual risk tolerance, investment time frame etc. etc. should all be taken into account when planning the total asset mix, and addition of bonds/cash/commodities all has a role in tailoring that - as might a different mix of equities chosen for reduced return/less worry for example, or to show support for ESG, or for a particular country etc. etc., however there should be no concern about skews/distortion by going with a market cap.

Cus

You can't distort a market based on market cap by investing in market cap. The distortion I refer to is across more variables

michael1234

Cus said:

You can't distort a market based on market cap by investing in market cap. The distortion I refer to is across more variables

Surely you can because you maintain the status quo. Without heavy index based investing, the market might "naturally" move some place else. A bit like putting a brace on your teeth.

By the way, if you didn't want to invest too much into the mag7 (as I don't think I do), why not include some equal-weight trackers ? Yes they seem to have performed poorly in recent years but so what. 

masonic

michael1234 said:

Cus said:

You can't distort a market based on market cap by investing in market cap. The distortion I refer to is across more variables

Surely you can because you maintain the status quo. Without heavy index based investing, the market might "naturally" move some place else.

By the way, if you didn't want to invest too much into the mag7 (as I don't think I do), why not include some equal-weight trackers ? Yes they seem to have performed poorly in recent years but so what. 

Wherever the active market moves, the index reflects. An image on a 28" display is not distorted compared to the same image on an 18" display. It is just bigger. If an element of the image halves in size, it would do so on both displays and the difference would be larger on the bigger one. The image could be a disproportionate size compared with the rest of the room.

An index fund cannot maintain the status quo. It is powerless to do so. It simply follows the index, which is dictated by what active participants are willing to buy and sell shares for. Only traded shares can impact prices, and when one side of a trade is passive, it has to accept the price set by those with agency. But there is relatively little trading by these funds.

An actively managed fund ingests money from investors who have assigned responsibility for what to invest in to a fund manager who can distort the market through their choices and biases. They could choose not to invest a penny in Nvidia for example. If enough active investors did that, then index investors would face a large loss as it fell down the index (without the index fund buying or selling a thing) and eventually out of the index (where the share would finally be sold for a big loss). This hasn't happened because a lot of active money backs this company rather than avoids it.

The index is constructed from the mid points between what those willing to sell shares are willing to accept and what those willing to buy shares are willing to pay. Momentary distortions can happen when participants buy or sell indiscriminately and exhaust supply or demand, but here we are more concerned with persisting valuations we (in our infinite wisdom) disagree with. But these have come about through active market participants voting on and weighing companies prospects, often over a protracted period of time.

Cus

The index you refer to is the index based on market cap?

GeoffTF

Cus said:

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.

If you buy a market weighted tracker, you buy the performance of the average dollar invested in the market (before costs). You also have very low costs. Additional costs compound up over time. After a market weighted tracker has been held for many years, it will have beaten nearly all the actively managed alternatives.

Consider a fund weights according to earnings rather than market cap (the most plausible of your alternatives). That is active investment by definition because it overweights companies with higher earnings and underweights those with lower earnings. If you bought such a fund, you would in effect saying that earnings are a better indication of a company’s value than its market weight. (Think about what would happen if a large proportion of the market - or all the market - bought that fund.)

Market weighted trackers do not trade, except when companies enter or leave the market, or in response to corporate actions. (If the stock price doubles, the market weight doubles too.) That keeps costs to a minimum and ensures that holding the fund does not affect market prices. A fund that weights according to earnings has to constantly rebalance.