UK asset allocation

george4064

For me, I’ve got c5% allocation to U.K. equities via a FTSE 250 ETF index tracker.

michael1234

Quite a few of the "global" funds I've looked at are 70% invested in the US.

Also, with so much pension money going into the stock markets, does it make those markets overvalued and if so how to gain from that knowledge?

InvesterJones

michael1234 said:

Quite a few of the "global" funds I've looked at are 70% invested in the US.

Also, with so much pension money going into the stock markets, does it make those markets overvalued and if so how to gain from that knowledge?

No, it makes them fair value as considered by the total of investments going on (since they are market cap weighted I presume). If you think the rest of the world is overvaluing them, then sure, you simply sell more of them and buy something else, and in time you'll be proved right or wrong by performing better or worse than such funds.

michael1234

InvesterJones said:

michael1234 said:

Quite a few of the "global" funds I've looked at are 70% invested in the US.

Also, with so much pension money going into the stock markets, does it make those markets overvalued and if so how to gain from that knowledge?

No, it makes them fair value as considered by the total of investments going on (since they are market cap weighted I presume). If you think the rest of the world is overvaluing them, then sure, you simply sell more of them and buy something else, and in time you'll be proved right or wrong by performing better or worse than such funds.

But if you sell one stock and buy another, the net amount of cash invested in those markets remains the same. Ultimately valuation comes down to personal attitude. But lets take an extreme example, imagine all the stocks in all markets in the world were being sold at 10x what they actually are. i.e. in some sense they are 10x overvalued. In that extreme case, so long as they don't crash, I don't see how you would profit out of it ?

Hoenir

michael1234 said:

InvesterJones said:

michael1234 said:

Quite a few of the "global" funds I've looked at are 70% invested in the US.

Also, with so much pension money going into the stock markets, does it make those markets overvalued and if so how to gain from that knowledge?

No, it makes them fair value as considered by the total of investments going on (since they are market cap weighted I presume). If you think the rest of the world is overvaluing them, then sure, you simply sell more of them and buy something else, and in time you'll be proved right or wrong by performing better or worse than such funds.

But if you sell one stock and buy another, the net amount of cash invested in those markets remains the same. Ultimately valuation comes down to personal attitude. But lets take an extreme example, imagine all the stocks in all markets in the world were being sold at 10x what they actually are. i.e. in some sense they are 10x overvalued. In that extreme case, so long as they don't crash, I don't see how you would profit out of it ?

Markets indices of any kind including ETF's (as opposed to individual stocks) are ultimately determined by the momentum of capital flows. If 85 out of 100  investors are buying. Then an incoming tide will lift all boats. The money is going into the same group of stocks whatever. 

One only has to look at Tesla since it's S&P 500 inclusion to question people's sanity. Nothing to do with fundamentals. A speculative gambling stock. 

InvesterJones

michael1234 said:

InvesterJones said:

michael1234 said:

Quite a few of the "global" funds I've looked at are 70% invested in the US.

Also, with so much pension money going into the stock markets, does it make those markets overvalued and if so how to gain from that knowledge?

No, it makes them fair value as considered by the total of investments going on (since they are market cap weighted I presume). If you think the rest of the world is overvaluing them, then sure, you simply sell more of them and buy something else, and in time you'll be proved right or wrong by performing better or worse than such funds.

But if you sell one stock and buy another, the net amount of cash invested in those markets remains the same. Ultimately valuation comes down to personal attitude. But lets take an extreme example, imagine all the stocks in all markets in the world were being sold at 10x what they actually are. i.e. in some sense they are 10x overvalued. In that extreme case, so long as they don't crash, I don't see how you would profit out of it ?

I think I understand, so a question of price compared to expected return? The market will price at what investors consider the right level for the expected return and risk (which as illustrated above, doesn't necessarily correspond to fundamentals, but instead the value of something to someone else), but if you feel differently then you can likewise sell to those investors and use your capital to invest in something else that you think will return better e.g. bonds, property, commodities, cash, whatever. Again, the market will have priced those at what it thinks is the right level compared to stocks (usually adjusted for risk - i.e. the safer something is, the lower the return) but if you think you know better than the market, you can take advantage by selling what's overvalued and buying what's undervalued.

Albermarle

InvesterJones said:

michael1234 said:

InvesterJones said:

michael1234 said:

Quite a few of the "global" funds I've looked at are 70% invested in the US.

Also, with so much pension money going into the stock markets, does it make those markets overvalued and if so how to gain from that knowledge?

No, it makes them fair value as considered by the total of investments going on (since they are market cap weighted I presume). If you think the rest of the world is overvaluing them, then sure, you simply sell more of them and buy something else, and in time you'll be proved right or wrong by performing better or worse than such funds.

But if you sell one stock and buy another, the net amount of cash invested in those markets remains the same. Ultimately valuation comes down to personal attitude. But lets take an extreme example, imagine all the stocks in all markets in the world were being sold at 10x what they actually are. i.e. in some sense they are 10x overvalued. In that extreme case, so long as they don't crash, I don't see how you would profit out of it ?

I think I understand, so a question of price compared to expected return? The market will price at what investors consider the right level for the expected return and risk (which as illustrated above, doesn't necessarily correspond to fundamentals, but instead the value of something to someone else), but if you feel differently then you can likewise sell to those investors and use your capital to invest in something else that you think will return better e.g. bonds, property, commodities, cash, whatever. Again, the market will have priced those at what it thinks is the right level compared to stocks (usually adjusted for risk - i.e. the safer something is, the lower the return) but if you think you know better than the market, you can take advantage by selling what's overvalued and buying what's undervalued.

The problem here is that 'the market' is effectively large numbers of very clever people who are constantly looking at and researching the market. Also if any new news should arrive they can react almost instantaneously.
So is it likely that you ( or me ) could discover that a stock was undervalued or overvalued, and that all these clever people have not noticed ?
I suppose it is possible, but I would not bet on it .

GeoffTF

Hoenir said:

Markets indices of any kind including ETF's (as opposed to individual stocks) are ultimately determined by the momentum of capital flows. If 85 out of 100  investors are buying.

For every share sold, there has to be both a buyer and a seller. If the buyers are keen to buy even if they have to pay above the market price, and the sellers will only sell at above the market price, the market price will rise. Nonetheless, the momentum of cash flows of the buyers and sellers will always be equal.

Hoenir

Albermarle said:

InvesterJones said:

michael1234 said:

InvesterJones said:

michael1234 said:

Quite a few of the "global" funds I've looked at are 70% invested in the US.

Also, with so much pension money going into the stock markets, does it make those markets overvalued and if so how to gain from that knowledge?

No, it makes them fair value as considered by the total of investments going on (since they are market cap weighted I presume). If you think the rest of the world is overvaluing them, then sure, you simply sell more of them and buy something else, and in time you'll be proved right or wrong by performing better or worse than such funds.

But if you sell one stock and buy another, the net amount of cash invested in those markets remains the same. Ultimately valuation comes down to personal attitude. But lets take an extreme example, imagine all the stocks in all markets in the world were being sold at 10x what they actually are. i.e. in some sense they are 10x overvalued. In that extreme case, so long as they don't crash, I don't see how you would profit out of it ?

I think I understand, so a question of price compared to expected return? The market will price at what investors consider the right level for the expected return and risk (which as illustrated above, doesn't necessarily correspond to fundamentals, but instead the value of something to someone else), but if you feel differently then you can likewise sell to those investors and use your capital to invest in something else that you think will return better e.g. bonds, property, commodities, cash, whatever. Again, the market will have priced those at what it thinks is the right level compared to stocks (usually adjusted for risk - i.e. the safer something is, the lower the return) but if you think you know better than the market, you can take advantage by selling what's overvalued and buying what's undervalued.

The problem here is that 'the market' is effectively large numbers of very clever people who are constantly looking at and researching the market. 

Focused on a relatively low number of stocks. Many stocks go under the radar. Simply not large enough in market value nor sufficient market liquidity or freefloat to warrant the expense involved in researching in detail. 

Hoenir

GeoffTF said:

Hoenir said:

Markets indices of any kind including ETF's (as opposed to individual stocks) are ultimately determined by the momentum of capital flows. If 85 out of 100  investors are buying.

For every share sold, there has to be both a buyer and a seller. If the buyers are keen to buy even if they have to pay above the market price, and the sellers will only sell at above the market price, the market price will rise. Nonetheless, the momentum of cash flows of the buyers and sellers will always be equal.

If you buy or sell a collective investment. Then the underlying stocks will be traded at whatever price is on offer. With zero thought. The fund simply maintains the tracking of the index. 

As for individual stocks. Look at the historic share price chart of Tesla. Note the buying prior to entry into the SP500. Through to early December 2021. Then subsequently the forced buying of stock at any price by index funds. As they were forced to rebalance their portfolio's. Once the exercise was complete the share price fell as the surge of demand (capital flow) for the stock subsided. Had absolutely nothing to do with pricing the stock on a fundamental basis. 

Everything ultimately boils down to basic maths combined with supply and demand. .