Stock markets are too high and set to fall?

[Deleted User]

https://forums.moneysavingexpert.com/discussion/comment/82011235#Comment_82011235

My apologies if my remarks come across as disparaging, that was not the intent. I think my remarks are more factual than disparaging as several sources on the web will confirm:

"Research indicates that while many UK retail investors grasp the fundamental concepts of equities (ownership in companies) and bonds (loans to entities), a significant knowledge gap remains regarding the nuances of risk, valuation, and market mechanics". Comments by members that I have read here confirm this is the case. All of which is fine, we all have to start learning somewhere and many members such as Masonic, Litton and many others, are extremely helpful and willing to share vast amounts of useful knowledge. But I don't think any of that should mask the fact that there are plenty of members who are still at the very early stages of their investing knowledge journey, albeit many may not fully understand that!

There was a discussion, not too long ago, about the extent of US dominance in global equities tracker funds, funds that large numbers of members appear to hold (myself included but for different reasons than many). It was a time when Tech dominance was in focus and the extent to which US holdings dominated those trackers, approximately 60% to 74%. It was a time when Tech was seen as a potential bubble and several people were looking to underweight their US holdings. But global tracker holders couldn't easily do so unless they exchanged funds or diluted them with other things. Both those actions require knowledge and effort, more than many wanted or could easily manage. It was apparent from comments that some were unaware of the US markets risk in their tracker and that few people understood their sectoral holdings.

My argument at the time was that there were plenty of other regions globally that presented solid investment opportunities, without relying solely on the US market. The point here is that there seemed to be very little awareness of those things and instead, great comfort by some members that they were holding a brand name, well known global equities tracker and that everything would be OK. Over time, that is the correct approach to take, I think. If you hold a global tracker for many years, the ups will outweigh the downs and you'll make the profit you wanted. But for those people who are not happy with the downs, it seemed that the Tech bubble was a significant risk but not everyone understood that. The fact the Tech "bubble" risk hasn't been realised to date, doesn't change the fact the risk existed.

I said I also hold a global equities tracker but I do/did so as a means to hold US equities, but on a diluted basis, which means, the Tech bubble risk was substantially reduced by holding other balancing funds.

Index trackers appear to occupy about 20% of the global equities market and around five major names seem to dominate the global index tracker space, HSBC, Fidelity, Vanguard, SPDR and iShares. It's a fairly easy decison to chose from the five, one that doesn't require lots of knowledge or insight, in order to buy a reasonable global tracker.

coyrls

It was apparent from comments that some were unaware of the US markets
risk in their tracker and that few people understood their sectoral
holdings.

That didn't seem apparent to me from what was in general a well informed discussion about the wisdom of market timing and how to manage risk. In particular most people seemed well aware of their sectoral holdings all be it that they were different from yours.

[Deleted User]

https://forums.moneysavingexpert.com/discussion/comment/82012034#Comment_82012034

The discussion to which I refered in my post was a thread entitled US Markets Risk which is linked below. In it, several informed members agreed on the points that I mentioned:

https://forums.moneysavingexpert.com/discussion/6653516/us-markets-risk/p2

I have no issues with whatever holdings people want to invest in, it is entirely their perogative. The issue here is whether or not many retail investors actually understand what is inside the things they have bought. Most people will be comfortable I imagine with the idea of a global index tracker, issued by a household name. But if you tell them their tracker comprises 70% US holdings and 35% Tech Sector, many are surprised and some will be likely to have second thoughts, if they understand the implications of those things that is and the evidence is that many don't. I have no wish to be argumentative on this point, it's merely my point of view, which I will leave there.

coyrls

My point of view is that people active on this forum aren't as uninformed as you seem to think and do understand the implications of what they hold. I too will leave it there.

thunderroad88

My point of view is that you’re both correct to some extent but should use the term “some people” in your posts…clearly there are some very knowledgeable people on here but at the same time I’ve seen plenty of uninformed, naive posts and questions too. Hopefully after being here and asking their questions and digesting the replies they become a bit more informed, which is after all the point of the forum…I know that’s why I keep looking in.

silvercue

My problem is I am just too greedy. I will ride the wave until it is too late! Risk management after the event. I will tell myself "I told you so" afterwards.

kempiejon

https://forums.moneysavingexpert.com/discussion/comment/82013411#Comment_82013411

Do you mean you buy speculatively and when overvalued you haven't noticed so end up holding as the value falls? I used to research and try to buy undervalued and sell once outed. It is hard to know when to get out, in fact I'm still holding some a decade later showing more increases.

coyrls

https://forums.moneysavingexpert.com/discussion/comment/82013508#Comment_82013508

If you have an asset allocation model, trigger based or periodic rebalancing will deal with assets that disproportionally increase in value.

[Deleted User]

One particularly memorable post that sticks in my mind was where a (seemingly) novice investor wrote that he didn't feel as though he needed to make any changes to his holdings, because his index tracker comprised 500 of the biggest US companies. Perhaps this was a reference to Warren Buffet, who recommended buying an S&P500 tracker and leaving it for decades. Which is great, as long as you are certain that you have decades and you fully accept the potential risk of bursting bubbles et al. That approach may be justifiable for native Americans, who have a strong home country bias, but for international investors it strikes me as very much of an eggs in a single basket strategy and unecessaily high risk!

The next step up of course is the truly global index tracker, which dilutes US holding by adding in between 30% & 40% of other markets equities. That's a big improvement over a single market tracker but I question whether it is actually enough for the average novice investor. Adding in a global bonds tracker begins to take us into Bogglehead territory, which is even less risky still and has the potential to reduce the amount of money at risk.

But as you can see from my opening paragraph, there are plenty of people who will adopt Warrens recommendation without understanding the downsides and the less risky alternatives. This is where giving the problem of fund selection to an IFA is money very well spent.

aroominyork

Being 100% US isn't about "the potential risk of bursting bubbles". It's about being undiversified when, for an economic cycle, that region is out of favour. No bubble required - just rotation.