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Doom scrolling and the next financial crash!
Comments
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AVSG is not the sort of thing that should be added in a large amount. It started at 10% of my portfolio and has grown to about 12% owing to its recent performance and me not taking any rebalancing action yet. It sounds like ARIY is also using it as a smallish tilt.
My other US exposure comes from the S&P500 (no small cap) and my European exposure comes from the STOXX 600 (no small cap). I would still be a little "overweight" small caps at my level of allocation (given large-cap equities are around 44%), but that's by design. Critically, AVSG corrects a growth (style) and sector concentration issue my other holdings have. The other risk asset I hold is non-equity - commodity futures via CMFP, which is something Vanguard doesn't advocate.
I've already alluded to the numbers associated with major crashes, the 2000-2009 numbers (S&P roughly -1%/year vs US SCV roughly +13%/year) is an extreme example, but modest outperformance was seen in other bear markets since 1927.
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I've already alluded to the numbers associated with major crashes, the
2000-2009 numbers (S&P roughly -1%/year vs US SCV roughly +13%/year)
is an extreme example, but modest outperformance was seen in other bear
markets since 1927.2000-2009 is a long period. The S&P 500 was falling only for about a year at the end of that period. What is relevant to my comment is the relative performance of SCV and the S&P 500 when the market was going down. The doom mongers say that the next crash will be much larger than that one. As I have said, longer term performance of SCV depends on the starting valuation. I sceptical of the claim that SCV will always outperform over the long term, as the reward for the extra risk. I am doubly sceptical of any claim that it will protect value in a mighty crash.
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I wasn't expecting to be criticised for picking too long a period 😉. Fair challenge though - it's worth separating the two crashes inside 2000-2009, because SCV behaved almost oppositely in each, for clear reasons.
The dotcom crash was a large-cap growth valuation bubble unwinding, and value was underweight in the shares that popped. Looking at the crash years: in 2000 the S&P 500 was down roughly 9% while small-cap value was up around 9%, in 2001 the S&P 500 was down roughly 12% while small-cap value was up around 23%, in 2002 the S&P 500 was down roughly 22% while small-cap value was down only around 9%. Cumulatively over those three years, the S&P 500 lost around 38% while small-cap value gained around 21%. About as clean a hedge as you'll find.
The GFC was a different beast entirely - a systemic credit crisis. SCV didn't protect there: from the 2007 peak to the 2009 trough, both S&P 500 and SCV fell over 50%, with SCV dropping slightly more, at around 55%.
So I see SCV as a hedge against bubbles and lost decades. But it has greater short term volatility when examined in isolation and not within a broader portfolio. So like I said earlier, it's still a risk asset, just a different flavour of risk.
To be clear, it's also not the case that SCV will always outperform over different longer term periods. During secular bull markets like the one we've been in since the GFC, it would be expected to underperform, and has. What makes it interesting to me isn't a claim that it beats the market consistently, or that it cushions any particular kind of crash. It's that its returns have historically had a lower correlation with large-cap growth than most of what else sits in a typical portfolio.
Now I don't know what the doom mongers are predicting, but to me the likely bear case for markets right now is something that parallels the dotcom crash rather than anything "much larger".
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Google AI claimed that SCV performs miserably in crashes, but that does not appear to be true.
I think I have only watched one of the doom videos, so I am not an expert on them. The doomsters seem to be focusing on the debt raised to fund AI. They believe that AI will not raise enough revenue to service that debt, and there will be defaults. They claim that the mainstream banks are big lenders here, and we will have lots of bank failures. Scare stories get lots of clicks. The next big crash may have nothing to do with AI.
"Small cap" internationally means the larger FTSE 250 companies in the UK. The are not small cap by our standards. "Value" does not necessarily mean that the companies are heading for bankruptcy. They may just be companies that the market does not believe have good growth prospects. I made good profits from investing in companies like that.
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Really nice analysis by masonic (5.29pm) of how SCV reacted in different types of market crash. Many thanks.
GeoffTF: The doomsters seem to be focusing on the debt raised to fund AI. They believe that AI will not raise enough revenue to service that debt, and there will be defaults. They claim that the mainstream banks are big lenders here, and we will have lots of bank failures.
Without starting a discussion about the role of corporate bond funds within a diversification strategy, I'll make the point that companies most loaded with debt will be the largest holdings in an index fund. It's why I only buy actively managed funds (except for AGBP) which is justified by corporate bond index funds generally being in the bottom third of performance tables.
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When you say "index funds" I assume you mean indexes like S&P500, FTSE100 etc. that just consider capitalization. There are "index funds" that overlay additional criteria like value or dividend payments. It's semantics, but important.
And so we beat on, boats against the current, borne back ceaselessly into the past.0 -
My equity growth portfolio strategy is primarily driven by diversification, focusing on investing in the maximum number of companies of all sizes in the broadest range of sectors located in as many places around the world as practicable.
I take the view that the only risk that matters is systemic risk, ie external events causing major disruption of the markets. The type of risk measured by standard deviation, ie volatility within a limited range about a mean, is completely irrelevent in that as there is no intention of cashing-in in the short/medium term. Catastrophic "End of the world as we know it" scenarios can be ignored because there is nothing an equity investor can do about them. So the only concern is protecting the portfolio from major external events in individual countries or sectors - single point of failures. This also provides exposure to new growth areas across the world.
Another core belief is that the future is completely unpredictable. So there is no point in changing one's approach because of headlines. A major crash is always possible no matter what they say - the strategy must always take that possibility into account.
Finally, in order to keep the portfolio manageable and avoid duplication I am limiting the portfolio to 7 funds which rules out some options.
Applying some of these principles matters raised in this thread….
Independently of whether the dodgy financing and ambitious pricing of AI is leading to a major collapse in the US market, the level of one's investments there must be constrained to allow meaningful diversifying exposure to other areas. Simlarly with the Tech sector as a whole.
I now limit exposure to individual very large companies and spread investments as broadly as possible by using a combination of index trackers and equal weight funds for both the US and Europe. This avoids a problem of small company funds focusing on the very small leaving a gap in the middle.
This, coupled with its focus on Value decreasing diversification and its 67% allocation to the US, rules out AVSG.
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Independently of whether the dodgy financing and ambitious pricing of AI
is leading to a major collapse in the US market, the level of one's
investments there must be constrained to allow meaningful diversifying
exposure to other areas. Simlarly with the Tech sector as a whole.If the doomsters are right, it will not just be the US and the Tech sector that are hit.
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I'm talking about Sterling corporate bond index funds. Those with most issued debt will be the largest positions in corporate bond index funds.
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The US market is going down now and it does not appear to be AI fears that are driving it:
Expect the other markets to follow. When America sneezes, the world catches a cold.
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