When will indexing blow up?

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vnatale
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Re: When will indexing blow up?

Post by vnatale » Fri Jun 02, 2023 4:57 pm

seajay wrote:
Thu May 25, 2023 11:33 am

LEXCX holds a sizeable proportion in Union Pacific, and some Berkshire Hathaway stock. Initial equal weight not rebalanced will tend to end up like that, more average weighting in the stock(s) that did well. Rebalancing has a tendency to reduce the concentration risk, whilst still tending to achieve the same overall total returns.

At the offset equal weightings is reasonable, as you've no idea which will end up as having been the best. Cap weighting in effect adds more capital to the stock(s) that HAD performed the best up to that point in time, and injecting more capital into those, less into others is in effect a prediction that past momentum will persist, often it doesn't.

On a risk adjusted reward basis, rebalanced tends to yield the higher/better result, same reward with less volatility. As a marketing product I guess Vanguard just prefer a one size fits all rather than having to manage thousands of accounts each with different weightings.

The Golden Butterfly/PP run along similar lines. Stock price only, cash and bonds with interest accumulated, gold ... might each reasonably be expected to negate inflation, but individually with some pretty wild volatility. Equal weightings is inclined to smooth down that volatility, same inflation pacing reward, with less portfolio volatility. Over any one time period you might expect to see the sorted worst to best order (left to right) having a bad case left tail, but where the best case right tail compensates and more that worst case. That's just a natural fractal pattern that applies at both the short and long time scale, and across multiples assets (for instance if you divided the Dow 30 into 5 sets of 6 stocks ranked by total returns worst to best, you'd be inclined to see a similar left tail set compensated and more by the right tail set).

Buying the market, cap weighted index, can accommodate all, however many choose to invest. Equal initial weighting with large amounts thrown at it will disproportionately modify the index, add more to smaller caps. Most investors would be better served by initial weightings, but are left to do that for themselves, such as via the PP, GB ...etc.

Bogle figures his static-50 fund would cost 0.15% of assets to run. Alas, his successor as chief executive of the nonprofit Vanguard Group, John Brennan, doesn't plan to offer the product. Creating new portfolios annually (because newcomers would not be allowed into an existing portfolio) would be an administrative headache with each distinct one lacking sufficient economies of scale, Vanguard believes.

https://www.forbes.com/forbes/1999/0614 ... f358a76874


LEXCX discussed here:

https://www.mymoneyblog.com/buy-hold-do ... tg=9627344

The Power (and Limitations) of Buy & Hold “Do Nothing” Portfolios
JUNE 1, 2023 BY JONATHAN PING 2 COMMENTS


"He added a real-world example of “buy and hold forever” in the Voya Corporate Leaders Trust (LEXCX), which is a very quirky mutual fund that essentially bought equal amounts of stock from 30 of the largest US companies back in 1935 and then sat on its hands. Voya Corporate Leaders Trust also did quite well over the same 1993-2023 period:"

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Above provided by: Vinny, who always says: "I only regret that I have but one lap to give to my cats." AND "I'm a more-is-more person."
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seajay
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Re: When will indexing blow up?

Post by seajay » Fri Jun 09, 2023 10:41 am

Since 1960, compared to total stock market (total returns)

Image

Recently holding around 22 stocks, of which one is BRK, some months back was holding 20 stocks, so even though its 'static' it does still evolve/change. Largest recent holding is Union Pacific, at around 33% weighting. Whilst that seems a lot of idiosyncratic risk that also changes over time.

Along the lines of how many used to invest. It was expensive to trade so investors tended to pick perhaps 8 stocks out of the Dow 30 (Blue Chips they liked and that were diversified), bought and held.

Some suggest you have to buy the entire haystack, yet the Dow 30 broadly compares to the S&P500, as has the LEXCX 30. Buying the haystack to ensure you buy some of the best performing stock(s), omits that with fewer stocks you have more invested in each holding, so the best case doesn't have to be as great as if you have a very small amount invested in a super-great stock.

A good practice is to diversify equally across different assets, and just accept that one of those will be the years best/worst asset, and where generally the gains from the best outweighs and more the loss in the worst.
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Re: When will indexing blow up?

Post by ochotona » Mon Jun 12, 2023 12:23 pm

Just yesterday I was comparing iShares US Minimum Volatility Factor ETF to SPY, and they track well until all of the COVID money printing, at which point SPY stands on its tail. It just seems to me that S&P500 is just a stupid bet on something, and someday SPY is going to catch-down to USMV, and it won't be nice.

Image

I Shrugged wrote:
Thu Mar 02, 2023 10:20 am
I get this free market and ramblings email from Jared Dillian, which I enjoy. Today's was about indexing being a time bomb. This is something I have thought for years. When everyone owns the index, it will no longer be a safe thing. I could not find a link so here is the actual text. Thoughts?

Here is a link to get the free email letter: https://www.mauldineconomics.com/the-10th-man
The Indexing Bomb
Jared Dillian

....

One thing I like to point out to people is this:

When you invest in an index, you get the return of the index, but you also get the volatility of the index.
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ochotona
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Re: When will indexing blow up?

Post by ochotona » Fri Sep 01, 2023 10:18 pm

Ten year stock market return forecasts

https://allocatesmartly.com/new-feature ... -forecast/
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vnatale
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Re: When will indexing blow up?

Post by vnatale » Fri Sep 01, 2023 10:21 pm

ochotona wrote:
Fri Sep 01, 2023 10:18 pm

Ten year stock market return forecasts

https://allocatesmartly.com/new-feature ... -forecast/


How much credence / value do you put in such a forecast?
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Re: When will indexing blow up?

Post by ochotona » Sat Sep 02, 2023 11:15 am

I treat it as I would a weather forecast... large error bars, but you probably shouldn't ignore it. It is probabilistic. There is another page I see there (I have to login) which shows a number of forecasts, which make up the single composite predictor, which range from pretty good to lousy. The aggregate prediction is near the simple median of them all. It's not a timing tool, it's a "huh, that's interesting... hmmm..." tool. At some point, probably years from now, it will show better conditions, but at that moment in time everyone will be sick of stocks. The Dow : Gold ratio hasn't gone through its inevitable oscillation yet. But these things take a long time. People don't have the patience. That includes me.

https://imgur.com/a/bC9Wevb
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