Stock Indexes Seem Busted. 20% in 4 stocks

[volcker]

I think it is risky, but not necessarily because of the concentration in crazy growth stocks. The Shiller CAPE of US stocks is historically high, substantially more so than the CAPE of developed ex-US stocks. There's a (not strong) statistical relationship between the CAPE and the next 10 year stock returns: the higher the CAPE, the lower the 10-year forward returns. It's not a good idea to time the market by getting out of stocks when CAPE is high, because metrics such as CAPE are not stationary, but it is a good idea to tilt towards markets where CAPE is lower in relative terms. You have better odds there. I go out on a limb and put 85% of my stock sub-allocation in ex-US stocks and only 15% in US stocks, and the 15% US stocks are all in a value index, but no financial advisor is going to endorse this as a balanced stock allocation. (I also don't live in the US, so I don't mind a heavy ex-US allocation.)

[volcker]

William Bernstein, a respected financial author, in his book Rational Expectations, recommends for US residents (or investors who plan to have retirement liabilities in USD) that least 50% of your stocks be in the US market, despite the high CAPE. That's probably standard advice.

[pp4me]

20% of stock index funds are concentrated in Only four companies: Microsoft, Apple, amazon, and google.

Between this and bonds at all time highs, I’m concerned about the viability of the PP. For those here smarter than me, have we ever had such concentration in the indexes before? I think most of the stock market gains of recent years was a handful of stocks. Add Netflix and Facebook in there for the gains concentration.

This feels risky.

Well, at least you have the 6 entities you mentioned monopolizing most of the power.

With LTT's you only have one.

This is why we have gold and cash (and in my case with the GB there is also SCV so I am only at 40% risk with your two concerns).

[Kriegsspiel]

It seems pretty goddamn wild, but I'll keep my vanilla PP, and I'll nudge my VP every once in a while. If I had a 100% VTSAX portfolio like so many people nowadays I'd be more nervous knowing stuff like this.

[Smith1776]

If one invests globally and also does a little bit of factor tilting I think that the overall risks expressed in the OP can be largely mitigated.

[jalanlong]

Serious question: does it matter for a PP investor? If you are investing in US stocks as an asset class then don’t you just want to own what everyone in the market is buying regardless of whether it is 5 stocks or 50?

[pp4me]

Serious question: does it matter for a PP investor? If you are investing in US stocks as an asset class then don’t you just want to own what everyone in the market is buying regardless of whether it is 5 stocks or 50?

No, I don't think it matters to a PP investor. What we are actually talking about is 20% of 25% (PP) or 20%(GB) being tied up in 4 companies. So that's basically 5% or 4% of your overall portfolio being tied up in 4 companies at the top of the index because they are doing well. Not a big worry IMHO - especially when you contrast it with 25% being invested in a single entity (gold or LTT).

[glennds]

Serious question: does it matter for a PP investor? If you are investing in US stocks as an asset class then don’t you just want to own what everyone in the market is buying regardless of whether it is 5 stocks or 50?

No, I don't think it matters to a PP investor. What we are actually talking about is 20% of 25% (PP) or 20%(GB) being tied up in 4 companies. So that's basically 5% or 4% of your overall portfolio being tied up in 4 companies at the top of the index because they are doing well. Not a big worry IMHO - especially when you contrast it with 25% being invested in a single entity (gold or LTT).

In addition to the above ^^^, take some comfort in the fact that these four companies have basically earned "too big to fail" status. Once a company has that status, well, you know.

[Smith1776]

I think over-concentration in market cap weighted indexes can be a legitimate concern. Here in Canada we got bit hard by the phenomenon. Remember Nortel? At its peak during the dotcom bubble, Nortel was over 30% of the S&P/TSX Composite Index.

After this debacle our major index turned into the S&P/TSX Capped Composite Index. Now no individual constituent can occupy more than 10% of the index.

[pmward]

Everyone in this thread is only looking at left tail risk. What about right tail risk? What if those big tech names you're afraid of do continue to carry the indexes for the next decade or more? Not saying this will happen, but it is certainly possible. If one goes to great lengths to tilt away from it and massively underperforms because of it, is that not also "risk" that needs to be considered? Underperformance and a drawdown are the same thing. It's ok if someone wants to tilt because they believe in tilting. I'm not so sure I would tilt away just to trade left tail risk for an equal amount of right tail risk though. Portfolio decisions based purely on fear or greed usually prove to be the wrong decision over time, at least in my experience. Every mistake I've ever made in investing/trading have all been due to things I did specifically because of fear or greed. Whenever the emotions have taken the front seat, and the data has taken the backseat, bad things always have always happened.

[mathjak107]

William Bernstein, a respected financial author, in his book Rational Expectations, recommends for US residents (or investors who plan to have retirement liabilities in USD) that least 50% of your stocks be in the US market, despite the high CAPE. That's probably standard advice.

I believe that is only after you meet all your living expenses with tips and annuities ...then he says invest in stocks .


No way I would plan my retirement around his LMP..there are way to many flaws in his assumptions about life’s expenses ....

We never really know if we one the game until there are no more innings left ....just think about if you projected out 30 years ago what your expenses would be ......for most of us not even close ....

Interesting article on the flaws of trying to decide if you really won the game

https://medium.com/@justusjp/liability- ... b7300dcbdd

[yankees60]

William Bernstein, a respected financial author, in his book Rational Expectations, recommends for US residents (or investors who plan to have retirement liabilities in USD) that least 50% of your stocks be in the US market, despite the high CAPE. That's probably standard advice.

I believe that is only after you meet all your living expenses with tips and annuities ...then he says invest in stocks .


No way I would plan my retirement around his LMP..there are way to many flaws in his assumptions about life’s expenses ....

We never really know if we one the game until there are no more innings left ....just think about if you projected out 30 years ago what your expenses would be ......for most of us not even close ....

Interesting article on the flaws of trying to decide if you really won the game

https://medium.com/@justusjp/liability- ... b7300dcbdd

What expenses would not be under one's control and know about other than medical / health care? All else are under your control.

Vinny

[mathjak107]

William Bernstein, a respected financial author, in his book Rational Expectations, recommends for US residents (or investors who plan to have retirement liabilities in USD) that least 50% of your stocks be in the US market, despite the high CAPE. That's probably standard advice.

I believe that is only after you meet all your living expenses with tips and annuities ...then he says invest in stocks .


No way I would plan my retirement around his LMP..there are way to many flaws in his assumptions about life’s expenses ....

We never really know if we one the game until there are no more innings left ....just think about if you projected out 30 years ago what your expenses would be ......for most of us not even close ....

Interesting article on the flaws of trying to decide if you really won the game

https://medium.com/@justusjp/liability- ... b7300dcbdd

What expenses would not be under one's control and know about other than medical / health care? All else are under your control.

Vinny

Life ...with a potential 30 years of the unknown in retirement and a changing world

30 years ago I didn’t pay for radio ,,I had no cable ...no cell phone ,,no internet ,,,,we didn’t pay for water .I had nooooo grand kids ...6 grand kids to be entertained, gifts , events parties can cost a lot of money .

30 years ago who saw taxes here on homes jumping from 3-4 k to 12-18k a year .

I spent over 40k on dental for my wife and I the last 10 years .

7k a year for a New York State partnership plan for long term care for the two of us was never a thought , because 30 years ago we had no assets to protect as we aged

30 years ago who ever thought we would get near o interest

I can go on and on .

So we never know if we won ....crap happens to us or it happens to your kids



Of course you could keep lowering your standards , live In places you don’t want to live to hold costs ...not my idea of a successful retirement

[yankees60]

William Bernstein, a respected financial author, in his book Rational Expectations, recommends for US residents (or investors who plan to have retirement liabilities in USD) that least 50% of your stocks be in the US market, despite the high CAPE. That's probably standard advice.

I believe that is only after you meet all your living expenses with tips and annuities ...then he says invest in stocks .


No way I would plan my retirement around his LMP..there are way to many flaws in his assumptions about life’s expenses ....

We never really know if we one the game until there are no more innings left ....just think about if you projected out 30 years ago what your expenses would be ......for most of us not even close ....

Interesting article on the flaws of trying to decide if you really won the game

https://medium.com/@justusjp/liability- ... b7300dcbdd

What expenses would not be under one's control and know about other than medical / health care? All else are under your control.

Vinny

Life ...with a potential 30 years of the unknown in retirement and a changing world

30 years ago I didn’t pay for radio ,,I had no cable ...no cell phone ,,no internet ,,,,we didn’t pay for water .I had nooooo grand kids ...6 grand kids to be entertained, gifts , events parties can cost a lot of money .

30 years ago who saw taxes here on homes jumping from 3-4 k to 12-18k a year .

I spent over 40k on dental for my wife and I the last 10 years .

7k a year for a New York State partnership plan for long term care for the two of us was never a thought , because 30 years ago we had no assets to protect as we aged

30 years ago who ever thought we would get near o interest

I can go on and on .

So we never know if we won ....crap happens to us or it happens to your kids



Of course you could keep lowering your standards , live In places you don’t want to live to hold costs ...not my idea of a successful retirement

You have a far more complicated life than me just having to worry about myself and no one else.

Vinny

[pmward]

Another way popped into my mind that one could express this other than just factors and international. S&P 500 equal weight. There is a handy ETF RSP that does this for you, and since it's an ETF you don't get taxed on the quarterly rebalancing like you would in a mutual fund. RSP actually tends to outperform SPY over the long term. It spreads your risk out evenly to the S&P companies as opposed to going market cap weight, meaning your single company risk becomes a total non-factor. We are also believers in the magic of rebalancing here, and this allows one to take advantage of that rebalancing in individual stocks within the S&P. I personally believe that if one truly wants to be "passive" and make no bets that equal weight makes a lot more sense than market cap weight, even when things are not as extreme as they currently are.

[mathjak107]

William Bernstein, a respected financial author, in his book Rational Expectations, recommends for US residents (or investors who plan to have retirement liabilities in USD) that least 50% of your stocks be in the US market, despite the high CAPE. That's probably standard advice.

I believe that is only after you meet all your living expenses with tips and annuities ...then he says invest in stocks .


No way I would plan my retirement around his LMP..there are way to many flaws in his assumptions about life’s expenses ....

We never really know if we one the game until there are no more innings left ....just think about if you projected out 30 years ago what your expenses would be ......for most of us not even close ....

Interesting article on the flaws of trying to decide if you really won the game

https://medium.com/@justusjp/liability- ... b7300dcbdd

What expenses would not be under one's control and know about other than medical / health care? All else are under your control.

Vinny

Life ...with a potential 30 years of the unknown in retirement and a changing world

30 years ago I didn’t pay for radio ,,I had no cable ...no cell phone ,,no internet ,,,,we didn’t pay for water .I had nooooo grand kids ...6 grand kids to be entertained, gifts , events parties can cost a lot of money .

30 years ago who saw taxes here on homes jumping from 3-4 k to 12-18k a year .

I spent over 40k on dental for my wife and I the last 10 years .

7k a year for a New York State partnership plan for long term care for the two of us was never a thought , because 30 years ago we had no assets to protect as we aged

30 years ago who ever thought we would get near o interest

I can go on and on .

So we never know if we won ....crap happens to us or it happens to your kids



Of course you could keep lowering your standards , live In places you don’t want to live to hold costs ...not my idea of a successful retirement

You have a far more complicated life than me just having to worry about myself and no one else.

Vinny

Predicting anyone’s life over 30 years of retirement can be a crap shoot ...I don’t buy in to this winning the game bologna

[yankees60]

William Bernstein, a respected financial author, in his book Rational Expectations, recommends for US residents (or investors who plan to have retirement liabilities in USD) that least 50% of your stocks be in the US market, despite the high CAPE. That's probably standard advice.

I believe that is only after you meet all your living expenses with tips and annuities ...then he says invest in stocks .


No way I would plan my retirement around his LMP..there are way to many flaws in his assumptions about life’s expenses ....

We never really know if we one the game until there are no more innings left ....just think about if you projected out 30 years ago what your expenses would be ......for most of us not even close ....

Interesting article on the flaws of trying to decide if you really won the game

https://medium.com/@justusjp/liability- ... b7300dcbdd

What expenses would not be under one's control and know about other than medical / health care? All else are under your control.

Vinny

Life ...with a potential 30 years of the unknown in retirement and a changing world

30 years ago I didn’t pay for radio ,,I had no cable ...no cell phone ,,no internet ,,,,we didn’t pay for water .I had nooooo grand kids ...6 grand kids to be entertained, gifts , events parties can cost a lot of money .

30 years ago who saw taxes here on homes jumping from 3-4 k to 12-18k a year .

I spent over 40k on dental for my wife and I the last 10 years .

7k a year for a New York State partnership plan for long term care for the two of us was never a thought , because 30 years ago we had no assets to protect as we aged

30 years ago who ever thought we would get near o interest

I can go on and on .

So we never know if we won ....crap happens to us or it happens to your kids



Of course you could keep lowering your standards , live In places you don’t want to live to hold costs ...not my idea of a successful retirement

You have a far more complicated life than me just having to worry about myself and no one else.

Vinny

Predicting anyone’s life over 30 years of retirement can be a crap shoot ...I don’t buy in to this winning the game bologna

Can I get you to concede that Bill Gates and Bezos have "won the game"?

VInny

[mathjak107]

i can't speak for them ... us falling in to a depression may alter their status too greatly wealth wise .

for most of us we only appear to be winning until we aren't .

those who retired in 1965 -1966 and thought they won , got pounded by unexpected double digit inflation .

In the years after 1965, the perfect storm of retirement killing conditions took place. Inflation grew rapidly over the following decade, exceeding 10% in several years in the 1970’s and averaging 6% a year from 1965 to 1985. Interest rates rose rapidly, from ~4% in 1965 to ~8% in 1970, up to 15% in 1982, causing bonds prices to plummet. The combo of fast rising high inflation and rising interest rates destroyed bonds.

Stocks also performed horribly for 19 years

there were few winners among regular folk like us ..

sayings like why play when you won the game may open the door for book sales and articles to keep you in the spot light as an author but for most of us " no such thing " until the GAME ACTUALLY ENDS when you do or close to it .

[Kbg]

Lucky us, we have an ETF(s) for that concentration concern. Equal weighting, different market cap, factor weighting, all kinds of flavors. The closest to vanilla is RSP.