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Vanguard Is Growing Faster Than Everybody Else Combined

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Re: Vanguard Is Growing Faster Than Everybody Else Combined

#311

Post by random_comment »

hyperpape wrote: post #297
pembrook wrote: post #289

Earlier quoted context omitted.

The flows to Vanguard are largely driven by retail investors and I think you are grossly overestimating the pricing value that "active" retail investors provide. Retail investors don't act as a rational pricing mechanism. 99% of them don't discount future cash flows, examine balance sheets, or evaluate growth prospects. In fact they statistically buy high and sell low which only serves to make boom and bust cycles mo…

What makes indexing worse in the short term?

Volatility, i.e. greater dispersion of returns in the short term.

http://www.investopedia.com/terms/v/volatility.asp

Re: Vanguard Is Growing Faster Than Everybody Else Combined

#312

Post by random_comment »

lr4444lr wrote: post #154
headmelted wrote: post #125

As a Vanguard customer, I can understand why people are so enthusiastic about their products, and have known for a while that passive investment, and Vanguard in particular, was growing while active management was on the decline. At no point did I think the difference in inflows was anywhere close to 8.5x. And it does worry me. I'm familiar with the contention that even having some active players in the market will a…

If you're a Vanguard customer (buying the flagship fund classes, I presume), you're expressing faith in CAPM[0] and EMH[1] on a significant level. Some active investors will probably in the long term scoop up some extra gains, but the question still remains: which of them, over what time horizon, and is that a risk you want to take? Vanguard gives you lots of no-commission funds with 1 day liquidity even in the mutua…

faith in EMH[1]: This is only true if you make a single lump sum investment into Vanguard without looking at the price.

Re: Vanguard Is Growing Faster Than Everybody Else Combined

#313

Post by VLM »

kgwgk wrote: post #302
ethbro wrote: post #279

Earlier quoted context omitted.

I think the question might have been what a "systemic mispricing of 0.1%" means. If the majority of the market is passively rebalancing, does the true value matter or does the weighting swamp it? I see how one would make money on arbitraging pre- and post-90s mandatory rebalancing by major passives. I'm less clear on how one arbitrages difference between the prices passives are investing at and a "true" price.

> passively rebalancing What does that mean?

In real estate you'd call it investing via a gentrification strategy. Lets say in a net inflow market where the net flow is going in and supply (of new stocks) isn't keeping up with demand, you buy company A B and C and greater supply/demand effects (plus inflation, I suppose) mean they all go up, A goes up 10%, B 20%, C 30% and your investment strategy is to own equal dollar values of A B and C.

Perhaps A is large caps, B is small caps, and C is metals, it don't really matter for the sake of discussion.

You started off with purchases equal to your 33% 33% 33% goal ratios but after a year of unequal growth you're overweight C and underweight A.

Active rebalancing is selling enough C and buying enough A to get roughly equal ratios of A:B:C.

Passive rebalancing is if you're contributing $5K IRA per year or whatever, dump all your contributions into underweight A. Or whichever is underweight at any time.

Basically if your position ratios don't match your goal ratios, if you're selling thats active rebalancing and if you're merely changing the ratio of what you buy because you're a net investor thats passive rebalancing.

Going back to the real estate analogy dumping money into purchasing a lot in a gentrifying neighborhood is an analogy for passive rebalancing. If you sold your best performing property to fund it, that analogy would be active rebalancing.

Re: Vanguard Is Growing Faster Than Everybody Else Combined

#314

Post by cmurf »

I imagine they must have some kind of stop loss strategy; there's a bunch of research comparing various strategies to buy and hold, and buy and hold is pretty much 2nd worst, with the worst being an overly aggressive stop loss (like sell everything at a 5% drop).

Re: Vanguard Is Growing Faster Than Everybody Else Combined

#315

Post by zeroer »

grzm wrote: post #294
matwood wrote: post #292

Earlier quoted context omitted.

> This is true any time you move brokerages, is it not? No. If you own the assets directly, and they are traded on the exchange (like the ETFs WF/Betterment use) they can be transferred around without triggering a sale event. Target date funds and the like would probably have to be sold. I have my tax advantage at VG and my taxable has been all over the place finally settling with CS for now.

Okay, you have me a little confused now :) I read my parent as saying that in order to move investments out of Wealthfront, you'll need to sell and pay capital gains. I read your comment saying this isn't necessarily the case. There seems to be some disagreement here. What am I misunderstanding? The ins and outs of investments and tax ramifications can sometimes seem very opaque to me, so I appreciate any education o…

I stand corrected. I thought they had their own mutual funds that they charge an expense ratio on, but I took a closer look at their site and it looks like they put you in third-party mutual funds from e.g. Vanguard and iShares. Since this is the case, you can just do a transfer-in-kind to another brokerage if you want to leave, and this is not a taxable event. (Sorry for my mistake!)

Re: Vanguard Is Growing Faster Than Everybody Else Combined

#316

Post by kgwgk »

rsync wrote: post #233
gabemart wrote: post #56

Earlier quoted context omitted.

I had assumed - perhaps incorrectly - that as more and more money is invested in index funds and similar passive vehicles, it becomes increasing easy to beat the market as an active trader. My thinking goes like this - as less money in invested actively, the market becomes less efficient at pricing. As the market becomes less efficient at pricing, it becomes easier to make money as an active trader. As it becomes eas…

"My thinking goes like this - as less money in invested actively, the market becomes less efficient at pricing." Wouldn't it be that the market becomes as efficient at pricing as the accuracy of index inclusion ? That is, we have replaced the widely varying performance and heuristics of active stock pickers with the more formulaic S&P 500 pickers ? Presumably that's a lot more efficient, but I suspect there is room f…

What do you mean by "pricing"? If there were only passive investors in the market, all the stocks would move together. Apple could announce that the next iPhone will be delayed until 2020 or Google could discover how to get energy from water and there would be no reaction in their stock price.

Re: Vanguard Is Growing Faster Than Everybody Else Combined

#317

Post by kgwgk »

ak217 wrote: post #51
stygiansonic wrote: post #44

Earlier quoted context omitted.

This doesn't answer your question directly, but Matt Levine has written some great articles, in particular, about index funds and their effect on the market. Here's one: [1] "Second: One of my little stock-market obsessions is that index funds free-ride on the work done by active investors. Someone needs to make decisions that allocate capital to businesses. A world in which everyone indexes, and in which no one thin…

This is an absolutely crucial point that is not discussed nearly enough in the context of passive investing. Thanks for the link, I didn't know Matt Levine had stated it so eloquently already. A tangentially related point is that membership in e.g. the S&P500 imparts a big financial advantage to companies for a somewhat arbitrary reason, due to passive investing.

That advantage can become a liability when the market goes down.

Re: Vanguard Is Growing Faster Than Everybody Else Combined

#318

Post by [deleted] »

tanderson92 wrote: post #269
quantumhobbit wrote: post #265

I seems like there should be an opportunity for active investors to make money off of all the passively managed money. All I can think of would be to take advantage of the margin of the index. For example buy stock #501 and a discount and sell when it crosses into the sp 500 since vanguard will prop up the price by buying it for tge index fund. Similarly shorting #499. I'm sure that the market has gotten more sophist…

Look here: https://personal.vanguard.com/us/funds/snapshot?FundIntExt=I... The Vanguard S&P500 index fund currently contains 511 stocks. Even the S&P500 index itself holds 505 stocks.

[deleted]

Re: Vanguard Is Growing Faster Than Everybody Else Combined

#319

Post by VLM »

ctkrohn wrote: post #296
hsitz wrote: post #272

Earlier quoted context omitted.

You say "A disbeliever in EMH should look to identify these managers and pay them some fee". In the next breath you say that even if the EMH is false "individuals investors should act as if it were true". This makes your post somewhat ambiguous; not so clear about which position you're advocating. How "plausible" is it that these managers are "impossible to identify ex ante."? Why is it plausible? "Impossible" seems…

Here's perhaps a better way to say what I'm getting at: identifying and investing with a manager that predictably outperforms a benchmark is just as difficult an intellectual challenge as constructing a portfolio that outperforms that same benchmark. Both of these tasks are so difficult as to be essentially impossible for an unsophisticated retail investor.

I'll throw you a better analogy, identifying and hiring an outperforming programmer should be much simpler than identifying and hiring outperforming investment managers because there is relatively little effect of chance on programming output and measurement of success is mostly objective.

Yet we know that hiring for programmers is utterly hopelessly broken beyond all belief, industry wide.

Therefore its very unlikely that people of a similar cognitive and training level that utterly failed at hiring programmers could possibly select outperforming investment managers given that being an even more difficult job. No one in HR or management is going to be selecting outperforming investment managers.

Its possible that someone outside HR and management is better at selecting the best programmers. Certainly plenty of advice from outsiders is given to hire more of coincidentally highly politically correct demographic group A or group B. Or perhaps ivy college admissions officers magically know how to pick future great programmers (LOL). Professors and college advisors might put forth a weak argument in their own favor. Still, money seems to talk and greed means management and HR, however awful they are at selecting programmers, none the less are the best skilled at it, regardless how low that skill level is.

Re: Vanguard Is Growing Faster Than Everybody Else Combined

#320

Post by kgwgk »

quantumhobbit wrote: post #265

I seems like there should be an opportunity for active investors to make money off of all the passively managed money. All I can think of would be to take advantage of the margin of the index. For example buy stock #501 and a discount and sell when it crosses into the sp 500 since vanguard will prop up the price by buying it for tge index fund. Similarly shorting #499. I'm sure that the market has gotten more sophist…

It's not obvious when a company is going to be added to an index. The strategy may work, but there are no guarantees.

https://www.indexologyblog.com/2015/07/07/inside-the-sp-500-...

https://www.usatoday.com/story/money/columnist/krantz/2013/0...

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