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The Growing Peril of Index Funds: Too Much Tech

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Re: The Growing Peril of Index Funds: Too Much Tech

#61

Post by whack »

avar wrote: post #52
whack wrote: post #51

Earlier quoted context omitted.

Even if the average returns and risk are identical for each security individually, you can minimise your portfolio risk by investing equally across many different industries. If a downturn were to occur, different securities in a single industry will be much more correlated, as compared to different securities across different industries.

Yes, that makes sense. But that's entirely unrelated to what I'm pointing out here. (Some of) the article is making the argument that investors should decide for themselves how over- or undervalued certain segments of the economy are. So on one hand you'd have a diverse market cap weighted index where you buy into stocks representing the proportional to their portion of the economy. On the other hand you might think…

I'll be honest and admit that because of the WSJ paywall, I wasn't able to read the entire article. If an actively-managed-fund with much higher fees is trying to convince people that they can beat the market by cutting down on tech stocks, I agree with you that's BS.

However, if a passively-managed-fund with similar fees is claiming that you can lower your portfolio-risk by investing equally across many industries, that's an argument I find much more convincing. I had actually not considered this argument before, which is why I found the article interesting for bringing it up (perhaps tangentially).

Re: The Growing Peril of Index Funds: Too Much Tech

#62

Post by ataturk »

perl4ever wrote: post #54
pedrocr wrote: post #41

Earlier quoted context omitted.

>Equal weighted funds are more risky (volatile), but have higher historic returns than market cap weighted funds. But do they outperform after risk adjustment? I doubt it and if not you're better off just leveraging a bit to your desired level of risk. The point of passive investing isn't that the trading strategy can be automated, the point is to say "I want to grab exactly the average return of the market every yea…

I don't think it makes sense to equate risk with volatility. Say I have $1M. If I buy a cap weighted S&P 500 fund, I have about $40,000 in Apple, because it's about 4%. If I then switch to an equal weighted S&P 500, that $40K will be split up between 20 stocks with about $2K each. That is clearly more diversified with respect to company specific risk. It may or may not be worth it given increased fees, but you can't…

The S&P fund or any index that spreads out your risk is pretty much always your best bet. If you hold a single stock, say AAPL, and that one stock slides for any reason, you don't have enough years to make it all back. We regular folk who do not buy options as insurance can only spread out our risk as widely as possible. Institutions and firms with billions of dollars can do fancy things to protect themselves.

Re: The Growing Peril of Index Funds: Too Much Tech

#63

Post by harrisjt »

brndnmtthws wrote: post #9

This is an inherent property of all market cap weighted indexes. An alternative approach is equal weighted indexes, which have historically outperformed market cap weighted indexes. There's no free lunch though: this is a case of your typical risk/reward tradeoff. Equal weighted funds are more risky (volatile), but have higher historic returns than market cap weighted funds. Some of them feature equal weighting acros…

50% in crypto? Good luck man, that sounds very risky.

Re: The Growing Peril of Index Funds: Too Much Tech

#64

Post by mitchdoogle »

harrisjt wrote: post #63
brndnmtthws wrote: post #9

This is an inherent property of all market cap weighted indexes. An alternative approach is equal weighted indexes, which have historically outperformed market cap weighted indexes. There's no free lunch though: this is a case of your typical risk/reward tradeoff. Equal weighted funds are more risky (volatile), but have higher historic returns than market cap weighted funds. Some of them feature equal weighting acros…

50% in crypto? Good luck man, that sounds very risky.

It could easily have started out as 5% in crypto a year ago and just recently grew to be 50%.

Re: The Growing Peril of Index Funds: Too Much Tech

#65

Post by perl4ever »

pedrocr wrote: post #58
perl4ever wrote: post #53

Earlier quoted context omitted.

I don't think it's a good idea to guess what's over/undervalued. But equal weighting different industries is not quite the same thing. No matter how you weight things (by capitalization, by company, by industry, whatever) you are making assumptions about correlations. No dogma can tell you which is right a priori, because correlations change, especially in crises when it matters most. Also...the total market, cap wei…

>If you have $100B, say, you can't put it in a stock that's currently valued at $1B. But if you have $1000, you don't have that constraint. Your argument is that there is a mispriced security somewhere that can be bought at a low price. There is currently only 1B$ of it available and so the professional manager with 100B$ to spend just doesn't bother to pick up that money. But you with just 1000$ can do it instead. W…

Every cap weighted fund has a cutoff where it omits companies that are too small. But even the stocks that are barely large enough to include don't contribute much to returns.

I don't think the small cap stock is "mispriced". Rather, it has a different value for different investors, and the market price is a compromise. That means different investors should probably have a different amount of it in a portfolio.

It's an abuse of theory to claim that since the market is efficient, you should ignore the things that make you different from the total market. For example, suppose you invest in tax-exempt investments when you are in a low tax bracket, or even when you are investing in a tax free account. Is that optimal because markets are efficient? Of course not. Because the value set by the market does not take into account the way in which you differ.

The reason to believe in index investing is because you understand your own lack of knowledge and are honest about it. That's a good thing, but it doesn't justify pretending you don't know things that you do know. People seem to have the same issue with probability, I find.

Re: The Growing Peril of Index Funds: Too Much Tech

#66

Post by perl4ever »

pedrocr wrote: post #57
perl4ever wrote: post #54

Earlier quoted context omitted.

I don't think it makes sense to equate risk with volatility. Say I have $1M. If I buy a cap weighted S&P 500 fund, I have about $40,000 in Apple, because it's about 4%. If I then switch to an equal weighted S&P 500, that $40K will be split up between 20 stocks with about $2K each. That is clearly more diversified with respect to company specific risk. It may or may not be worth it given increased fees, but you can't…

>you can't just dogmatically say it's equivalent to cap-weighted plus leverage I'm saying it's strictly better to do cap-weighted plus leverage. That's what financial theory tells us anyway, that the best portfolio is whatever mix between risk free cash and the same mix as all the assets in the world. Deviating from that brings you farther away from the efficiency frontier. Now for this to hold EMH must hold and we k…

I don't think there's a theory that tells you risk is volatility. Isn't that more of an axiom? And I have the distinct impression it was chosen because it leads to tractable math. I'm not endorsing a specific alternative definition of risk, but I was suggesting risk is clearly multidimensional and intimately related to predicting what will be correlated in the future.

Re: The Growing Peril of Index Funds: Too Much Tech

#67

Post by brndnmtthws »

mitchdoogle wrote: post #64
harrisjt wrote: post #63

Earlier quoted context omitted.

50% in crypto? Good luck man, that sounds very risky.

It could easily have started out as 5% in crypto a year ago and just recently grew to be 50%.

Closer to this, but with different numbers.

Re: The Growing Peril of Index Funds: Too Much Tech

#68

Post by module0000 »

astrange wrote: post #29
module0000 wrote: post #27

The growing peril is only for long positions . Peril for long positions is profit for short positions. Seeing this article advising "reducing your exposure to tech by selling your tech stocks" assumes that you have no choice to participate other than buying . They are looking at half of the market(buy-side) and ignoring the equal-sized selling-side of the market. Stocks going down == Short the market. Stocks going up…

Are you suggesting an index fund that passively shorts everything? I don’t think that’s in my 401k. (I use Hedgeable which is the most complex robo-advisor, but as they say they hedge long instead of using options. Please sign up, I’d be inconvenienced if they went out of business!)

I'm suggesting if the article has any conviction for moving out of tech, then the smart play is not to move out but to short. The language of "reduce exposure" is not what you should hear from your advisor/broker. You don't reduce exposure, you reduce risk by opening short hedges or opening short outright. If these people are tied up long in QQQ(the article references this instrument, which is an amateur hour NQ100 ETF), then risk of tech bust is managed by shorting NQ as a hedge.

Re: The Growing Peril of Index Funds: Too Much Tech

#69

Post by givehimagun »

yborg wrote: post #37
rsync wrote: post #34

Earlier quoted context omitted.

"Theoretically, is not another growing peril of indexing that it removes incentives for companies to behave well or outperform, since if they're part of an index their shares will be bought automatically by retirement plans and investors anyway, irregardless of performance or competency?" You don't have to look far to find this ... a great example is Restoration Hardware, which very recently borrowed money to buy bac…

The crowd's wisdom extends to the indexer. Another issue with these index-linked funds is that they create a single point of failure, i.e. the few people at Russell that curate the index. It would be very very easy for someone to, um, externally compensate an individual or two at Russell to include a dog in the index for the purpose of a massive stock pop. Similar to the bond-rating agency fiasco(s) leading up to the…

I think you hit something right on the head. The index itself is defined by a formula that we generally agreed upon. We only need to have more choices of formulas...Russell is capitalization based - maybe that is too simple? Can we make a Hacker News 5000?

Re: The Growing Peril of Index Funds: Too Much Tech

#70

Post by brokensegue »

mitchdoogle wrote: post #64
harrisjt wrote: post #63

Earlier quoted context omitted.

50% in crypto? Good luck man, that sounds very risky.

It could easily have started out as 5% in crypto a year ago and just recently grew to be 50%.

doesnt change how risky it is
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