Author Topic: S&P indexing is moronic right now  (Read 9926 times)

GregS

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Re: S&P indexing is moronic right now
« Reply #20 on: November 10, 2017, 10:30:56 AM »
In investing, a good plan you can stick to is better than a great plan you can't.

Indexing is an attempt to provide a good plan investors can stick to.  Few people have the time or skill to invest in individual names themselves.  Funds have proven their long term track record vs indexes is poor in general, and the average investor's return in the successful funds is terrible due to performance chasing.

Indexing brings more long term focus and discipline that, in theory, should allow more people to stick with it through corrections, especially when combined with dollar cost averaging.  Set and forget.  However, given how popular it is getting over the last few years, it hasn't been thoroughly tested.  Like, at all.  I doubt it ends much differently for the average person than any other strategy.


Cigarbutt

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Re: S&P indexing is moronic right now
« Reply #21 on: November 10, 2017, 11:49:17 AM »
Instructive.

Would add an opinion that the increasing market share of ETFs (now very significant) has had a tendency to reinforce the general upward trend and to decrease short term volatility. That's OK. A big question is how the typical investor will react when trends change. As GregS says, history offers some suggestions.

Would also add that the significant rise in synthetic replication ETFs has created a new potential risk, especially in the leveraged category. The risk is related to the opacity and lengthened financial intermediation process. It reminds me of the period when the market of credit default swaps on a specific underlying asset was actually much larger than the value of the underlying asset. I don't know exactly how this may play out if risk management is eventually tested but the 2008-9 period for the CDS market showed that price discovery may be a painful process when the true market value of an asset is difficult to appraise in a fire sale context even if the pool of assets is said to be over-collateralized. Ask AIG. Of course then, systemic risk was socialized. Who could have predicted that?

A word on ERP mentioned by Packer16 along the way. Probably not worth discussing but Damadoran has written a lot of interesting stuff on the topic. What I find particularly fascinating are not the numbers he comes up with but the actual "models" used. There is a relatively large consensus on historically realised ERP. But, I would humbly submit that, going forward (let's say for a relatively short term horizon like 10 or 15 years), you can hypothesize a number but need also to include a standard deviation that is much larger than the number.
« Last Edit: November 10, 2017, 12:27:15 PM by Cigarbutt »

clutch

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Re: S&P indexing is moronic right now
« Reply #22 on: November 10, 2017, 12:14:59 PM »
I think people only view indexing as buying the "entire market".

But you can also view indexing (market cap weighted) as piggy-backing the collective decisions made by active market participants.

stahleyp

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Re: S&P indexing is moronic right now
« Reply #23 on: November 10, 2017, 12:31:16 PM »
For the early retirement folks, they normally base their assumptions on the 4% rule. The 4% rule is successful (historically) under just about all market conditions. I believe it also worked if one retired on the eve of the Great Depression. Is it 100% fool-proof? No, but neither is stepping in your car either. However, the odds are very much in your favor. No all even assume 4%. Plenty of people assume worse and if markets get too bad they can also reduce expenses. You can live a pretty decent life on very little money (trust me on that).

I do find it odd that folks are so sure that future returns will be so much lower than history. I'm sure people were just as confident of their assumptions back in 1979...at least Businessweek was. Who knows, with all the technological advances things could still be cheap. That said, there will probably always be bumps along the way - some much bigger than others.
Paul

hobbit

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Re: S&P indexing is moronic right now
« Reply #24 on: November 10, 2017, 12:39:25 PM »
indexing does not scale well at all. it is a solution only if a relatively small number of people do it. Once it gets adopted en masse , it creates bubbles .

stahleyp

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Re: S&P indexing is moronic right now
« Reply #25 on: November 10, 2017, 12:46:50 PM »
indexing does not scale well at all. it is a solution only if a relatively small number of people do it. Once it gets adopted en masse , it creates bubbles .

Do you have evidence of this?
Paul

clutch

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Re: S&P indexing is moronic right now
« Reply #26 on: November 10, 2017, 12:50:58 PM »
indexing does not scale well at all. it is a solution only if a relatively small number of people do it. Once it gets adopted en masse , it creates bubbles .

It's not so clear. Imagine a world where there are 100 people and only one person is an active market participant. The rest of 99 people follows this person's capital allocation a la "indexing". Is this equivalent to a bubble in the overall market?

Cameron

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Re: S&P indexing is moronic right now
« Reply #27 on: November 10, 2017, 01:11:37 PM »
indexing does not scale well at all. it is a solution only if a relatively small number of people do it. Once it gets adopted en masse , it creates bubbles .

It's not so clear. Imagine a world where there are 100 people and only one person is an active market participant. The rest of 99 people follows this person's capital allocation a la "indexing". Is this equivalent to a bubble in the overall market?

The percentage of people participating doesn't matter, if those 99 people are indexing because they heard some billionaire tell them to do so without regard to the fundamentals is that any different than any other bubble we have had, its easy to tell people to index when we are in a bull market.

There is a reason that ETF's and Index funds are now regarded as shadow banking, its nothing more than a glorified money market fund. The money can leave just as fast as it came in.

stahleyp

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Re: S&P indexing is moronic right now
« Reply #28 on: November 10, 2017, 01:19:09 PM »
From inception, a $10,000 investment in VFINX would have turned into $751,983 (and $827,396 in the actual index). The average large blend fund comes in at $624,918. This is all before taxes, too.  Also at a time when markets were, allegedly, less efficient.
Paul

Cigarbutt

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Re: S&P indexing is moronic right now
« Reply #29 on: November 10, 2017, 01:37:06 PM »
"Do you have evidence of this?"
Trying to look at this objectively with data.

The growth in ETFs has been matched to some degree by investors getting out of mutual funds.
So, in a way, what we see may just be a new distribution of the same pool of investors.
However, some numbers suggest that, overall, the level of "passive" investing is on the rise.
Nothing wrong with that if guiding lights are rational and act based on fundamentals.
The inherent risk is that crowd psychology associated with passivity can go both ways.

In terms of evidence, have you been in a moving crowd recently?
Better hope that the crowd is moving in the right direction.
https://www.amazon.ca/Crowd-Study-Popular-Mind/dp/1773230190/ref=sr_1_3?s=books&ie=UTF8&qid=1510349533&sr=1-3&keywords=the+crowd+le+bon

Data from GS:

http://www.goldmansachs.com/our-thinking/public-policy/directors-dilemma-f/report.pdf

Having said all that, if your time horizon is 20 years or more, with time, these "crowd" issues become progressively inconsequential.