Author Topic: S&P indexing is moronic right now  (Read 9925 times)

LongHaul

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S&P indexing is moronic right now
« on: November 10, 2017, 07:35:19 AM »
I have the opposite opinion of the current masses on Indexing (right now).  More than any other time in history that I can think of, almost everyone seems on one side of the boat in recommending and liking indexing.
In practice if you buy the S&P 500 it is like you are buying one massive US Company.  And if that Company is way overvalued your returns will stink until value catches up with the price.  And currently the S&P is a ripoff - especially with low GDP growth.  At something like 26x P/E you might have 7-9 years of 1% return per year while the downside could be 30-50% in the near term. 

Previous market bubbles saw individual and institutional investors excited over individual stocks.  Today indexes are all the rage.   I guess the koolaid tastes too great - until one's liver stops working.

I generally agree with indexing but at fair or undervalued levels.  Not today.
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hyten1

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Re: S&P indexing is moronic right now
« Reply #1 on: November 10, 2017, 07:42:34 AM »
for someone who doesn't want over exposure to individual companies through the typical s&p500 etf you can buy equal weight etfs

not saying the index are cheap or expensive, with equal weight etfs you get rid of the over exposure to "one/few" company problem

stahleyp

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Re: S&P indexing is moronic right now
« Reply #2 on: November 10, 2017, 07:43:58 AM »
I don't disagree that the S&P 500 is trading at a higher than average historical valuation. With that being said, I do think it's much better than most of the alternatives for the US large cap blend category. Valuations aren't dramatically higher today than the were in 2007...and the index still did just fine. I'm not saying the S&P 500 is the best investment option out there (it probably isn't) but it's way better than the typical mutual fund (let alone if you're paying an advisory fee on top of a mutual fund expense) if you want large cap US exposure...this is especially true once you factor in taxes.
« Last Edit: November 10, 2017, 08:20:01 AM by stahleyp »
Paul

Sullivcd

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Re: S&P indexing is moronic right now
« Reply #3 on: November 10, 2017, 07:54:21 AM »
If the index earns 140 next year, one estimate I found, you are making 5.4% on your investment compared to 2.4% if you buy ten year treasuries.

rb

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Re: S&P indexing is moronic right now
« Reply #4 on: November 10, 2017, 08:22:38 AM »
If the index earns 140 next year, one estimate I found, you are making 5.4% on your investment compared to 2.4% if you buy ten year treasuries.
That's a ridiculous comment. Why would you compare the index relative to bonds as opposed to other equities? And since when is it a good thing if your equities earn 3% more than treasuries?

Nomad

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Re: S&P indexing is moronic right now
« Reply #5 on: November 10, 2017, 08:52:54 AM »
In the past year or two, it has become a common refrain at financial independence blogs and related fora to push a 100% allocation to VTSAX, the Vanguard Total Stock Market Index.

Most of these 'pushers' are Millenials who weren't even around for the crash of '08, much less the collapse of the late 1990s tech bubble or the 16 year (16 year!) S&P bear market from 1966 to 1982. The members of the 100% equities/VTSAX club believe that they will win out in the long run (they naturally decline to define "the long run") because US equities have always gone up. But as investors in 1929 and the mid 1960s discovered, the "long run" can be very long indeed.

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Re: S&P indexing is moronic right now
« Reply #6 on: November 10, 2017, 09:10:25 AM »
In the past year or two, it has become a common refrain at financial independence blogs and related fora to push a 100% allocation to VTSAX, the Vanguard Total Stock Market Index.

Most of these 'pushers' are Millenials who weren't even around for the crash of '08, much less the collapse of the late 1990s tech bubble or the 16 year (16 year!) S&P bear market from 1966 to 1982. The members of the 100% equities/VTSAX club believe that they will win out in the long run (they naturally decline to define "the long run") because US equities have always gone up. But as investors in 1929 and the mid 1960s discovered, the "long run" can be very long indeed.

Despite the overvaluation, will the returns still be better than holding cash or bonds ?

tede02

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Re: S&P indexing is moronic right now
« Reply #7 on: November 10, 2017, 09:24:31 AM »
Many people also seem to mistakenly believe that indexing is somehow "less risky."  I don't think it's a bad strategy over a long time frame but a lot of retail investors are probably in for a nasty surprise.

Nomad

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Re: S&P indexing is moronic right now
« Reply #8 on: November 10, 2017, 09:28:46 AM »

Despite the overvaluation, will the returns still be better than holding cash or bonds ?

Over the next 50 to 100 years? Probably. But I suspect that most of us, lacking the genetics of Metusaleh, do not have that time horizon.

Many people also seem to mistakenly believe that indexing is somehow "less risky."  I don't think it's a bad strategy over a long time frame but a lot of retail investors are probably in for a nasty surprise.

They are, in my opinion, making the classic mistake identified by Ben Graham: Mistaking a conventional investment for a conservative one.

Liberty

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Re: S&P indexing is moronic right now
« Reply #9 on: November 10, 2017, 09:43:02 AM »
I think it's always very difficult to forecast the future... If you go back in the archives of this forum, you'll see people say similar things pretty much every year since 2011. "The new normal" used to be mentioned a lot, with the permanent stagnation and such... Even Fairfax stayed hedged for many years expecting low or negative returns. And since then the SP500 has more than doubled, so it's definitely not easy to know.

It'll depend on what interest rates and the economy do (and not just the US economy, since so many of the SP500 companies get a meaningful amount of their sales globally--another change to take into account when comparing with historical numbers), and it's also hard to compare historical metrics for the SP500 since it's not a static thing. Decades ago a lot of it might have been industrial/manufacturing companies with low margins and low ROE/ROIC, and today more of it might be composed of asset-light, high-margin, high ROIC/ROE companies (more software, more services, more medical, more branded CPG, etc). Does the index always deserve a static multiple or does that change over time too? \_(ツ)_/
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