Spreading the Risk - World Stock versus S&P 500?

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SmilerUK
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Spreading the Risk - World Stock versus S&P 500?

Post by SmilerUK »

Hello Glorious Bogleheads! :-)

Always love everything I've gained from this forum. The knowledge is intense! Thank you!

I have a question...

I've put around 30% of my equities into the S&P 500, and 70% into MCSI World Shares.

So, 30% exposure to US stocks, and 70% to global stocks (which obviously also contains a big chunk of US stocks!).

Question...

The S&P 500 has always recovered after a crash within X months/years historically.

Is the same true for global markets?

I know that individually some markets, such as the NIKKEI, haven't. But overall, do they all have the same medium to long term bullish trend?

I'm based in the UK, so prefer that global exposure, but not sure if it's historically sound!

Thank you, genii! :dollar
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vineviz
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Re: Spreading the Risk - World Stock versus S&P 500?

Post by vineviz »

If you define "crash" as a 10% drop in a single calendar month, this has happened to MSCI World ex US about 16 times since 1970.

The average time it's taken to regain the pre-crash high (on a total return basis) is about about 12 months. The majority of the time it's taken less than six months, but in two cases it took 24 or 25 months.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
UpperNwGuy
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Re: Spreading the Risk - World Stock versus S&P 500?

Post by UpperNwGuy »

This is a good example of the type of question investors should be asking BEFORE investing.
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SmilerUK
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Re: Spreading the Risk - World Stock versus S&P 500?

Post by SmilerUK »

Thank you, @vineviz. Incidentally, where are you getting those summary stats?

And, in a related newbie question, why would anyone invest in an index such as the Dow Jones?

I know it's a dumb question, so please don't bash me too much.

Unlike other market indices, it took 15 years to recover to base line at one point (versus other weighted indexes, such as the S&P).

So my dumb question is why would people bother with it, or do they just presume "the worst is over"?

Thank you! :sharebeer :sharebeer
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nisiprius
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Re: Spreading the Risk - World Stock versus S&P 500?

Post by nisiprius »

SmilerUK wrote: Mon Oct 29, 2018 6:40 pm...And, in a related newbie question, why would anyone invest in an index such as the Dow Jones?...
I strongly suspect that you are looking at price indexes, not total return indexes.

Point #1: very few people do invest in the Dow Jones Industrial Average DJIA. I only know of one index fund/ETF that tracks the DJIA, DIA. It has total assets of $21 billion. That ain't hay, but it doesn't compare to investments in the S&P 500 ($250 billion in SPY + $460 billion in Vanguard 500 index + many others), or Total Stock Market index funds ($750 billion in Vanguard Total Stock Market Index Fund alone).

The Dow Jones Industrial Average is frequently trashed. It's unscientific, it doesn't follow the methodology laid out in 1922 by Irving Fisher in The Making of Index Numbers. However, it continues to be cited because of continuity, it's been calculated the same way for longer than any other stock market average. And despite in theory being awful, in practice it really isn't such a bad measure of the market as a whole.

Point #2: In total return, the Dow, as embodied in DIA, hasn't been hugely different from the S&P 500 and by some measurements might be superior.
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vineviz
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Re: Spreading the Risk - World Stock versus S&P 500?

Post by vineviz »

nisiprius wrote: Mon Oct 29, 2018 6:56 pm Point #1: very few people do invest in the Dow Jones Industrial Average DJIA. I only know of one index fund/ETF that tracks the DJIA, DIA.
One of the ETFs I use is technically a Dow Jones Industrial Average fund: Invesco Dow Jones Industrial Average Dividend ETF (DJD). It weights the 30 DJIA components by dividend yield.

Mostly I use it because there is no transaction fee at my brokerage (and the ER is a pretty reasonable 7bps) so it is a relatively inexpensive vehicle for investing small amounts of cash. It also has a relatively low correlation with my core small-cap value holdings, but except for the lack of transaction fee I wouldn't necessarily recommend it as a core fund.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
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Re: Spreading the Risk - World Stock versus S&P 500?

Post by asset_chaos »

SmilerUK wrote: Mon Oct 29, 2018 5:59 pm I've put around 30% of my equities into the S&P 500, and 70% into MCSI World Shares.

So, 30% exposure to US stocks, and 70% to global stocks (which obviously also contains a big chunk of US stocks!).

I'm based in the UK, so prefer that global exposure, but not sure if it's historically sound!
If you're from the UK, why are you substantially over-weighting US stocks?
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Re: Spreading the Risk - World Stock versus S&P 500?

Post by Valuethinker »

SmilerUK wrote: Mon Oct 29, 2018 5:59 pm Hello Glorious Bogleheads! :-)

Always love everything I've gained from this forum. The knowledge is intense! Thank you!

I have a question...

I've put around 30% of my equities into the S&P 500, and 70% into MCSI World Shares.

So, 30% exposure to US stocks, and 70% to global stocks (which obviously also contains a big chunk of US stocks!).
So you have 55% of 70% say 38.5% + 30% US - 68.5% US or about a 13% overweighting (a little more, in fact).

What's the logic?
Question...

The S&P 500 has always recovered after a crash within X months/years historically.
Oh indeed. We don't have an S&P 500 for the 1930s but the market fell in 1929, recovered, collapsed again, recovered again and then collapsed in 1938. Sometime in the early 1950s it passed its 1929 level. In the period 1966-1980 it oscillated down and up, never again breaching 1000 (on the Dow Jones) and losing about 40% in real terms due to inflation. There was a similar crash after 1872 and I have seen some numbers which suggest it did not recover until the 1890s.

So yes, markets always recover after X months or years. Always. So far. But X can be quite a long time.
Is the same true for global markets?
The US is the top performing market of the last 117 years other than Australia. So no, they have not done as well. Germany, Japan etc. "recovered" from 1945 quite well. Problem is if you owned them in 1939, you got wiped out.
I know that individually some markets, such as the NIKKEI, haven't. But overall, do they all have the same medium to long term bullish trend?

I'm based in the UK, so prefer that global exposure, but not sure if it's historically sound!

Thank you, genii! :dollar
Stocks will go up in the long run as long as stock market Anglo Saxon financial capitalism survives. However the long run can include a slump longer than you can sustain. The period 1980-2000 was, in retrospect, quite a unique period in the history of stock markets.

It's worth reading Benoit Mandelbrot The Misbehaviour (Misbehavior) of Markets. And also the early Nicolas Taleb books (annoying though he can be). Stock markets are much more volatile than our theoretical assumptions would predict. *Much* more volatile.
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SmilerUK
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Re: Spreading the Risk - World Stock versus S&P 500?

Post by SmilerUK »

I love this forum. Thank you for your insights.

To answer several people who stated that I'm overweighted.

Yes, I'm aware of this.

I have 30% in S&P 500 and 70% MCSI World Shares.

So, as @Valuethinker states, that *really* equates to around 70% US and 30% world.

You asked what's the logic?

My logic is that the US has always been the stronger and more stable market. Certainly more than the UK or even global markets.

So I'm trying to spread the risk.

Both are also hedged back to GBP for stability (at a cost!).

Please do let me know if my thinking is flawed... it often is!

(PS. @nisiprius -- It's great to know that my assumption wasn't totally flawed! Thank you! :sharebeer )
Ron Scott
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Re: Spreading the Risk - World Stock versus S&P 500?

Post by Ron Scott »

SmilerUK wrote: Tue Oct 30, 2018 8:13 am
You asked what's the logic?

My logic is that the US has always been the stronger and more stable market. Certainly more than the UK or even global markets.

So I'm trying to spread the risk.
Good thinking!
Retirement is a game best played by those prepared for more volatility in the future than has been seen in the past. The solution is not to predict investment losses but to prepare for them.
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nedsaid
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Re: Spreading the Risk - World Stock versus S&P 500?

Post by nedsaid »

nisiprius wrote: Mon Oct 29, 2018 6:56 pm
SmilerUK wrote: Mon Oct 29, 2018 6:40 pm...And, in a related newbie question, why would anyone invest in an index such as the Dow Jones?...
I strongly suspect that you are looking at price indexes, not total return indexes.

Point #1: very few people do invest in the Dow Jones Industrial Average DJIA. I only know of one index fund/ETF that tracks the DJIA, DIA. It has total assets of $21 billion. That ain't hay, but it doesn't compare to investments in the S&P 500 ($250 billion in SPY + $460 billion in Vanguard 500 index + many others), or Total Stock Market index funds ($750 billion in Vanguard Total Stock Market Index Fund alone).

The Dow Jones Industrial Average is frequently trashed. It's unscientific, it doesn't follow the methodology laid out in 1922 by Irving Fisher in The Making of Index Numbers. However, it continues to be cited because of continuity, it's been calculated the same way for longer than any other stock market average. And despite in theory being awful, in practice it really isn't such a bad measure of the market as a whole.

Point #2: In total return, the Dow, as embodied in DIA, hasn't been hugely different from the S&P 500 and by some measurements might be superior.
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Silly us, we were told that you got better diversification with 500 stocks rather than 30. Perhaps we should invest in the so-called Diamonds that track the Dow 30 rather than the S&P 500. I am joking a bit here, but not by too much. My silly 15-18 individual stocks over 15 year periods have about tracked the indexes. This is, of course, time period dependent. Sometimes my stocks beat the averages a tiny bit, sometimes they trail, again depending upon the time period. I did some googling around a few months ago and the articles I found indicated that the S&P 500 had the better performance than the Dow 30. So that is also dependent upon the time period you pick.

My standard advice still holds. Obviously the more stocks you own, the less single stock risk you have. The more stocks you have, the less volatile the portfolio. Of course, you get to a point of diminishing returns. Indexing, particularly if you use the better indexes like the S&P indexes, will screen out the worst stocks. I define the better indexes as the ones that utilize some sort of screening for quality. But even the "Total" Stock Indexes will sample the Micro-Caps and will not invest in the frontiers of the "Wild West" like Pink Sheets, the NASDAQ Bulletin Board, the Vancouver Stock Exchange. A market cap weighting ensures a tilt towards the largest and most successful companies.

So I would recommend an All-World Stock Index over the S&P 500. Half of it will still be US Stocks but you get the very broad diversification that investors should seek. A core belief of mine is that broad diversification is better than narrow diversification. Spread those risks.
A fool and his money are good for business.
Topic Author
SmilerUK
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Re: Spreading the Risk - World Stock versus S&P 500?

Post by SmilerUK »

Ron Scott wrote: Tue Oct 30, 2018 8:22 am
SmilerUK wrote: Tue Oct 30, 2018 8:13 am
You asked what's the logic?

My logic is that the US has always been the stronger and more stable market. Certainly more than the UK or even global markets.

So I'm trying to spread the risk.
Good thinking!
That may be my first Boglehead compliment! :-D

I feel I've accomplished something! Thank you! :sharebeer
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