Consumer Staples > Total Index?

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invest0
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Consumer Staples > Total Index?

Post by invest0 »

Obviously a bit of clickbait in this title, for this audience. :)

But this blog struck me as interesting:

http://www.millennialinvest.com/blog/20 ... les-part-1
http://www.millennialinvest.com/blog/20 ... es-part-ii

and

http://www.millennialinvest.com/blog/20 ... ng-is-good

I think at least most of us would agree with the notion of "boring is good" as indexers. But looking at the last 50 years, it seems that the consumer staples sector has both appeared to be the least risky (basically always recovering from a bear within a year), and the highest performing of all the sectors by a good deal.

That in mind - is there something amiss here? Is it really less/more risky than VTI? Does it belong in an asset allocation as a tilt, or even replacement of total index?
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Phineas J. Whoopee
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Re: Consumer Staples > Total Index?

Post by Phineas J. Whoopee »

Proposition: Consumer Staples > Total Index
Proof: Consumer Staples is a subset of Total Index
Conclusion: Consumer Staples < Total Index

The proposition is false.

Proposition: Patrick O'Shaughnessy's blog at millennialinvest.com is fit to be used as a guide for tilting away from or even replacing the total market.
Proof: It's a blog with the word millennial in its name!
Conclusion: Patrick O'Shaughnessy's blog at millennialinvest.com is unreliable as a guide for tilting away from or even replacing the total market.

The proposition does not admit of a true or false value, but should be approached with extreme caution.

(di)Lemma 1: Past performance does not guarantee future results.

(di)Lemma 2: Using the present tense when only the past tense applies can be hazardous to your wealth.

PJW
steve_14
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Re: Consumer Staples > Total Index?

Post by steve_14 »

You're definitely demonstrating why the impulse to "tilt toward the past", as so many investors do, is misguided. The market just doesn't care about the historical data. It cares about future events. Imagine you're a stock investor. Would you value a company based on past data patterns?
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Taylor Larimore
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Re: Consumer Staples > Total Index?

Post by Taylor Larimore »

Investo:

I used your link to the article by Patrick O'Shaughnessy on how to beat the market with Consumer Staples.

Patrick O'Shaughnessy is the manager of three funds. Morningstar ranks his three funds for a maximum of three years and only for after-tax performance. This is each O'Shaughnessy funds category ranking:

O'Shaughnessy Enhanced Dividend Fund (OFDAX): Bottom 88%
O'Shaughnessy All Cap Core Fund (OFAAX): Bottom 73%
O-Shaughnessy Small-Mid Cap Growth Fund (OFMAX): Bottom 77%

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle
Beliavsky
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Re: Consumer Staples > Total Index?

Post by Beliavsky »

This is the "low volatility anomaly" (Google it) in another guise. Even Vanguard has a "Global Minimum Volatility Fund".
Last edited by Beliavsky on Thu Jul 24, 2014 7:18 am, edited 1 time in total.
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JoMoney
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Re: Consumer Staples > Total Index?

Post by JoMoney »

In Jason Zweig's commentary of the book "The Intelligent Investor" he brings up James Patrick O'Shaughnessy.
Apparently, he's been in the business of selling fund strategies for awhile now. In his 1996 book "What Works On Wall Street" he showed various strategies that back-tested well to "beat the market" including such strategies as buying a basket of 50 stocks with the highest one year returns (very similar to "Momentum" strategies). He also brought up other strategies like the "Dogs Of The Dow" strategy. He went as far as to obtain U.S. Patent No. 5,978,778 for his “automated strategies” and launched a group of four mutual funds:
O’Shaughnessy Cornerstone Growth
O’Shaughnessy Cornerstone Value
O’Shaughnessy Aggressive Growth
O’Shaughnessy Dogs of the Market
None of those funds exist today, 2 of them were shutdown in early 2000 and the others got merged into other mutual funds.
When people actually try to use strategies that would seem to have worked well in the past they often underestimate the problems they may face going forward, often the market impacts of their decisions to implement them might be their downfall, especially when an idea gets popular enough books are being written about it. The market represents the aggregate decisions of all the participants acting and reacting together. Just because something may have worked in the past doesn't mean it will persist going forward.
Jason Zweig, Commentary in The Intelligent Investor wrote:O’Shaughnessy’s shareholders might have been less upset if he had given his book a more precise title—for instance, What Used to Work on Wall Street . . . Until I Wrote This Book
I found it interesting that there are Mutual Funds out there that have actually tried to use the "Dogs of the Dow" strategy, HDOGX and HBFBX try to create a fund that holds a mixture of cash/bonds and uses the Dogs Of The Dow strategy for the equities. The Vanguard Balanced Fund (VBINX) which uses a 60/40 Total Stock market and Total Bond market strategy has performed much better:Image
Last edited by JoMoney on Thu Jul 24, 2014 7:27 am, edited 1 time in total.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham
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JoMoney
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Re: Consumer Staples > Total Index?

Post by JoMoney »

FWIW,
Here's a chart of the total return on Vanguard's Total Stock Market over the life of XLP "Consumer Staples Select Sector SPDR ETF" one of the older index funds out their tracking Consumer Staples: Image
The performance over time has been "period dependent", sometimes outperforming - sometimes not. I'm not willing to guess what it will look like over the period that is my investment horizon.
The fund is very concentrated, currently holding almost 30% of its assets in the top 3 stocks. Some of those stocks have been among the greatest performers over the historical record, but they've also been lousy performers at various sub-periods that have been quite long.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham
pkcrafter
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Re: Consumer Staples > Total Index?

Post by pkcrafter »

Invest0, most of the replies are somewhat negative, so I'll offer a little different view.

First, let's separate O'Shaughnessy from consumer staples. Most people in the business have an agenda of promoting and selling, so I would not send much time reading O'Shaughnessy or any other gurus.

If we just look at Vanguard's consumer staples ETF, VDC, we see a fund that has done well with lower 10 year volatility (10 vs TSM 16) and lower drawdown in 2008 (16 vs TSM 37). Consumer staples (CS) has something in common with bonds--it is a defensive investment and investors tend to move out of more volatile funds and into CS in falling markets. Of course, the actual protection is much less than bonds, but it's there to some degree. The reason is companies in CS tend to be those that produce products that are needed by consumers no matter the condition of the market or the economy.
That in mind - is there something amiss here? Is it really less/more risky than VTI? Does it belong in an asset allocation as a tilt, or even replacement of total index?
No, nothing amiss. VDC has lower volatility than total stock market, so if that's what you mean by less risky, then yes. It might be included in a risk averse retirees portfolio, but I don't think anyone would recommend it as a replacement for TSM. I don't own VDC.

Paul
When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.
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invest0
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Re: Consumer Staples > Total Index?

Post by invest0 »

This is fantastic, thanks everybody. :)

I was skeptical myself, but honestly just wasn't seeing a way to pick this apart.
Beliavsky
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Re: Consumer Staples > Total Index?

Post by Beliavsky »

pkcrafter wrote:Invest0, most of the replies are somewhat negative, so I'll offer a little different view.
I didn't mean to be negative. I think the OP has stumbled onto the fact that low-volatility stocks and stock sectors have historically offered higher Sharpe ratios, and often even higher returns than high-volatility stocks and stock sectors. Overweighting low-volatility sectors of the market through low-cost ETFs may be a good strategy.
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