Index bubble?

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student5
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Joined: Wed Jan 06, 2016 8:07 pm

Index bubble?

Post by student5 »

Hi All,

I'm new to Bogleheads, but have been reading many posts and learning from them. It's been greatly helpful and encouraging to me. I have moved my portfolio from a financial adviser to Vanguard based on what I've learnt from the many missives on this forum. My current question is based on this article- http://www.cnbc.com/2016/01/14/watch-ou ... =103301093.

Can anyone comment on this?

Thanks,

Bill
mhalley
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Re: Index bubble?

Post by mhalley »

When I read the article I was struck by all of these phrases:
Could put pressure
Cold be aProblem
Problem may arise
Potential problem
This is unfamiliar territory
Vaguely right
Sounds like a bunch of vagueness to me.
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Phineas J. Whoopee
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Re: Index bubble?

Post by Phineas J. Whoopee »

My interpretation of the subtext:

Onoz! OMG! Onoz! OMG!

Where will my next sailboat payment come from?

They're about to repossess my riding lawnmower!

PJW

P.S. Oh, and welcome to the forum!
Last edited by Phineas J. Whoopee on Sat Jan 16, 2016 8:01 pm, edited 1 time in total.
Call_Me_Op
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Re: Index bubble?

Post by Call_Me_Op »

IMO, this is yet another attempt by a desperate financial services industry to disparage index funds.
Best regards, -Op | | "In the middle of difficulty lies opportunity." Einstein
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TheTimeLord
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Re: Index bubble?

Post by TheTimeLord »

I assume index ETFs have the potential to act the same as a crowded trade in an individual stock if everyone was to try to head for the door. Definitely has the potential for ugliness but usually real ugliness requires the presence of extreme leverage to make the momentum feed upon itself to the downside.
IMHO, Investing should be about living the life you want, not avoiding the life you fear. | Run, You Clever Boy! [9085]
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Phineas J. Whoopee
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Re: Index bubble?

Post by Phineas J. Whoopee »

TheTimeLord wrote:I assume index ETFs have the potential to act the same as a crowded trade in an individual stock if everyone was to try to head for the door. Definitely has the potential for ugliness but usually real ugliness requires the presence of extreme leverage to make the momentum feed upon itself to the downside.
Not if they're total market indices. Use those.
PJW
ogrehead
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Re: Index bubble?

Post by ogrehead »

This is a scaremongering sales pitch from overpriced, underperforming fund managers and high cost advisors who are getting squeezed out. The title is about a bubble, but the text is about flash crashes and ETF mispricing, neither of which really have anything to do with indexing.
carofe
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Re: Index bubble?

Post by carofe »

Basically, if an investor wants to sell an index fund as the market declines, the managers of the fund might have trouble selling some of the stocks in the fund.
Totally right. The index funds are intended for buy-and-hold strategies, tax efficiency, little turn over.
But in part because of the flow of money into index funds, the U.S. equities market has become more dominated by a handful of big technology stocks.
That's true. The Technology Industry is over-weighted in the total market index funds, because they are the biggest industry in the stock market in the US. If you are afraid of that you can tilt to value and/or add REIT.

Taking into account that a lot of actively managed funds have an internal index they create themselves, and I can't see how the flow of money towards the index funds are really going to affect the market. They only represent the 30% so far.
US Total Stock Market + Intermediate Term Bond. That's it.
sawhorse
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Re: Index bubble?

Post by sawhorse »

What a ridiculous article. Nothing but a weak sales pitch for pricey active management funds.
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Phineas J. Whoopee
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Re: Index bubble?

Post by Phineas J. Whoopee »

carofe wrote:...
That's true. The Technology Industry is over-weighted in the total market index funds, because they are the biggest industry in the stock market in the US. If you are afraid of that you can tilt to value and/or add REIT.
...
I've read the sentiment here before, not always about the same sector, but have never understood it.

If something is over-weighted, it must be relative to the correct weighting. Total-market indices, and the funds that love them, weight each company, and therefore each sector, as the market does.

If the market portfolio is over-weight something, then there must be a non-market portfolio which is correctly weighted, from which the market portfolio deviates.

What is the correctly weighted portfolio, and why is it more correct than market weight?

PJW
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TheTimeLord
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Re: Index bubble?

Post by TheTimeLord »

Phineas J. Whoopee wrote:
TheTimeLord wrote:I assume index ETFs have the potential to act the same as a crowded trade in an individual stock if everyone was to try to head for the door. Definitely has the potential for ugliness but usually real ugliness requires the presence of extreme leverage to make the momentum feed upon itself to the downside.
Not if they're total market indices. Use those.
PJW
Why? I would have thought the opposite.
IMHO, Investing should be about living the life you want, not avoiding the life you fear. | Run, You Clever Boy! [9085]
carofe
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Re: Index bubble?

Post by carofe »

Phineas J. Whoopee wrote:
carofe wrote:...
That's true. The Technology Industry is over-weighted in the total market index funds, because they are the biggest industry in the stock market in the US. If you are afraid of that you can tilt to value and/or add REIT.
...
I've read the sentiment here before, not always about the same sector, but have never understood it.

If something is over-weighted, it must be relative to the correct weighting. Total-market indices, and the funds that love them, weight each company, and therefore each sector, as the market does.

If the market portfolio is over-weight something, then there must be a non-market portfolio which is correctly weighted, from which the market portfolio deviates.

What is the correctly weighted portfolio, and why is it more correct than market weight?

PJW
I was just expressing an idea. But as you said, it is not technically over-weighted, it is just the weight the market gives it in the US. In the Total stock market index the technology is the sector with the biggest slice. Some people may not feel comfortable with that and prefer a more equally distributed risk among sectors. If you add some tilt to value and some REIT you can reduce the technology slice in your portfolio.
US Total Stock Market + Intermediate Term Bond. That's it.
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Phineas J. Whoopee
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Re: Index bubble?

Post by Phineas J. Whoopee »

Good, carofe, I'm glad we're on the same, if not page, then at least chapter. :happy

I accomplish the end by including international equities as 40% (OK, 37.5%, but the reason I did that was to go from 24/16 to 25/15 for the purpose of avoiding brain strain, and how much difference could such a small increment make, expectantly) of my more-risky assets.

PJW
Dirghatamas
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Re: Index bubble?

Post by Dirghatamas »

That article sounds scholarly but is really just fear mongering. It confuses "indexing" which we typically use for broad indices like US total market or International total market with very narrow asset classes.

There is one part of the article which is fair. It is true that while US has the most diversified stock market in the world (number of companies, number of sectors, industries etc), it is over-represented in some sectors and under represented in others.

By "over" and "under" I mean compared to the total world. For example, the % of US market in health-care and technology is MUCH higher than the world. At the same time, it is significantly lower in things like basic materials/mining, heavy industrials etc.

Some would argue that a key reason for US stock markets doing better than world average is this exact fact that healthcare and technology have been the fastest growing sectors in the last 10-20 years...so if you are comfortable with that bet and are comfortable that commodities, miners, heavy construction and industrials will never come back, you should be comfortable with US total market.

If you are not comfortable with that "tilt" and concentration, then the most obvious solution is to hold international index in a ratio that gives you world stock. This is what I do.

I am not arguing that you should do this or not. Simply that there is no rational reason to listen to the fear mongering in that article. Either you are diversified enough with a broad US index. In that case fine. If you want more diversification, go index international. In neither case do I see a great value in adding active (which was the point of the article).
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