measurement of success of investment(s)

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TD2626
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Re: measurement of success of investment(s)

Post by TD2626 » Sun Oct 08, 2017 12:27 am

triceratop wrote:
Tue Sep 19, 2017 2:24 pm
patrick013 wrote:
Tue Sep 19, 2017 2:17 pm
triceratop wrote:
Tue Sep 19, 2017 1:23 pm
patrick013 wrote:
Tue Sep 19, 2017 1:19 pm
triceratop wrote:
Tue Sep 19, 2017 1:08 pm


What do you mean?
The market portfolio is the 500 best stocks in the country based
on large cap performance. A particular fund has an index which
is unique to that fund. Like a dividend fund based on a dividend
index perhaps, it's benchmark. That's all.
That is absolutely not the market portfolio for the US, and absolutely-certainly-100% not the market portfolio for global equities.

The market portfolio for the US is a Total Stock Market Index (Dow Jones, CRSP, etc)

The market portfolio for equities is a Total World Stock Market Index (like the one Vanguard's fund holds)

Those are facts, not opinions.
Nope, then we differ. Walk into any advanced finance class and see what
they say. The US market portfolio is the S&P 500 not a proprietary index.
Not talking about small caps, global, REIT's or anything else. It's OK to differ.
Vanguard doesn't decide that. I know Fama would like TSM to be the market
portfolio also, but the 500 is most commonly used. Check your beta calculation,
but that can be deselected also. :)
"The US market portfolio is the S&P 500 not a proprietary index"

What? :shock: Do you know what the "S&P" in "S&P 500" stands for? It is the proprietary name for the corporation which constructs the index.

The US market portfolio must include US small caps and REITs. You're simply mistaken.

(It is true that the US market portfolio will not include global stocks, but i didn't claim that it would)

"I know Fama would like TSM to be the market portfolio also, but the 500 is most commonly used. "

Not to make an appeal to authority, but just to be clear you're stating that a Nobel laureate in economics is incorrect about what the market portfolio is? And you're still confident in your assertions?

You are disseminating falsehoods.
I largely agree with Triceratop. An investor who invests in domestic and international stock (at near cap weight) should consider Total World as a very reasonable benchmark. (Would you benchmark against Total World's return in US dollars or SDRs, though?)

It's worth noting that TSM and SP500 have had a historical correlation of 0.99, since TSM is mostly large caps (source: https://www.portfoliovisualizer.com/bac ... ion2_2=100).

Also, if you want to be "traditional" and use an index that has fewer stocks than the total market, yet is widely quoted, why not go with the Dow 30? I feel that it, like the S&P 500, is a fairly archaic index that is interesting historically but has probably been outmoded by TSM or Total World... but I wonder what S&P 500 proponent's reasons are for not using the Dow 30.

A few other random things:
1. Vanguard Life Strategy funds may be reasonable to benchmark against. I believe Nedsaid does this (here: viewtopic.php?f=10&t=170697&start=50#p3421515)

2. A benchmark is just a benchmark. If you have a portfolio that is not identical to the benchmark, then you can expect tracking error over short timescales and even over several year timescales. Failing to keep up after many decades, though, is what one is trying to avoid.

3. If you benchmark against Vanguard Total World and have a portfolio that is 100% Vanguard Total World, then that isn't really a benchmark... that's more a tautology. One can't benchmark the portfolio to itself. If you do this, and your portfolio drops 99%, you could claim that you "didn't trail your benchmark"! In this case, looking at a few other globally-diversified 100% equity options and seeing if they are broadly keeping pace could be reasonable.

4. Maybe a "primary benchmark" / "secondary benchmark" framework could be helpful for some?

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patrick013
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Re: measurement of success of investment(s)

Post by patrick013 » Sun Oct 08, 2017 4:22 pm

TD2626 wrote:
Sun Oct 08, 2017 12:27 am

Also, if you want to be "traditional" and use an index that has fewer stocks than the total market, yet is widely quoted, why not go with the Dow 30? I feel that it, like the S&P 500, is a fairly archaic index that is interesting historically but has probably been outmoded by TSM or Total World... but I wonder what S&P 500 proponent's reasons are for not using the Dow 30.
You need 500 stocks for proper diversification. Otherwise the math for
volatility can be excessively high.

It's just a matter of practicality most investors use the 500. A multicap
index even gives different statistics. Why would I invest in EM or anything
else for example if it doesn't beat the 500 ? Negative correlation ? Most
books refer to a total market portfolio also but remind the professors the
500 represents 85% of total US market cap so we are going to use it anyway
for other reasons. GNP estimates are very important also apart from the
prior performance of the market index.

I did an AA that includes 8 index funds, too many I know, from the DOW to
small cap index, and all but one beat the 500. That's how I do things, also
anticipating positive GNP growth. Should put an EM index in it also as other
metrics are recently favorable. But Large, Mid, and Small cap indexes make
up a pretty good portfolio with just 3 funds. Oh well.

Have a good one.
age in bonds, buy-and-hold, 10 year business cycle

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triceratop
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Re: measurement of success of investment(s)

Post by triceratop » Sun Oct 08, 2017 5:16 pm

TD2626 wrote:
Sun Oct 08, 2017 12:27 am
triceratop wrote:
Tue Sep 19, 2017 2:24 pm
patrick013 wrote:
Tue Sep 19, 2017 2:17 pm
triceratop wrote:
Tue Sep 19, 2017 1:23 pm
patrick013 wrote:
Tue Sep 19, 2017 1:19 pm


The market portfolio is the 500 best stocks in the country based
on large cap performance. A particular fund has an index which
is unique to that fund. Like a dividend fund based on a dividend
index perhaps, it's benchmark. That's all.
That is absolutely not the market portfolio for the US, and absolutely-certainly-100% not the market portfolio for global equities.

The market portfolio for the US is a Total Stock Market Index (Dow Jones, CRSP, etc)

The market portfolio for equities is a Total World Stock Market Index (like the one Vanguard's fund holds)

Those are facts, not opinions.
Nope, then we differ. Walk into any advanced finance class and see what
they say. The US market portfolio is the S&P 500 not a proprietary index.
Not talking about small caps, global, REIT's or anything else. It's OK to differ.
Vanguard doesn't decide that. I know Fama would like TSM to be the market
portfolio also, but the 500 is most commonly used. Check your beta calculation,
but that can be deselected also. :)
"The US market portfolio is the S&P 500 not a proprietary index"

What? :shock: Do you know what the "S&P" in "S&P 500" stands for? It is the proprietary name for the corporation which constructs the index.

The US market portfolio must include US small caps and REITs. You're simply mistaken.

(It is true that the US market portfolio will not include global stocks, but i didn't claim that it would)

"I know Fama would like TSM to be the market portfolio also, but the 500 is most commonly used. "

Not to make an appeal to authority, but just to be clear you're stating that a Nobel laureate in economics is incorrect about what the market portfolio is? And you're still confident in your assertions?

You are disseminating falsehoods.
I largely agree with Triceratop. An investor who invests in domestic and international stock (at near cap weight) should consider Total World as a very reasonable benchmark. (Would you benchmark against Total World's return in US dollars or SDRs, though?)

It's worth noting that TSM and SP500 have had a historical correlation of 0.99, since TSM is mostly large caps (source: https://www.portfoliovisualizer.com/bac ... ion2_2=100).

Also, if you want to be "traditional" and use an index that has fewer stocks than the total market, yet is widely quoted, why not go with the Dow 30? I feel that it, like the S&P 500, is a fairly archaic index that is interesting historically but has probably been outmoded by TSM or Total World... but I wonder what S&P 500 proponent's reasons are for not using the Dow 30.

A few other random things:
1. Vanguard Life Strategy funds may be reasonable to benchmark against. I believe Nedsaid does this (here: viewtopic.php?f=10&t=170697&start=50#p3421515)

2. A benchmark is just a benchmark. If you have a portfolio that is not identical to the benchmark, then you can expect tracking error over short timescales and even over several year timescales. Failing to keep up after many decades, though, is what one is trying to avoid.

3. If you benchmark against Vanguard Total World and have a portfolio that is 100% Vanguard Total World, then that isn't really a benchmark... that's more a tautology. One can't benchmark the portfolio to itself. If you do this, and your portfolio drops 99%, you could claim that you "didn't trail your benchmark"! In this case, looking at a few other globally-diversified 100% equity options and seeing if they are broadly keeping pace could be reasonable.

4. Maybe a "primary benchmark" / "secondary benchmark" framework could be helpful for some?
Re point 3: Well, what you want to do is compare the fund total return to the index total return, and the remainder is tracking error. But yes, I agree, it would be helpful to track a few global equities indices to ensure that your index construction isn't hurting your returns.
"To play the stock market is to play musical chairs under the chord progression of a bid-ask spread."

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