Is there a High Tech Bubble in S&P 500 & Total Market?

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nedsaid
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Is there a High Tech Bubble in S&P 500 & Total Market?

Post by nedsaid »

We are into a decade now of a bull market, led by the High Tech/Internet stocks and in particular the FAANG stocks (Facebook, Apple, Amazon, Netflix, and Google). The USA Today article adds Microsoft to the FAANG stocks dubbing the combo as the FANMAG stocks, these 6 stocks have a market cap of $4.5 Trillion. Comparisons are made to 1999. Here is the link to the article:

https://www.usatoday.com/story/money/20 ... 789539001/
Research Affiliates, in its latest report on bubbles, isn't arguing against indexing per se. Nor is it calling for a stock-market crash, though the company's chairman, Rob Arnott, said he views the market as expensive. Rather, the firm cautions that some index funds, concentrated as they are in large technology stocks, could be vulnerable.
Note that the market cap of the S&P 500 is $24.42 Trillion as of June 2019 compared to a market cap of $4.5 trillion for just 6 stocks: Facebook, Apple, Netflix, Microsoft, Amazon, and Google. That is 18.4% of the S&P 500 in these 6 stocks!

https://ycharts.com/indicators/sp_500_market_cap

My best guess is that the US Total Stock Market Index would have a market cap of $30 Trillion to $32.6 Trillion. In the article below, I see a figure of $34 Trillion as of April 2018. That would mean that about 13-14% of the US Stock Market is in 6 stocks! Something to think about.

https://www.nasdaq.com/article/us-stock ... e-cm942558
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Re: Is there a High Tech Bubble in S&P 500 & Total Market?

Post by bantam222 »

13-14% seems reasonable and sustainable to me

Think about the scope of what these companies do and the impact they have on your life. Some of these companies can be thought of multiple smaller companies (i.e can spin off some of the cloud divisions or similar groups)
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Re: Is there a High Tech Bubble in S&P 500 & Total Market?

Post by HawkeyePierce »

Those companies all throw off mind-boggling amounts of free cash flow. The same can’t be said of tech in 1999.

I also recall a saying but don’t remember the source: “equity bubbles don’t cause crises, debt bubbles cause crises”. How much debt do those companies have compared to the rest of the market? I’d wager it’s pretty low.

Google organizes all the world’s information. Amazon powers the internet through AWS and is on a path to lead the entire logistics industry. Facebook has nearly half the planet on its platform and has built the most lucrative ad business in history. Microsoft may not “own” categories to the degree of those three but their businesses are remarkably profitable.

Apple prints money. Netflix... honestly not sure why they’re in this category. I’d consider them the most vulnerable of the group.

(Disclaimer: I work for one of Facebook’s biggest competitors)
Last edited by HawkeyePierce on Tue Jul 23, 2019 3:04 am, edited 1 time in total.
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Re: Is there a High Tech Bubble in S&P 500 & Total Market?

Post by sambb »

seems like a better industry than newspapers, some car companies, malls, movie theaters, etc. volatile but game changing. maybe undervalued. who goes to a mall or retail or talks instead of texts? or to the movies? times changed
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Re: Is there a High Tech Bubble in S&P 500 & Total Market?

Post by simplesimon »

HawkeyePierce wrote: Tue Jul 23, 2019 2:58 am Those companies all throw off mind-boggling amounts of free cash flow.
I can't disagree with you on this point but the question is of valuation.

The growth part of the equation is what drives these valuations to eye-watering levels. Microsoft and Amazon currently have higher market caps than Apple, but have half or less the free cash flow.

We all know Amazon is pumping money into everything it can and investors are betting that these projects will pay off.

Will they pay off? I don't know.
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Re: Is there a High Tech Bubble in S&P 500 & Total Market?

Post by Forester »

nedsaid wrote: Tue Jul 23, 2019 2:09 am We are into a decade now of a bull market, led by the High Tech/Internet stocks and in particular the FAANG stocks (Facebook, Apple, Amazon, Netflix, and Google). The USA Today article adds Microsoft to the FAANG stocks dubbing the combo as the FANMAG stocks, these 6 stocks have a market cap of $4.5 Trillion. Comparisons are made to 1999. Here is the link to the article:

https://www.usatoday.com/story/money/20 ... 789539001/
Research Affiliates, in its latest report on bubbles, isn't arguing against indexing per se. Nor is it calling for a stock-market crash, though the company's chairman, Rob Arnott, said he views the market as expensive. Rather, the firm cautions that some index funds, concentrated as they are in large technology stocks, could be vulnerable.
Note that the market cap of the S&P 500 is $24.42 Trillion as of June 2019 compared to a market cap of $4.5 trillion for just 6 stocks: Facebook, Apple, Netflix, Microsoft, Amazon, and Google. That is 18.4% of the S&P 500 in these 6 stocks!

https://ycharts.com/indicators/sp_500_market_cap

My best guess is that the US Total Stock Market Index would have a market cap of $30 Trillion to $32.6 Trillion. In the article below, I see a figure of $34 Trillion as of April 2018. That would mean that about 13-14% of the US Stock Market is in 6 stocks! Something to think about.

https://www.nasdaq.com/article/us-stock ... e-cm942558
Megacap concentration at the top of the S&P 500 is consistent through history. If anything the stock market is less top-heavy than prior periods in the 20th Century. But just holding the total market index has also been a consistently sub-optimal idea.
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Re: Is there a High Tech Bubble in S&P 500 & Total Market?

Post by z3r0c00l »

The P/E for Apple, Alphabet, and Facebook are all quite reasonable for tech. Amazon and Netflix, not so much, but all Amazon and Netflix have to do is squeeze a bit more profit from their business. Amazon in particular, their revenue is half of Walmart right now and that could improve quickly; it has been increasing at 25-30% per year for several years now. Apple and Amazon should be among the largest companies in the world without question. Netflix is the future of TV and movies and could easily charge $19.99 a month without losing more than a few subscribers.

These companies couldn't be further from the dot-com companies of the late 90's. Maybe we should look at the nifty-fifty instead. Lots of stocks have done abnormally well recently, including Nike and McDonalds. These stocks have every reason to do well, especially in an era of low interest rates. When that changes they may have a rough decade.
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Re: Is there a High Tech Bubble in S&P 500 & Total Market?

Post by aristotelian »

Maybe? One thing I would point out is that tech is in every industry now. Amazon is not just tech, it is retail. Netflix is media. Uber is transportation. Google and Facebook are marketing. These guys are not just tech, they are colonizing and disrupting whole sectors of the US economy.
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Re: Is there a High Tech Bubble in S&P 500 & Total Market?

Post by packer16 »

I think these firms do have competitive advantage & the market has given them credit for the advantage before it has been proven. That is where the danger lies. Look at Netflix for example. They have only raised their fees by 30% and have customer defections already. This is with little competition. Once Disney & Comcast have the launches of their OTT products & pull their content from Netflix then we will see if Netflix is the future of TV or just another player in the competitive (& not very profitable media content business). Where these companies make the money is in the distribution of content that folks like to see over & over again & in live sports. Making this content is expensive & low on average return on investment endeavor (as Netflix is showing us with their continued losses). Disney has done better than the typical content business due to monetizing their content across theme parks, movies & merchandise.

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Re: Is there a High Tech Bubble in S&P 500 & Total Market?

Post by SovereignInvestor »

Hardly a 10 year bull market. The new highs of S&P were in 2013..barely 6 years ago.

In the 1980s bull market most people coin the start as 1982 when Dow broke above 1K and stayed there not at the actual low in 1974.
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Re: Is there a High Tech Bubble in S&P 500 & Total Market?

Post by HEDGEFUNDIE »

SovereignInvestor wrote: Tue Jul 23, 2019 7:05 am Hardly a 10 year bull market. The new highs of S&P were in 2013..barely 6 years ago.

In the 1980s bull market most people coin the start as 1982 when Dow broke above 1K and stayed there not at the actual low in 1974.
Exactly, we just had a bear market in 2H18.
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Re: Is there a High Tech Bubble in S&P 500 & Total Market?

Post by JoMoney »

Huh.... Rob Arnott, arguing against holding market-cap weighted mutual fund... what possible motivations could he have arguing for alternative weighted funds? :confused ;)

The performance of his RAFI "Fundamental Weighted Index" hasn't been doing so well lately... it must be the market that is wrong. </SARCASM>
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Re: Is there a High Tech Bubble in S&P 500 & Total Market?

Post by asif408 »

All I know is that the tech stock index (QQQ) is up over 530% since March 2009, nearly double that of the S&P (270%), and has returned 7-8x more than EM value or European stocks, which the authors suggest people shift into. So a sector of an index has had twice the performance of an index that has performed extremely well, and has completely swamped the returns outside the US. I don't think it's quite as bad as the tech bubble, but it doesn't seem terribly far off.
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Re: Is there a High Tech Bubble in S&P 500 & Total Market?

Post by KlangFool »

Folks,

Historically, everyone gave good reasons as to why this time is not a bubble. Then, when the bubble burst, everyone gave a good reason why it was a bubble. The story repeated itself all the time. It is a cycle.

As an individual investor, we should be prepared. Then, it won't matter whether it is a bubble this time.

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Re: Is there a High Tech Bubble in S&P 500 & Total Market?

Post by nedsaid »

The comments on this thread from other posters are mostly reassuring. So far, I have done only some mild Growth to Value rebalancing in my portfolio. There certainly are parallels to 1999 but I don't see extremes in valuations now as I did then. I have expressed concerns about the FAANG stocks and High Tech/Internet but the current market doesn't feel like 1999. Not feeling the euphoria.
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Re: Is there a High Tech Bubble in S&P 500 & Total Market?

Post by SmileyFace »

nedsaid wrote: Tue Jul 23, 2019 9:36 am The comments on this thread from other posters are mostly reassuring. So far, I have done only some mild Growth to Value rebalancing in my portfolio. There certainly are parallels to 1999 but I don't see extremes in valuations now as I did then. I have expressed concerns about the FAANG stocks and High Tech/Internet but the current market doesn't feel like 1999. Not feeling the euphoria.
I have thought about upping my Mid-Cap and Small-Cap Index Allocations as a way of moving slightly from the FANMAG stocks but have decided to "stay the course". As someone else mentioned - these aren't companies like the dot-coms that went bust (I got caught up in the hype myself - lost money on CMGI and a few others - emerged a Boglehead as a result of that lesson). Amazon has retail but also has AWS which a huge number of companies now rely on to drive their business - then they have media/etc. Similar (to various extents) with the others.
There was another thread here whereby someone mentioned they were allocating 50% of their portfolio to FAANG - that's certainly a risk I wouldn't take. While FAANG makes up 18% of the S&P - when I consider my total market allocation with an SVP tilt / and an AA of stocks/bonds - even if the FAANG stocks dropped 50% or more in a day - the impact to my portfolio would be a mere fraction there-of.

To make this actionable - I would simply calculate your real FAANG (or FANMAG) exposure and make sure you can sleep at night if the P/Es of these stocks comes down one day.
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Re: Is there a High Tech Bubble in S&P 500 & Total Market?

Post by ohai »

Are valuations for these stocks really unreasonable though? These companies are making real money and offer what are now indispensible services to billions of people. The stock price increase has been astronomical, but is not inappropriate to the role these companies now play in the world.

Furthermore, the "Tech" label needs to be adjusted, as these companies play diverse roles, not just "Technology". Facebook is an advertizing company, Amazon is a retail commerce company, and so on. "Tech" is overweight because we are not updating our terminology. A lot of other companies - JPM or something - could be compared to some "Tech" companies in terms of their use of technology.
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Re: Is there a High Tech Bubble in S&P 500 & Total Market?

Post by nedsaid »

DaftInvestor wrote: Tue Jul 23, 2019 9:50 am
nedsaid wrote: Tue Jul 23, 2019 9:36 am The comments on this thread from other posters are mostly reassuring. So far, I have done only some mild Growth to Value rebalancing in my portfolio. There certainly are parallels to 1999 but I don't see extremes in valuations now as I did then. I have expressed concerns about the FAANG stocks and High Tech/Internet but the current market doesn't feel like 1999. Not feeling the euphoria.
I have thought about upping my Mid-Cap and Small-Cap Index Allocations as a way of moving slightly from the FANMAG stocks but have decided to "stay the course". As someone else mentioned - these aren't companies like the dot-coms that went bust (I got caught up in the hype myself - lost money on CMGI and a few others - emerged a Boglehead as a result of that lesson). Amazon has retail but also has AWS which a huge number of companies now rely on to drive their business - then they have media/etc. Similar (to various extents) with the others.
There was another thread here whereby someone mentioned they were allocating 50% of their portfolio to FAANG - that's certainly a risk I wouldn't take. While FAANG makes up 18% of the S&P - when I consider my total market allocation with an SVP tilt / and an AA of stocks/bonds - even if the FAANG stocks dropped 50% or more in a day - the impact to my portfolio would be a mere fraction there-of.

To make this actionable - I would simply calculate your real FAANG (or FANMAG) exposure and make sure you can sleep at night if the P/Es of these stocks comes down one day.
Problem is, if I am seeing parallels to 1999 and have concerns about FAANG, I am not the only one thinking this. I am sure there is somebody in the hedge fund world trying to capitalize on this, making it much harder for any of us to make a killing. Whatever moves I make with my own portfolio are more about reducing risk rather than increasing returns. Probably, about the most I will be doing is the Growth to Value rebalancing and restoring portfolio tilts. I will not abandon the very large Mega-Cap Growth stocks, just lighten up.
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Re: Is there a High Tech Bubble in S&P 500 & Total Market?

Post by KyleAAA »

No. Those companies earn a ton of money. They aren't exactly cheap, but this ain't 1999. In the tech bubble companies without revenue were valued in the billions. These companies have profits to back up their valuations.
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Re: Is there a High Tech Bubble in S&P 500 & Total Market?

Post by nedsaid »

ohai wrote: Tue Jul 23, 2019 9:57 am Are valuations for these stocks really unreasonable though? These companies are making real money and offer what are now indispensible services to billions of people. The stock price increase has been astronomical, but is not inappropriate to the role these companies now play in the world.

Furthermore, the "Tech" label needs to be adjusted, as these companies play diverse roles, not just "Technology". Facebook is an advertizing company, Amazon is a retail commerce company, and so on. "Tech" is overweight because we are not updating our terminology. A lot of other companies - JPM or something - could be compared to some "Tech" companies in terms of their use of technology.
That is why I say High Tech/Internet. Amazon has a Cloud business but is a retailer. Netflix is a media company. Of the FAANG stocks, I would be most concerned about Facebook, Amazon, and Netflix. Google is fantastically profitable and Apple has shown up on Value screens. I do own Microsoft individually but bought it when it was a Value stock, it was dead money for the first seven years that I owned it.
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Re: Is there a High Tech Bubble in S&P 500 & Total Market?

Post by Forester »

JoMoney wrote: Tue Jul 23, 2019 8:13 am Huh.... Rob Arnott, arguing against holding market-cap weighted mutual fund... what possible motivations could he have arguing for alternative weighted funds? :confused ;)

The performance of his RAFI "Fundamental Weighted Index" hasn't been doing so well lately... it must be the market that is wrong. </SARCASM>
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RAFI 1000 is beating the S&P 500 since March '09 https://stockcharts.com/freecharts/perf.php?PRF,spy
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Re: Is there a High Tech Bubble in S&P 500 & Total Market?

Post by ohai »

nedsaid wrote: Tue Jul 23, 2019 10:03 am
ohai wrote: Tue Jul 23, 2019 9:57 am Are valuations for these stocks really unreasonable though? These companies are making real money and offer what are now indispensible services to billions of people. The stock price increase has been astronomical, but is not inappropriate to the role these companies now play in the world.

Furthermore, the "Tech" label needs to be adjusted, as these companies play diverse roles, not just "Technology". Facebook is an advertizing company, Amazon is a retail commerce company, and so on. "Tech" is overweight because we are not updating our terminology. A lot of other companies - JPM or something - could be compared to some "Tech" companies in terms of their use of technology.
That is why I say High Tech/Internet. Amazon has a Cloud business but is a retailer. Netflix is a media company. Of the FAANG stocks, I would be most concerned about Facebook, Amazon, and Netflix. Google is fantastically profitable and Apple has shown up on Value screens. I do own Microsoft individually but bought it when it was a Value stock, it was dead money for the first seven years that I owned it.
My point is that these stocks do not have to be grouped tightly together at all, even in something like "high tech/internet", which can mean anything. Walmart gets half its sales from internet, but you wouldn't call it an "internet company". So, why associate Amazon with Facebook but not Walmart?
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Re: Is there a High Tech Bubble in S&P 500 & Total Market?

Post by garlandwhizzer »

I do not believe we're in a tech bubble. LC tech is the only segment of the economy that offers reliable and robust profit growth, huge free cash flow, immense cash on the balances sheet, and to some extent wide moats because some of these firms hold dominant positions in their markets that are high hurdles for competitors. Tech pervades everything including manufacturing where it allows for more and more output with fewer and fewer workers which concentrates wealth at the top end for the creative and highly educated while it destroys non-information economy jobs at the other end of the economic spectrum. Tech drives our economic growth and the dominance of tech in the US is the biggest reason IMO why our markets are doing so much bette than Europe's or Japan's whose markets are dominated by low growth areas like financials, industrials, consumer staples, and basic materials. It is not an unmixed blessing. Silicon Valley and the West Coast, where much of tech innovation is concentrated, thrives enormously. Try to buy a condo in San Francisco to get a sense of this. Meanwhile many rural and rust belt areas in the middle of the country continue to struggle economically after a decade of "recovery." So tech has been transformative to the markets and economy (FAANG dominance) and also to our society itself.

Will it continue? No one knows for sure but It is safe to say there are some clouds on the horizon. Tariff and trade policy can have a huge impact on some of these companies as it can disrupt their supply chains, raising prices and also reducing international demand for their products. Tech has thrived in the free trade/free labor world where skilled jobs and other inputs can be bid out worldwide to the lowest bidder and finished goods sold worldwide without substantial tariffs. That situation may not persist going forward. In addition, privacy and security concerns including personal security and privacy as well as nation security with the 5G rollout for example have the potential to dramatically increase governmental regulation of tech giants which will have a negative impact on the revenues and profits.

IMO the past for the FAANGs has been splendid but it is unlikely that it will continue to the same degree. Tech so dominates our lives now that regulatory issues may put the brakes on their success to some degree which, like everything else about the market's future, is not accurately predictable at this time. Nedsaid's move to value from growth may turn out to be prescient. Personally, I suspect the FAANG outperformance has peaked, but that other tech firms may take up some of the slack going forward resulting in market-like returns for tech going forward at least until regulatory details become clear.

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Re: Is there a High Tech Bubble in S&P 500 & Total Market?

Post by heyyou »

Same post, different thread:
In a 30 year retirement spending calculator, McClung found that Small Growth was the lowest performing sub-asset class but Large Growth was second worst, so he left out both of them in his recommended equal sliced equity allocation. The differences were small between each equity subasset class, so keeping the two worst ones is not a major problem, just less than what is more optimal. That was his whole theme, do what is incrementally better in several different areas, to have more money in retirement.

If TSM suits you better, stay with it.
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Too much tech in total stock market?

Post by LIGuy82 »

I just had a call with a financial advisor - free consultation and I said I did not plan to hire them - but one thing really stuck out: Vanguard total stock market being very tilted towards tech due to market capitalization. Is this something that warrants rebalancing by buying another fund in order to diversify. I worry that such a move would be he first step into making us portfolio complicated. Advice welcome.
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Re: Too much tech in total stock market?

Post by willthrill81 »

This has nothing to do with Vanguard and everything to do with capitalization-weighted indexing. It's true that about one-sixth of the total stock market (TSM) is in about 10 companies, and most of these are tech companies. Over the last decade, that's been a good thing because tech has been the cat's meow. But it might not always be that way.

If you don't like that, you can just own something other than TSM, although the S&P 500 is basically the same thing. You can own all mid-caps or small-caps. You could put one-third each in TSM, mid-caps, and small-caps, a possibility being discussed right now in another thread.

But you certainly DON'T need a financial adviser salesperson moving you into actively managed funds with high expense ratios and charging you an asset-under-management fee to boot in order to address this issue.
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Re: Too much tech in total stock market?

Post by LIGuy82 »

willthrill81 wrote: Tue Jul 23, 2019 3:28 pm This has nothing to do with Vanguard and everything to do with capitalization-weighted indexing. It's true that about one-sixth of the total stock market (TSM) is in about 10 companies, and most of these are tech companies. Over the last decade, that's been a good thing because tech has been the cat's meow. But it might not always be that way.

If you don't like that, you can just own something other than TSM, although the S&P 500 is basically the same thing. You can own all mid-caps or small-caps. You could put one-third each in TSM, mid-caps, and small-caps, a possibility being discussed right now in another thread.

But you certainly DON'T need a financial adviser salesperson moving you into actively managed funds with high expense ratios and charging you an asset-under-management fee to boot in order to address this issue.
Thanks. It was personal capital and I wasn’t convinced it would perform better at higher cost along with me surrendering control. Apologize if it sounded like I thought vanguard was the problem - not my intention. Weighting towards small- and mid-caps sounds like a reasonable solution that would not be hard to maintain. Thanks.
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Re: Too much tech in total stock market?

Post by willthrill81 »

LIGuy82 wrote: Tue Jul 23, 2019 3:32 pm
willthrill81 wrote: Tue Jul 23, 2019 3:28 pm This has nothing to do with Vanguard and everything to do with capitalization-weighted indexing. It's true that about one-sixth of the total stock market (TSM) is in about 10 companies, and most of these are tech companies. Over the last decade, that's been a good thing because tech has been the cat's meow. But it might not always be that way.

If you don't like that, you can just own something other than TSM, although the S&P 500 is basically the same thing. You can own all mid-caps or small-caps. You could put one-third each in TSM, mid-caps, and small-caps, a possibility being discussed right now in another thread.

But you certainly DON'T need a financial adviser salesperson moving you into actively managed funds with high expense ratios and charging you an asset-under-management fee to boot in order to address this issue.
Thanks. It was personal capital and I wasn’t convinced it would perform better at higher cost along with me surrendering control. Apologize if it sounded like I thought vanguard was the problem - not my intention. Weighting towards small- and mid-caps sounds like a reasonable solution that would not be hard to maintain. Thanks.
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Re: Too much tech in total stock market?

Post by delamer »

Here’s info on the different sectors of the S&P 500, including percentage of total capitalization: https://www.thebalance.com/what-are-the ... 00-3957507

Health Care is a high percentage of the total too. As are financial companies.

And here’s the 20 highest cap stocks: https://www.investopedia.com/articles/i ... amznfb.asp

You can second guess yourself crazy on this stuff.
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Re: Too much tech in total stock market?

Post by bloom2708 »

Every trading day a bunch (lot) of trades happen. The markets close. That is the market.

Tomorrow, the same thing will happen. That is tomorrow's market.

I can think the market is wrong today and tomorrow and any other day. That is what tilting away from the market caps is.

If too much tech (or any other) the market will correct. Or it may not. It may be just the right amount of tech. Today and tomorrow and the day after. Nobody knows.
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Re: Too much tech in total stock market?

Post by vineviz »

LIGuy82 wrote: Tue Jul 23, 2019 3:24 pm I just had a call with a financial advisor - free consultation and I said I did not plan to hire them - but one thing really stuck out: Vanguard total stock market being very tilted towards tech due to market capitalization. Is this something that warrants rebalancing by buying another fund in order to diversify. I worry that such a move would be he first step into making us portfolio complicated. Advice welcome.
One of the "optimizations" that Personal Capital touts is the (quite robust, it turns out) tendency of an equal sector weight strategy to outperform the total cap-weighted market.

In other words, if there are ten equity sectors then you just hold 10% in each sector. Such a strategy has historically produced higher returns and lower volatility than the total stock market.

This has had the effect of tilting the portfolio towards the value factor, the quality factor, & the bet-against-beta factor and away from momentum somewhat. It's pretty consistent in the Fama-French data back to 1926, and here are live SPDR sector funds since 1999.

Image

Tweaks like this are relatively simple to implement for a roboadvisor, but an individual investor could theoretically do it pretty easily using Fidelity or Vanguard sector ETFs.

Personally I think there are easier ways to capture the factor tilts using fewer funds, but the equal sector weight approach might appeal to folks who were factor-agnostic: in many ways it's a classic contrarian investing approach in a modern guise.
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Re: Too much tech in total stock market?

Post by H-Town »

If you look around, what have changed in the past decade? Technologies. In some forms or fashion, technologies have a huge impact on our lives.

What do you see the world in 10, 20 years from now? It's not a guarantee but I would bet my farm that technologies will remain the focus point.

Buying a whole market guarantee that you won't get the best result, but it will guarantee that you will get an average result. It might not sound good but in the investing world, average return with low cost is the best thing since slide bread.
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Re: Too much tech in total stock market?

Post by Sandtrap »

Here is another option.
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Re: Is there a High Tech Bubble in S&P 500 & Total Market?

Post by garlandwhizzer »

One more factor to add to my post above on tech stocks and particularly the FAANGs. The DOJ is currently looking into questions of abuse of market power with Apple, Facebook, Amazon all of which have until now had wide and ever enlarging moats that discouraged competitors. The European Commission has fined Google $1.49 billion for abusing its market dominance. Governments have it in their power in multiple ways to put the brakes on mega-cap tech if they choose to use it.

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Re: Too much tech in total stock market?

Post by Northern Flicker »

LIGuy82 wrote: Tue Jul 23, 2019 3:24 pm I just had a call with a financial advisor - free consultation and I said I did not plan to hire them - but one thing really stuck out: Vanguard total stock market being very tilted towards tech due to market capitalization. Is this something that warrants rebalancing by buying another fund in order to diversify. I worry that such a move would be he first step into making us portfolio complicated. Advice welcome.
The most important thing is to stay the course either way. Some people add a factor tilt like a small-value tilt (which will often limit the outsized allocations to the hottest sectors), while others stay cap-weighted. Do what you can stick with through thick and thin.
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Re: Too much tech in total stock market?

Post by tibbitts »

I have done some sector tweaking because I thought tech was overpriced (and my career, too.) Unfortunately I've thought that way for a while, and been wrong for just as long - at least so far.
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Re: Too much tech in total stock market?

Post by NoFred »

Also I would hope an advisor would think overweight is fine *right now* since it’s working - no current reason to overthink (and pay for) portfolio safety for TSM, except for your regular AA.
-NoFred
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Re: Too much tech in total stock market?

Post by RogueBear »

I have had similar concerns and addressed this by using the Invesco S&P 500 Equal Weight Index ETF (RSP). The results have been very good. I also have Vanguard Total Stock Market ETF (VTI) because I do think market capitalization produces a good result as well. When there is a market downturn I suspect they will both perform similarly though.
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Re: Too much tech in total stock market?

Post by NMBob »

Invesco S&P 500 Equal Weight - RSP

JAN04-JUN19
Portfolio Initial Balance Final Balance CAGR Stdev Best Year Worst Year Max. Drawdown Sharpe Ratio Sortino Ratio US Mkt Correlation
Portfolio 1 $10,000 $39,982 9.35% 15.94% 44.64% -40.07% -55.58% 0.56 0.83 0.98
Vgd 500 Investor$10,000 $35,734 8.56% 13.64% 32.18% -37.02% -50.97% 0.58 0.84 1.00
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Re: Is there a High Tech Bubble in S&P 500 & Total Market?

Post by nedsaid »

garlandwhizzer wrote: Tue Jul 23, 2019 5:32 pm One more factor to add to my post above on tech stocks and particularly the FAANGs. The DOJ is currently looking into questions of abuse of market power with Apple, Facebook, Amazon all of which have until now had wide and ever enlarging moats that discouraged competitors. The European Commission has fined Google $1.49 billion for abusing its market dominance. Governments have it in their power in multiple ways to put the brakes on mega-cap tech if they choose to use it.

Garland Whizzer
Garland, as usual your commentary is excellent.

I want to make a few things clear here. This is not an OMG, the Indexes are in a bubble, and sell all your index funds immediately thread. This is like a yellow caution light, getting people to take a minute and reflect upon where we are. The US Total Stock Market Index and the S&P 500 are good indexes and they have been and will continue to be good investments. I have concerns that the FAANG stocks and the High Tech/Internet stocks are getting overheated here.

What I am doing myself is some Growth to Value rebalancing. I sold down my Total Stock Market Index a bit and took the proceeds mostly to a Large Value Index. Traded part of my stake in a Growth fund into a Value fund. Also traded a bit of a Mid-Cap Growth fund for a Mid-Cap Value fund. Been buying a bit of the S&P 600 Value Index ETF and a bit of the Wisdom Tree International Small-Cap Dividend ETF. Bought a bit of Small Cap Index fund. The moves are relatively small so far but a process of restoring tilts to my portfolio.

Though we don't have the valuation or sentiment extremes we saw back in 1999, there are some eerie similarities. Thought this would be a good time to rebalance from the hot Growth stocks into Value. Again, I am NOT saying to sell 100% of your Total Stock Market Index and S&P 500 funds. This might be a good time to sell a portion and reallocate into Value indexes. Pretty much, selling a portion of your expensive stocks to buy cheaper ones. I would never advocate being out of the large Growth stocks altogether.

How much of a shift? I am not sure of this myself. My thoughts for now is maybe 10% of my Total Market Index fund shifted over to Value. If I get bolder, maybe 20%. I could go even more than that, maybe 30%. I will just watch the markets, depends upon how overheated the Large Growth stocks get. Still thinking this through. But this is something that will be done over time, I am only one month into the Growth to Value rebalance. I expect to be in this process for some time. Maybe a year? Two years? Bit by bit over time. Might also be a good time for US Stocks to International Stocks rebalance. The International Stock Markets are cheaper than the US, particularly Emerging Markets.

So for right now, I am just doing Growth to Value rebalancing. I may go further and do some tactical asset allocation perhaps reallocating 10% or 20% or 30% of my Total Stock Market Index into Value Indexes.

What do I think might happen? Some event that shakes the market and causes market leadership to change from High Tech and the more visible Internet stocks to another sector of the market. When this happens, I could see the Value indexes beating the S&P 500 and Total Stock Market Indexes for a few years. Not predicting Armageddon here. We have been in a Large Growth trend for a decade now and that won't continue forever.
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Re: Too much tech in total stock market?

Post by FIREchief »

vineviz wrote: Tue Jul 23, 2019 4:30 pm One of the "optimizations" that Personal Capital touts is the (quite robust, it turns out) tendency of an equal sector weight strategy to outperform the total cap-weighted market.

In other words, if there are ten equity sectors then you just hold 10% in each sector. Such a strategy has historically produced higher returns and lower volatility than the total stock market.

This has had the effect of tilting the portfolio towards the value factor, the quality factor, & the bet-against-beta factor and away from momentum somewhat. It's pretty consistent in the Fama-French data back to 1926, and here are live SPDR sector funds since 1999.

Image

Tweaks like this are relatively simple to implement for a roboadvisor, but an individual investor could theoretically do it pretty easily using Fidelity or Vanguard sector ETFs.

Personally I think there are easier ways to capture the factor tilts using fewer funds, but the equal sector weight approach might appeal to folks who were factor-agnostic: in many ways it's a classic contrarian investing approach in a modern guise.
Hmmm... I wonder why 1999 was chosen as the starting date? Round number (20 years)? Perhaps not! :twisted:
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Re: Is there a High Tech Bubble in S&P 500 & Total Market?

Post by nedsaid »

ohai wrote: Tue Jul 23, 2019 11:27 am
nedsaid wrote: Tue Jul 23, 2019 10:03 am
ohai wrote: Tue Jul 23, 2019 9:57 am Are valuations for these stocks really unreasonable though? These companies are making real money and offer what are now indispensible services to billions of people. The stock price increase has been astronomical, but is not inappropriate to the role these companies now play in the world.

Furthermore, the "Tech" label needs to be adjusted, as these companies play diverse roles, not just "Technology". Facebook is an advertizing company, Amazon is a retail commerce company, and so on. "Tech" is overweight because we are not updating our terminology. A lot of other companies - JPM or something - could be compared to some "Tech" companies in terms of their use of technology.
That is why I say High Tech/Internet. Amazon has a Cloud business but is a retailer. Netflix is a media company. Of the FAANG stocks, I would be most concerned about Facebook, Amazon, and Netflix. Google is fantastically profitable and Apple has shown up on Value screens. I do own Microsoft individually but bought it when it was a Value stock, it was dead money for the first seven years that I owned it.
My point is that these stocks do not have to be grouped tightly together at all, even in something like "high tech/internet", which can mean anything. Walmart gets half its sales from internet, but you wouldn't call it an "internet company". So, why associate Amazon with Facebook but not Walmart?
Sometimes you have to use sort of a rhetorical shorthand. I won't take paragraphs and paragraphs to make qualifying statements and very precise definitions. When I say High Tech/Internet most folks should have the FAANG stocks come to mind first. To me High Tech implies computing, data, advanced electronics, advanced chips, new forms of communication. When I think of Internet stocks, I think of Internet Communication and Media stocks like Google, Facebook, Netflix and I think of online retailers like Amazon. Virtually everyone now is using the internet to help move product, so I suppose you could say virtually everything now is an Internet stock. Or you could say that virtually everyone benefits from technological advances so that we could say that virtually everything is a technology stock. I know that the big box retailers like Wal-Mart are doing more and more business on the internet, I don't think of them as Internet stocks. Perhaps we should but again, I am speaking in a bit of shorthand hoping folks will know what I mean. It saves lots of typing.
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Re: Is there a High Tech Bubble in S&P 500 & Total Market?

Post by FIREchief »

sambb wrote: Tue Jul 23, 2019 3:01 am seems like a better industry than newspapers, some car companies, malls, movie theaters, etc. volatile but game changing. maybe undervalued. who goes to a mall or retail or talks instead of texts? or to the movies? times changed
Bingo!!! Thank God the US isn't trying to win with heavy manufacturing any more. We still have a few bright spots, but there are better ways to win these days.
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Re: Is there a High Tech Bubble in S&P 500 & Total Market?

Post by Dottie57 »

HawkeyePierce wrote: Tue Jul 23, 2019 2:58 am Those companies all throw off mind-boggling amounts of free cash flow. The same can’t be said of tech in 1999.

I also recall a saying but don’t remember the source: “equity bubbles don’t cause crises, debt bubbles cause crises”. How much debt do those companies have compared to the rest of the market? I’d wager it’s pretty low.

Google organizes all the world’s information. Amazon powers the internet through AWS and is on a path to lead the entire logistics industry. Facebook has nearly half the planet on its platform and has built the most lucrative ad business in history. Microsoft may not “own” categories to the degree of those three but their businesses are remarkably profitable.

Apple prints money. Netflix... honestly not sure why they’re in this category. I’d consider them the most vulnerable of the group.

(Disclaimer: I work for one of Facebook’s biggest competitors)
Netflix is communications with vast server and streaming capabilities.
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Re: Too much tech in total stock market?

Post by blankcheck »

Wait, am I missing something? "The big companies in certain sectors are so big that they take up a large part of the cap weighting! Oh no!" Who cares what the sector is? Who cares what the overweighting is? If you own an index fund, then you own all of it. When those large companies sink, there may be some small wonder breaking through in a category that nobody thought about. Guess what? Own that too. I do see an inherent appeal to equal sector weighting, but I'll admit some inertia on my part, and it's not available in my tax advantaged plans.
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Re: Too much tech in total stock market?

Post by drk »

FIREchief wrote: Tue Jul 23, 2019 8:45 pm Hmmm... I wonder why 1999 was chosen as the starting date? Round number (20 years)? Perhaps not! :twisted:
Portfolio Visualizer puts this information right up front:
The time period was constrained by the available data for Consumer Staples Select Sector SPDR ETF (XLP) [Jan 1999 - Jun 2019].
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Re: Too much tech in total stock market?

Post by sf_tech_saver »

I'm not sure that's a problem so much as a feature. Tech companies aren't the someday stories of 2k anymore -- they run our lives. (Hi from the internet!)

The beauty of VTI is that you get it all without having to make a judgment call. How many billions of dollars a day vote on this ratio? Many...
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Re: Too much tech in total stock market?

Post by bhsince87 »

By definition, this is how the passive Total Market works.

If you or an advisor thinks there's "too much tech", then that implies an active approach is better.

Going forward, it may be or mat not be. But history shows it's not.
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Re: Too much tech in total stock market?

Post by LIGuy82 »

bhsince87 wrote: Tue Jul 23, 2019 10:10 pm By definition, this is how the passive Total Market works.

If you or an advisor thinks there's "too much tech", then that implies an active approach is better.

Going forward, it may be or mat not be. But history shows it's not.
Thanks!
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Re: Is there a High Tech Bubble in S&P 500 & Total Market?

Post by HawkeyePierce »

This might be off topic. One thing I’ve noticed about the value or small/mid index funds is they have a very small number of companies.

If one is concerned about mega-cap valuations, why not an extended market fund instead?

Vanguard’s mid cap index has 371 stocks. Small cap index is about 1400. Small value index is 871.

The extended market fund has nearly 3300. Wouldn’t that be a more diversified tilt away from mega cap?
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