SP500 is very top heavy right now

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GRP
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Re: SP500 is very top heavy right now

Post by GRP » Thu Nov 14, 2019 9:00 pm

rkhusky wrote:
Thu Nov 14, 2019 8:36 pm
permport wrote:
Thu Nov 14, 2019 8:32 pm
rkhusky wrote:
Thu Nov 14, 2019 8:05 pm
permport wrote:
Thu Nov 14, 2019 7:47 pm
I think the Journal of Finance literature is pretty clear: the Fama-French Three Factor Model explains over 90% of the cross section of stock market returns. Exposure to these additional factors has benefit over and above a total market fund.
The Fama-French Three Factor Model does not say anything about whether the factors have any benefit. It's a common misconception.
Oh good grief.
Exactly. The FF model works equally well whether value outperforms growth or vice versa. The FF model works equally well whether small outperforms big or vice versa. It is ambivalent to the performance of the factors.
Yes, but you and I and everyone else knows exactly what he meant by that post. You're being overly pedantic at best, and at worst just trolling the poor fellow.

Ocean77
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Re: SP500 is very top heavy right now

Post by Ocean77 » Thu Nov 14, 2019 9:09 pm

columbia wrote:
Thu Nov 14, 2019 8:13 pm
If this information were actionable (is it?), it would seem to point to reducing equity exposure - as the implication is that a crash is coming; pulling your money from large caps and placing it it into small caps and/or international won’t save you from a crash.
Small caps often outperform big cap stocks during and right after recessions. I.e. they outperformed large caps big time during that 2001 crash.

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JoMoney
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Re: SP500 is very top heavy right now

Post by JoMoney » Thu Nov 14, 2019 9:09 pm

GRP wrote:
Thu Nov 14, 2019 9:00 pm
rkhusky wrote:
Thu Nov 14, 2019 8:36 pm
permport wrote:
Thu Nov 14, 2019 8:32 pm
rkhusky wrote:
Thu Nov 14, 2019 8:05 pm
permport wrote:
Thu Nov 14, 2019 7:47 pm
I think the Journal of Finance literature is pretty clear: the Fama-French Three Factor Model explains over 90% of the cross section of stock market returns. Exposure to these additional factors has benefit over and above a total market fund.
The Fama-French Three Factor Model does not say anything about whether the factors have any benefit. It's a common misconception.
Oh good grief.
Exactly. The FF model works equally well whether value outperforms growth or vice versa. The FF model works equally well whether small outperforms big or vice versa. It is ambivalent to the performance of the factors.
Yes, but you and I and everyone else knows exactly what he meant by that post. You're being overly pedantic at best, and at worst just trolling the poor fellow.
Yes, we knows factor enthusiasts are chasing returns, but if there is anything to the idea of "risk factors" it's not a "benefit" it's risk exposure, whether or not potentially increasing ones risk is a "benefit" is a distinction of some importance.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

Smith1776
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Re: SP500 is very top heavy right now

Post by Smith1776 » Thu Nov 14, 2019 9:15 pm

JoMoney wrote:
Thu Nov 14, 2019 9:09 pm
GRP wrote:
Thu Nov 14, 2019 9:00 pm
rkhusky wrote:
Thu Nov 14, 2019 8:36 pm
permport wrote:
Thu Nov 14, 2019 8:32 pm
rkhusky wrote:
Thu Nov 14, 2019 8:05 pm

The Fama-French Three Factor Model does not say anything about whether the factors have any benefit. It's a common misconception.
Oh good grief.
Exactly. The FF model works equally well whether value outperforms growth or vice versa. The FF model works equally well whether small outperforms big or vice versa. It is ambivalent to the performance of the factors.
Yes, but you and I and everyone else knows exactly what he meant by that post. You're being overly pedantic at best, and at worst just trolling the poor fellow.
Yes, we knows factor enthusiasts are chasing returns, but if there is anything to the idea of "risk factors" it's not a "benefit" it's risk exposure, whether or not potentially increasing ones risk is a "benefit" is a distinction of some importance.
Well, yeah, they're independent sources of risk/return, and markets tend to price assets so they have similar risk adjusted returns. On top of that they are uncorrelated enough that there is indeed a diversification benefit. As these other guys have mentioned, the literature and research convincingly demonstrates benefit.

Dead Man Walking
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Re: SP500 is very top heavy right now

Post by Dead Man Walking » Thu Nov 14, 2019 9:17 pm

Stinky wrote:
Thu Nov 14, 2019 7:40 pm
AHTFY wrote:
Thu Nov 14, 2019 1:04 pm
VTWAX (Vanguard Total World Stock Index Fund) has 10.8% in the top ten names. https://investor.vanguard.com/mutual-fu ... d-holdings
Interesting that 9 of top 10 names in the Total World fund are based in the US.

Only Nestle is non-US incorporated. But they do a lot of business in the US.
Great point and perhaps justification for investing in Total World Stock Index Fund rather than Total Stock Market Index Fund as the primary equity investment in a diversified portfolio.

DMW

rkhusky
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Re: SP500 is very top heavy right now

Post by rkhusky » Thu Nov 14, 2019 9:17 pm

GRP wrote:
Thu Nov 14, 2019 9:00 pm
Yes, but you and I and everyone else knows exactly what he meant by that post. You're being overly pedantic at best, and at worst just trolling the poor fellow.
I know that he meant to bolster an argument for using factors by invoking the Fama-French model, when the latter provides no support for using factors.

One needs to look elsewhere to show increased risk or increased return or increased diversification. The Fama-French model is silent on those characteristics.

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Re: SP500 is very top heavy right now

Post by rkhusky » Thu Nov 14, 2019 9:27 pm

Here are some acquisitions and subsidiaries for FAANG (apart from Netflix):

https://en.wikipedia.org/wiki/List_of_m ... y_Facebook
https://en.wikipedia.org/wiki/List_of_m ... s_by_Apple
https://en.wikipedia.org/wiki/List_of_m ... _by_Amazon
https://en.wikipedia.org/wiki/List_of_m ... y_Alphabet

The companies (apart from Netflix) are not just homogeneous companies, but are comprised of many technologies and products. I don't see how Total Stock Market would have less risk if many of the larger components of these companies were spun off as stand-alone companies.

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nedsaid
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Re: SP500 is very top heavy right now

Post by nedsaid » Thu Nov 14, 2019 10:19 pm

rkhusky wrote:
Thu Nov 14, 2019 8:55 pm
nedsaid wrote:
Thu Nov 14, 2019 8:39 pm
rkhusky wrote:
Thu Nov 14, 2019 8:30 pm
nedsaid wrote:
Thu Nov 14, 2019 8:23 pm
You could also think of it as reducing risk, as a higher and higher percentage of the market cap of Total Stock Market Index goes into just a few stocks, the risk of Total Stock Market Index goes higher and higher.
So, Warren Buffett buying up companies, and making Berkshire Hathaway larger, creates more risk for the Total Stock Market? Total Stock Market is riskier with those companies under the Berkshire Hathaway umbrella than when the companies were operating on their own?
The Berkshire Hathaway phenomenon pales in comparison to the effect of the FAANG stocks (Facebook, Apple, Amazon, Netflix, and Google) on the index. What I am commenting on is the effect of High Tech/Internet on the index, Berkshire/Hathaway last I checked was not a Tech Stock. Indeed, I still see B/H in the Value Indexes, so B/H is not suffering from valuation or sentiment extremes. But yes, I would say that when you see concentration like we are seeing now in the indexes, risk is increased. The index is always somewhat top-heavy, the graph shows that it is more top-heavy than normal. The Warren Buffett effect here, while it exists, is relatively mild.
Or it is the affect of the economy changing to a tech-based economy. The FAANG have also been buying up small companies and incorporating their technologies into their offerings.
I don't see more risk in the FAANG companies innovating and producing new products that the public wants to buy.
I don't think that Apple splitting into 5 separate companies would decrease the risk of the Total Stock Market.
Yes, we could be seeing the effect of an increasingly tech-based company. There are pretty good discussions out there on the forum that Growth represents the future and that Value represents the past. I myself don't buy into that way of thinking but I do think there is a grain of truth there. This is also why I discuss more modest shifts into cheaper stocks (US Value, International Stocks in General) rather than wholesale abandoning Large Growth. I still want to be in those Large Growth stocks, I just want a portfolio that tilts to Value and towards the Mid-Caps and Small-Caps. I do not have the all or nothing philosophy. Sometimes things really are different, perhaps the markets and the economy have permanently changed and perhaps we need to adjust our thinking in response. I am not in that camp. Also allowing for the chance that I could be wrong, particularly in the shorter term. So I am giving you a hedged answer.

There gets to be a point where expectations for great companies get to be so high that even great companies can become terrible investments. A good example was GE in the late 1990's with a P/E of 45 but with an underlying growth rate of maybe 8%, once you took out all of the financial engineering. Great company but expectations were wildly unrealistic. This could happen with the FAANG stocks. I have had a skeptical eye towards Amazon for years. Apple actually hits a lot of Value screens. Google is a cash machine but how long can it maintain relatively high rates of earnings growth?

We do have a precedent with Standard Oil, when the Feds forced it to split up, the parts were more valuable than the whole. It reduced single stock risk and unlocked value at the same time. Even Mr. Rockefeller got richer from this.
A fool and his money are good for business.

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nedsaid
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Re: SP500 is very top heavy right now

Post by nedsaid » Thu Nov 14, 2019 10:39 pm

rkhusky wrote:
Thu Nov 14, 2019 9:27 pm
Here are some acquisitions and subsidiaries for FAANG (apart from Netflix):

https://en.wikipedia.org/wiki/List_of_m ... y_Facebook
https://en.wikipedia.org/wiki/List_of_m ... s_by_Apple
https://en.wikipedia.org/wiki/List_of_m ... _by_Amazon
https://en.wikipedia.org/wiki/List_of_m ... y_Alphabet

The companies (apart from Netflix) are not just homogeneous companies, but are comprised of many technologies and products. I don't see how Total Stock Market would have less risk if many of the larger components of these companies were spun off as stand-alone companies.
Quite often acquisitions destroy rather than create value. Often spin-offs unlock value. We see trends towards acquisition and then later to spin-offs. The effect could be from management boredom or from reading too many trade magazines.
A fool and his money are good for business.

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Forester
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Re: SP500 is very top heavy right now

Post by Forester » Fri Nov 15, 2019 12:33 am

3% in small cap via TSM is meaningless... sure one can be philosophical and pat oneself on the back "the wisdom of the market has decided that this is the correct weighting" etc etc but you may as well own the S&P 500 or just the biggest 50 stocks.

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Re: SP500 is very top heavy right now

Post by MotoTrojan » Fri Nov 15, 2019 12:54 am

nedsaid wrote:
Thu Nov 14, 2019 8:51 pm
MotoTrojan wrote:
Thu Nov 14, 2019 8:42 pm
nedsaid wrote:
Thu Nov 14, 2019 8:23 pm
MotoTrojan wrote:
Thu Nov 14, 2019 8:15 pm
nedsaid wrote:
Thu Nov 14, 2019 8:12 pm


Thank you. I have been warning of this and the 3 fund people think I am a nut. Notice also that the graph shows eerie similarities to 1999, we all know what happened in 2000, the Tech and Internet crash. The difference is that valuations aren't crazy like they were in 1999 and early 2000 and we are not seeing signs of a market blow-off. Perhaps a "Swedroe Shuffle" of part of your Total Market holdings into Value indexes might be a good idea.
Swedroe shuffle sounds like market timing to me, and I already struggle enough with avoiding tinkering. I’d rather just hold the broad index but tilt small-value, as I do. Best of both worlds.
Yes, it is a mild form of market timing. Really what you are doing is selling something with a lower future expected return and replacing it with something that has a higher future expected return. You could also think of it as Growth to Value rebalancing. You could also think of it as reducing risk, as a higher and higher percentage of the market cap of Total Stock Market Index goes into just a few stocks, the risk of Total Stock Market Index goes higher and higher. If you sell a portion of your Total Stock Market Index and buy Small Cap Market Index, you might get some 3 funders that will peer over their glasses at you but it won't get you banned from Bogleheads.
Are you also moving your overall domestic allocation to International? Seems the same logic would suggest that is prudent.
Yes, I actually would advocate a move of a portion of one's US Stocks to International. But you have to look at this in the larger context of your life situation. I would never abandon the US Total Stock Market Index, just saying taking a portion of that to Small/Value and another portion to International might be prudent here. US Stock Market has higher valuations than International for some very good reasons yet seeing cheaper stocks outside of US gets my attention.
I recently decided to start a position in international small-value (up to 100% of International, only holding in Roth so it'll end up a fluctuating split more likely) and I won't lie, it has me thinking about increasing my international allocation from 25% to 30% (I know, small change) but that felt more like market timing, or even just anchoring on past returns. I picked 25% International at one time, and it feels disingenuous to change just because I perceive suddenly that I'll get a better return with the tilt. On the other hand it would be a move towards market-weight, at-least region wise... Buffett was right; investing really is simple, but not easy...

shess
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Re: SP500 is very top heavy right now

Post by shess » Fri Nov 15, 2019 1:23 am

mrspock wrote:
Thu Nov 14, 2019 12:26 pm
Last I checked, all of them make money — a lot of money. What were the top 5 companies’ names for 1999? I think this context matters when assessing the validity of the comparison.

Today they are:
Microsoft
Apple
Amazon
Facebook
Berkshire

Seems to be they are all pretty legit, large moats, revenue not hinging on a bubble, tons of cash etc. It’s indexing surfacing the best of the best like it is supposed to.
Just in case you were thinking that BRK offsets the techiness of the others, note that Alphabet is #6 (GOOG) and #7 (GOOGL).

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CyclingDuo
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Re: SP500 is very top heavy right now

Post by CyclingDuo » Fri Nov 15, 2019 7:13 am

JoMoney wrote:
Thu Nov 14, 2019 8:48 pm
If you look at the top 10 it's relatively light compared to history.
John Bogle in The Policy Portfolio in an Era of Subdued Returns, June 2003 wrote: http://johncbogle.com/speeches/JCB_IASC0603.pdf
Image
... It’s easy to argue, of course that having, as the S&P 500 Index currently does, 24% of assets in its
10 largest stocks is inadequate diversification. But the reality is that that level of concentration is in fact
also below historic norms. In 1950, for example, the largest ten stocks composed fully 51%(!) of the total
value of the Index, and even in 1964 the top ten composed 38%. Is such diversification adequate?
There’s no way to be certain. But if the actual goal of investing is to capture as close as possible to 100%
of the return of the stock market, one simply tries to own the market itself, warts and all, with each
company weighted by its own market capitalization.
...


It's also good to look at the profits. The top 10 stocks in the S&P 500 will post 21% of the net profits made for all 500 companies in that index ($306B coming from the top 10 out of $1.4T from the entire S&P 500 for 2019).
https://www.investors.com/etfs-and-fund ... ofit-year/

The top 20 most profitable companies in the world include 10 US companies: Apple, JP Morgan, Alphabet, Bank of America, Wells Fargo, Facebook, Intel, Exxon Mobile, AT&T, Citigroup

This site breaks down the profit per day for the top 20 most profitable companies in the world, as well as their annual profits:

https://www.visualcapitalist.com/the-wo ... companies/

PROFIT PER DAY
Image

PROFIT PER YEAR
Image
Image


PROFIT PER SECOND for top S&P 500 in 2016
Image
"Everywhere is within walking distance if you have the time." ~ Steven Wright

Ferdinand2014
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Re: SP500 is very top heavy right now

Post by Ferdinand2014 » Fri Nov 15, 2019 7:33 am

It’s a market cap index fund. Top heavy is how it works. 1.3% of all global stocks represent the entire return above the yield of treasury bills. I have no worries about this. It is normal and expected. The top 10 will be replaced by something else at some point. When it does I will own that too. I have no plans to try and outsmart myself or the market.

“We study compound returns to nearly 62,000 global common stocks during the 1990 to 2018 period, documenting that the majority, 56% of US stocks and 61% of non-US stocks, underperform one-month US Treasury bills over the full sample. Focusing on aggregate shareholder wealth creation measured in US dollars, we find that the top-performing 1.3% of firms account for the $US 44.7 trillion in global stock market wealth creation from 1990 to 2018. Outside the US, less than one percent of firms account for the $US 16.0 trillion in net wealth creation. These results highlight the practical implications of the fact that the distribution of long-run stock returns is strongly positively skewed.”

https://poseidon01.ssrn.com/delivery.ph ... 24&EXT=pdf
“You only find out who is swimming naked when the tide goes out.“ — Warren Buffett

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Re: SP500 is very top heavy right now

Post by rkhusky » Fri Nov 15, 2019 7:58 am

Forester wrote:
Fri Nov 15, 2019 12:33 am
3% in small cap via TSM is meaningless... sure one can be philosophical and pat oneself on the back "the wisdom of the market has decided that this is the correct weighting" etc etc but you may as well own the S&P 500 or just the biggest 50 stocks.
Where are you getting 3%? Even Morningstar has it as above 6% and that is after they changed their definition of small in 2018. Before that it was more than 9%. The definition of "small" is quite arbitrary and you can make the percentage contained in TSM to be pretty much what you want to fit your narrative.

edit: However, Morningstar still lists the old breakdown on their website (giant/large/mid/small/micro = 40/30/20/7/3), even though in practice they are using the new breakdown (approx 46/30/17/6/1). http://quicktake.morningstar.com/DataDe ... pshot.html and http://portfolios.morningstar.com/fund/summary?t=vtsax
Last edited by rkhusky on Fri Nov 15, 2019 8:18 am, edited 1 time in total.

mjb
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Re: SP500 is very top heavy right now

Post by mjb » Fri Nov 15, 2019 8:11 am

The reason we hold the index is to preserve value when a company crashes. Usually, when a company goes under, it is due to competition. Holding the market let's you capitalize on the gains of the competitors.

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Forester
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Re: SP500 is very top heavy right now

Post by Forester » Fri Nov 15, 2019 8:21 am

rkhusky wrote:
Fri Nov 15, 2019 7:58 am
Forester wrote:
Fri Nov 15, 2019 12:33 am
3% in small cap via TSM is meaningless... sure one can be philosophical and pat oneself on the back "the wisdom of the market has decided that this is the correct weighting" etc etc but you may as well own the S&P 500 or just the biggest 50 stocks.
Where are you getting 3%? Even Morningstar has it as above 6% and that is after they changed their definition of small in 2018. Before that it was more than 9%. The definition of "small" is quite arbitrary and you can make the percentage contained in TSM to be pretty much what you want to fit your narrative.

edit: However, Morningstar still lists the old breakdown on their website (giant/large/mid/small/micro = 40/30/20/7/3), even though in practice they are using the new breakdown (approx 46/30/17/6/1). http://quicktake.morningstar.com/DataDe ... pshot.html and http://portfolios.morningstar.com/fund/summary?t=vtsax
The 3% came from someone else in this thread. It could be 3% to 15% it doesn't matter, point is TSM = S&P 500 = DJIA, broadly speaking.

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Taylor Larimore
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Small Cap Value represents only 3% of U.S. Stock Market

Post by Taylor Larimore » Fri Nov 15, 2019 9:03 am

Forester wrote:The 3% came from someone else in this thread.
Bogleheads:

I believe I'm the "someone else in this thread." I used the figure of 3% as being representative of "small-cap value" in the total U.S. stock Market.

This article by The White Coat Investor explains:

https://www.whitecoatinvestor.com/under ... t-you-own/

Best wishes.
Taylor
Jack Bogle's Words of Wisdom: "I don't believe in factor funds. I believe factors come and go. I believe that the coming and going of a factor cycle is unpredictable, and the record I think pretty much bears me out."
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Ocean77
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Re: SP500 is very top heavy right now

Post by Ocean77 » Fri Nov 15, 2019 11:13 am

mjb wrote:
Fri Nov 15, 2019 8:11 am
The reason we hold the index is to preserve value when a company crashes. Usually, when a company goes under, it is due to competition. Holding the market let's you capitalize on the gains of the competitors.
This can also be achieved by spreading the portfolio across a variety of index funds, i.e. small cap, mid cap, Europe, Asia, Emerging market, Real Estate etc.

The market collective wisdom that we try to rely upon simply functions to set the price of each specific company. History shows that we as individual investors have no hope of outguessing the market in that regard (i.e. picking winning stocks). But there is no "market collective wisdom" for the allocation of an investment portfolio, i.e. should it be market cap based. The "market" does not say anything about it.

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hdas
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Re: SP500 is very top heavy right now

Post by hdas » Fri Nov 15, 2019 11:20 am

columbia wrote:
Thu Nov 14, 2019 8:13 pm
If this information were actionable (is it?), it would seem to point to reducing equity exposure - as the implication is that a crash is coming; pulling your money from large caps and placing it it into small caps and/or international won’t save you from a crash.
It could be actionable in the following way:

> We can agree that the level of concentration of top holdings is elevated relative to recent history.
> We can also agree that it's likely that the level of concentration is mean reverting.
> If we expect mean reversion, it has to be due to relative under-performance of top holdings.
> Relative under-performance of top holdings doesn't imply a crash.

However, this line of thinking implies timing of said mean reversion and that could be a tricky proposition.

Cheers :greedy
"whenever there is a randomized way of doing something, then there is a nonrandomized way that delivers better performance but requires more thought" ET Jaynes

Ocean77
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Re: SP500 is very top heavy right now

Post by Ocean77 » Fri Nov 15, 2019 11:26 am

hdas wrote:
Fri Nov 15, 2019 11:20 am
columbia wrote:
Thu Nov 14, 2019 8:13 pm
If this information were actionable (is it?), it would seem to point to reducing equity exposure - as the implication is that a crash is coming; pulling your money from large caps and placing it it into small caps and/or international won’t save you from a crash.
It could be actionable in the following way:

> We can agree that the level of concentration of top holdings is elevated relative to recent history.
> We can also agree that it's likely that the level of concentration is mean reverting.
> If we expect mean reversion, it has to be due to relative under-performance of top holdings.
> Relative under-performance of top holdings doesn't imply a crash.

However, this line of thinking implies timing of said mean reversion and that could be a tricky proposition.

Cheers :greedy
The "timing" can be automated by setting a portfolio allocation once (i.e. 50% large cap / 50% small cap just to make up a simplified example), and then rebalancing annually. If the large caps grow disproportionally, you'd move money to small cap as part of the strategy. No guessing or market timing involved. The current overweight of the large caps may well continue for another 10 years, nobody on the planet knows. So what we can do is simply to set an allocation that has a good likelihood to succeed in a variety of future developments.

inbox788
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Re: SP500 is very top heavy right now

Post by inbox788 » Fri Nov 15, 2019 11:50 am

columbia wrote:
Thu Nov 14, 2019 8:13 pm
If this information were actionable (is it?), it would seem to point to reducing equity exposure - as the implication is that a crash is coming; pulling your money from large caps and placing it it into small caps and/or international won’t save you from a crash.
I don't think it's a matter of small caps or international as much as trading the subsets of the SP500. They're different comparisons.

It would be a form of active trading, but the graph shows a weight of 11 to 16% with a mean of about 13% between 1989 and 2019. If these ebbs and flows recurred and you could ride the waves, you'd overweight the top at the bottom of the range and underweight them at the top. That would be now, so you want an SP495 fund that should outperform the top 5 if their share shrinks back down to 11%.

I don't think these funds exist, and the total market is heavily weighted towards large caps, so that wouldn't single out the top 5. If you really wanted to, you could have used the Nasdaq tech heavy QQQ on the way up, and now switch to and Equal Weight SP500 RSP for the way down.

There are 2 flaws in trying to trade this that you would need to overcome. First, there is no reason for the top 1% to remain range bound either direction. The second is that even if there was mean to trade around, that it's in a particular cycle or pattern that's predictable. You might at best be playing odds, but you know the saying “The market can stay irrational longer than you can stay solvent.” https://en.wikiquote.org/wiki/John_Maynard_Keynes

rkhusky
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Re: SP500 is very top heavy right now

Post by rkhusky » Fri Nov 15, 2019 12:00 pm

Ocean77 wrote:
Fri Nov 15, 2019 11:13 am
This can also be achieved by spreading the portfolio across a variety of index funds, i.e. small cap, mid cap, Europe, Asia, Emerging market, Real Estate etc.
Achieved by Total World or Total Stock Market/Total International.
Ocean77 wrote:
Fri Nov 15, 2019 11:13 am
The market collective wisdom that we try to rely upon simply functions to set the price of each specific company. History shows that we as individual investors have no hope of outguessing the market in that regard (i.e. picking winning stocks). But there is no "market collective wisdom" for the allocation of an investment portfolio, i.e. should it be market cap based. The "market" does not say anything about it.
True. However, a market cap weighted index is most efficient in that one does not need to buy/sell stocks when stock prices change. The allocations do not depend on stock prices, but on the relative fraction of investable shares that each company has issued compared to the total investable shares in the market (something the market has no hand in setting).

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siamond
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Re: SP500 is very top heavy right now

Post by siamond » Fri Nov 15, 2019 12:03 pm

Ocean77 wrote:
Fri Nov 15, 2019 11:26 am
The "timing" can be automated by setting a portfolio allocation once (i.e. 50% large cap / 50% small cap just to make up a simplified example), and then rebalancing annually. If the large caps grow disproportionally, you'd move money to small cap as part of the strategy. No guessing or market timing involved. The current overweight of the large caps may well continue for another 10 years, nobody on the planet knows. So what we can do is simply to set an allocation that has a good likelihood to succeed in a variety of future developments.
Totally agreed. The more I think about diversification, the more I see it as diversification of (significant) sources of returns. Cap-weighting, as efficient as it is, then goes in the way by overly focusing on mega-caps. I wouldn't forget mid-caps though. One can definitely do worse than 50% large-caps, 25% mid-caps, 25% small-caps allocation (just as an example!). This might make the best of conflicting forces (cap-weighting vs. more balanced diversification).

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Re: Small Cap Value represents only 3% of U.S. Stock Market

Post by nedsaid » Fri Nov 15, 2019 12:09 pm

Taylor Larimore wrote:
Fri Nov 15, 2019 9:03 am
Forester wrote:The 3% came from someone else in this thread.
Bogleheads:

I believe I'm the "someone else in this thread." I used the figure of 3% as being representative of "small-cap value" in the total U.S. stock Market.

This article by The White Coat Investor explains:

https://www.whitecoatinvestor.com/under ... t-you-own/

Best wishes.
Taylor
Jack Bogle's Words of Wisdom: "I don't believe in factor funds. I believe factors come and go. I believe that the coming and going of a factor cycle is unpredictable, and the record I think pretty much bears me out."
Taylor, you probably got that 3% figure from Morningstar. I noticed that more recently, they had Small/Value at 2% of US Total Stock Market Index.
A fool and his money are good for business.

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Re: SP500 is very top heavy right now

Post by Ocean77 » Fri Nov 15, 2019 12:14 pm

rkhusky wrote:
Fri Nov 15, 2019 12:00 pm
Ocean77 wrote:
Fri Nov 15, 2019 11:13 am
This can also be achieved by spreading the portfolio across a variety of index funds, i.e. small cap, mid cap, Europe, Asia, Emerging market, Real Estate etc.
Achieved by Total World or Total Stock Market/Total International.
Ocean77 wrote:
Fri Nov 15, 2019 11:13 am
The market collective wisdom that we try to rely upon simply functions to set the price of each specific company. History shows that we as individual investors have no hope of outguessing the market in that regard (i.e. picking winning stocks). But there is no "market collective wisdom" for the allocation of an investment portfolio, i.e. should it be market cap based. The "market" does not say anything about it.
True. However, a market cap weighted index is most efficient in that one does not need to buy/sell stocks when stock prices change. The allocations do not depend on stock prices, but on the relative fraction of investable shares that each company has issued compared to the total investable shares in the market (something the market has no hand in setting).
This is a good point: A cap weighted portfolio will be more tax efficient, and you also avoid the trading costs (even if commissions are 0 now, there are still costs due to bid/ask spreads). But there are some ways to mitigate this. I.e. the tax issue goes away in IRAs. Also, at the moment I can achieve all my rebalancing without selling anything. I just add new money to the asset class that is below target. An investor who sets and wants to maintain a fixed allocation across different asset classes cannot achieve this with a total market fund.

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Re: SP500 is very top heavy right now

Post by willthrill81 » Fri Nov 15, 2019 12:28 pm

If you believe that the expected absolute returns of all publicly traded stocks are the same, then a TSM approach is optimal.

If you believe that the expected risk-adjusted returns are of all publicly traded stocks are the same, then a TSM may not be the best approach since you may want to take on greater risk in return for greater expected returns than TSM.

If you do believe that the risk-adjusted returns of all publicly traded stocks are NOT the same, then a TSM approach is definitely not appropriate.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: SP500 is very top heavy right now

Post by Ocean77 » Fri Nov 15, 2019 12:37 pm

willthrill81 wrote:
Fri Nov 15, 2019 12:28 pm
If you believe that the expected absolute returns of all publicly traded stocks are the same, then a TSM approach is optimal.
Hm, what if we had a crystal ball that would tell us that the S&P500 and the S&P600 (small cap) index will both have the exact same average return of 6% per year for the next 30 years. Will a TSM fund be optimal then? Let's see what happens if the relative performance of the S&P500 and S&P600 alternate each year: In one year, the large caps do much better, in the next year the small caps do much better. On average, both will still return 6% per year. And that is the return the TSM investor would get after 30 year.

On the other hand, if I set a fixed allocation of 50% each (split equally between the S&P500 and S&P600), and rebalance each year, then I would have a return higher than 6% after the 30 years. Because each year I'd harvest some of the gains of the outperforming asset and move it into the underperforming one. And then get the benefit as they trade places.

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Re: SP500 is very top heavy right now

Post by nisiprius » Fri Nov 15, 2019 12:41 pm

An honest chart.

Image
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hdas
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Re: SP500 is very top heavy right now

Post by hdas » Fri Nov 15, 2019 12:45 pm

nisiprius wrote:
Fri Nov 15, 2019 12:41 pm
An honest chart.

Image
honest chart, same conclusion, namely the top 5 are as concentrated as 1999. Cheers :greedy
"whenever there is a randomized way of doing something, then there is a nonrandomized way that delivers better performance but requires more thought" ET Jaynes

rkhusky
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Re: SP500 is very top heavy right now

Post by rkhusky » Fri Nov 15, 2019 1:07 pm

hdas wrote:
Fri Nov 15, 2019 12:45 pm
nisiprius wrote:
Fri Nov 15, 2019 12:41 pm
An honest chart.

Image
honest chart, same conclusion, namely the top 5 are as concentrated as 1999. Cheers :greedy
Looks pretty constant to me, with some minor fluctuations.

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Re: SP500 is very top heavy right now

Post by nedsaid » Fri Nov 15, 2019 1:16 pm

Want to make it clear that my comments are not to panic folks out of their Total Stock Market Index and S&P 500 stocks. I have toyed with the idea of shifting as much as 30% of such funds into Value indexes, so far I have shifted maybe 5%-10%. Not a crisis or anything like that but the valuation spreads between Growth and Value, according to Larry Swedroe, are about where they were in 1999. The "Swedroe Shuffle", a shift from Growth to Value is probably a bit more aggressive than just Growth to Value rebalancing. Not advocating a wholesale abandonment of Total Stock Market or the S&P 500, just some trimming and reallocation to cheaper stocks. Is that market timing? Yes, but it in a mild form.
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Re: SP500 is very top heavy right now

Post by rkhusky » Fri Nov 15, 2019 1:18 pm

willthrill81 wrote:
Fri Nov 15, 2019 12:28 pm
If you do believe that the risk-adjusted returns of all publicly traded stocks are NOT the same, then a TSM approach is definitely not appropriate.
Even if you don’t have a reliable method for determining future risk-adjusted returns?

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Re: SP500 is very top heavy right now

Post by willthrill81 » Fri Nov 15, 2019 1:22 pm

rkhusky wrote:
Fri Nov 15, 2019 1:18 pm
willthrill81 wrote:
Fri Nov 15, 2019 12:28 pm
If you do believe that the risk-adjusted returns of all publicly traded stocks are NOT the same, then a TSM approach is definitely not appropriate.
Even if you don’t have a reliable method for determining future risk-adjusted returns?
I said 'believe'. I also didn't say which approach other than TSM such an investor should adopt since that is dependent on that person's other beliefs regarding the market.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: SP500 is very top heavy right now

Post by rkhusky » Fri Nov 15, 2019 1:26 pm

willthrill81 wrote:
Fri Nov 15, 2019 1:22 pm
rkhusky wrote:
Fri Nov 15, 2019 1:18 pm
willthrill81 wrote:
Fri Nov 15, 2019 12:28 pm
If you do believe that the risk-adjusted returns of all publicly traded stocks are NOT the same, then a TSM approach is definitely not appropriate.
Even if you don’t have a reliable method for determining future risk-adjusted returns?
I said 'believe'.
I believe that stocks will have different risk-adjusted returns, but I don’t have a reliable method for determining which ones will out-perform. So, I essentially choose TSM.

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Re: SP500 is very top heavy right now

Post by Ocean77 » Fri Nov 15, 2019 1:52 pm

nedsaid wrote:
Fri Nov 15, 2019 1:16 pm
Want to make it clear that my comments are not to panic folks out of their Total Stock Market Index and S&P 500 stocks. I have toyed with the idea of shifting as much as 30% of such funds into Value indexes, so far I have shifted maybe 5%-10%. Not a crisis or anything like that but the valuation spreads between Growth and Value, according to Larry Swedroe, are about where they were in 1999. The "Swedroe Shuffle", a shift from Growth to Value is probably a bit more aggressive than just Growth to Value rebalancing. Not advocating a wholesale abandonment of Total Stock Market or the S&P 500, just some trimming and reallocation to cheaper stocks. Is that market timing? Yes, but it in a mild form.
My opinion: We can all have different approaches and styles, but I think it is important not to shift funds around, no matter what the reason. One should set some allocation and stick with it. If one invests in a TSM fund and sticks with it for the next 30 years, the result will be good. If one splits the portfolio between large, small, value etc and sticks with that for the next 30 years, the results will be good. If one starts to shift around between funds because it looks one area is overvalued at a time, then results won't be good.

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Re: SP500 is very top heavy right now

Post by nedsaid » Fri Nov 15, 2019 2:43 pm

Ocean77 wrote:
Fri Nov 15, 2019 1:52 pm
nedsaid wrote:
Fri Nov 15, 2019 1:16 pm
Want to make it clear that my comments are not to panic folks out of their Total Stock Market Index and S&P 500 stocks. I have toyed with the idea of shifting as much as 30% of such funds into Value indexes, so far I have shifted maybe 5%-10%. Not a crisis or anything like that but the valuation spreads between Growth and Value, according to Larry Swedroe, are about where they were in 1999. The "Swedroe Shuffle", a shift from Growth to Value is probably a bit more aggressive than just Growth to Value rebalancing. Not advocating a wholesale abandonment of Total Stock Market or the S&P 500, just some trimming and reallocation to cheaper stocks. Is that market timing? Yes, but it in a mild form.
My opinion: We can all have different approaches and styles, but I think it is important not to shift funds around, no matter what the reason. One should set some allocation and stick with it. If one invests in a TSM fund and sticks with it for the next 30 years, the result will be good. If one splits the portfolio between large, small, value etc and sticks with that for the next 30 years, the results will be good. If one starts to shift around between funds because it looks one area is overvalued at a time, then results won't be good.
I don't do much in shifting things around. In early 2000, 15% of my stocks were sold and taken to cash. In 2005, I took almost all of my remaining cash and put it into bonds. In 2007-2008, I did some Small/Value tilting. From 2013-present, I have been slowly decreasing my allocation to stocks and increasing my allocation to bonds. Recently, I have been doing a bit of Growth to Value rebalancing. Mostly de-risking and trying to buy things when they are relatively cheap.
A fool and his money are good for business.

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Re: SP500 is very top heavy right now

Post by willthrill81 » Fri Nov 15, 2019 2:50 pm

rkhusky wrote:
Fri Nov 15, 2019 1:26 pm
willthrill81 wrote:
Fri Nov 15, 2019 1:22 pm
rkhusky wrote:
Fri Nov 15, 2019 1:18 pm
willthrill81 wrote:
Fri Nov 15, 2019 12:28 pm
If you do believe that the risk-adjusted returns of all publicly traded stocks are NOT the same, then a TSM approach is definitely not appropriate.
Even if you don’t have a reliable method for determining future risk-adjusted returns?
I said 'believe'.
I believe that stocks will have different risk-adjusted returns, but I don’t have a reliable method for determining which ones will out-perform. So, I essentially choose TSM.
Just to be clear, you're saying that historical factors that have been robust across asset classes, time, and geography will not yield higher absolute or risk-adjusted returns for real world funds than TSM funds? You're certainly not alone if that's your view; I just want to be clear.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: SP500 is very top heavy right now

Post by Phineas J. Whoopee » Fri Nov 15, 2019 3:07 pm

willthrill81 wrote:
Thu Nov 14, 2019 1:49 pm
...
Many say that it's impossible to do better than a TSM approach. ...
Any many who claim that are wrong. Perhaps it isn't possible to reliably get more return, or perhaps it is, but of course any investor who differs from the market will earn more or less than it.

An investor can take their personal circumstances into account to adjust their risks, if not directly their returns. A technology firm executive with lots of employer stock and options might want to tilt away from technology in the remainder of their portfolio, for example.

I don't mind criticisms of the EMH. I respond when it's mischaracterized. If somebody isn't going to accept some thing, let's at least make sure the thing they don't accept is what they meant to reject.

Here's my write-up from several years ago.

PJW

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Re: SP500 is very top heavy right now

Post by nedsaid » Fri Nov 15, 2019 3:49 pm

Today I trimmed a bit from my Total Stock Market Index to buy more US Large Value Index and US Small Cap Index. The amounts aren't big but a continuation of rebalancing efforts, more Large Value and more Small Cap.
A fool and his money are good for business.

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Re: SP500 is very top heavy right now

Post by rkhusky » Fri Nov 15, 2019 7:29 pm

willthrill81 wrote:
Fri Nov 15, 2019 2:50 pm
Just to be clear, you're saying that historical factors that have been robust across asset classes, time, and geography will not yield higher absolute or risk-adjusted returns for real world funds than TSM funds? You're certainly not alone if that's your view; I just want to be clear.
I don't believe that one can reliably obtain higher risk-adjusted returns than TSM in any given future time frame.

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Re: SP500 is very top heavy right now

Post by willthrill81 » Fri Nov 15, 2019 8:00 pm

rkhusky wrote:
Fri Nov 15, 2019 7:29 pm
willthrill81 wrote:
Fri Nov 15, 2019 2:50 pm
Just to be clear, you're saying that historical factors that have been robust across asset classes, time, and geography will not yield higher absolute or risk-adjusted returns for real world funds than TSM funds? You're certainly not alone if that's your view; I just want to be clear.
I don't believe that one can reliably obtain higher risk-adjusted returns than TSM in any given future time frame.
Then TSM is the best instrument for you.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: SP500 is very top heavy right now

Post by columbia » Fri Nov 15, 2019 8:09 pm

rkhusky wrote:
Fri Nov 15, 2019 7:29 pm
willthrill81 wrote:
Fri Nov 15, 2019 2:50 pm
Just to be clear, you're saying that historical factors that have been robust across asset classes, time, and geography will not yield higher absolute or risk-adjusted returns for real world funds than TSM funds? You're certainly not alone if that's your view; I just want to be clear.
I don't believe that one can reliably obtain higher risk-adjusted returns than TSM in any given future time frame.
Folks like to point to small cap value, but it’s always important to use actually investable assets, so I’m comparing Vanguard 500 to the DFA SCV fund (and not some phony back testing results):

https://www.portfoliovisualizer.com/bac ... ion2_2=100

So far (since 1994), that SCV fund has not delivered higher risk adjusted returns.

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Re: SP500 is very top heavy right now

Post by willthrill81 » Fri Nov 15, 2019 8:25 pm

columbia wrote:
Fri Nov 15, 2019 8:09 pm
rkhusky wrote:
Fri Nov 15, 2019 7:29 pm
willthrill81 wrote:
Fri Nov 15, 2019 2:50 pm
Just to be clear, you're saying that historical factors that have been robust across asset classes, time, and geography will not yield higher absolute or risk-adjusted returns for real world funds than TSM funds? You're certainly not alone if that's your view; I just want to be clear.
I don't believe that one can reliably obtain higher risk-adjusted returns than TSM in any given future time frame.
Folks like to point to small cap value, but it’s always important to use actually investable assets, so I’m comparing Vanguard 500 to the DFA SCV fund (and not some phony back testing results):

https://www.portfoliovisualizer.com/bac ... ion2_2=100

So far (since 1994), that SCV fund has not delivered higher risk adjusted returns.
Despite all the derision it's received by not being 'valuey' enough, Vanguard's VISVX has had significantly higher risk-adjusted returns than the S&P 500 over its slightly shorter lifespan.

https://www.portfoliovisualizer.com/bac ... ion2_2=100
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: SP500 is very top heavy right now

Post by rkhusky » Fri Nov 15, 2019 10:14 pm

willthrill81 wrote:
Fri Nov 15, 2019 8:25 pm
columbia wrote:
Fri Nov 15, 2019 8:09 pm
rkhusky wrote:
Fri Nov 15, 2019 7:29 pm
willthrill81 wrote:
Fri Nov 15, 2019 2:50 pm
Just to be clear, you're saying that historical factors that have been robust across asset classes, time, and geography will not yield higher absolute or risk-adjusted returns for real world funds than TSM funds? You're certainly not alone if that's your view; I just want to be clear.
I don't believe that one can reliably obtain higher risk-adjusted returns than TSM in any given future time frame.
Folks like to point to small cap value, but it’s always important to use actually investable assets, so I’m comparing Vanguard 500 to the DFA SCV fund (and not some phony back testing results):

https://www.portfoliovisualizer.com/bac ... ion2_2=100

So far (since 1994), that SCV fund has not delivered higher risk adjusted returns.
Despite all the derision it's received by not being 'valuey' enough, Vanguard's VISVX has had significantly higher risk-adjusted returns than the S&P 500 over its slightly shorter lifespan.

https://www.portfoliovisualizer.com/bac ... ion2_2=100
Goes to show how time-dependent the performance can be. So, which is better SV or TSM? I say that no one knows, it just depends on what time period that you choose.

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Re: SP500 is very top heavy right now

Post by HippoSir » Fri Nov 15, 2019 10:24 pm

nedsaid wrote:
Fri Nov 15, 2019 3:49 pm
Today I trimmed a bit from my Total Stock Market Index to buy more US Large Value Index and US Small Cap Index. The amounts aren't big but a continuation of rebalancing efforts, more Large Value and more Small Cap.
*high five* :beer

Me too, although not by a significant amount. I moved 2.5% of my equity allocation into AVUV.

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Re: SP500 is very top heavy right now

Post by MotoTrojan » Sat Nov 16, 2019 1:56 am

HippoSir wrote:
Fri Nov 15, 2019 10:24 pm
nedsaid wrote:
Fri Nov 15, 2019 3:49 pm
Today I trimmed a bit from my Total Stock Market Index to buy more US Large Value Index and US Small Cap Index. The amounts aren't big but a continuation of rebalancing efforts, more Large Value and more Small Cap.
*high five* :beer

Me too, although not by a significant amount. I moved 2.5% of my equity allocation into AVUV.
Curious your rationale for using AVUV over say VIOV (or any other S&P600 value offering)? I’m starting a position in AVDV but felt the pure index options for domestic funds are a safer bet. Also imagine the index offering to be better in taxable.

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Re: SP500 is very top heavy right now

Post by hdas » Sat Nov 16, 2019 8:43 am

rkhusky wrote:
Fri Nov 15, 2019 1:07 pm
hdas wrote:
Fri Nov 15, 2019 12:45 pm
nisiprius wrote:
Fri Nov 15, 2019 12:41 pm
An honest chart.

Image
honest chart, same conclusion, namely the top 5 are as concentrated as 1999. Cheers :greedy
Looks pretty constant to me, with some minor fluctuations.
It seems that the high concentration doesn’t bother you in principle, appropriately so. However, in terms of degree, is there a level that will challenge your beliefs? Cheers :greedy
"whenever there is a randomized way of doing something, then there is a nonrandomized way that delivers better performance but requires more thought" ET Jaynes

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Re: SP500 is very top heavy right now

Post by lostdog » Sat Nov 16, 2019 9:29 am

Vanguard Total World Index helps me sleep very well at night.
VTWAX and chill.

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Re: SP500 is very top heavy right now

Post by bhjjk19 » Sat Nov 16, 2019 12:31 pm

Sounds to me that some individuals are over reacting to social media where prior posts suggest to ignore social media.
I read social media as well and a lot of top heavy equities were discussed my many financial blogs. They all sound like reasonable assumptions.
However, they are "assumptions" and I don't think I should over react at the moment.

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