New article casting doubt on index investing

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Lauretta
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New article casting doubt on index investing

Post by Lauretta »

I just received a new article in my email inbox, highlighting the potential dangers of indexing.
https://www.bloomberg.com/opinion?cmpid ... gn=authers

One sentence struck me in particular
(Charles) Gave points out that the US stock market is now about 70% of world market capitalization, even though its economy is only 17.8% of global gross domestic product. Therefore, he says, the markets are implying that “over the next 20 years, less than 20% of the world economy will earn three times more profits than the remaining 70% or so,” or put differently, that US tech firms will be “entrenched global monopolies stretching into perpetuity.”
Perhaps one can solve this by still indexing, but by a cut and dice method using a number of indeces for different geographical regions and underweighing the US? I have been doing this since 2015 and have kept losing (relative to just having MSCI World) but the sentence above points to the fact that over the long haul it is very very unlikely that the US will outperform. Thoughts?
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Re: New article casting doubt on index investing

Post by Jonbuck »

I believe holding something along the lines of VT as a core part of one’s portfolio helps solve this. The issue is not necessarily indexing, but based on what was quoted, the issue would be focused primarily on one geographic region with all your holdings.
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Re: New article casting doubt on index investing

Post by minimalistmarc »

I stick with the all world index and ignore all these articles
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Re: New article casting doubt on index investing

Post by Intrepyd »

Is US market cap really up to 70%? How does that compare with the international allocation of VT or target date funds?
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Re: New article casting doubt on index investing

Post by jebmke »

minimalistmarc wrote: Fri Feb 09, 2024 5:32 am I stick with the all world index and ignore all these articles
They are being whipped up by the active management crowd. It also helps sell clicks if you create a horse race.
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Re: New article casting doubt on index investing

Post by BitTooAggressive »

Lauretta wrote: Fri Feb 09, 2024 3:48 am I just received a new article in my email inbox, highlighting the potential dangers of indexing.
https://www.bloomberg.com/opinion?cmpid ... gn=authers

One sentence struck me in particular
(Charles) Gave points out that the US stock market is now about 70% of world market capitalization, even though its economy is only 17.8% of global gross domestic product. Therefore, he says, the markets are implying that “over the next 20 years, less than 20% of the world economy will earn three times more profits than the remaining 70% or so,” or put differently, that US tech firms will be “entrenched global monopolies stretching into perpetuity.”
Perhaps one can solve this by still indexing, but by a cut and dice method using a number of indeces for different geographical regions and underweighing the US? I have been doing this since 2015 and have kept losing (relative to just having MSCI World) but the sentence above points to the fact that over the long haul it is very very unlikely that the US will outperform. Thoughts?
That sentence is just wrong. Publicly traded capital markets do not represent all the world’s economic output. Not reading the article, the active arguments are always weak. But recognize few things are passively an index and involve no active decisions.
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Re: New article casting doubt on index investing

Post by Lauretta »

minimalistmarc wrote: Fri Feb 09, 2024 5:32 am I stick with the all world index and ignore all these articles
You don't think there's a risk that the US will be as Japan in the 90s?
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Re: New article casting doubt on index investing

Post by chazas »

Lauretta wrote: Fri Feb 09, 2024 5:58 am
minimalistmarc wrote: Fri Feb 09, 2024 5:32 am I stick with the all world index and ignore all these articles
You don't think there's a risk that the US will be as Japan in the 90s?
Of course there’s a risk. There’s a risk of almost anything. Does it appear to be a significant risk at present? No.
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Re: New article casting doubt on index investing

Post by KlangFool »

Lauretta wrote: Fri Feb 09, 2024 5:58 am
minimalistmarc wrote: Fri Feb 09, 2024 5:32 am I stick with the all world index and ignore all these articles
You don't think there's a risk that the US will be as Japan in the 90s?
Are you 100% US stock index and nothing else? If not, why does this matters to you?

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Re: New article casting doubt on index investing

Post by Lauretta »

KlangFool wrote: Fri Feb 09, 2024 6:43 am
Lauretta wrote: Fri Feb 09, 2024 5:58 am
minimalistmarc wrote: Fri Feb 09, 2024 5:32 am I stick with the all world index and ignore all these articles
You don't think there's a risk that the US will be as Japan in the 90s?
Are you 100% US stock index and nothing else? If not, why does this matters to you?

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I have 45% stocks in US stock index
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Re: New article casting doubt on index investing

Post by Tom_T »

Lauretta wrote: Fri Feb 09, 2024 6:46 am
KlangFool wrote: Fri Feb 09, 2024 6:43 am
Lauretta wrote: Fri Feb 09, 2024 5:58 am
minimalistmarc wrote: Fri Feb 09, 2024 5:32 am I stick with the all world index and ignore all these articles
You don't think there's a risk that the US will be as Japan in the 90s?
Are you 100% US stock index and nothing else? If not, why does this matters to you?

KlangFool
I have 45% stocks in US stock index
There is a very long thread (100 pages!) where the U.S-.vs.-international debate has been raging for a long time. There is no consensus. Some people insist that U.S. is all you need, and others are in vehement disagreement. Neither side budges an inch. Ultimately, you have to make your own choice since nobody can predict the future.

The pinned first post on the thread does have a summary of all the arguments for both sides. You can decide which ones appeal to you.

https://bogleheads.org/forum/viewtopic.php?t=409214
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Re: New article casting doubt on index investing

Post by KlangFool »

Lauretta wrote: Fri Feb 09, 2024 6:46 am
KlangFool wrote: Fri Feb 09, 2024 6:43 am
Lauretta wrote: Fri Feb 09, 2024 5:58 am
minimalistmarc wrote: Fri Feb 09, 2024 5:32 am I stick with the all world index and ignore all these articles
You don't think there's a risk that the US will be as Japan in the 90s?
Are you 100% US stock index and nothing else? If not, why does this matters to you?

KlangFool
I have 45% stocks in US stock index
So, why would this matters to you?

Do you have any international stock index fund?

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Re: New article casting doubt on index investing

Post by minimalistmarc »

Lauretta wrote: Fri Feb 09, 2024 5:58 am
minimalistmarc wrote: Fri Feb 09, 2024 5:32 am I stick with the all world index and ignore all these articles
You don't think there's a risk that the US will be as Japan in the 90s?
I think there’s a risk but I don’t actually care enough to do anything about it as I don’t believe I know anything the market doesn’t.
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Re: New article casting doubt on index investing

Post by Lauretta »

KlangFool wrote: Fri Feb 09, 2024 6:50 am
Lauretta wrote: Fri Feb 09, 2024 6:46 am
KlangFool wrote: Fri Feb 09, 2024 6:43 am
Lauretta wrote: Fri Feb 09, 2024 5:58 am
minimalistmarc wrote: Fri Feb 09, 2024 5:32 am I stick with the all world index and ignore all these articles
You don't think there's a risk that the US will be as Japan in the 90s?
Are you 100% US stock index and nothing else? If not, why does this matters to you?

KlangFool
I have 45% stocks in US stock index
So, why would this matters to you?

Do you have any international stock index fund?

KlangFool
mainly because I've been increasing my allocation to US to match its % in world market cap. So I am selling Intl and buying US and investing new money in US till I got to about 65% in US; but this article made me think I might be making a huge mistake
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Re: New article casting doubt on index investing

Post by YeahBuddy »

I'm very close to 100% US stock index. Is the sky falling? Do I click?
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Re: New article casting doubt on index investing

Post by KlangFool »

Lauretta wrote: Fri Feb 09, 2024 7:07 am
KlangFool wrote: Fri Feb 09, 2024 6:50 am
Lauretta wrote: Fri Feb 09, 2024 6:46 am
KlangFool wrote: Fri Feb 09, 2024 6:43 am
Lauretta wrote: Fri Feb 09, 2024 5:58 am

You don't think there's a risk that the US will be as Japan in the 90s?
Are you 100% US stock index and nothing else? If not, why does this matters to you?

KlangFool
I have 45% stocks in US stock index
So, why would this matters to you?

Do you have any international stock index fund?

KlangFool
mainly because I've been increasing my allocation to US to match its % in world market cap. So I am selling Intl and buying US and investing new money in US till I got to about 65% in US; but this article made me think I might be making a huge mistake
You cannot buy confidence from anyone else. You either believe in what you are doing or you don't.

I am sticking to my international allocation.

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Re: New article casting doubt on index investing

Post by ScubaHogg »

GDP != company profits
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Re: New article casting doubt on index investing

Post by TimeIsYourFriend »

70% doesn't sound right.
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Re: New article casting doubt on index investing

Post by Onlineid3089 »

ScubaHogg wrote: Fri Feb 09, 2024 7:22 am GDP != company profits
That is kind of what I was wondering about. Take Apple. They are a US company. The iPhone is manufactured in China with parts primarily from that general part of Asia. I don't know how GDP works to know whether the US or China/Taiwan/Vietnam, etc get the GDP benefit from the iPhone?
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Re: New article casting doubt on index investing

Post by ScubaHogg »

Onlineid3089 wrote: Fri Feb 09, 2024 8:01 am
ScubaHogg wrote: Fri Feb 09, 2024 7:22 am GDP != company profits
That is kind of what I was wondering about. Take Apple. They are a US company. The iPhone is manufactured in China with parts primarily from that general part of Asia. I don't know how GDP works to know whether the US or China/Taiwan/Vietnam, etc get the GDP benefit from the iPhone?
Even if it was all made in the US it kinda doesn’t matter. The USSR had a gdp, but absolutely zero earnings to invest in.

So America could be 20% of world gdp but make up 80% of world company earnings. Not saying that’s so, just saying gdp doesn’t really tell you anything
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Re: New article casting doubt on index investing

Post by NashTransplant »

mainly because I've been increasing my allocation to US to match its % in world market cap. So I am selling Intl and buying US and investing new money in US till I got to about 65% in US; but this article made me think I might be making a huge mistake/quote]

My bet is that a difference of, say, 10% weight difference between int'l and US will have very little impact on your long term returns. If you use portfolio visualizer, it certainly would have limited impact historically. We tend to obsess here over asset allocation ratios that ultimately have limited impact, and are impossible to foresee on the frontside anyway. If you were deciding between 100% and 50-50, it's a big deal, but it sounds like the question is mainly if you are 60 vs 70% in US which I wouldn't lose too much sleep over.
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Re: New article casting doubt on index investing

Post by nisiprius »

Toss it on the pile of 1,389 articles in the last twenty years casting doubt on index investing, and get on with life.

Yes, I made that number up.

Why does he think it's the passive investors that are expending the alleged tech bubble? I think it's the active investors, like Cathie Wood, who are doing that.

If there isn't a net inflow into index funds, then S&P 500 and total market index funds do not need to buy any new tech stocks to continue tracking their index and cannot be expanding the the bubble.

If there is a net inflow, then they must buy tech stocks, yes, but they must buy every other kind of stock as well, and might be elevating all valuations but can't be elevating the relative valuation of tech, and can't be expanding the tech bubble.

If passive investors are "expressing no opinion on value," and if value is actually... uh, valuable, then that is favorable for active investors, who should be able to use their superior judgement to take money away from passive investors.

If the proper function of the stock market is to transfer wealth from the general public to David Einhorn, then, sure, passive investing by the general public might be "breaking" the market.
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Re: New article casting doubt on index investing

Post by exodusing »

As always, ask yourself if you're significantly better at valuing stocks or choosing an asset allocation than the average investor (weighted by portfolio size or perhaps trading volume) or are significantly different from the average investor, in each case in a way that leads to a different allocation. If you can't confidently answer those questions in the affirmative, stick with market weights.

Ask yourself why an active manager might dislike low cost indexing. Consider the famous Upton Sinclair quote "It is difficult to get a man to understand something when his salary depends on his not understanding it."
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Re: New article casting doubt on index investing

Post by Jack FFR1846 »

So the article is casting doubt on US companies because they feel other countries will outperform. But what is a US company? One headquartered in the US? Take one inside and one outside. Texas Instruments, headquartered just north of Dallas sells 65% of it's stuff outside the US. It owns the largest IC packaging facility at the former Clark base in the Philippines. It has both factories, design centers and purchased companies all over the world. So is it really a US company? I worked for them for 8 years so saw this from inside. What about Bosch? You'd say it's a German company. Have fun finding all the factories, design centers and sales facilities, many of which are in the US. So is it an international company? How about Tesla? (gasps from the Tesla fanbois). With a huge factory in China and huge sales there, is it becoming a Chinese company?

So in short, the article takes some very simplistic assumptions that are wrong. Say the economy in Australia booms. Well, you know both GM and Ford are huge in Australia? This isn't new.
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Re: New article casting doubt on index investing

Post by Tamalak »

Lauretta wrote: Fri Feb 09, 2024 3:48 am I just received a new article in my email inbox, highlighting the potential dangers of indexing.
https://www.bloomberg.com/opinion?cmpid ... gn=authers

One sentence struck me in particular
(Charles) Gave points out that the US stock market is now about 70% of world market capitalization, even though its economy is only 17.8% of global gross domestic product. Therefore, he says, the markets are implying that “over the next 20 years, less than 20% of the world economy will earn three times more profits than the remaining 70% or so,” or put differently, that US tech firms will be “entrenched global monopolies stretching into perpetuity.”
Perhaps one can solve this by still indexing, but by a cut and dice method using a number of indeces for different geographical regions and underweighing the US? I have been doing this since 2015 and have kept losing (relative to just having MSCI World) but the sentence above points to the fact that over the long haul it is very very unlikely that the US will outperform. Thoughts?
The reasoning is nonsense on its face. US market cap as a % of the world is much higher than US GDP as a % of the world not because the US is overvalued, but because a much greater percentage of the US GDP is in the form of corporations than the rest of the world.

So of the investible portion of the world GDP, (global) index investors invest equally.

It's like complaining that there are more fisheries in Vietnam than Mongolia even though Mongolia is a much bigger country. There are many more locations TO FISH in Vietnam than Mongolia.
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Re: New article casting doubt on index investing

Post by Lauretta »

nisiprius wrote: Fri Feb 09, 2024 9:45 am

If the proper function of the stock market is to transfer wealth from the general public to David Einhorn, then, sure, passive investing by the general public might be "breaking" the market.
Sorry you lost me here :confused
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Re: New article casting doubt on index investing

Post by z3r0c00l »

I agree the US market cap is unreasonable and think international is undervalued significantly for ideological/political reasons, not intrinsic economic reasons. The Nikkei 225 has been on an absolute tear during the past year (+35%) yet is still at a P/E of 16. Toyota is up over 50% during the past year, and is only now hitting the PE ratio of 10! Buffett is pouring billions into Japanese stocks, etc. etc.

But I don't think index investing has anything to do with this strange US outperformance, nor does it leave one uniquely exposed to it. On the contrary, index investing allows you to capture market returns no matter how inexplicable they are. If international swings back, true index investors will benefit from that. If the US continues to Japan 1989 its way to global dominance for a while, indexing also works. What doesn't work is stock picking and trying to time the market, or worrying about GDP to market cap which isn't really a comparable figure. Some countries like Saudi Arabia and Qatar have a high GDP but not necessarily a large percent of that GDP captured by publicly traded companies.
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Re: New article casting doubt on index investing

Post by gavinsiu »

I can't read the article, but based on your quote, you are worry that US is a smaller share of the world, but has a outsize capital market. You are concern that this will fall to match the GDP. You can probably mitigate this by:
  1. Add more international allocation, which as you notice has been a drag on the return.
  2. Change to a global index fund and bet on the world, which is just a variation of the first.
This is more of international investment debate than a index debate. I would think an actively managed domestic fund would have the same issue.
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Re: New article casting doubt on index investing

Post by Elysium »

Lauretta wrote: Fri Feb 09, 2024 5:58 am You don't think there's a risk that the US will be as Japan in the 90s?
No, US will be US, regardless of what happens to it's capital markets in long run, meaning it will be unique and different from another country just like they are from US. I've been hearing this Japan 90's syndrome as reason to invest overseas since I started, for 25 years, and listening to that has cost me a lot, than had I listened to Jack Bogle and skipped it all together or capped at 20%, which I didn't always. Even now holding 30% in hope someday the benefits will show up.

Perhaps it is time we change this Japan syndrome as the reason to invest overseas to something compelling that makes those capital markets attractive. I'd like to hear positive cases about investing in UK companies than simply putting my money there in fear of US becoming another Japan - I mean, even if that were to happen do we know why UK companies are a better alternative - will they do better than US then?

To your original post - what's wrong if US is taking 70% of profits even though it's only 20% of the worldwide economy. Throughout history resource allocation has been lopsided. It will become very clear to us if we just realized that the US is living at the expense of the world. The dollar with it's reserve currency is one major advantage for US, there are others, will someday all this end - history of world tells us that nothing is forever, although no one can predict how long this will last or what will shift this.
Last edited by Elysium on Sat Feb 10, 2024 8:08 am, edited 2 times in total.
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Re: New article casting doubt on index investing

Post by exodusing »

Lauretta wrote: Sat Feb 10, 2024 7:25 am
nisiprius wrote: Fri Feb 09, 2024 9:45 am

If the proper function of the stock market is to transfer wealth from the general public to David Einhorn, then, sure, passive investing by the general public might be "breaking" the market.
Sorry you lost me here :confused
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Re: New article casting doubt on index investing

Post by stan1 »

It's all mental: if one views the S&P 500 as a global index because large US-based companies do business around the world then folks are good to go. Jack Bogle possibly felt this way when he said "international not needed".
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Re: New article casting doubt on index investing

Post by jebmke »

exodusing wrote: Sat Feb 10, 2024 8:05 am
Lauretta wrote: Sat Feb 10, 2024 7:25 am
nisiprius wrote: Fri Feb 09, 2024 9:45 am

If the proper function of the stock market is to transfer wealth from the general public to David Einhorn, then, sure, passive investing by the general public might be "breaking" the market.
Sorry you lost me here :confused
Einhorn makes money from active investing other people's money. Passive investing denies him income from exorbitant fees he charges other people - it breaks that transfer of wealth from investors to Einhorn.
edited for clarity :P
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Re: New article casting doubt on index investing

Post by nyejos11 »

Japan doesn’t have a reserve currency that is used all around the world does it? That’s one of the reasons I feel the Japan comparison is apples to oranges.
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Re: New article casting doubt on index investing

Post by watchnerd »

stan1 wrote: Sat Feb 10, 2024 9:13 am It's all mental: if one views the S&P 500 as a global index because large US-based companies do business around the world then folks are good to go. Jack Bogle possibly felt this way when he said "international not needed".
The people who make the indices don't view the S&P500 as a global index.
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Re: New article casting doubt on index investing

Post by Florida Orange »

The U.S. stock market is a certain percentage of world market capitalization because that's the percentage investors expect U.S. corporate profits to be of all the publicly traded companies in the world. As soon as the expectations change, the percentages will change.
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Re: New article casting doubt on index investing

Post by stan1 »

watchnerd wrote: Sat Feb 10, 2024 10:11 am
stan1 wrote: Sat Feb 10, 2024 9:13 am It's all mental: if one views the S&P 500 as a global index because large US-based companies do business around the world then folks are good to go. Jack Bogle possibly felt this way when he said "international not needed".
The people who make the indices don't view the S&P500 as a global index.
Of course they don't, but everyone is an expert and can form their own opinion that's as valid as anyone else's, right? Have to justify and rationalize any belief we want to hold /sarcasm.
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Re: New article casting doubt on index investing

Post by watchnerd »

stan1 wrote: Sat Feb 10, 2024 11:16 am
watchnerd wrote: Sat Feb 10, 2024 10:11 am
stan1 wrote: Sat Feb 10, 2024 9:13 am It's all mental: if one views the S&P 500 as a global index because large US-based companies do business around the world then folks are good to go. Jack Bogle possibly felt this way when he said "international not needed".
The people who make the indices don't view the S&P500 as a global index.
Of course they don't, but everyone is an expert and can form their own opinion that's as valid as anyone else's, right? Have to justify and rationalize any belief we want to hold /sarcasm.
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Re: New article casting doubt on index investing

Post by Charles Joseph »

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Re: New article casting doubt on index investing

Post by cheese_breath »

I didn't read the article and don't intend to. I know indexing worked for me, and that's all I need to know.
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Re: New article casting doubt on index investing

Post by nisiprius »

nyejos11 wrote: Sat Feb 10, 2024 10:01 am Japan doesn’t have a reserve currency that is used all around the world does it?
It does.

The International Monetary Fund (IMF) officially recognizes eight major reserve currencies: the Australian dollar, the British pound sterling, the Canadian dollar, the Chinese renminbi, the euro, the Japanese yen, the Swiss franc, and the U.S. dollar.

The dollar is not "the" reserve currency, only the biggest. By far the biggest, but only one of eight. And the yen is another.

Currenc Composition of Official Foreign Exchange Reserves (COFER)

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Re: New article casting doubt on index investing

Post by LadyGeek »

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texasdiver
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Location: Vancouver WA

Re: New article casting doubt on index investing

Post by texasdiver »

I expect that every single one of the world's 100 or even 500 largest publicly traded companies is global or at least international. The main thing that distinguishes them is where they are based, not what they actually do and where they do business.

Ford vs Toyota
Apple vs Samsung
Twitter vs TikTok
Novartis vs Pfizer
CitiBank vs HSBC
Hershey vs Nestle

shrug....
02nz
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Re: New article casting doubt on index investing

Post by 02nz »

Intrepyd wrote: Fri Feb 09, 2024 5:37 am Is US market cap really up to 70%? How does that compare with the international allocation of VT or target date funds?
It's not. VT (Vanguard Total World) holds about 39% international stocks.
trueson1
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Re: New article casting doubt on index investing

Post by trueson1 »

Active investors seeing more people flee to index fund investing - just a troll! Not worth the energy to speculate.
lws
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Re: New article casting doubt on index investing

Post by lws »

Noise to me.
rockstar
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Re: New article casting doubt on index investing

Post by rockstar »

Passive investing seems to be breaking value investing. That’s my take from the interviews on Bloomberg. Not really actionable for me.
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bobcat2
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Re: New article casting doubt on index investing

Post by bobcat2 »

Lauretta wrote: Fri Feb 09, 2024 3:48 am
(Charles) Gave points out that the US stock market is now about 70% of world market capitalization...
The US stock market is now a little over 60% of global market capitalization - not about 70%.

Link to 60% source - https://www.aaii.com/etf/ticker/VT#:~:t ... %20stocks.

BobK
In finance risk is defined as uncertainty that is consequential (nontrivial). | The two main methods of dealing with financial risk are the matching of assets to goals & diversifying.
Logan Roy
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Re: New article casting doubt on index investing

Post by Logan Roy »

Lauretta wrote: Fri Feb 09, 2024 3:48 am I just received a new article in my email inbox, highlighting the potential dangers of indexing.
https://www.bloomberg.com/opinion?cmpid ... gn=authers

One sentence struck me in particular
(Charles) Gave points out that the US stock market is now about 70% of world market capitalization, even though its economy is only 17.8% of global gross domestic product. Therefore, he says, the markets are implying that “over the next 20 years, less than 20% of the world economy will earn three times more profits than the remaining 70% or so,” or put differently, that US tech firms will be “entrenched global monopolies stretching into perpetuity.”
Perhaps one can solve this by still indexing, but by a cut and dice method using a number of indeces for different geographical regions and underweighing the US? I have been doing this since 2015 and have kept losing (relative to just having MSCI World) but the sentence above points to the fact that over the long haul it is very very unlikely that the US will outperform. Thoughts?
20% of something making 80% of the returns is typical all across nature, academia, work, etc. it's a Pareto Distribution. You should expect it. 1% of stocks are responsible for about half the market return.

I don't think the article makes much sense. Take Google, they've got offices in England, they're used in Poland, they sell ad space in Japan, phones in Spain .. These are global businesses, exposed to global revenues, with global offices .. Google, Apple, Amazon are not plays on the US economy – if China slows, Apple sales drop. It's arguable you get all the geographic diversification you need just from buying Apple stock.

And with China more willing to reign in its Big Tech, there's probably a good chance US equivalents do remain vastly more profitable
moneyflowin
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Re: New article casting doubt on index investing

Post by moneyflowin »

World market cap is $110T. US is $49T.

Someone failed 2nd grade math
1moreyr
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Re: New article casting doubt on index investing

Post by 1moreyr »

In 2022 stocks and bonds dropped together and all the articles were "Is the 60/40 portfolio dead?"

I had just retired and it was freaking me out with my 60/40 portfolio... I stayed the course more frozen with fear than anything else..

Within 9-12 months, the same people were printing articles "The 60/40 is back!"

Nobody knows nothing....don't let one article get you to lose sleep. Do what works for you.
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