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Smart Index Fund Investing

Discussion in 'Medium/Long Term Investing' started by Darc Knight, Oct 22, 2018.

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  1. Darc Knight

    Darc Knight Investor not Trader

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    I'll start this thread as it looks like people have missed the point of my Lazy Portfolios O.P. People can continue to post their preferred Index Funds there but if we could please make this a thread about overcoming some of current problems with Index Funds.

    Problem one I see is that the popular but "narrow" Index Funds such as ASX200 or 300, or S&P500 etc are inflating Share Price too far from the Intrinsic Value.
    With Index Fund investing approaching 40℅ of the Market, eventually Value Investors are going to leave the market leaving only the Index Fund investors who are basically "blind" Investors.

    My solution; go Global to one of whole World Index Funds???

    https://investor.vanguard.com/etf/profile/VT

    Thoughts?
     
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  2. basilio

    basilio

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    How much more useful is the vanguard World Index Fund? Wouldn't it have a similar problem with a narrowness of focus ?
     
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  3. Ann

    Ann

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    G'day DK, sorry I misunderstood you, its the dyslexia, I hate derailing someone's thread. The link is an interesting Vanguard US ETF, I can't seem to find the same sort of fund at Vanguard Australia. However I am not sure it would offer much protection in a downturn. The fund is made up of 57.9% North America, 19.2% Europe, 13.5% Pacific (all of which would travel in the same direction if there was a major market fall) then you have 9.10% of emerging markets which undoubtedly would feel the effects of a market downturn followed by 0.20% of Middle East and Other (short term bonds and cash) makes up 0.10%. Here the cash and bonds won't offer too much protection in a downterm as the holding is merely a blip figure in the overall holdings of the fund.

    Trying to create a similar portfolio I guess you could work out a weight for each and then buy into a bit of VAF Fixed Interest, VGB Australian Government Bonds, VAP Property, VGS International Shares and finally a bit of VGE for Emerging Markets. That would diversify your portfolio away from just the local stock market holdings.

    I hope this is the sort of thing you were wanting for this thread BK.
     
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  4. Darc Knight

    Darc Knight Investor not Trader

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    I think it's only a temporary fix, but getting more exposure to assets which aren't inflated by the big Index Funds is the point. Just don't tell anyone lol.

    Thoughts?
     
  5. Darc Knight

    Darc Knight Investor not Trader

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    @Ann my thread title was a bit deceptive apologies. You've made a great contribution, thanks :)
     
  6. luutzu

    luutzu

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    Guess I better do some "finance" positing...

    Wouldn't going global in the same asset class [stocks/bonds] be on the same (bigger, more fees) boat if/when the financial market corrects?

    I think explod was saying gold/silver could hold and preserve better during a financial market downturn. I'm no expert but reckon he has a good point.

    Chuggling along with my Mitsui book... seem their better managers in the late/early 20th century have the same idea as explod.

    That is, they accumulate gold/silver among their portfolio in the boom years... during market disruptions, traded those in for more valuable, productive stocks. Rinse and repeat.

    For those with a few bucks to their name... maybe hang on to the cash if you can, wait until you see serious amount of profit to be made before buying? Else keep the cash and quality businesses you already own, hope and pray for the best.

    That's not advice of course. Just my 2cents.
     
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  7. CBerg

    CBerg

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    I wouldn't call those narrow compared to some of "index" funds you see from the likes of BetaShares. I think we'll continue to see a lot of money flow into index funds. Most ordinary people don't care about individual companies but they hear the news about the "market", markets up, markets down, markets going bonkers. And it makes sense if you don't have time to properly research companies & understand P&L's, balance sheets, cash flows - you just hitch your ride to the market.

    I think index funds are a huge boon to any individual investor who has the time to sit down & do some serious research. You can pick up bargains for longer because everyone else is indexing away while you can be accumulating positions in companies that are undervalued because they're not in an index :2twocents
     
  8. basilio

    basilio

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    My observation is that the inflation of the asset value by the action of the Big Index funds is the point of the game. If enough funds keep chasing stock then the price will go up.

    This may not be true value or fairvalue but what the heck as long as the SP is high the funds won't care.

    Let's imagine one finds an investment that is promising . In fact what will happen is that IF it starts to be successful the index funds will want to include it in their list. But there is also a chance it can dawdle along make a profit but not achieving the astonomical PE ratios so far reserved for the stellar players.
     
  9. Ann

    Ann

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    If you wanted to get very adventurous DK you could always create a basket of illiquid to semi illiquid ETFs. My choices would be ASIA Asian Technology Tigers, HACK Global Cyber Security, DRUG Global healthcare ex Aussie, TECH Global Infrastucture, ZUSD US$ relative to the $A and lets chuck in a bit of bling..... GOLD. With the majority of these I would only be looking at Capital appreciation not income.
     
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  10. aus_trader

    aus_trader

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    I think so too so I have allocated a small % into QAU for gold exposure in the Medium/Longer Term Stock Portfolio and some brainstorming and discussing going into this choice as I want to leave it alone and perhaps add to in the future. Reasons are in another thread Storing Physical Gold - Coins etc.

    Just repeating what I wrote in the Lazy Portfolios. DK, I see your point about index funds approaching 40% of the market, I have also read somewhere how ETF's can magnify the risk for individual stocks during a financial crisis as multiple funds may dump losers as they rebalance portfolios.
     
  11. Darc Knight

    Darc Knight Investor not Trader

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    Thanks for your contributions everyone.
    I for one am going to keep investigating. I think once Index Fund investors reach 50% of the Market the Press will make it a big story, making even current Index Fund investors nervous. They say a lot of Index Fund investors already arent passive investors.
     
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  12. Ann

    Ann

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    It is a very interesting point you have made DK, I have not thought about it until now. My first take on it is that it may not be an unhealthy thing for the market for large funds to hold a major quantity of the market, unless they turn rogue and decide to rule the world, this is not something I can see happening. Maybe I am foolish thinking this way. The way I see it, the funds aren't on margin loans so there will be no panic selling in a market retrace. They will re-balance their holdings at an expected and predictable time of the year and this will be factored into the market so no shocks here. They are devoid of emotion so all sales and purchases will be done in a steady and appropriate manner creating correct weights for their particular fund focus. I actually feel the funds will stabalize the markets more than destabalize them. Very happy to hear another view, I admit to being a profound optimist who always sees the upside.
     
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  13. IFocus

    IFocus You are arguing with a Galah

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    Is there a difference in ETF's and say superfunds holding the same stocks?
     
  14. aus_trader

    aus_trader

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    One difference may be fees.
     
  15. Ann

    Ann

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    Starting to get the wobbles?
    Every Vanguard Sector ETF Bled Cash After a Big Investor Bailed
    By
    Carolina Wilson
    December 20, 2018, 7:33 AM GMT+11
    • Combined $1.8 billion pulled from all 11 Vanguard sector ETFs
    • Trading data indicates outflows were triggered by one seller


    It appears that one major investor called it quits on every single one of Vanguard’s popular exchange-traded funds tracking U.S. economic sectors.

    https://www.bloomberg.com/news/arti...tor-etf-bled-cash-after-a-big-investor-bailed
     
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  16. aus_trader

    aus_trader

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    If the big investors are leaving the funds I think it confirms my view to stay minimally exposed or to stay out of the market for the time being.
     
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  17. Darc Knight

    Darc Knight Investor not Trader

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  18. mcgrath111

    mcgrath111

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    Index's merely offer exposure too a broad range that wouldn't otherwise be accessible to the ordinary investor i.e VGE for emerging markets.
    I think index's can bring about value opportunities i.e. CBA implodes and hedge funds begin selling, it may drop out of a top 50 or even a top 200 index. Falling out of these index's would further push the price lower, even though it's IV may be $X

    Even without index based ETF's superfunds are essentially doing the same thing / buying blue chips / re balancing.

    As for "blind investors", I think a lot of people who invest in individual stocks are blind. You mention intrinsic value, yet doing a dcf etc gives a nice number, however how many people buy stocks without doing calc's and deep research?


    Why do you believe stocks in the top 200 are inflated? - Looking at P/E multiples, I would say for the most part are priced fairly.

    I don't think ETF's will be a thing where all mum and dad's start investing into, it still holds a degree of risk / far more risk than a term deposit!

    tldr: ETF's good, people are (I am) lazy.
     
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  19. Darc Knight

    Darc Knight Investor not Trader

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    Yes, sort of. I remember Noel Whittaker saying "if it's too good to be true it usually is" certainly applies to the world of investing.

    To me Index Funds are too good to be true. Me, as a dumb passive investor can out perform most big funds with their floors of Analysts and Computers.
     
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  20. aus_trader

    aus_trader

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    I agree DK, I am also trying to do that in my portfolios of stocks. I do however use certain ETFs such as gold related ETFs and Oil ETFs to implement strategies especially in the Medium/Longer Term Stock Portfolio.
     
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