How to tilt away from possible bubbles in mega-cap growth stocks

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Locarno
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How to tilt away from possible bubbles in mega-cap growth stocks

Post by Locarno »

If one is concerned that many growth stocks (i.e. TSLA, FB, AAPL, and others) seem to be overvalued and overweighted in the common indexes, is it consistent with a Boglehead mindset to tilt away from these stocks somehow? And what is the best way to do so: is it just to move some percentage out of market cap-weighted (i.e. ordinary) index funds and into...value index funds, or value-weighted index funds, or fundamentals-weighted index funds, or something else?

And are there any good strategies for tilting away from potential bubbles other than value-based approaches?
sycamore
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Re: How to tilt away from possible bubbles in mega-cap growth stocks

Post by sycamore »

Locarno wrote: Sun Jun 13, 2021 9:59 pm If one is concerned that many growth stocks (i.e. TSLA, FB, AAPL, and others) seem to be overvalued and overweighted in the common indexes, is it consistent with a Boglehead mindset to tilt away from these stocks somehow? And what is the best way to do so: is it just to move some percentage out of market cap-weighted (i.e. ordinary) index funds and into...value index funds, or value-weighted index funds, or fundamentals-weighted index funds, or something else?
Consider some principles of the Bogleheads philosophy:

Diversify. "Rather than trying to pick the specific stocks or sectors of the market that may outperform in the future, Bogleheads buy funds that are widely diversified, or even approximate the whole market."

Invest with simplicity. This one doesn't say it explicitly but on the face of it suggests you not use another fund to achieve a tilt. A whole stock market fund is good enough.

But "Boglehead mindset" may be another matter. Is there such as thing? And even if there is one, it may even be of two minds, e.g., best to use a total market weight approach -- but not when it comes to international investing.

You'll find lots of opinions on whether to tilt and how. It's certainly a common practice to tilt. One of the more common is to small-cap and/or small-cap value, like what you're suggesting. Instead of a 70/20/10 large/mid/small split of total stock market, people might do a moderate tilt like 60/20/20 or 50/30/20.

I wouldn't use what others do as an example of what's a good idea or not. To be successful in investing and dealing with bubbles, I suggest reading a couple more Boglehead principles: Develop a workable plan and Stay the course. Whatever plan you come up with (with or without a tilt) needs to be something you can stick with through bubbles and crashes.
Locarno wrote: Sun Jun 13, 2021 9:59 pm And are there any good strategies for tilting away from potential bubbles other than value-based approaches?
The classic way is to use an asset allocation that fits your risk tolerance. If you're concerned about stock bubbles breaking, pick a stock allocation that's not too big. E.g., if stocks were to drop 50%, would it be too much for you to bear? (this varies depending on age, $ amount invested, job prospects, etc.). If so, then you need a smaller allocation to stocks. Bonds' expected returns are very low right now and thus aren't appealing, but they won't drop nearly as much as stocks could.

Also, I don't know if it's good approach but some would use options to cover a potential downside loss, kind of like a form of insurance. I don't know much about this. Maybe someone else will chime in on it.
Last edited by sycamore on Mon Jun 14, 2021 9:24 am, edited 1 time in total.
Flashes1
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Re: How to tilt away from possible bubbles in mega-cap growth stocks

Post by Flashes1 »

A couple ideas if you want to stick with equities:

1. Small/Mid Cap index funds.
2. There's index funds that aren't cap weighted...forget what they're called but each company in the S&P 500 index fund is weighed equally at 1/500.
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Re: How to tilt away from possible bubbles in mega-cap growth stocks

Post by uberdoc »

Bubble here bubble there… it seems like we are in a children’s water park. Let’s act like a responsible adult here and keep an eye on them from a distance. They will be fine.
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Re: How to tilt away from possible bubbles in mega-cap growth stocks

Post by Ramjet »

I feel like you are setting yourself up for underperformance if you do this
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Re: How to tilt away from possible bubbles in mega-cap growth stocks

Post by JonnyDVM »

Small cap
International
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Re: How to tilt away from possible bubbles in mega-cap growth stocks

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Re: How to tilt away from possible bubbles in mega-cap growth stocks

Post by nisiprius »

Locarno wrote: Sun Jun 13, 2021 9:59 pm If one is concerned that many growth stocks (i.e. TSLA, FB, AAPL, and others) seem to be overvalued and overweighted in the common indexes, is it consistent with a Boglehead mindset to tilt away from these stocks somehow?
No. Two quotations from John C. Bogle:
Own the entire U.S. stock market, own it at low cost, hang on to it forever.
There are an infinite number of strategies worse than this one: Commit, over a period of a few years, half of your assets to a stock index fund and half to a bond index fund. Ignore interim fluctuations in their net asset values. Hold your positions for as long as you live, subject only to infrequent and marginal adjustments as your circumstances change. When there are multiple solutions to a problem, choose the simplest one.
He may have been right, he may have been wrong, but he made it very clear that he did not favor tilting or adjustments based on valuations.
Locarno wrote:And what is the best way to do so: is it just to move some percentage out of market cap-weighted (i.e. ordinary) index funds and into...value index funds, or value-weighted index funds, or fundamentals-weighted index funds, or something else?

And are there any good strategies for tilting away from potential bubbles other than value-based approaches?
1) If you try to avoid "potential" bubbles by tilting away from the best-performing stocks, you will of course miss out on "potential" gains if it turns out that it is not actually a bubble.

2) The stocks which you fear are in a bubble are all large growth stocks. How do you plan to remove them without increasing your percentage invested in value stocks? You sound as if you are aware that the value factor has underperformed for over a decade and want to have your cake and eat it, too--to avoid growth stocks without leaning toward value stocks. That seems... impossible.

You could take an active stock-picking approach and try to identify "those large growth stocks that are not in a bubble," I guess.

3) The track record of stock funds that try to avoid bubbles is what it is. Look at a couple. There can and will be endless discussions of whether the future will resemble the past. My belief is that there is no evidence that weights and tilts have ever provided robust, powerful, dependable protection without cutting return, too. For example:

Image

Blue--equally weighted
Orange--fundamental indexing
Green--value tilted
Yellow--plain old S&P 500

Not one of them kept you out of the bubble any better than the S&P 500 and not one of them mitigated the crash.
Last edited by nisiprius on Mon Jun 14, 2021 8:19 am, edited 1 time in total.
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Re: How to tilt away from possible bubbles in mega-cap growth stocks

Post by JoMoney »

Mr. Bogle had a nice speech at the peak of the dot-com bubble
"Risk and Risk Control in an Era of Confidence"
http://johncbogle.com/speeches/JCB_NE_Pension_4-00.pdf

What's very different now compared to then, is that bonds were providing a (relatively) very good income return then. Bond yields were several multiples of the dividend yield on stocks, and the security of a 'promise' of what they would return. Currently the yield on the S&P 500 dividends is about the same as the 'Total Bond' aggregate index :? but at least bonds do continue to provide the security of a promise about what you'll get paid and when you'll get the principal back, which you won't get with stocks of any flavor.
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Re: How to tilt away from possible bubbles in mega-cap growth stocks

Post by retired@50 »

Locarno wrote: Sun Jun 13, 2021 9:59 pm And are there any good strategies for tilting away from potential bubbles other than value-based approaches?
Welcome to the forum. :happy

Using traditional value metrics like P/E and Price to Sales is precisely how one would tilt away from a high P/E or high Price to Sales "bubble" stock. Of course, a company actually has to have sales or earnings to be able to calculate these ratios, so if you find yourself trying to divide by zero, don't buy that stock. :wink:

If you're interested in doing some reading on the topic, consider "The Intelligent Investor" by Benjamin Graham. There's a somewhat recent edition with commentary by Jason Zweig for a slightly more up to date interpretation of what Graham was talking about.

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Re: How to tilt away from possible bubbles in mega-cap growth stocks

Post by William Million »

Problem is you don't know a crash is mega-caps in coming. All you know is that they've risen a lot lately.
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Re: How to tilt away from possible bubbles in mega-cap growth stocks

Post by anon_investor »

William Million wrote: Mon Jun 14, 2021 8:32 am Problem is you don't know a crash is mega-caps in coming. All you know is that they've risen a lot lately.
And they might keep rising...
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Re: How to tilt away from possible bubbles in mega-cap growth stocks

Post by Californiastate »

Locarno wrote: Sun Jun 13, 2021 9:59 pm If one is concerned that many growth stocks (i.e. TSLA, FB, AAPL, and others) seem to be overvalued and overweighted in the common indexes, is it consistent with a Boglehead mindset to tilt away from these stocks somehow? And what is the best way to do so: is it just to move some percentage out of market cap-weighted (i.e. ordinary) index funds and into...value index funds, or value-weighted index funds, or fundamentals-weighted index funds, or something else?

And are there any good strategies for tilting away from potential bubbles other than value-based approaches?
IIRC market timing isn't the BH mindset, period. I suggest you read the manifesto.
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Re: How to tilt away from possible bubbles in mega-cap growth stocks

Post by David Jay »

Welcome to the forum!
Locarno wrote: Sun Jun 13, 2021 9:59 pm If one is concerned that many growth stocks (i.e. TSLA, FB, AAPL, and others) seem to be overvalued…

“Seem” is really a weak term for avoiding the winners in the market. I would re-evaluate why you want to under-weight the winners and by doing so effectively over-weight the losers. Owning the total market (with a US total market stock fund) assures that you own every winner and “ride” all future winners as they rise.

…and overweighted in the common indexes…

They are not “over-weighted”. The market has established the price of each stock and the index reflects that price. You appear to be saying that the market is wrong. A myriad of people have taken that position in the past, and it have almost always worked out poorly.

And are there any good strategies for tilting away from potential bubbles winners other than value-based approaches?

Explain to me again why it is you want to tilt away from the winners? Most of the outperformance in the stock market each year come from just a handful of winners. Underweight the winners and you dramatically reduce your portfolio performance.
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Re: How to tilt away from possible bubbles in mega-cap growth stocks

Post by whodidntante »

I would point you to the Rational Reminder podcast and the related forum, which I participate in. Ben Felix also has some excellent videos on YouTube.
https://www.youtube.com/watch?v=jKWbW7Wgm0w
https://community.rationalreminder.ca/
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Re: How to tilt away from possible bubbles in mega-cap growth stocks

Post by retired@50 »

whodidntante wrote: Mon Jun 14, 2021 8:41 am I would point you to the Rational Reminder podcast and the related forum, which I participate in. Ben Felix also has some excellent videos on YouTube.
https://www.youtube.com/watch?v=jKWbW7Wgm0w
https://community.rationalreminder.ca/
Welcome back to the forum whodidntante! Haven't seen you post in a while.

Speaking of Rational Reminder, I've been listening to the podcast recently on my morning walk. So far, I've found it quite interesting.

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Re: How to tilt away from possible bubbles in mega-cap growth stocks

Post by retiredjg »

Welcome to the forum. :happy

Tilting away from something is a form of market timing and would definitely not be considered a Bogleheaded strategy. Oddly enough, it is considered OK to tilt toward something if there is academic evidence from the past that certain asset classes have done better in the past.

I'm not going to tell you that is not market timing as well, but in spite of that, it is an accepted strategy around here. The example would be the studies that showed that small cap and value stocks outperformed the market over a significant time period. So tilting to small cap and value (often in the form of small cap value) gets a lot of attention here.

The true Boglehead model portfolio would be market caps in all the US stocks and all the international stocks along with a "total bond" type of bond fund...commonly known as "the three fund portfolio".

I would not suggest tilting away from what you think it is bubble. I would suggest you use a market cap weighted portfolio unless you have a particular desire to tilt to small cap or value.
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Re: How to tilt away from possible bubbles in mega-cap growth stocks

Post by pkcrafter »

Welcome to the forum,
Locarno wrote: Sun Jun 13, 2021 9:59 pm If one is concerned that many growth stocks (i.e. TSLA, FB, AAPL, and others) seem to be overvalued and overweighted in the common indexes, is it consistent with a Boglehead mindset to tilt away from these stocks somehow?

No, it's not a Boglehead strategy to tilt, etc, although some still do it. Bogleheads hold the whole market and it has proven to be a sound and successful strategy over time. It's very easy to let feelings and emotions determine your strategy, but you will end up with a lower return over time if you do it.

So, you are at the point where you have to decide just what kind of investor you are going to be.


And are there any good strategies for tilting away from potential bubbles other than value-based approaches?

What you are really asking is related to market timing, which true Bogleheads don't do.

Bogleheads' Philosophy


https://www.bogleheads.org/wiki/Boglehe ... philosophy


Paul


When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.
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Re: How to tilt away from possible bubbles in mega-cap growth stocks

Post by whodidntante »

retired@50 wrote: Mon Jun 14, 2021 8:44 am Welcome back to the forum whodidntante! Haven't seen you post in a while.
Thank you!
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Re: How to tilt away from possible bubbles in mega-cap growth stocks

Post by Gaston »

Flashes1 wrote: Mon Jun 14, 2021 7:53 am There's index funds that aren't cap weighted...forget what they're called but each company in the S&P 500 index fund is weighed equally at 1/500.
Be careful here. The total market cap of the S&P 500 is about $36 trillion. This means the average market cap of an S&P 500 company is $72 billion ($36 / 500).

But Apple weighs in at $2 trillion, whereas the smallest S&P companies are valued at about $10 billion, 500 hundred times smaller than Apple. Xerox, who just left the index last quarter, was valued even lower, at $5 billion.

So if you choose an index that equally weights the S&P 500 companies, you will massively underweight Apple, and massively overweight the little guys. Make sure this is what you want to do.
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Re: How to tilt away from possible bubbles in mega-cap growth stocks

Post by Wedemeyer »

It's important not to chase returns and not to predict the market. No one knows nothing. Pick a strategy you are comfortable with and stick to it.

My personal strategy is to tilt mid, small, small value, and REITs in my equities that includes US and international. It was, and remains my strategy until I retire in 15-20 years. I feel this spreads the chips a little more evenly across the table. But that's me.
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Re: How to tilt away from possible bubbles in mega-cap growth stocks

Post by David Jay »

Wedemeyer wrote: Mon Jun 14, 2021 12:30 pm It's important not to chase returns and not to predict the market. No one knows nothing. Pick a strategy you are comfortable with and stick to it.

My personal strategy is to tilt mid, small, small value, and REITs in my equities that includes US and international. It was, and remains my strategy until I retire in 15-20 years. I feel this spreads the chips a little more evenly across the table. But that's me.
I don't think it is the "tilting" that is the problem. In the case of the OP, it is timing one's tilt based on the current perceived "overvalue" of a few mega-tech-stocks. Remember what Bogle said: he didn't even know anyone who knew someone who could reliably time the market.

I admire someone who knows what they want and can hold a tilt through thick-and-thin.
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Re: How to tilt away from possible bubbles in mega-cap growth stocks

Post by arcticpineapplecorp. »

https://papers.ssrn.com/sol3/papers.cfm ... id=2900447
A landmark academic study that came out a few years ago reached a startling conclusion: This 10% return could be traced to fewer than 4% of all public companies.

On average, the stocks of the other 96% returned about 3% a year, similar to the return of Treasury bills. If that pattern continues—and we have no reason to think it won’t—then your chances of finding a blockbuster stock are about one in 25.

That’s the bad news. The good news is that if you owned all the stocks, you would have received that 10% return.

It seems counter-intuitive, but additional academic studies indicate that investing in more stocks leads to higher returns, not lower returns.

source: Paul Merriman and Rich Buck's "We're Talking Millions"
look at how big companies became smaller and small companies became larger over 24 years (1994-2018):
https://americanbusinesshistory.org/lar ... 1994-2018/

there was no way to know which companies would rise or fall.

If you held the market from 1994-2018 regardless of all the big company changes in those 24 years you'd have made 8.6X on your original investment:

http://quotes.morningstar.com/chart/fun ... A%5B%5D%7D

you don't know that overvalued companies won't continue to be even more overvalued, so to dump them could be a mistake.

Greenspan alluded to the irrational exuberance of investor behavior in Dec 1996. The market then went up 100% more between 1997-1999:

http://quotes.morningstar.com/chart/fun ... A%5B%5D%7D

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Re: How to tilt away from possible bubbles in mega-cap growth stocks

Post by rockstar »

Locarno wrote: Sun Jun 13, 2021 9:59 pm If one is concerned that many growth stocks (i.e. TSLA, FB, AAPL, and others) seem to be overvalued and overweighted in the common indexes, is it consistent with a Boglehead mindset to tilt away from these stocks somehow? And what is the best way to do so: is it just to move some percentage out of market cap-weighted (i.e. ordinary) index funds and into...value index funds, or value-weighted index funds, or fundamentals-weighted index funds, or something else?

And are there any good strategies for tilting away from potential bubbles other than value-based approaches?
There is more than equities and bonds when you invest outside of your 401k.

I have no clue if anything is over or under valued right now. The economy shutdown and trailing PEs went to the moon. And forward PEs are a wild guess at the future.

Right now, I'm staying the course and adding more real estate exposure.
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Re: How to tilt away from possible bubbles in mega-cap growth stocks

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Locarno wrote: Sun Jun 13, 2021 9:59 pm And are there any good strategies for tilting away from potential bubbles other than value-based approaches?
If you go global market cap with equities, you no longer tilt towards the large cap tech growth of the US market. In fact, you don't tilt towards anything. It's a diversified total market approach. Some people would say it's also a value-based approach. But really it's a diversified total market approach.
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Re: How to tilt away from possible bubbles in mega-cap growth stocks

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Those last two are cash machines and the first one you mentioned is getting money from BTC trading.
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Re: How to tilt away from possible bubbles in mega-cap growth stocks

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Extended Market Index Fund -- VEXAX

Extended Market ETF -- VXF

all the stocks MINUS the 500 largest

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