Most people [Is TSM not the best choice for informed investors?]

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bertilak
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Re: Most people

Post by bertilak »

David Jay wrote: Fri Sep 24, 2021 2:57 pm
HomerJ wrote: Fri Sep 24, 2021 2:23 pm
DMSeattle wrote: Fri Sep 24, 2021 2:10 pm
cacophony wrote: Wed Sep 22, 2021 4:19 pm Well if you didn't have at least some people investing in individual securities then how would they be accurately priced?
Great & important question.
At what point (if any) do index funds become a problem for accurate markets?

Index funds depend on the collective wisdom of investors who are selecting individual securities. The fewer the people looking at individual companies the weaker the index fund. No?
No idea of exact numbers, but I'd bet price discovery would work even with 90% Index, 10% individual investors. Or at least 80/20.

It's a self-correcting problem in any case. If it becomes easier to beat the index because the market has become less efficient, then more people will move out of index investing, and then the market will become more efficient again.
This! (bold above)

I am a recovering stock picker, and if it becomes relatively easy to outperform the market then I will go back to stock picking. My personal indication is when most (ha-ha) of active mutual funds in the SPIVA scorecard can beat their respective indexes. Today that number stands at about 20%.
And it's not the same 20% from year to year, making it an even tougher indicator.
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Re: Most people

Post by David Jay »

bertilak wrote: Fri Sep 24, 2021 3:00 pm
David Jay wrote: Fri Sep 24, 2021 2:57 pmI am a recovering stock picker, and if it becomes relatively easy to outperform the market then I will go back to stock picking. My personal indication is when most (ha-ha) of active mutual funds in the SPIVA scorecard can beat their respective indexes. Today that number stands at about 20%.
And it's not the same 20% from year to year, making it an even tougher indicator.
I don't expect it to happen in my lifetime, but I leave the door open. And I do mean 50% on the SPIVA scorecard, I just couldn't resist using "most" in this thread. :happy
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Re: Most people [Is TSM not the best choice for informed investors?]

Post by Northern Flicker »

Before fees, professional active managers don't do all that badly. Amateurs and DIYers on average don't do well. The rub is that you do have to pay fees for good professional active managers.
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Re: Most people [Is TSM not the best choice for informed investors?]

Post by HomerJ »

Northern Flicker wrote: Fri Sep 24, 2021 6:52 pm Before fees, professional active managers don't do all that badly. Amateurs and DIYers on average don't do well. The rub is that you do have to pay fees for good professional active managers.
Not only fees, but what's also hard is you have to be able to pick the good professional active managers.

Really annoying to pay fees to a bad professional active manager.
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Re: Most people [Is TSM not the best choice for informed investors?]

Post by 000 »

I think the big problem with TSM dogma is that it assumes that TSM will never underperform "the average". But there are many asset classes not included in the TSM. So there is risk of "tracking error" and underperformance relative to the whole world of capital assets.

Some investors cannot get direct exposure to these asset classes (e.g. real estate), so synthetic exposure via equities may provide a portfolio with composition closer to total capital assets.

To be honest I have a growing suspicion that passive investing coupled with QE is creating a dangerous situation for capital markets. I have sought diversification with other asset classes and specific parts of the stock market.
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Re: Most people [Is TSM not the best choice for informed investors?]

Post by mikejuss »

000 wrote: Fri Sep 24, 2021 9:06 pmTo be honest I have a growing suspicion that passive investing coupled with QE is creating a dangerous situation for capital markets. I have sought diversification with other asset classes and specific parts of the stock market.
Mind being a little more specific, 000?
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Re: Most people [Is TSM not the best choice for informed investors?]

Post by qwertyjazz »

You may have legacy investments that you cannot get out of so want to balance against them.
You might want to balance against your human capital weighted to a particular field.
You might want to balance against a real estate or another real investment.
You might have industry risk or even specific company risk that you want to balance against.
You might have a series of upcoming expenses.
You might have specific tax considerations where mutual funds are an issue or another investment is sufficiently encouraged.
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Re: Most people [Is TSM not the best choice for informed investors?]

Post by Northern Flicker »

HomerJ wrote: Fri Sep 24, 2021 8:15 pm
Northern Flicker wrote: Fri Sep 24, 2021 6:52 pm Before fees, professional active managers don't do all that badly. Amateurs and DIYers on average don't do well. The rub is that you do have to pay fees for good professional active managers.
Not only fees, but what's also hard is you have to be able to pick the good professional active managers.

Really annoying to pay fees to a bad professional active manager.
Picking the manager has risk. But before fees, I think about 60% of professionally managed active US portfolios overperform in a given year. That would not be too bad for a probability of picking a winning active manager if that were an actual choice available. But once fees are charged off, it drops off, and once say 10-yr returns are considered it drops off even more.

Factor tilts with low cost funds, and conventional active management at low cost (if and when available) are not unreasonable, but it is hard to beat the transparency of a market index fund that tracks an index administered by a 3rd party. The most disciplined active funds often are closet factor exposure funds anyway.
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Re: Most people [Is TSM not the best choice for informed investors?]

Post by Northern Flicker »

000 wrote: I think the big problem with TSM dogma is that it assumes that TSM will never underperform "the average". But there are many asset classes not included in the TSM. So there is risk of "tracking error" and underperformance relative to the whole world of capital assets.
I'm not sure what you mean by TSM dogma, but if it is deciding you need a 3-fund index portfolio before you've even developed an asset allocation, that would not be a good strategy. Passive investing does not require limiting yourself to 3 asset classes-- rather it is the choice of passive implementations for the asset classes you include in an asset allocation.

But for many investors, limiting asset classes to US stocks, non-US stocks, and bonds, implemented as TSM, TISM, and TBM, is a great way to avoid behavioral mistakes in constructing an asset allocation. Simple index fund portfolios have proven to be very resilient and hard to beat without taking more risk.
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Re: Most people [Is TSM not the best choice for informed investors?]

Post by mikejuss »

I agree with much of what has been said in this thread about total-stock-market indexes being an excellent way to invest. But a recent post over at "Humble Dollar" got me thinking. The writer is discussing a study by the finance professor Hendrik Bessembinder: "From 1926 to 2016, more than half of all U.S. stocks—57.4% to be exact—returned less than one-month Treasury bills. [. . .] Bessembinder found that the best-performing shares, a mere 4% of all stocks, were responsible for the stock market’s entire gain over and above T-bills."

This raises a question for me: why not identify and concentrate one's investments in that high-performing, 4% of stocks? Why not, in other works, create a less-than-total-stock-market index by dumping the roughly 50% of stocks that are likely to underperform T-bills? Is the preference on this board for indexes containing many thousands of stocks misguided in any way?
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Re: Most people [Is TSM not the best choice for informed investors?]

Post by muffins14 »

mikejuss wrote: Sat Sep 25, 2021 8:11 am
This raises a question for me: why not identify and concentrate one's investments in that high-performing, 4% of stocks? Why not, in other works, create a less-than-total-stock-market index by dumping the roughly 50% of stocks that are likely to underperform T-bills? Is the preference on this board for indexes containing many thousands of stocks misguided in any way?
Is this a serious question? The problem with your proposal is basically a topic called “active vs index” that you can Google or search here. It’s hard to consistently predict the 50-96% of stocks that underperform, so it’s often more effective to not even try
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Re: Most people [Is TSM not the best choice for informed investors?]

Post by Jags4186 »

It’s hard to wrap my head around the logic that if the TSM is better than the SP500 because it includes an extra 2500 or so companies. If the 2500 or so companies are improving on the SP500, then wouldn’t you want to own *more* than market weight of those additional companies?

This is why I have roughly equal weights large/mid/small caps in my portfolio.
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Re: Most people [Is TSM not the best choice for informed investors?]

Post by muffins14 »

Jags4186 wrote: Sat Sep 25, 2021 8:25 am It’s hard to wrap my head around the logic that if the TSM is better than the SP500 because it includes an extra 2500 or so companies. If the 2500 or so companies are improving on the SP500, then wouldn’t you want to own *more* than market weight of those additional companies?
Some people do, which would allocate to the Small, or SmB factor. In some models it does have a higher expected return but now it’s more common to have multi-factor approaches rather than just Small. Example: small cap value
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Re: Most people [Is TSM not the best choice for informed investors?]

Post by mikejuss »

muffins14 wrote: Sat Sep 25, 2021 8:21 am
mikejuss wrote: Sat Sep 25, 2021 8:11 am
This raises a question for me: why not identify and concentrate one's investments in that high-performing, 4% of stocks? Why not, in other works, create a less-than-total-stock-market index by dumping the roughly 50% of stocks that are likely to underperform T-bills? Is the preference on this board for indexes containing many thousands of stocks misguided in any way?
Is this a serious question? The problem with your proposal is basically a topic called “active vs index” that you can Google or search here. It’s hard to consistently predict the 50-96% of stocks that underperform, so it’s often more effective to not even try
Yes, it is a serious question.

Hmm--really? Let's say we can't easily identify the 50% of stocks that underperform. But what if we had a reasonable chance of identifying 10% of them. Would that make for a better index?
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Re: Most people [Is TSM not the best choice for informed investors?]

Post by Jags4186 »

mikejuss wrote: Sat Sep 25, 2021 8:34 am
muffins14 wrote: Sat Sep 25, 2021 8:21 am
mikejuss wrote: Sat Sep 25, 2021 8:11 am
This raises a question for me: why not identify and concentrate one's investments in that high-performing, 4% of stocks? Why not, in other works, create a less-than-total-stock-market index by dumping the roughly 50% of stocks that are likely to underperform T-bills? Is the preference on this board for indexes containing many thousands of stocks misguided in any way?
Is this a serious question? The problem with your proposal is basically a topic called “active vs index” that you can Google or search here. It’s hard to consistently predict the 50-96% of stocks that underperform, so it’s often more effective to not even try
Yes, it is a serious question.

Hmm--really? Let's say we can't easily identify the 50% of stocks that underperform. But what if we had a reasonable chance of identifying 10% of them. Would that make for a better index?
Today’s garbage is tomorrow’s darling. Today’s high flyers are tomorrow’s scandals. What you propose seems simple but is so difficult to be almost impossible to do. Good companies underperform for very long times.

Between 2000-2014 Microsoft returned under 1% per year. Cash returned nearly 2%.
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Re: Most people [Is TSM not the best choice for informed investors?]

Post by mikejuss »

Jags4186 wrote: Sat Sep 25, 2021 8:44 am
mikejuss wrote: Sat Sep 25, 2021 8:34 am
muffins14 wrote: Sat Sep 25, 2021 8:21 am
mikejuss wrote: Sat Sep 25, 2021 8:11 am
This raises a question for me: why not identify and concentrate one's investments in that high-performing, 4% of stocks? Why not, in other works, create a less-than-total-stock-market index by dumping the roughly 50% of stocks that are likely to underperform T-bills? Is the preference on this board for indexes containing many thousands of stocks misguided in any way?
Is this a serious question? The problem with your proposal is basically a topic called “active vs index” that you can Google or search here. It’s hard to consistently predict the 50-96% of stocks that underperform, so it’s often more effective to not even try
Yes, it is a serious question.

Hmm--really? Let's say we can't easily identify the 50% of stocks that underperform. But what if we had a reasonable chance of identifying 10% of them. Would that make for a better index?
Today’s garbage is tomorrow’s darling. Today’s high flyers are tomorrow’s scandals. What you propose seems simple but is so difficult to be almost impossible to do. Good companies underperform for very long times.

Between 2000-2014 Microsoft returned under 1% per year. Cash returned nearly 2%.
Yeah, at least in theory, it would seem to be easy, but I guess it isn't. Looks like I'll be holding onto VTSAX for the time being!
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Re: Most people [Is TSM not the best choice for informed investors?]

Post by 02nz »

bertilak wrote: Wed Sep 22, 2021 4:14 pm Much of the "total market" advice talks about TSM being best for "most people."

Well, 51% is most. Does reading all those words of wisdom put one in the 49% where TSM is NOT the best choice?

Asking for a friend.
51% is most, but 99% is also most. And so the claim that for 49% TSM is NOT the best choice doesn't pass the most elementary logic test.
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Re: Most people [Is TSM not the best choice for informed investors?]

Post by bertilak »

mikejuss wrote: Sat Sep 25, 2021 8:11 am This raises a question for me: why not identify and concentrate one's investments in that high-performing, 4% of stocks? Why not, in other works, create a less-than-total-stock-market index by dumping the roughly 50% of stocks that are likely to underperform T-bills? Is the preference on this board for indexes containing many thousands of stocks misguided in any way?
You are suggesting active portfolio management by stock-picking.

There is a ton of good research, theory, and empirical evidence, suggesting (proving, to the extent possible) that technique to be a loser. (See Winning the Loser's Game by Ellis.) Indexing is a major premise of the general strategy behind this board. The other, related, premise is that costs matter so, to whatever degree your suggestion might pay off, any improved return will most likely be offset by costs. Sustainability of any effective active management is an issue.

Indexing is the way to avoid participating in that "loser's game."
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Re: Most people [Is TSM not the best choice for informed investors?]

Post by bertilak »

02nz wrote: Sat Sep 25, 2021 9:16 am 51% is most, but 99% is also most. And so the claim that for 49% TSM is NOT the best choice doesn't pass the most elementary logic test.
Part of my point is that whenever I see "most people," "most" is unspecified. Forget 49, 51, 99. They, and any other specific number, are not important as they are not given.
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Re: Most people [Is TSM not the best choice for informed investors?]

Post by mikejuss »

bertilak wrote: Sat Sep 25, 2021 9:20 am
mikejuss wrote: Sat Sep 25, 2021 8:11 am This raises a question for me: why not identify and concentrate one's investments in that high-performing, 4% of stocks? Why not, in other works, create a less-than-total-stock-market index by dumping the roughly 50% of stocks that are likely to underperform T-bills? Is the preference on this board for indexes containing many thousands of stocks misguided in any way?
You are suggesting active portfolio management by stock-picking.

There is a ton of good research, theory, and empirical evidence, suggesting (proving, to the extent possible) that technique to be a loser. (See Winning the Loser's Game by Ellis.) Indexing is a major premise of the general strategy behind this board. The other, related, premise is that costs matter so, to whatever degree your suggestion might pay off, any improved return will most likely be offset by costs. Sustainability of any effective active management is an issue.

Indexing is the way to avoid participating in that "loser's game."
I don't doubt you're correct, but I wonder what would happen if VTSAX were reduced from 3,980 stocks to, say, 3,000 stocks. Is the idea that we could never really know with much certainty how to pick the 980 stocks not to include? I'm not suggesting active management; I'm suggesting a narrower index fund.
Last edited by mikejuss on Sat Sep 25, 2021 10:27 am, edited 2 times in total.
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"The Arithmetic of Active Management"

Post by Taylor Larimore »

Bogleheads:

The best analysis I have seen of the active/passive debate is this article by Nobel Laureate, William Sharpe:

The Arithmetic of Active Management

Best wishes.
Taylor
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Re: Most people [Is TSM not the best choice for informed investors?]

Post by bertilak »

mikejuss wrote: Sat Sep 25, 2021 10:03 am
bertilak wrote: Sat Sep 25, 2021 9:20 am
mikejuss wrote: Sat Sep 25, 2021 8:11 am This raises a question for me: why not identify and concentrate one's investments in that high-performing, 4% of stocks? Why not, in other works, create a less-than-total-stock-market index by dumping the roughly 50% of stocks that are likely to underperform T-bills? Is the preference on this board for indexes containing many thousands of stocks misguided in any way?
You are suggesting active portfolio management by stock-picking.

There is a ton of good research, theory, and empirical evidence, suggesting (proving, to the extent possible) that technique to be a loser. (See Winning the Loser's Game by Ellis.) Indexing is a major premise of the general strategy behind this board. The other, related, premise is that costs matter so, to whatever degree your suggestion might pay off, any improved return will most likely be offset by costs. Sustainability of any effective active management is an issue.

Indexing is the way to avoid participating in that "loser's game."
I don't doubt you're correct, but I wonder what would happen if VTSAX were reduced from 3,980 stocks to, say, 3,000 stocks. Is the idea that we could never really know with much certainty how to pick the 980 stocks not to include? I'm not suggesting active management; I'm suggesting a narrower index fund.
The S&P500 reduces TSM to 500 stocks and when plotted together it's hard to see a gap between the two plots so reducing it even less (to more stocks, i.e. to 3000 stocks) wouldn't make any more of a difference. Admittedly, the S&P500 were chosen to represent the whole market, which is pretty easy to do by picking the largest caps. A different criteria (to get rid of 980 "bad" stocks) is getting into stock-picking territory which I don't think is productive (see above).
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Re: Most people [Is TSM not the best choice for informed investors?]

Post by HomerJ »

mikejuss wrote: Sat Sep 25, 2021 8:11 am This raises a question for me: why not identify and concentrate one's investments in that high-performing, 4% of stocks? Why not, in other works, create a less-than-total-stock-market index by dumping the roughly 50% of stocks that are likely to underperform T-bills? Is the preference on this board for indexes containing many thousands of stocks misguided in any way?
LOL...

Yeah, just pick the good stocks.

Will Rogers was making fun of this idea 100 years ago...

"Buy some good stock and hold it till it goes up, then sell it. If it don't go up, don't buy it."

We buy the index because it's DIFFICULT to pick the 4% of awesome stocks ahead of time. If you buy them all, then you will own the 4%.

Instead of looking for the needle in the haystack, buy the haystack.

It's even difficult to figure out which 50% is going to underperform T-Bills.

If it was easy, active fund managers could beat the index easily.
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Re: Most people [Is TSM not the best choice for informed investors?]

Post by mikejuss »

bertilak wrote: Sat Sep 25, 2021 10:48 am
mikejuss wrote: Sat Sep 25, 2021 10:03 am
bertilak wrote: Sat Sep 25, 2021 9:20 am
mikejuss wrote: Sat Sep 25, 2021 8:11 am This raises a question for me: why not identify and concentrate one's investments in that high-performing, 4% of stocks? Why not, in other works, create a less-than-total-stock-market index by dumping the roughly 50% of stocks that are likely to underperform T-bills? Is the preference on this board for indexes containing many thousands of stocks misguided in any way?
You are suggesting active portfolio management by stock-picking.

There is a ton of good research, theory, and empirical evidence, suggesting (proving, to the extent possible) that technique to be a loser. (See Winning the Loser's Game by Ellis.) Indexing is a major premise of the general strategy behind this board. The other, related, premise is that costs matter so, to whatever degree your suggestion might pay off, any improved return will most likely be offset by costs. Sustainability of any effective active management is an issue.

Indexing is the way to avoid participating in that "loser's game."
I don't doubt you're correct, but I wonder what would happen if VTSAX were reduced from 3,980 stocks to, say, 3,000 stocks. Is the idea that we could never really know with much certainty how to pick the 980 stocks not to include? I'm not suggesting active management; I'm suggesting a narrower index fund.
The S&P500 reduces TSM to 500 stocks and when plotted together it's hard to see a gap between the two plots so reducing it even less (to more stocks, i.e. to 3000 stocks) wouldn't make any more of a difference. Admittedly, the S&P500 were chosen to represent the whole market, which is pretty easy to do by picking the largest caps. A different criteria (to get rid of 980 "bad" stocks) is getting into stock-picking territory which I don't think is productive (see above).
Interesting to know that even 500 stocks is too many to create a significantly higher return than that provided by VTSAX's 3,980 stocks. Is any brokerage firm offering completely personalized index funds--ie, allowing people to pick, say, 100 stocks and to bundle them as an index? For exactly the reasons you've mentioned above, I'm not suggesting that that's a good idea--just curious.
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Re: Most people [Is TSM not the best choice for informed investors?]

Post by bertilak »

mikejuss wrote: Sat Sep 25, 2021 10:58 am Interesting to know that even 500 stocks is too many to create a significantly higher return than that provided by VTSAX's 3,980 stocks. Is any brokerage firm offering completely personalized index funds--ie, allowing people to pick, say, 100 stocks and to bundle them as an index? For exactly the reasons you've mentioned above, I'm not suggesting that that's a good idea--just curious.
At least for that particular population of 500.

One can probably identify x-hundred riskier stocks (small-cap?) that have a generally higher return -- except for the occasional wipe-out! That's what risk is all about. You might get paid a premium for taking the extra risk OR that risk may end up costing you, or both. This shows up as volatility.
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Re: Most people [Is TSM not the best choice for informed investors?]

Post by Northern Flicker »

Jags4186 wrote: Sat Sep 25, 2021 8:25 am It’s hard to wrap my head around the logic that if the TSM is better than the SP500 because it includes an extra 2500 or so companies. If the 2500 or so companies are improving on the SP500, then wouldn’t you want to own *more* than market weight of those additional companies?

This is why I have roughly equal weights large/mid/small caps in my portfolio.
This is flawed logic. First, the reason to own the whole market is to get market returns at low transaction cost. There is little index maintenance to implement. It is not motivated by improving returns relative to the S&P500.

Second, there is nothing special about the S&P500 to make it a reference point other than cultural tradition. The market portfolio is the neutral portfolio. Everything else is a tilt.

What you have implemented is a size factor tilt. If the size factor returns a premium, which we expect it will over a sufficiently long period, you will be rewarded for taking a little bit more risk. This is a very reasonable thing to do, so there is nothing wrong with your portfolio, but the motivation for doing it should not be the same as the motivation for holding the market portfolio instead of just large caps.

The point of the market portfolio is that it can be implemented at low cost. If you want to take more risk, you also can adjust the ratio of stocks and bonds without increasing portfolio cost. That is the rationale for holding a market portfolio. This also is a reasonable strategy.
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Re: Most people [Is TSM not the best choice for informed investors?]

Post by Northern Flicker »

mikejuss wrote: Sat Sep 25, 2021 8:11 am I agree with much of what has been said in this thread about total-stock-market indexes being an excellent way to invest. But a recent post over at "Humble Dollar" got me thinking. The writer is discussing a study by the finance professor Hendrik Bessembinder: "From 1926 to 2016, more than half of all U.S. stocks—57.4% to be exact—returned less than one-month Treasury bills. [. . .] Bessembinder found that the best-performing shares, a mere 4% of all stocks, were responsible for the stock market’s entire gain over and above T-bills."

This raises a question for me: why not identify and concentrate one's investments in that high-performing, 4% of stocks? Why not, in other works, create a less-than-total-stock-market index by dumping the roughly 50% of stocks that are likely to underperform T-bills? Is the preference on this board for indexes containing many thousands of stocks misguided in any way?
Nobody knows in advance which stocks to dump.
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Re: Most people [Is TSM not the best choice for informed investors?]

Post by 000 »

mikejuss wrote: Fri Sep 24, 2021 9:11 pm
000 wrote: Fri Sep 24, 2021 9:06 pmTo be honest I have a growing suspicion that passive investing coupled with QE is creating a dangerous situation for capital markets. I have sought diversification with other asset classes and specific parts of the stock market.
Mind being a little more specific, 000?
I'm not convinced that price discovery is really occurring between broad asset classes to keep their valuations relatively "fair" in terms of future potential. This kind of price discovery is only done by investors shifting their broad AA and thus not by, for example, an actively managed stock mutual fund nor by an endowment etc. that has a broad AA mandate. The fact that Japan and such happen seems to indicate there is really no market mechanism to keep a broad asset class in line with others even though there may be an eventual correction.

When you add in an 800 lb gorilla scaring investors into TINA and the danger of shorting stocks, it really does seem no one is at the wheel.
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Re: Most people [Is TSM not the best choice for informed investors?]

Post by 000 »

Northern Flicker wrote: Fri Sep 24, 2021 10:29 pm I'm not sure what you mean by TSM dogma, but if it is deciding you need a 3-fund index portfolio before you've even developed an asset allocation, that would not be a good strategy. Passive investing does not require limiting yourself to 3 asset classes-- rather it is the choice of passive implementations for the asset classes you include in an asset allocation.

But for many investors, limiting asset classes to US stocks, non-US stocks, and bonds, implemented as TSM, TISM, and TBM, is a great way to avoid behavioral mistakes in constructing an asset allocation. Simple index fund portfolios have proven to be very resilient and hard to beat without taking more risk.
By dogma I mean the widely held trope here that TSM "will never be below average" which is either a tautology (comparing TSM to TSM) or false.

If the Bogleheads Version of the EMH holds true (i.e. they don't have to worry about valuations and can just blindly buy assets), then really any randomly selected portfolio should have the same risk-adjusted expected return.
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Re: Most people [Is TSM not the best choice for informed investors?]

Post by smalliebigs »

For the vast majority of people, TSM is really the best option. For some, TSM is just 'safe'. I have most of my money in TSM, but the mindset is different. Daily +- of thousands of dollars, meh, no biggie.

But when I tried $2,000 in individual stocks, I was worried about minor changes and fretting over it, even though the dollar change is really negligible. My heart and stress was just too high. When you buy individual stocks, you just feel a lot more personally invested.
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Re: Most people [Is TSM not the best choice for informed investors?]

Post by Beensabu »

At least it's become clear that this is a confirmation thread. Well done, OP. More interesting that usual.
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Re: Most people [Is TSM not the best choice for informed investors?]

Post by Northern Flicker »

mikejuss wrote: Sat Sep 25, 2021 10:58 am
Interesting to know that even 500 stocks is too many to create a significantly higher return than that provided by VTSAX's 3,980 stocks.
That is a false statement, however. You could overperform VTSAX with 3979 stocks if you knew in advance which would be the worst performer to boot out of the portfolio.

You are making an assumption that you are a better stockpicker than 95% or more of professionals who do it for a living. No disrespect intended when I say that I'm pretty sure that you aren't. I'm not either.

If your goal is to beat the market, there are systematic ways to try to do that. You may want to educate youself on factor-based portfolios. When individuals try to DIY their own actively managed portfolio the most likely outcome is a portfolio that takes uncompensated risk and underperforms.
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Re: Most people

Post by LilyFleur »

reln wrote: Wed Sep 22, 2021 4:39 pm
bertilak wrote: Wed Sep 22, 2021 4:31 pm
reln wrote: Wed Sep 22, 2021 4:23 pm
bertilak wrote: Wed Sep 22, 2021 4:14 pm Much of the "total market" advice talks about TSM being best for "most people."

Well, 51% is most. Does reading all those words of wisdom put one in the 49% where TSM is NOT the best choice?

Asking for a friend.
If you're smart enough to beat the market or if you're willing to take the risk of underperforming to beat the market, then you should try to beat it. For everyone else that isn't either smart enough or risk taking enough, TSM is a fine solution.
Thus my question "Does reading all those words of wisdom put one in the 49% where TSM is NOT the best choice?" If not, how DO I get there?
That's for the individual to decide. My hunch is no.

Also, I'd say 49% is generous. Maybe more like 0.01% of people are smart enough to beat the market. I think "most" here means "vast majority".
I think there is an element of sheer dumb luck as well.
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Re: Most people [Is TSM not the best choice for informed investors?]

Post by LilyFleur »

smalliebigs wrote: Sat Sep 25, 2021 5:11 pm For the vast majority of people, TSM is really the best option. For some, TSM is just 'safe'. I have most of my money in TSM, but the mindset is different. Daily +- of thousands of dollars, meh, no biggie.

But when I tried $2,000 in individual stocks, I was worried about minor changes and fretting over it, even though the dollar change is really negligible. My heart and stress was just too high. When you buy individual stocks, you just feel a lot more personally invested.
It depends on your risk tolerance.
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Re: Most people [Is TSM not the best choice for informed investors?]

Post by smalliebigs »

LilyFleur wrote: Sat Sep 25, 2021 8:27 pm It depends on your risk tolerance.
No, you misunderstood my point. I have all my investments in TSM stocks. My point was that in buying TSM, the mindset is different. And that, for many people, takes the anxiety out of stock market investing.
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Re: Most people [Is TSM not the best choice for informed investors?]

Post by LilyFleur »

smalliebigs wrote: Sat Sep 25, 2021 8:36 pm
LilyFleur wrote: Sat Sep 25, 2021 8:27 pm It depends on your risk tolerance.
No, you misunderstood my point. I have all my investments in TSM stocks. My point was that in buying TSM, the mindset is different. And that, for many people, takes the anxiety out of stock market investing.
There are many factors involved: age, risk tolerance, total portfolio dollars, % in individual stocks.

Some people feel anxious if they hold more than 25% of their portfolio in TSM index funds.

Some people feel anxious if they do not hold some individual stocks.

Some people on this forum have 5% of their portfolio in "play money" individual stocks with a very diverse range of dollar values. If they have been saving for decades, they could have $50,000 in individual stocks but that amount would only be perhaps 2% of their portfolio.

It all depends.
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Re: Most people [Is TSM not the best choice for informed investors?]

Post by Northern Flicker »

LilyFleur wrote: Sat Sep 25, 2021 8:27 pm
smalliebigs wrote: Sat Sep 25, 2021 5:11 pm For the vast majority of people, TSM is really the best option. For some, TSM is just 'safe'. I have most of my money in TSM, but the mindset is different. Daily +- of thousands of dollars, meh, no biggie.

But when I tried $2,000 in individual stocks, I was worried about minor changes and fretting over it, even though the dollar change is really negligible. My heart and stress was just too high. When you buy individual stocks, you just feel a lot more personally invested.
It depends on your risk tolerance.
No matter how much risk tolerance you have, taking risk that on average is uncompensated is not a good strategy.
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Re: Most people [Is TSM not the best choice for informed investors?]

Post by LilyFleur »

Northern Flicker wrote: Sun Sep 26, 2021 12:42 pm
LilyFleur wrote: Sat Sep 25, 2021 8:27 pm
smalliebigs wrote: Sat Sep 25, 2021 5:11 pm For the vast majority of people, TSM is really the best option. For some, TSM is just 'safe'. I have most of my money in TSM, but the mindset is different. Daily +- of thousands of dollars, meh, no biggie.

But when I tried $2,000 in individual stocks, I was worried about minor changes and fretting over it, even though the dollar change is really negligible. My heart and stress was just too high. When you buy individual stocks, you just feel a lot more personally invested.
It depends on your risk tolerance.
No matter how much risk tolerance you have, taking risk that on average is uncompensated is not a good strategy.
You probably wouldn't have had a wink of sleep, ever, with my portfolio.

My parents were both CFPs. I first owned an individual stock when I was 19. My parents told me they had studied this stock and were buying some, and they mentioned I might want to buy some. I did. It wasn't a lot, but it doubled, enough for me to buy myself a used car. Even when my 401k went down by a six-digit amount in 2008 (it was mostly in a company stock), my mom advised me to hold on--she had studied this company-- and not lose a wink of sleep over it. She was right. I think she gave me nerves of steel. I'm not rich, but I retired early and am comfortable with a part-time job now. I am 98.5% invested following Boglehead principles, but I still like a bit of play money in the market.

You do you, and I'll do me. I think we can agree that index funds are an excellent investment.
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Re: Most people [Is TSM not the best choice for informed investors?]

Post by Northern Flicker »

000 wrote: Sat Sep 25, 2021 5:05 pm
Northern Flicker wrote: Fri Sep 24, 2021 10:29 pm I'm not sure what you mean by TSM dogma, but if it is deciding you need a 3-fund index portfolio before you've even developed an asset allocation, that would not be a good strategy. Passive investing does not require limiting yourself to 3 asset classes-- rather it is the choice of passive implementations for the asset classes you include in an asset allocation.

But for many investors, limiting asset classes to US stocks, non-US stocks, and bonds, implemented as TSM, TISM, and TBM, is a great way to avoid behavioral mistakes in constructing an asset allocation. Simple index fund portfolios have proven to be very resilient and hard to beat without taking more risk.
By dogma I mean the widely held trope here that TSM "will never be below average" which is either a tautology (comparing TSM to TSM) or false.

If the Bogleheads Version of the EMH holds true (i.e. they don't have to worry about valuations and can just blindly buy assets), then really any randomly selected portfolio should have the same risk-adjusted expected return.
You are misinterpreting and spinning the philosophy to make a straw man to knock down. There is no BH version of EMH. There is EMH, and there are incorrect statements of EMH. (Strong and weak forms of EMH have also been proposed, but are not relevant to the discussion).

As long as unsystematic risk is diversified away, there is no reason a tilted portfolio cannot have expected risk-adjusted return that matches the market portfolio, consistent with EMH. One of the major theories of factors is that they are systematic risk factors that deliver a premium consistent with the risk taken, consistent with EMH.

When individuals are overconfident and think they can outsmart the market, there is significantly increased risk of behavioral errors when outcomes differ from projections.

A market index investor only expects market returns. The market could be +/- 50% in 6 months and will meet those expectations either way.
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Re: Most people [Is TSM not the best choice for informed investors?]

Post by HomerJ »

LilyFleur wrote: Sun Sep 26, 2021 1:25 pm
Northern Flicker wrote: Sun Sep 26, 2021 12:42 pm
LilyFleur wrote: Sat Sep 25, 2021 8:27 pm
smalliebigs wrote: Sat Sep 25, 2021 5:11 pm For the vast majority of people, TSM is really the best option. For some, TSM is just 'safe'. I have most of my money in TSM, but the mindset is different. Daily +- of thousands of dollars, meh, no biggie.

But when I tried $2,000 in individual stocks, I was worried about minor changes and fretting over it, even though the dollar change is really negligible. My heart and stress was just too high. When you buy individual stocks, you just feel a lot more personally invested.
It depends on your risk tolerance.
No matter how much risk tolerance you have, taking risk that on average is uncompensated is not a good strategy.
You probably wouldn't have had a wink of sleep, ever, with my portfolio.

My parents were both CFPs. I first owned an individual stock when I was 19. My parents told me they had studied this stock and were buying some, and they mentioned I might want to buy some. I did. It wasn't a lot, but it doubled, enough for me to buy myself a used car. Even when my 401k went down by a six-digit amount in 2008 (it was mostly in a company stock), my mom advised me to hold on--she had studied this company-- and not lose a wink of sleep over it. She was right. I think she gave me nerves of steel. I'm not rich, but I retired early and am comfortable with a part-time job now. I am 98.5% invested following Boglehead principles, but I still like a bit of play money in the market.

You do you, and I'll do me. I think we can agree that index funds are an excellent investment.
Your Mom sounds lovely, but she was probably lucky, not right. Or maybe a little of both.

Do you really think all it takes to pick the good stocks is to be a CFP and study companies?
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Re: Most people [Is TSM not the best choice for informed investors?]

Post by 000 »

Northern Flicker wrote: Sun Sep 26, 2021 2:20 pm You are misinterpreting and spinning the philosophy to make a straw man to knock down. There is no BH version of EMH. There is EMH, and there are incorrect statements of EMH. (Strong and weak forms of EMH have also been proposed, but are not relevant to the discussion).

As long as unsystematic risk is diversified away, there is no reason a tilted portfolio cannot have expected risk-adjusted return that matches the market portfolio, consistent with EMH. One of the major theories of factors is that they are systematic risk factors that deliver a premium consistent with the risk taken, consistent with EMH.

When individuals are overconfident and think they can outsmart the market, there is significantly increased risk of behavioral errors when outcomes differ from projections.

A market index investor only expects market returns. The market could be +/- 50% in 6 months and will meet those expectations either way.
No, I don't think it's a straw man but I don't follow the connection in the rest of your post.
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Re: Most people [Is TSM not the best choice for informed investors?]

Post by Northern Flicker »

Northern Flicker wrote: Sun Sep 26, 2021 12:42 pm
LilyFleur wrote: Sat Sep 25, 2021 8:27 pm
No matter how much risk tolerance you have, taking risk that on average is uncompensated is not a good strategy.
You probably wouldn't have had a wink of sleep, ever, with my portfolio.

My parents were both CFPs. I first owned an individual stock when I was 19. My parents told me they had studied this stock and were buying some, and they mentioned I might want to buy some. I did. It wasn't a lot, but it doubled, enough for me to buy myself a used car. Even when my 401k went down by a six-digit amount in 2008 (it was mostly in a company stock), my mom advised me to hold on--she had studied this company-- and not lose a wink of sleep over it. She was right. I think she gave me nerves of steel. I'm not rich, but I retired early and am comfortable with a part-time job now. I am 98.5% invested following Boglehead principles, but I still like a bit of play money in the market.

You do you, and I'll do me. I think we can agree that index funds are an excellent investment.
Yes, but I'm not sure we agree on the difference between strategy and outcome.
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Re: Most people [Is TSM not the best choice for informed investors?]

Post by Beensabu »

000 wrote: Sat Sep 25, 2021 5:05 pm By dogma I mean the widely held trope here that TSM "will never be below average" which is either a tautology (comparing TSM to TSM) or false.

If the Bogleheads Version of the EMH holds true (i.e. they don't have to worry about valuations and can just blindly buy assets), then really any randomly selected portfolio should have the same risk-adjusted expected return.
Index investors theoretically accept the returns of their index, which is why valuations do not matter to them. That is fine.

The issue is when they expect the returns of their index to meet a certain level or fall within a certain range.

It comes down to being okay with being average, as long as average is good enough.

If return expectations are not met, and average becomes not good enough, that is when people start to make behavioral errors.

The popularity of the persistence prediction shows that many index investors are indeed expecting the returns of their index to meet a certain level or fall within a certain range long-term. It has reached the point where it is almost as if US stocks are somehow perceived to be safer than US bonds. I'm not sure if that's ever happened before.

It's interesting because perception may or may not be reality. If stocks are still riskier than bonds, then behavioral error will abound when that is shown to still be true. But if stocks are no longer riskier than bonds, then why would there be a risk premium for stocks and what is the riskier asset that a premium can reasonably be expected for?
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Re: Most people [Is TSM not the best choice for informed investors?]

Post by tibbitts »

Beensabu wrote: Sun Sep 26, 2021 4:41 pm It comes down to being okay with being average, as long as average is good enough.
This is very true. I expect the forum will evolve away from advocating market-cap passive funds if "average" results cease being sufficient to meet typical objectives (comfortable retirement, etc.) for a long enough period.
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Re: Most people

Post by reln »

LilyFleur wrote: Sat Sep 25, 2021 8:22 pm
reln wrote: Wed Sep 22, 2021 4:39 pm
bertilak wrote: Wed Sep 22, 2021 4:31 pm
reln wrote: Wed Sep 22, 2021 4:23 pm
bertilak wrote: Wed Sep 22, 2021 4:14 pm Much of the "total market" advice talks about TSM being best for "most people."

Well, 51% is most. Does reading all those words of wisdom put one in the 49% where TSM is NOT the best choice?

Asking for a friend.
If you're smart enough to beat the market or if you're willing to take the risk of underperforming to beat the market, then you should try to beat it. For everyone else that isn't either smart enough or risk taking enough, TSM is a fine solution.
Thus my question "Does reading all those words of wisdom put one in the 49% where TSM is NOT the best choice?" If not, how DO I get there?
That's for the individual to decide. My hunch is no.

Also, I'd say 49% is generous. Maybe more like 0.01% of people are smart enough to beat the market. I think "most" here means "vast majority".
I think there is an element of sheer dumb luck as well.
Agreed. By chance you can choose a great fund / stock before the run up.
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Re: Most people [Is TSM not the best choice for informed investors?]

Post by Northern Flicker »

000 wrote: Sun Sep 26, 2021 3:41 pm
Northern Flicker wrote: Sun Sep 26, 2021 2:20 pm You are misinterpreting and spinning the philosophy to make a straw man to knock down. There is no BH version of EMH. There is EMH, and there are incorrect statements of EMH. (Strong and weak forms of EMH have also been proposed, but are not relevant to the discussion).

As long as unsystematic risk is diversified away, there is no reason a tilted portfolio cannot have expected risk-adjusted return that matches the market portfolio, consistent with EMH. One of the major theories of factors is that they are systematic risk factors that deliver a premium consistent with the risk taken, consistent with EMH.

When individuals are overconfident and think they can outsmart the market, there is significantly increased risk of behavioral errors when outcomes differ from projections.

A market index investor only expects market returns. The market could be +/- 50% in 6 months and will meet those expectations either way.
No, I don't think it's a straw man but I don't follow the connection in the rest of your post.
The claim that there is a BH version of EMH that you then critique is a hypothetical straw proposal.

When people try to outsmart the capital markets, it can be emotionally challenging when things don't play out as projected. This is true for all investors, but an investor in a market index fund expects to get market return whatever that is, and barring an uncommon but not precluded miss on index tracking, the index fund investor will get that market return.
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Re: Most people [Is TSM not the best choice for informed investors?]

Post by vanbogle59 »

LilyFleur wrote: Sun Sep 26, 2021 1:25 pm my mom advised me to hold on--she had studied this company-- and not lose a wink of sleep over it. She was right.
Sure, but how much did she charge?
Advisory fees from moms have been through the roof at some firms.
:D
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Re: Most people [Is TSM not the best choice for informed investors?]

Post by 000 »

Beensabu wrote: Sun Sep 26, 2021 4:41 pm Index investors theoretically accept the returns of their index, which is why valuations do not matter to them. That is fine.

The issue is when they expect the returns of their index to meet a certain level or fall within a certain range.

It comes down to being okay with being average, as long as average is good enough.

If return expectations are not met, and average becomes not good enough, that is when people start to make behavioral errors.

The popularity of the persistence prediction shows that many index investors are indeed expecting the returns of their index to meet a certain level or fall within a certain range long-term. It has reached the point where it is almost as if US stocks are somehow perceived to be safer than US bonds. I'm not sure if that's ever happened before.

It's interesting because perception may or may not be reality. If stocks are still riskier than bonds, then behavioral error will abound when that is shown to still be true. But if stocks are no longer riskier than bonds, then why would there be a risk premium for stocks and what is the riskier asset that a premium can reasonably be expected for?
Agreed. There really does seem to be a perception here that the US equity index will never be below the average performance of capital assets in general or outside some absolute range.

Your comment that "it is almost as if US stocks are somehow perceived to be safer than US bonds" is spot on.
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Re: Most people [Is TSM not the best choice for informed investors?]

Post by 000 »

Northern Flicker wrote: Sun Sep 26, 2021 7:01 pm The claim that there is a BH version of EMH that you then critique is a hypothetical straw proposal.

When people try to outsmart the capital markets, it can be emotionally challenging when things don't play out as projected. This is true for all investors, but an investor in a market index fund expects to get market return whatever that is, and barring an uncommon but not precluded miss on index tracking, the index fund investor will get that market return.
See above post and the quoted post by Beensabu. I am not talking about your rational take on what TSM investors should expect, but rather what I sense many do in fact expect about that particular investment.
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Re: Most people [Is TSM not the best choice for informed investors?]

Post by Northern Flicker »

I would suggest not worrying about investors who may expect something other than market return from a market index fund when formulating your own strategies.
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