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ScottO

S&P 500 Concentration - Any Reason to Lose Sleep?

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Opinion: Eeek! Why I don’t trust S&P 500 index funds (least of all now) https://a.msn.com/r/2/BB17MZtK?m=en-us&a=0

Opinion: The hidden risk in your S&P 500 index fund http://a.msn.com/01/en-us/BB16RLDI?ocid=se

The S&P 500 Grows Ever More Concentrated https://www.morningstar.com/articles/992504/the-sp-500-grows-ever-more-concentrated?utm_medium=referral&utm_campaign=linkshare&utm_source=link

Top 10 companies make up 23% of VTSAX, 10% of VTIAX.

There have been a few more articles on the topic. One looked at equal weighting and concluded that it would not have beaten cap weighting over any time period (S&P500.) Seems like we're headed for mega corporations, so I guess this will be a continuing trend. What's the ticker symbol for Weyland-Yutani?

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Scott 0

The simple answer here is diversify diversify diversify!!!

You need to take those articles with a grain of salt. These journalists have to write about something to catch your attention. I'm not saying there isn't some truth in the articles just that they can sometimes be sensationalist to attract readership. You can learn from reading them but always stay cynical. Obviously the simple answer is diversify beyond the 500 index . A total stock market index has always been a better choice in my opinion but even there you need to keep your eyes open .  Plus as the Morningstar mentions smaller stocks  in a portfolio are always a good idea  and thats why I recommend a 4 fund portfolio which includes an extended market index or a small cap index fund in the mix.

I will hear from Ed about this I'm sure and he will have a pretty good reason why  I am out of my mind with my comments, but I'm keeping my small stock allocation. I basically own the Vanguard life strategy fund ( index fund of funds) plus some Vanguard small cap index fund, plus some cash.

 

 

 

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6 hours ago, tony said:

Obviously the simple answer is diversify beyond the 500 index . A total stock market index has always been a better choice in my opinion but even there you need to keep your eyes open .

https://www.marketwatch.com/story/the-total-market-index-isnt-all-its-cracked-up-to-be-2019-10-21
^ that article compares the S&P500 vs the TMI(Total Market Index) to say that they are pretty much just as diversified.

https://paulmerriman.com/vanguard-total-stock-market-isnt-best-fund-fleet/
^ was Paul Merriman one of the guys someone on this forum was recommending at one point?

Looks like this was discussed on this forum before:

More Discussion:
https://forum.mrmoneymustache.com/investor-alley/collins-vs-merriman-buy-and-hold/
https://www.bogleheads.org/forum/viewtopic.php?f=10&t=38374&start=750

 

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ScottO

Thanks for the flashback.  Oh wow, I remember that Steve doesn't like Merriman!  

Investing isn't an exact science, and  no one has the exact formula but I do know Steve owns the Extended Market Index now.  I was torn between owning small cap value index vs small cap index vs the extended index. I chose the small cap index. From my experience it's been a good performer and it certainly doesn't hurt my performance. It's been a positive. 

At the same time, I know/knew a fellow teacher years ago now retired who owned only one fund, the 500 index, and did very very well with no diversification beyond the S&P 500.

 

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Seems like it's a story making the rounds again - Rick Ferri versus Paul Merriman on Factor Investing(Podcast):
(Part 1) https://www.whitecoatinvestor.com/rick-ferri-versus-paul-merriman-on-factor-investing-podcast-169/
(Part 2) https://www.whitecoatinvestor.com/rick-ferri-paul-merriman-pt-2-podcast-170/
(Uploaded recently - You can skim through transcripts if you want to skip listening for 2hrs+)

Paul's alternate strategy may benefit Paul more than anyone else. Click throughs, book sales, speaking engagements, etc. Like you said, writers have to write something to stay relevant.  The disagreement with the norm could just be to differentiate himself to get people to say, "Hey check out this guy - he's got another idea if you're uncomfortable with what everyone else is doing." 

Quote

http://johncbogle.com/speeches/JCB_IASC0603.pdf
... It’s easy to argue, of course that having, as the S&P 500 Index currently does, 24% of assets in its 10 largest stocks is inadequate diversification. But the reality is that that level of concentration is in fact also below historic norms. In 1950, for example, the largest ten stocks composed fully 51%(!) of the total value of the Index, and even in 1964 the top ten composed 38%. Is such diversification adequate? There’s no way to be certain. But if the actual goal of investing is to capture as close as possible to 100% of the return of the stock market, one simply tries to own the market itself, warts and all, with each company weighted by its own market capitalization.

^ from a 2003 speech by John Bogle

I'll just keep doing what the man says and try to get some sleep. Darn pandemic is keeping me up at night.

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Hi Scott,

Looks like you answered your question by Bogles speech.

Here is another interview only about 7 months before his death: https://www.youtube.com/watch?v=3uJbHREmUs4 .

I know you heard this before and I will repeat what Bogle preached, "Don't just do something, just stand there." 

There is plenty to worry about for our everyday life. These are terrible times. But the stock market operates differently from our ordinary life experiences, big shocker there!  The stock market doesn't know how anything will affect our portfolios. Capitalization weighting vs. equal weighting of the indexes have been argued for 20 years. Who really cares? Nobody knows.

I am wondering why the feds are buying up both government and corporate bonds. They never bought corporate bonds before. Is this move just to keep some companies in business when they should go bankrupt? Does all of the fed purchasing change the natural structure of how markets operate? The geniuses for the past decade have been warning us about fed's interference. I  also wonder about my California muni bond fund when I hear that state governments are going to be in deep trouble because of COVID19 affecting their tax revenue. 

There is a lot to be worried about, but I let all of the emotions of other investors be expressed as it will certainly be expressed in some fashion that even investors don't know. The stock reflects the attitude and temperament of human beings, both professional and lay investors.

As Newton said, "I can calculate the motions of heavenly stars but not the madness of crowds!" He was so upset when he lost a fortune in the 1700s tulip bubble. 

The madness continues to this day. Human beings, and their money, cannot help themselves. 

I am not changing a thing.   

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For those who do have small cap value or an extended index in their portfolio, its saving grace could come on the other side of this  Covid-19 induced bear market.Are we even  in a bear market? a recession?   Historically small cap stocks have earned a decent amount of their long-term premium in the aftermath of a bear market. Incidentally, to me adding smaller caps is not tilting. It's more like adding a supporting player. If you are going to do this, you need not time the market. You need to just own a slice of extra small caps through an index fund and  throughout your investing experience.It might or might not be rewarding.

Annotation-2020-04-06-225951-1.jpg.a5ead1c93d0090c8c6267025222882e4.jpg

 

 

 

 

Annotation-2020-04-06-225951-1.jpg

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Sorry about the repetitive chart. Have no  idea why or how it happened or how to fix it. I keep edit and deleting it but it comes back.

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20 hours ago, ScottO said:

Paul's alternate strategy may benefit Paul more than anyone else. Click throughs, book sales, speaking engagements, etc. Like you said, writers have to write something to stay relevant.  The disagreement with the norm could just be to differentiate himself to get people to say, "Hey check out this guy - he's got another idea if you're uncomfortable with what everyone else is doing." 

I don't think Paul Merriman is in it for the money.  I get the impression that he has been wealthy for decades; he seems to be a true believer who had his enlightenment experience when he went through the Dimensional Fund Advisors boot camp and he wants to evangelize.  That approach, involving "factors" like company size and "value" (I think that is primarily determined by the ratio of book value to market cap), is grounded in academic research, notably by Eugene Fama who was awarded a Nobel prize for his efforts in this area.  One can argue--as Bogle probably would--that Merriman's approach is overcomplicated, involves more fees and risks underperforming the broad cap-weighted market, which provides "Enough," to cite the title of one of Bogle's books.  But to my mind some overweighting of small cap, "value" and maybe a couple of other categories (in low-cost passive funds) in an effort to capture the premium that those factors are demonstrated to have yielded in the past is within the circle of reasonable approaches to investing, so long as one sticks with it.  If Bogle is right, those factors will revert to the mean and over the long run you'll end up with market returns minus fees, so you'll do slightly worse if you are paying higher fees.  If Fama is right, in the long run you can expect a bit better than broad-market returns, but you must assume more short-run risk to get that premium.

It is interesting to contrast Merriman with Rick Ferri, who was also a DFA, Fama and French-influenced slice-and-dicer (he wrote a book about asset allocation) but who seems to have drawn closer to Bogle's simple broad market philosophy in recent years, describing the basic decision to invest in stocks as "the cake," and questions about factors, etc., as "the color of the icing on the cake."   I count both of those guys among the voices that will set folks on a good course, in stark contrast to the horde of brokers and insurance salespeople that prey on 403b account holders.  We're doing fine if the arguments are confined to the icing.

 

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On 8/12/2020 at 1:23 PM, whyme said:

I don't think Paul Merriman is in it for the money.  I get the impression that he has been wealthy for decades; he seems to be a true believer who had his enlightenment experience when he went through the Dimensional Fund Advisors boot camp and he wants to evangelize.  That approach, involving "factors" like company size and "value" (I think that is primarily determined by the ratio of book value to market cap), is grounded in academic research, notably by Eugene Fama who was awarded a Nobel prize for his efforts in this area.  One can argue--as Bogle probably would--that Merriman's approach is overcomplicated, involves more fees and risks underperforming the broad cap-weighted market, which provides "Enough," to cite the title of one of Bogle's books.  But to my mind some overweighting of small cap, "value" and maybe a couple of other categories (in low-cost passive funds) in an effort to capture the premium that those factors are demonstrated to have yielded in the past is within the circle of reasonable approaches to investing, so long as one sticks with it.  If Bogle is right, those factors will revert to the mean and over the long run you'll end up with market returns minus fees, so you'll do slightly worse if you are paying higher fees.  If Fama is right, in the long run you can expect a bit better than broad-market returns, but you must assume more short-run risk to get that premium.

It is interesting to contrast Merriman with Rick Ferri, who was also a DFA, Fama and French-influenced slice-and-dicer (he wrote a book about asset allocation) but who seems to have drawn closer to Bogle's simple broad market philosophy in recent years, describing the basic decision to invest in stocks as "the cake," and questions about factors, etc., as "the color of the icing on the cake."   I count both of those guys among the voices that will set folks on a good course, in stark contrast to the horde of brokers and insurance salespeople that prey on 403b account holders.  We're doing fine if the arguments are confined to the icing.

 

Ferri interviewed Merriman in this episode of the Bogleheads podcast.

https://bogleheads.podbean.com/e/episode-018-paul-merriman-host-rick-ferri/

I'm in the camp that the average investor doesn't need to "tilt".  I mean it might work out better and it might not.  I think the main thing is that if you decide to do it, you don't chase performance, by changing your tilt every few years, or you are bound to underperform the total market by doing this.  You have to commit to it for your investing life, as Rick Ferri often says.

 

 

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