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S&P 500 passes 4,000 for the first time.

Index tracking funds and ETFs
Lootman
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S&P 500 passes 4,000 for the first time.

#400881

Postby Lootman » April 1st, 2021, 3:50 pm

Not that round numbers have any particular significance. But in this case it is interesting because the intra-day low during the sub-prime crisis was at the sinister level of 666, almost exactly 12 years ago. Which means that anyone who ignored the doom and gloom, and bought an index fund on that day, has increased their money sixfold.

Or to put it another way, they have compounded their investment at the rate of 16% per annum in capital terms. There was also about another 2% a year in dividends and, for some, a FX gain as well. Call that 20% a year for a sterling-based investor? Albeit from a freakish low point.

So even though there are some investors who can beat the index, this appears to show that the vast majority of returns from equities comes from beta, and not from any alpha that you may get on top of that. My largest position is 4,000 shares in VUSA and that won't change.

1nvest
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Re: S&P 500 passes 4,000 for the first time.

#400941

Postby 1nvest » April 1st, 2021, 8:27 pm

This indicates 16.6% total return in US$, 6.32 gain factor, which given 1.43 £/$ back then and 1.38 recent saw FX enhance rewards for a £ based investor to 17% annualised.

Prefer the first Portfolio choice in that link myself, but not that fond of bonds, with a 50/50 stock/gold barbell instead as a central bond bullet proxy. and this instead and 9.65 gain factor x 1.43 / 1.38 = 10 gain factor for £ investor ... 21% annualised over 12 years. 17% beta 4% alpha.

Swings and roundabouts however, for instance April 2007 to 2009 had a -3% alpha. Fundamentally its not really alpha, just higher volatility with the more volatile zigzagging either side of the less volatile.

After such great/fast gains its more often better to take some off the table. Japan had a great 1970's/1980's for instance, flat/down for a decade or two following that. Wall Street Crash was preceded by fantastic gains during the "roaring 20's" where stocks doubled, doubled again and doubled yet again - but then went on to halve, halved again and halved yet again. Buffett who is more usually a 10% reserves stylist is more recently up to 30% reserves.

NotSure
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Re: S&P 500 passes 4,000 for the first time.

#400961

Postby NotSure » April 1st, 2021, 11:08 pm

Lootman wrote:So even though there are some investors who can beat the index, this appears to show that the vast majority of returns from equities comes from beta, and not from any alpha that you may get on top of that. My largest position is 4,000 shares in VUSA and that won't change.


It seems to me that basically, 5 companies have done really, really well. The remaining S&P 495, not so much.

https://www.isabelnet.com/sp-500-sp-5-vs-sp-495/

Is it alpha vs beta, passive vs active, or FAGAM vs the world?

Lootman
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Re: S&P 500 passes 4,000 for the first time.

#400964

Postby Lootman » April 1st, 2021, 11:22 pm

NotSure wrote:
Lootman wrote:So even though there are some investors who can beat the index, this appears to show that the vast majority of returns from equities comes from beta, and not from any alpha that you may get on top of that. My largest position is 4,000 shares in VUSA and that won't change.

It seems to me that basically, 5 companies have done really, really well. The remaining S&P 495, not so much.

Well, anyone who predicted the five global companies that would add the most market cap in that time period will inevitably have done very well.

Interestingly the FAANG/MAGA names have done nothing in the last 6 months and are all 10% or more off their highs (Google aside). So the broader market appears to be confirming the trend in their absence.

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Re: S&P 500 passes 4,000 for the first time.

#401087

Postby forrado » April 2nd, 2021, 11:59 am

1nvest wrote:After such great/fast gains its more often better to take some off the table. Japan had a great 1970's/1980's for instance, flat/down for a decade or two following that. Wall Street Crash was preceded by fantastic gains during the "roaring 20's" where stocks doubled, doubled again and doubled yet again - but then went on to halve, halved again and halved yet again. Buffett who is more usually a 10% reserves stylist is more recently up to 30% reserves.

Even more advisable for those about to / or who have already entered the drawdown phase.

"When you’ve won the game - stop playing" is a quote that has been attributed to Bill Bernstein, American Modern Portfolio theorist and long-time supporter of passive investing. He advocates a matched liability strategy, one that matches future assets sales and income streams against the timing of expected future expenses.

In the absence of adequate pension provisions, being overly dependent on the performance of equites (often referred to as sequencing risk exposure) as a means of generating distributions is not a comfortable place to be.

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Re: S&P 500 passes 4,000 for the first time.

#401093

Postby NotSure » April 2nd, 2021, 12:18 pm

Lootman wrote:Well, anyone who predicted the five global companies that would add the most market cap in that time period will inevitably have done very well.


Fortunately for many of us, we didn't need to be that clever - simply holding S&P or even global trackers (especially developed world ex. UK) has given many a lot of exposure to FAGAM or whatever they are currently called. Take those shares out, and I wonder if the whole passive vs active statsistics and debate might look a lot different.

I guess my point is that these trends of the last 20 years likely cannot continue for the next 20 - the market cap of FAGAM would exeed that of the planet. Maybe going forward, there is more scope for good, actively managed funds and trusts to 'beat the market' than there has been over the last 20?

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Re: S&P 500 passes 4,000 for the first time.

#401109

Postby 1nvest » April 2nd, 2021, 1:28 pm

forrado wrote:
1nvest wrote:After such great/fast gains its more often better to take some off the table. Japan had a great 1970's/1980's for instance, flat/down for a decade or two following that. Wall Street Crash was preceded by fantastic gains during the "roaring 20's" where stocks doubled, doubled again and doubled yet again - but then went on to halve, halved again and halved yet again. Buffett who is more usually a 10% reserves stylist is more recently up to 30% reserves.

Even more advisable for those about to / or who have already entered the drawdown phase.

"When you’ve won the game - stop playing" is a quote that has been attributed to Bill Bernstein, American Modern Portfolio theorist and long-time supporter of passive investing. He advocates a matched liability strategy, one that matches future assets sales and income streams against the timing of expected future expenses.

In the absence of adequate pension provisions, being overly dependent on the performance of equites (often referred to as sequencing risk exposure) as a means of generating distributions is not a comfortable place to be.

Liability matching 'rent' is easy. Own your own home, so you're not having to find/pay rent to others as you're both landlord and tenant - doesn't matter if rents soar or collapse.

Liability matching disposable income is the main factor. Inflation bonds (index linked gilts for instance) seem to be the ideal, but tend to be plentiful in times of low risk/can largely vanish at times of 'payout'. Remember that Gilts are loans to a individual who can print money, set interest rates and taxation levels. Whilst some states such as the US tend to respect support of their population and ensure such protections persist across times of 'payout', others such as the UK do not and are inclined to 'default' - more often partially via manipulation of taxes/policies.

The ideal would be a choice of a secure net 4% real 'inflation bond' so that individuals could precisely plan how much they needed to save and when that was drawn. Where the risk was solely longevity. Along with collective health insurance and support rather than the onus being thrown onto each individual. Sadly the trend is away from security/safety and far more towards individual risks, which means that individuals have to accumulate much more in order to get anywhere near being reasonably protected.

The closest safe 4% real type 'inflation bond' I've found is a quarter each of home, UK stocks, US stocks, gold. More consistently achieves 10 year inflation beating outcomes. A home is more aligned/correlated to gold, both can do well during periods of negative real yields. When real yields are negative those with a mortgage can in effect be being paid for holding such. UK and US stocks tend to correlate and do well during prosperity, when typically real yields are positive. Such a 4 way 'barbell cross' is reasonably neutrally balanced, half £ half foreign currencies (half primary reserve currency US$, half global currency (gold)), half land and commodity (gold) physical assets half equities. Home + imputed is somewhat similar to share price + dividends. 50/50 equity/gold barbell combines to be like a currency unhedged global bond bullet. If 75% of equities ... home/UK stock/US stock - do collapse in half, then the 25% in gold may typically rise 2.5 to 3 fold and negate the losses.

All very subjective, but if such a 'inflation bond' has reasonable 10 year consistency of positive real yield outcomes of the order 4% lower, 6% average - then that looks good enough. But as you say sequence of return risk should also be factored in. Applying a 3% SWR is safer, along with a possible discretionary additional 3% on top, Which isn't so bad as that also excludes imputed rent (which proportioned historically was worth another 1% i.e. 4% average historic rental yields) and that also factors in a higher inflation rate of 25% house price inflation, 75% CPI as the inflation rate. When you expand the capital base i.e. include home value as part of the portfolio that also lowers the SWR % figure, same amount of income £ value being drawn from from a 33% larger capital base (home value 25% of total).

Perhaps VUKE, CSP1, SGLN funds. Or if you fancy blending small cap (which the FT250 is in US scale) with large cap (US stocks) instead, then VMID instead of VUKE. CSP1, US S&P500 primarily for its accumulation i.e. dividends rolled up, as otherwise within ISA if dividends were paid in US$ you end up with two lots of currency conversions due to not being permitted to hold foreign currencies within a ISA. Personally I prefer the FT250 instead of FT100 and year on year that's also had a good (fiscal) year.

Of the order +60% US stock, +55% FT250, +2% house prices, -5% gold type fiscal year individual changes. 29% for the year including imputed rent, but without having actually looked at recent actuals. Bearing in mind that a year ago was a big down/trough ("start of Covid"). Slide across to calendar year measures and the FT250 for instance was down -5% for the year. From 2020 year start the end of March 2020 -37% downslide in FT250 required a +58% gain to get back to the -5% down break-even level - in nominal terms, even more after factoring in inflation.

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Re: S&P 500 passes 4,000 for the first time.

#401119

Postby 1nvest » April 2nd, 2021, 2:20 pm

Hit the edit timeout before I could attach this image to my previous posting

Image

If you're drawing a income from a all stock portfolio as well as seeing a bad decade of all-stock returns
Image
... that can lead to a critical situation

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Re: S&P 500 passes 4,000 for the first time.

#401130

Postby 1nvest » April 2nd, 2021, 3:00 pm

Target a Perpetual Withdrawal Rate (PWR) and over the last century for that asset allocation where the inflation rate was considered to be 25% house prices/75% consumer prices inflation in reflection of 25% home value weighting. And ignoring imputed rent, I'm seeing a 3% PWR figure having a worst case of 110% of the inflation adjusted start date value still remaining after 50 years across all 50 year periods (calendar year granularity). In the median case (average tends to be distorted by infrequent extremes, so median is perhaps a batter measure), there was 4 times more inflation adjusted value at the end after the PWR. i.e. a average 2.8% annualised real gain on top (3% if you use the arithmetic average based measure). As imputed rent was historically 4.2% average, with a 25% allocation we might add 1% on top of that. Average case 3% PWR + 2.8% real + 1% imputed = 6.8%.

As home value is illiquid for yearly rebalancing purposes UK REIT type stocks could be used as a proxy. Maybe 20% UK home, 5% UK REIT type initial weighting for 25% of the portfolio and where more liquid REIT stocks were added/reduced as broader portfolio rebalancing depicted over time.

Contrast that with someone who was all-stock and had to find/pay (not liability matched) rent out of investments. 3% PWR + 1% imputed = 4%, so they'd need a 4% PWR to compare and consider the consequences if all stock total returns happened to lose more than -5% annualised real over a decade as per 1964 to 1974 Burning the candle at both ends (need for increased income to offset higher prices along with core capital/investment base being eroded by inflation/losses). For many back then in retirement/drawdown that was a wipe out event, lifetime savings lost in less than a decade. For accumulators it wasn't a issue as they added more savings in at what later turned out to be relatively low prices.

Also ponder that in some ways we are in a repeat of the 1960's situation. More inclined that a 'default' situation is closer rather than distant. Negative real yields, currency wars, de-globalisation, high/rising debt etc.

I should also highlight that broadly 25 house price/75 consumer price inflation used in the above was a higher inflation rate that just consumer price inflation alone, so there's a element of additional benefit there also in using that as our inflation rate.

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Re: S&P 500 passes 4,000 for the first time.

#401140

Postby hiriskpaul » April 2nd, 2021, 3:38 pm

NotSure wrote:
Lootman wrote:So even though there are some investors who can beat the index, this appears to show that the vast majority of returns from equities comes from beta, and not from any alpha that you may get on top of that. My largest position is 4,000 shares in VUSA and that won't change.


It seems to me that basically, 5 companies have done really, really well. The remaining S&P 495, not so much.

https://www.isabelnet.com/sp-500-sp-5-vs-sp-495/

Is it alpha vs beta, passive vs active, or FAGAM vs the world?

I do wonder how reliable that research is. I have held iShares MSCI USA Min Vol Factor ETF (USMV) for about 9 years. It has held up well against the S&P 500 despite only holding one of the big names, Microsoft, and even then it has a lower weight than the S&P. 10 year benchmark returns in USD to end of Feb were 12.7% for USMV, 13.4% for the S&P 500.

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Re: S&P 500 passes 4,000 for the first time.

#401172

Postby Lootman » April 2nd, 2021, 5:38 pm

NotSure wrote:
Lootman wrote:Well, anyone who predicted the five global companies that would add the most market cap in that time period will inevitably have done very well.


Fortunately for many of us, we didn't need to be that clever - simply holding S&P or even global trackers (especially developed world ex. UK) has given many a lot of exposure to FAGAM or whatever they are currently called. Take those shares out, and I wonder if the whole passive vs active statsistics and debate might look a lot different.

I guess my point is that these trends of the last 20 years likely cannot continue for the next 20 - the market cap of FAGAM would exeed that of the planet. Maybe going forward, there is more scope for good, actively managed funds and trusts to 'beat the market' than there has been over the last 20?

But maybe the next 20 years could be like the last 20. It is just that there will be a new generation of (US) market leaders to replace the current ones. We have seen Tesla skyrocket in the last couple of years to 1.5% of the market cap of the S&P 500. Nvidia is now 1% of the index. There could easily be others that take over the mantle. The top market caps 20 years ago were shares like Exxon, Phillip Morris, Citibank and so on. They didn't need to continue their dominance of the index to ensure that index did very well.

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Re: S&P 500 passes 4,000 for the first time.

#401186

Postby GeoffF100 » April 2nd, 2021, 6:28 pm

hiriskpaul wrote:
NotSure wrote:
Lootman wrote:So even though there are some investors who can beat the index, this appears to show that the vast majority of returns from equities comes from beta, and not from any alpha that you may get on top of that. My largest position is 4,000 shares in VUSA and that won't change.


It seems to me that basically, 5 companies have done really, really well. The remaining S&P 495, not so much.

https://www.isabelnet.com/sp-500-sp-5-vs-sp-495/

Is it alpha vs beta, passive vs active, or FAGAM vs the world?

I do wonder how reliable that research is. I have held iShares MSCI USA Min Vol Factor ETF (USMV) for about 9 years. It has held up well against the S&P 500 despite only holding one of the big names, Microsoft, and even then it has a lower weight than the S&P. 10 year benchmark returns in USD to end of Feb were 12.7% for USMV, 13.4% for the S&P 500.

I was hoping that you would turn your mighty brain to this hrp. The charts in the link are over the last five years. According to Google, the S&P 500 grew from 2047.60 to 4019.87 over the last five years, i.e. it grew by a factor of 4019.87 / 2047.60 = 1.963, very nearly a factor of two. Here are the constituents:

https://www.slickcharts.com/sp500

The top six constituents are AAPL, MSFT. AMZN, FB, GOOGL and GOOG. Together they account for 20.86% of the index. Even if they had increased from zero over the five years, they could only boost the S&P 500 by 20.86%. These stocks may be over valued, but I do not believe that is a great worry for passive investors.

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Re: S&P 500 passes 4,000 for the first time.

#401190

Postby NotSure » April 2nd, 2021, 6:37 pm

hiriskpaul wrote:I do wonder how reliable that research is. I have held iShares MSCI USA Min Vol Factor ETF (USMV) for about 9 years. It has held up well against the S&P 500 despite only holding one of the big names, Microsoft, and even then it has a lower weight than the S&P. 10 year benchmark returns in USD to end of Feb were 12.7% for USMV, 13.4% for the S&P 500.


Indeed - various sectors unrelated to the S&P have done well. I guess my point is that the mantra of "US/global tracker beats all but luck" owes a great deal to the success of FAGAM and as such, may not hold so true going forward. This has been particularly true post-Covid crash, where I note USMV seems to be well behind S&P (but still pretty healthy). Of couse over the same period (post-Covid crash) Tesla is now also in the mix, further accelerating the S&P/developed world trackers, where again "past performance may not be a good guide to future returns".

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Re: S&P 500 passes 4,000 for the first time.

#401212

Postby GeoffF100 » April 2nd, 2021, 7:58 pm

NotSure wrote:[I guess my point is that the mantra of "US/global tracker beats all but luck" owes a great deal to the success of FAGAM and as such, may not hold so true going forward.

"US/global tracker beats all but luck" was not aided in a any way be the success of the big tech stocks. Some active funds will do better than the index, and others will do worse. Nobody has demonstrated a method that has better than luck chance of prediction which funds will beat the index after costs. If they did, all the money would go into the more promising funds, and the method would cease to work.


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