S&P500 at record highs - time to stay in or pull out?

[Panamax]

LeoSayer said:

only c.1% of trades in the market are for index funds.

I don't understand.

Are you saying the massive index funds just make one trade at one price per day? I know nothing about how they actually work but if I was running one of them I'm pretty sure we wouldn't do it that way.

[p1stonhead]

Panamax said:

LeoSayer said:

only c.1% of trades in the market are for index funds.

I don't understand.

Are you saying the massive index funds just make one trade at one price per day? I know nothing about how they actually work but if I was running one of them I'm pretty sure we wouldn't do it that way.

Mine has a cut off time each day that you need to have placed an order by to get in that day. Likewise for selling - it s not instant.

So I guess they collate funds in and out each day and then actually place orders for the differences all at once? (I don’t actually know but it makes sense)

[Panamax]

p1stonhead said:

Mine has a cut off time each day that you need to have placed an order by to get in that day. Likewise for selling - it's not instant.

Yes, that's you dealing with the fund. The fund manager either sells a proportional amount of the underlying assets or uses existing cash reserves to cover your withdrawal. There isn't necessarily an exact match of either amount or timing in what the fund does in the market.

I just googled how passive funds conduct their own trades in the market when following the index and this was the response,
"Index Rebalancing: Passive funds make adjustments to their holdings only when companies are added or removed from the index they track (e.g., when the FTSE 100 or S&P 500 constituents change). Most of this trading is concentrated at the very end of the trading day in the closing auction to avoid straying from the benchmark price."

[LeoSayer]

Panamax said:

LeoSayer said:

only c.1% of trades in the market are for index funds.

I don't understand.

Are you saying the massive index funds just make one trade at one price per day? I know nothing about how they actually work but if I was running one of them I'm pretty sure we wouldn't do it that way.

They place one basket trade per day which could be for hundreds of different companies - it will be based on what is required to bring the fund back into acceptable tolerance with the index and to manage cash. On a daily basis, this is to pay for or invest net fund subscriptions and redemptions. On a less frequent basis (typically quarterly) they need to reflect changes to the index constituents.

These trades are often filled by dozens if not hundred of different prices for each company. Exactly how this is done is determined by the trading algorithm used by the trader.

There is no need to trade more than once per day because fund subscriptions and redemptions are only settled once per day.

[Anemoni]

It’s one attraction if index funds, as well as vastly diminishing the impulse to keep obsessively checking the price, the ability to make multiple or knee jerk trades is much less.

Both things that in the long run lead to poorer returns

[BobToc]

I don't think it's as low as 1%, but passive activity is just by definition lower than it's share of market value. Probably more like 10-20%. But the point made is a good one - trades are what determines prices and the overwhelming majority of trades are made by active investors.

[Anemoni]

So active investors make the market and the passive ones ride it?

That seems about right.

[LeoSayer]

Anemoni said:

It s one attraction if index funds, as well as vastly diminishing the impulse to keep obsessively checking the price, the ability to make multiple or knee jerk trades is much less.

Both things that in the long run lead to poorer returns

Index ETFs give you both those.

That's why I avoid them

[mikeiow]

Anemoni said:

So active investors make the market and the passive ones ride it?

That seems about right.

So long as you mean make the market move up OR down

[LeoSayer]

BobToc said:

I don't think it's as low as 1%, but passive activity is just by definition lower than it's share of market value. Probably more like 10-20%. But the point made is a good one - trades are what determines prices and the overwhelming majority of trades are made by active investors.

The other common misunderstanding about market cap-weighted index funds (which the majority are) is that they require remarkably little work to track the index.

Imagine you want to create a portfolio to track the S&P500. All you need to do on day 1 is buy the 500 index constituents in their % weights and then you just sit back and watch your portfolio track the index automatically from then on. You only need to trade again when the index constituents change (generally a few changes per quarter) or when you want to add or withdraw money from your portfolio.

This is part of the reason why the index fund fees are so low, along with the lack of highly paid investment teams.

[Jon39]

LeoSayer said:

The other common misunderstanding about market cap-weighted index funds (which the majority are) is that they require remarkably little work to track the index.

Imagine you want to create a portfolio to track the S&P500. All you need to do on day 1 is buy the 500 index constituents in their % weights and then you just sit back and watch your portfolio track the index automatically from then on. You only need to trade again when the index constituents change (generally a few changes per quarter) or when you want to add or withdraw money from your portfolio.

This is part of the reason why the index fund fees are so low, along with the lack of highly paid investment teams.

Perhaps I am thinking too deeply, but say a significant constituent company hits bad trouble. With 1 out of 500, we might think a single constituent would not make any difference, but often in an index, a small number of businesses have dominant percentages. Would tracker funds make an adjustment if the share price of a dominant fell enormously?

The 'just sit back' approach, I like.

An index can still be reasonably closely tracked, by not needing to hold all, but say just the 25 main companies out of 100.
EG. companies 90 to 100 would have almost no effect on a 100 index.
Then take that one stage further:- Select 25 of the higher weighted constituents (100 index) avoid high cyclicals, go overweight in defensives and you will be surprised what can be achieved over a very long period.

Am sitting back now watching tennis. Cheering for a Brit. who has just won the first set.

Edited by Jon39 on Wednesday 17th June 15:54

[LeoSayer]

Jon39 said:

Perhaps I am thinking too deeply, but say a significant constituent company hits bad trouble. With 1 out of 500, we might think a single constituent would not make any difference, but often in an index, a small number of businesses have dominant percentages. Would tracker funds make an adjustment if the share price of a dominant fell enormously?

If a dominant company share price collapsed so that the market cap dropped below the index threshold then it would be removed from the index at the next (quarterly) review point and replaced with another company. The index fund would then adjust their holdings at the same time.

If the company goes bust or no longer exists (eg. via merger) then it will be removed from the index immediately.

Jon39 said:

An index can still be reasonably closely tracked, by not needing to hold all, but say just the 25 main companies out of 100.
EG. companies 90 to 100 would have almost no effect on a 100 index.
Then take that one stage further:- Select 25 of the higher weighted constituents (100 index) avoid high cyclicals, go overweight in defensives and you will be surprised what can be achieved over a very long period.

I wouldn't be surprised at all. Warren Buffet and your good self have proved it. In fact, there may even be index funds out there that invest on the basis of the characteristics you describe. Whether they can be described as passive is another question.

Personally, I've found that I've been able to meet all my financial goals with index funds and the time not spend on stock selection has been spent productively on other aspects of personal finance.

[gotoPzero]

Warsh setting up a FED task force....hm.

Also seems that forward guidance is going in the bin.

[Jon39]

LeoSayer said:

... Personally, I've found that I've been able to meet all my financial goals with index funds and the time not spend on stock selection has been spent productively on other aspects of personal finance.

Thank you Leo.

What I was thinking theoretically, say an index top company suddenly encountered serious trouble, with a share price fall of 80%, but still remained eligible to stay in the same index. Would an index fund just ignore such an event?
I suppose they don't offer a guarantee of perfect index replication.

The majority of my stocks selection was done over 30 years ago, but much to my surprise is still working well (so far). -
There is always a huge variation in individual share performance as each year progresses, but that is irrelevant to me as long as the total is going OK. Therefore no ongoing work is involved.
I do still follow business matters in general, but little incentive now for me to increase existing holdings, or add new ones.

Corporate actions have obviously changed the holdings over time, sometimes for the better. A stand out was Shell's takeover of BG. They made an offer, then something happened, I don't remember but perhaps an oil price crash. Eventually when that deal finally went through, Shell stuck by their original terms. Very generous I thought, because they probably had the right to reduce their offer. A big uplift in a single transaction.

Picking stocks is initially an uncertain activity, but as we get to know the businesses, a clearer picture emerges of whether they are either good, or just mediocre. Investors are then well placed having that knowledge, because they will be in a much more confident position to increase holdings during the occasional market crashes.

[Diderot]

Neophyte here but at what point do you actually realise the gains? Take the wins and wait for the dips to buy back?

[Panamax]

Diderot said:

Neophyte here but at what point do you actually realise the gains? Take the wins and wait for the dips to buy back?

There's no realistic answer to this question.

If you look at the long term market graphs everything says "stay invested". However, if you go stock picking you'll never know whether your decisions were right or wrong until after the event, whether that's buying or selling.

There's a juggling exercise beween "trim your profits" and "hold your winners" to which there is no simple answer.

[Steve H]

Panamax said:

Diderot said:

Neophyte here but at what point do you actually realise the gains? Take the wins and wait for the dips to buy back?

There's no realistic answer to this question.

If you look at the long term market graphs everything says "stay invested". However, if you go stock picking you'll never know whether your decisions were right or wrong until after the event, whether that's buying or selling.

There's a juggling exercise beween "trim your profits" and "hold your winners" to which there is no simple answer.

It also depends on your own circumstances.

If you are drawing on your investments for income you may choose to scalp some profits out of the more successful stuff to live on and to balance out the mix and in the hope that the less successful picks will have their growth later.

If you are still accumulating the only reasons to sell are if you think a dip may be coming or just to rebalance your choices to the proportions you want.

[Sheepshanks]

Steve H said:

If you are drawing on your investments for income you may choose to scalp some profits out of the more successful stuff to live on and to balance out the mix and in the hope that the less successful picks will have their growth later.

That's exactly what my DFM seems to do.

I thought the idea was to run winners and cut losers but, nope, he does the opposite. I'm not sure he isn't taking the mick.

[The Gauge]

How would say the Vanguard global all cap index compare with an income bond as far as monthly income is concerned?

When I retire next year I m thinking of putting £100k into a monthly income investment to top up my monthly pension, at least for the first year to help me adjust to having a lower income.

NS&I fixed interest income bond is currently around 4.3% and would pay around £300/month after tax. Would an income index typically fare better, albeit with a risk attached?

[Steve H]

Sheepshanks said:

Steve H said:

If you are drawing on your investments for income you may choose to scalp some profits out of the more successful stuff to live on and to balance out the mix and in the hope that the less successful picks will have their growth later.

That's exactly what my DFM seems to do.

I thought the idea was to run winners and cut losers but, nope, he does the opposite. I'm not sure he isn't taking the mick.

Judgement either way. Is the winner an Nvidia that seems to keep climbing or is it one of the many that is worth cashing some in on while the peak is still there. Are the losers just tomorrow s winners in waiting ..


ETA, although fund managers will tend to work to formula so if something grows disproportionately they will only let it get so far before rebalancing anyway.

Edited by Steve H on Thursday 18th June 06:34