Rational data driven investment advice - the all world stock index

[steveo73]

Because I'm getting to be an old dude so in all likelihood have less time to fund than someone looking to ER in their 30s or 40s or even early 50s.

Makes sense. Thanks.

[suomalainen]

I am not trying to sell anything in this marketplace of ideas (this thread). You apparently were trying to sell your idea. I engaged with you to point out that your sales pitch needed work, that it was lacking in certain respects, that it had logical holes. I told you exactly how I thought it could be improved to be more informative, more logically consistent and therefore more persuasive. Instead of engaging with those critiques, you instead responded with "You're a shitty buyer if you can't see how great my idea is and, oh by the way, tell me why your idea is so much better." As I started off saying, I am not trying to sell you on anything. I was trying to see if you had more to your idea than at first blush, but apparently you do not, so I am no longer interested. Good luck with your strategy. I hope it works out well for you.

[rube]

My take is that an all world stock index (the most diversified stock index you can buy) will outperform any other investment strategy from a risk adjusted perspective over the longer term.

I don't understand what you meant with "risk adjusted perspective". Would you mind to elaborate?

What I understand from Tyler's site and specifically this article https://portfoliocharts.com/2021/12/16/ ... ortfolios/
Is that risk (ulcer index) and reward are not linear.
And personally I am not looking for an investment that gives me over the long term the highest return, but for one that lets me sleep well at night and produces sufficient return (for me).

I don't believe I have a specific edge which would help me to be a better analyzer/predictor than millions of other investors. And I am not interested to spend thousands of hours trying to become one. So I accept that my return might be average, I e. following the broad market. At least, for my portfolio part that consists of ETF, ETC, Bonds.

The other part of my portfolio consists of Real Estate and loans. This is much more local and depending on contacts, effort etc. So it's easier to create your own edge, find opportunities that are not visible to millions of others (i.e. the efficient market theory isn't applicable in that space).

[steveo73]

I don't understand what you meant with "risk adjusted perspective". Would you mind to elaborate?

What I understand from Tyler's site and specifically this article https://portfoliocharts.com/2021/12/16/ ... ortfolios/
Is that risk (ulcer index) and reward are not linear.
And personally I am not looking for an investment that gives me over the long term the highest return, but for one that lets me sleep well at night and produces sufficient return (for me).

I'm feel I'm coming from a similar perspective to you. The reason I would call an all world stock index the best risk adjusted perspective is that an all world index is highly diversified and it's a stock index. Stocks to me have the best long term reward and you want the most diversified index you can get.

I think the best risk adjusted returns will come from an all world index. There is an argument if you are American you can just use an S&P index or something similar.

Maybe a better way to phrase risk adjusted returns is to state at this point no one knows what stocks across the world will perform the best so the most likely way to get the average returns of the stock markets across the world is via an all world index.

Sure American stocks or Indian Stocks or a tilt towards small companies or whatever your specific index or stock may outperform but it's just as likely that those indexes/stocks will underperform. Since you don't know what will happen over the longer term why take the risk ? It just seems irrational to me. There can of course be other reasons for investing as I pointed out earlier but those aren't rational. You probably don't have an edge because if you did you'd be a multi millionaire and/or working/owning a successful hedge fund.

I provided a link earlier to Lars site but this is the most rational way to invest that I have ever heard. You can watch his videos to get a better view. It's simple which to me is another benefit.

https://www.youtube.com/watch?v=_chiIIxMGl0&t=14s

I don't do exactly what he does but that is due to tax reasons (including capital gains tax) and I also invest into property (only my own house). I stated earlier though that these are not really rational decisions from a portfolio creation sense excluding tax benefits.

One other point I'd make in relation to Tyler's article is that I don't like the premise that he is coming from within that article in that he is picking specific indexes and bond maturity terms. I disagree with that approach. I think that is making the situation way too complex and missing the point of the available investment vehicles we have today like all bond funds and an all world stock index. Instead of picking different indexes why not pick the most diversified indexes relevant to your situation. So bond indexes in your home country make sense because you then are not exposed to currency risks.

That solves the issue of stocks and bonds and that to me leaves commodities. I wouldn't consider crypto currencies or currencies or other speculative investment options. You could play with those options but stuff doing that with my retirement portfolio.

I also wouldn't add gold to my portfolio due to the same reason I wouldn't add specific stock indexes/stocks. I would pick an all commodities index.

I love Tyler's site but my conclusions are very different to his conclusions especially in that article.

I personally don't have a commodities index but I would consider it if I had a bigger portfolio. I considered a commodities index however the fees are for me much higher than the fees for holding a stock index. On top of that I live in Australia and have an Australian stock index which has a largish exposure to commodity companies. This is different to actually holding commodities but when I take into consideration my specific situation I just can't justify it.

One other side point is that the fees are probably higher in relation to commodity indexes because holding commodities sucks as they cost you money and don't give you any payout. Companies pay profits. Commodities have a holding cost. When you buy for instance gold on the futures market you are getting hammered via interest payments going against you. If for instance you hold the Aussie dollar and Australia has higher interest payments compared to the US then you are continually receiving interest payments holding the Aussie dollar. Commodities don't have this benefit. They actually work against you.

Let me add that I don't have any problems with holding a commodity index as part of your portfolio but for me personally the cons outweighed the pros. That could change over time depending on what happens with my portfolio.

In Australia the housing market has performed better than the stock market. It's been a gold mine. I own property but only my own house. Most people invested in investment properties however if I was going to invest into property I would also use an index.

I don't believe I have a specific edge which would help me to be a better analyzer/predictor than millions of other investors. And I am not interested to spend thousands of hours trying to become one. So I accept that my return might be average, I e. following the broad market. At least, for my portfolio part that consists of ETF, ETC, Bonds.

My take is at least this strong. I think people who think they have an edge are typically poor investors. The data on hedge funds backs this up.

I am only discussing an all world stock index. Your portfolio which is more what Tyler's site is about is a more complex beast.

[IlliniDave]

Sure American stocks or Indian Stocks or a tilt towards small companies or whatever your specific index or stock may outperform but it's just as likely that those indexes/stocks will underperform. Since you don't know what will happen over the longer term why take the risk ? It just seems irrational to me. There can of course be other reasons for investing as I pointed out earlier but those aren't rational. You probably don't have an edge because if you did you'd be a multi millionaire and/or working/owning a successful hedge fund.

This (what's below) is an oversimplification.

My take has always been that within reason riskier investments should have a reasonable expectation to outperform less risky ones. That's why, for example with bonds, US gov't bonds tend to yield less than municipals, which in turn yield less than corporates. Risk adjusted return seems to be a construct invented to try to make different classes more comparable. In my mind I've come to think of it as: what we primarily get paid for is putting our money at risk. Again with bonds the other two things we get paid for is a compensation for expected inflation over the term, and the inconvenience of not having our money in our pocket to use or invest in some other way. The latter two are essentially what you get from something like treasury bills/bonds. The "risk premium" is the difference as you go to municipalities and corporate borrowers.

That gets a little skewed due to investors like me that use bonds for ballast more so than expectation of growth.

The specifics are different but (again, just how I view it in my mind) but similar forces are at work in stocks although there's less predictability. "Value" stocks can be perceived as less reliable/solid (why their price is relatively low), and small companies are arguably more likely to go completely belly-up than large.

In a sense when you segment you are adding more peculiar risk on top of the systematic risk so more total risk, generally with the (hopefully) reasonable expectation of more long-term reward--the small company will turn into a big, enormously profitable company, or the value company will pay large dividends and/or work itself into having a lot of growth/growth potential and reward you with an outsized price increase.

So it's what you can stomach with risk. When risk is defined as volatility (not my favorite approach, but that's how the math is done), I think you're correct that the wider you spread stock holdings across the world, the more you minimize expected volatility in outcome versus segmenting, and thereby gain a reasonable expectation of higher risk-adjusted outcome. Things are more and more correlated across the world with stocks, but haven't reached 100% yet. Luckily a portfolio that has average return does (or would do) the job for a lot of investors.

[steveo73]

When risk is defined as volatility (not my favorite approach, but that's how the math is done), I think you're correct that the wider you spread stock holdings across the world, the more you minimize expected volatility in outcome versus segmenting, and thereby gain a reasonable expectation of higher risk-adjusted outcome. Things are more and more correlated across the world with stocks, but haven't reached 100% yet.

The wider your exposure the less likely you are to outperform but also underperform. You are looking at becoming average. Yes stocks are correlated but the make up of the top performing stocks changes all the time.

I think the average investor who invests in highly diversified indexes is really an elite investor because the vast majority of people who try to outperform will underperform. It's fascinating.

Luckily a portfolio that has average return does (or would do) the job for a lot of investors.

Exactly. Assuming you get to a reasonable portfolio level compared to your future spending (note future spending isn't set in stone either) then average returns can do the job just fine.

To me it's not about being the richest or something like that. I don't care.

There is one guy on the MMM forum who sells options and other stuff in order to bump up his returns but he started with and I think he still has a higher WR. I understand how you want to quit because work sucks but personally I don't want to take on additional risk like this with my retirement portfolio.

[IlliniDave]

The wider your exposure the less likely you are to outperform but also underperform ... vast majority of people who try to outperform will underperform. It's fascinating.

If you own some of everything in equal proportion to how it exists in the market you will never beat the market. Your gross returns will equal the market return (so you won't underperform either) and your actual net return will trail the market by the amount of management fees you pay plus any taxes that result from any distributions that occur (generally dividends and capital gains distributions). Dividends can't be helped and skillful management of an index fund can greatly curb any capital gains distributions (I've yet to receive a capital gains distribution from any Vanguard index fund, but never say never I suppose).

I've only seen one data source for relative performance of index funds. Vanguard used to do a study of the before-tax performance of their index funds by category versus actively managed funds using Morningstar data. I haven't seen one of the annual updates in a few years, I dunno if they quit doing it or if it is hidden somewhere on their website--I haven't looked very hard. And I don't know if anyone else is publishing such studies. The trend was pretty clear though. Looking at one year performance index funds across the various categories usually finished near the midpoint (50th percentile). Typically a little higher during rising markets, a little lower lower during falling markets. Over time the index funds crept up, and iirc generally got up near the 85th percentile over time (10 years, 15 years, or more, don't remember how long they were able to get data for). Emerging Markets and small cap did a little less well versus active, large cap and developed markets did more well.

One of the problems with the study is that mutual fund companies tend to cull underperforming funds (survivorship bias), and the pool of actively managed funds available for 15-, 20-, 30- performance comparisons is small.

Interestingly, the difference in performance on average of Vanguard index funds vs actively managed funds is about equal to the difference in management fees (Hence Bogle's "Cost Matters Hypothesis").

It's debatable how good of a proxy actively managed mutual funds are for individual DIY stock pickers. The managers have elite educations and access to elite tools and data. But they are somewhat bound by the prospectus, and don't have a lot of control over inflows or outflows. But they have to publish their performance data subject to accounting standards. Individuals can tailor their activity to optimize their tax situations (tax loss harvesting and such), and I'd think have little in the way of management cost analogs.

Sitting here, I can't think of a single stock picker I know who ever admitted doing worse than the market with their picks. They sometimes rue being too slow to get back in the market after selling out 100%. Even on these forums where a lot of investors talk semi-anonymously it's pretty rare to hear frank talk from pickers about performing sub market. It's probably safe to say on average the universe of stock pickers do about the same as the market, and in a given year probably half do worse and half do better. But that doesn't say much about how an individual might do over decades of continuous investment. I hope they do as well as they imply they do.

Except for one small stock option grant I got back in the 90s, I've never bought an individual stock, so have no first-hand experience. Like you I've convinced myself that doing a few basis points below the market for the core of my portfolio's stock allocation gives me good odds of meeting my goals with minimal adverse impact on my well-being (SWAN). I use my little Roth IRA to do some playing around, a few factor-based funds and other active specialty funds (all selected with expense ratio in mind). Jury's still out but so far they are trailing the index funds in the aggregate.

I know you pretty much know all this, so sorry I went overboard preaching to the choir. It's sometimes cathartic to reiterate big chunks of my philosophy and before I knew it I was doing that this morning. The combination of a bear market, erupting inflation, and probably a recession--all occurring in my first year of retirement (Murphy's Law, anyone?)--suddenly has me paying a lot more attention to the topic of investing than I have been in recent years.

[steveo73]

I've yet to receive a capital gains distribution from any Vanguard index fund

I have and regularly. I find it interesting that you haven't.

It's debatable how good of a proxy actively managed mutual funds are for individual DIY stock pickers. The managers have elite educations and access to elite tools and data. But they are somewhat bound by the prospectus, and don't have a lot of control over inflows or outflows. But they have to publish their performance data subject to accounting standards.

I think mutual fund owners will outperform average investors by miles. I've seen professional traders compared to average Joe's and there was a massive difference in results. We are talking lots of money.

I bolded the key part. That to me is the main difference. The amateur doesn't have to publish their results accurately. This enables the amateur to bypass actually looking at their results factually. You can tell everyone how you make money but when it's down you just put your head in the sand and ignore it.

But that doesn't say much about how an individual might do over decades of continuous investment. I hope they do as well as they imply they do.

This is a big point to me. I accept anyone can beat the market for a short time period but your stock that you marked as profitable last year can turn sour. Your profits that you made last year aren't necessarily going to continue. I'll go further than this and guarantee that this won't happen. The guy who mentored me said you need to keep your job because trading doesn't provide a regular income.

I've never bought an individual stock, so have no first-hand experience.

I have individual stocks. I was granted them from the company I worked for. I've also traded foreign currency. I did okay but it's risky and there are disadvantages. For instance one year I made say 20k. I had to pay about 1/2 of that in taxes. The following year I made a loss of about 5k. At that point I said stuff it.

I did find this interesting and fun. You are trying to figure out what is happening the world. Taking a position gives you a rush. I might even do it again but at this point I am much more interested in other activities/hobbies as well as not throwing any money away. I don't have a really low WR and I don't want to risk losing money.

The combination of a bear market, erupting inflation, and probably a recession--all occurring in my first year of retirement (Murphy's Law, anyone?)--suddenly has me paying a lot more attention to the topic of investing than I have been in recent years.

It's rough. I have various psychological tricks I use to handle down turns and difficult situations. I mark my holdings down significantly more than actual market value when there is a downturn. At the end of each financial year I mark my portfolio to market and I can then state well it wasn't that bad. I also have cash and bonds to last a number of years.

I also think I can go back to work or live on less etc. I've talked to my wife about spending less this year.

[IlliniDave]

steveo73,

Yeah, I get the appeal of active bets. For a long time I planned on taking a dollop of the stash, maybe $10K or something and putting together a small portfolio of individual issues and try out some of the many techniques I've read up on over the years. Just haven't got motivated to do it yet. And as I mentioned, I do it with funds instead individuals in my little Roth IRA.

Even though it is not wise from a security perspective, my coping mechanism when things are sour is to decrease how often I check my account balances. When the bulls are running I check much more often. I'm also positioned uber conservatively relative to my temperament as an accumulator, and grossly oversaved by ere standards. I'm also living a lifestyle (as defined by spending) that I know I can dial back. Knowing I'm not approaching a viability threshold helps. Still, I've started visiting Bogleheads regularly again, mostly to keep up on financial/investing news and the opinions of a very diverse community of accomplished investors and their approaches.

I'm not as certain as you are on some facets of the discussion, but that doesn't mean I think you are incorrect.

[steveo73]

Yeah, I get the appeal of active bets. For a long time I planned on taking a dollop of the stash, maybe $10K or something and putting together a small portfolio of individual issues and try out some of the many techniques I've read up on over the years. Just haven't got motivated to do it yet. And as I mentioned, I do it with funds instead individuals in my little Roth IRA.

I'll tell you something. Once I figured out I could save money, invest simply and retire early I lost all motivation for active trading. Active trading became the domain of the chumps because to me it's just about being financially secure.

Why bother with that unless it's for a game ? To me it's completely irrational. You are taking a risk for what ? I'm serious as well. There is no way you will outperform the market consistently and if you suffer a big loss you can put your lifestyle at risk. You aren't making big wins unless you are also having big losses. The two go hand in hand. If you are making small wins it's useless. You earn much more than you make via eking out a little extra return which you probably give back later.

I do other stuff. I've been playing Clapton style acoustic blues songs on my guitar for the last week or so. I just use my electric guitars. I've been working out at home trying to learn how to do handstands (been trying for years). I read heaps of books. I play chess. I go for walks with my wife. I cook. I try and keep reasonably fit.

The idea of gambling my money on taking positions just isn't more appealing than doing other stuff.

I'm not as certain as you are on some facets of the discussion, but that doesn't mean I think you are incorrect.

This is interesting. To be honest I don't like hearing that I'm so confident because when people are so confident I think they are delusional.

There are though reasons why I'm confident and it's not just my finances. My finances are a small part of my life. I'm basically an optimist and a happy person. I'm emotionally stable. I don't get too worked up about things. My wife still appears to be in love with me. I have 3 great kids. My daughter is turning 21 soon and she was so freaken difficult for years but now she is doing really well. My 18 yo son had some problems as an early teen but I think a lot of that was due to my daughter putting him in bad situations. He is now doing really well. My 9 yo son is gorgeous. I have a really good relationship with my parents and my brother and I have some good friends.

I don't need much and I've sort of over achieved in my eyes.

One of my favorite hobbies is supporting my footy team (Rugby League in Australia). My team is going to come last or second last and we consistently lose year in and year out. It frustrates me at times but every week I sit down to watch them play and every week prior to kick off I look forward to it.

[IlliniDave]

I'll tell you something. Once I figured out I could save money, invest simply and retire early I lost all motivation for active trading ...
Why bother with that unless it's for a game ?
...

This is interesting. To be honest I don't like hearing that I'm so confident because when people are so confident I think they are delusional.
...

One of my favorite hobbies is supporting my footy team (Rugby League in Australia). My team is going to come last or second last and we consistently lose year in and year out. It frustrates me at times but every week I sit down to watch them play and every week prior to kick off I look forward to it.

I always viewed potentially doing a little stock picking on the margins as a game, and similar to you once I won the "big" game, like you said, I pretty much lost interest. That's not to say I'll never do it. Just haven't worked my way that far down my list of leisure activities yet. Might never get that far though.

It's not that I thought you sounded over confident. About 10 years ago I was semi-well-read on a slice of investing-related topics but haven't maintained it. So it's really my lack of confidence I was reflecting. I'm a believer in behavior being the most important aspect of investing for average Joe's like me. So I'm confident my plan is suitable for me. The further afield I go from that, the more of an ignoramus I become. I have opinions, but I always hedge/caveat them.

Hoppinh across the world to American football, I totally understand where you're coming from. My two teams, Chicago Bears (professional) and University of Illinois (college) are fairly dreadful on average. But I still arrange autumn Saturdays and Sundays around them, and get a wave of nostalgia every August when I start hearing the whistles blow on the local high school practice fields.

[steveo73]

Hoppinh across the world to American football, I totally understand where you're coming from. My two teams, Chicago Bears (professional) and University of Illinois (college) are fairly dreadful on average. But I still arrange autumn Saturdays and Sundays around them, and get a wave of nostalgia every August when I start hearing the whistles blow on the local high school practice fields.

This is where I get my fun from amongst other things. I like your comment about winning the big game. It changes your perspective.