Do Global Index Funds Have A Problem?
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- Опубликовано: 15 июл 2024
- Are Global Index Funds too exposed to the US tech sector? Would it be better to just be invested in those companies and get much higher returns? What happens if everyone was a global index investor? Damo talks T through those concerns and answers your biggest questions.
You can watch our step by step guide to Index fund investing here: • How To Pick The Right ...
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This is not financial advice. The reason it’s not financial advice is because it’s not tailored to you. We explain the principles of building wealth but if you want personalised advice, it’s worth speaking to a financial advisor. As with everything financial, please do your own research. We really encourage that because no one cares more about your money than you and if you learn the basics then it will change your life.
Chapters:
00:00-00:45 - Intro
00:45-03:44 - What are the concerns?
03:44-06:59- Is it really lower risk than investing in just US tech?
06:59-08:51 - Is it better to exclude the Magnificent 7?
08:51-14:48 - S&P 500 or Global Index Fund?
14:48-15:44 - Hostinger ad
15:44-21:06 - Does an equal-weighted beat a market cap ETF?
21:06-24:55 - How often do indexes rebalance?
24:55-28:59 - What happens if the global economy slows down?
28:59-34:53 - What would happen if everyone was a passive investor?
34:53-35:43 - Outro
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MSCI rebalancing description is incorrect. Rebalances are indeed quarterly and 4 things happen that cause a weight change which have nothing to do with price changes: Additions, deletions, share in issue changes and freefloat changes. Price fluctuations from one rebalance to another do cause weight changes but the price movement itself is “self” rebalancing i.e. someone tracking the index does not have to buy more of the same stock as its weight will increase on its own due to the price outperformance vs all other stocks in the portfolio
Was thinking about this earlier today, but reassured myself that the fund managers rebalance, de risk and index funds are a diversifying strategy, rather than buying into a few stocks, when you would be more exposed to volatility.
Exacly, you pay 0,20 for that service, wich is nothing compared to the fees you'd pay if you rebalance yourself.
Thanks for trying out the Nepalese! We love you guys! 🇳🇵
Two key points to note here that I think you've missed:
1. It's clear too many people have no idea what's actually in their index fund (hence you see people buying All-World and S&P500 for example).
2. With an index like an S&P500 one you are buying businesses listed on a US exchange. Many of these businesses operate overseas and many even have more growth potential abroad than in the country of their listing. It's a global market so you're betting on companies, not the country of their listing. In a way the actual index is irrelevant (which leads me back to my first point). This is so important and yet nobody seems to understand or mention this.
Hey, T never writes notes on his hands. He remembers most things haha. Great video , thanks to all the team for producing and sharing..👍🏿
@26:00 Stock investing doesn't require never-ending GDP growth or earnings growth, that's a common misconception. Investing "works" because you're buying the rights to future cashflows that are uncertain. That uncertainty means that you can buy the cashflows for less than their fair value. Eg imagine a game that pays either £0 or £100 with a 50% chance. How much would you pay to play ? The fair value of that game is £50, but I personally wouldn't risk more than £40 because I don't like losses. But if you're brave enough, perhaps you'd be willing to buy that £50 of "expected" future cash for £45 -- thus earning a £5 reward (aka the risk premium). The long-run return from stocks is similar. It's a compensation for bearing risk, nothing more. And the same risk exists whether earnings are going up, down or sideways.
Great Podcast Timeyin & Damo. I love ETFs.😃
First one I've watched through completely 👕I might start working my way back through. Really enjoyed it.
You said one of the best things ever and I’m going to use it.
“Big companies can prosper from growing middle classes in developing country because there’ll be a market for their products”
There is also more people able to think new innovative ideas. So we all benefit from raising the tide. When people are only worried about not starving they aren't contributing new innovative ideas.
I agree completely in regards to all businesses being tech businesses.
Even though today's "tech" businesses are defined as such, almost all of the big businesses that have dominated the markets at one time or another have been the tech their that time. Even today, the tech businesses do not have a great deal of tech in common, most are manufacturers or media companies at their heart, and I think all could be called distribution companies.
Interesting chat, thanks guys 👕
Thanks guys - great stuff. Cheers.
Teeny, tiny 👕. Great chat guys. I love the fact that normal ‘blokes’ can chat about finances nowadays. Even my mates and I sit and discuss market trends over a few pints (we must be getting old 😉)
I’m on the index fund ‘train’ and it has proved to be a great vehicle compared to my old pension provider(high costs/poor performance). Keep up the great work, gents!
Yes normal blokes, with all that entails with non professionals, cosy chats but a lot of inaccuracies and misunderstanding
@@kippsguitar6539 true, but some of us are fairly well informed and able to articulate good financial principles over a beer and a packet of crisps (non-professional lunch).
👕 always an amusing and enlightening listen. Thanks fellas
👕 always watch to the end... and whilst I now know more about index funds, I particularly appreciated the bonus "dropping stuff" content! :D
Love this chat chaps! 👕
I'm a fan of market weighted indexes (to a degree) in that it is effectively a built in momentum strategy where the winners are allowed to grow and companies that do badly get penalised - having said that, the NASDAQ 100 undertook a 'special rebalance' relatively recently to trim the weighting of big tech which partially defeats the point to me. I think too many people try and over simplify index investing, every index has a trade off and there are literally thousands to pick from so an index investor still needs to understand what they're investing in to some degree.
A global fund, whilst it has traditionally had lower returns than US focussed funds, has also had lower volatility, so if you're going for a heavy equities weighting into retirement to draw down, that lower volatility can actually help allow you to withdraw more from your portfolio because of the downside protection it gives you - although I'm a BIG fan of the wisdom tree NTS family of funds which aim to basically give you a juiced up version of the classic 60/40 by going 90% equities and 60% US treasuries (1.5x leverage at a competitive expense)
Waiting for Damo's dividend portfolio update now hahaha
Yet another great video.
To be honest, when I started my ISA I was going to go 100% S&P500. But instead, decided to diversify it (slightly) following from one of your videos. So now I do 35% Global, ha ha.
My pension is all in Global funds though.
Great video!!!🎉🎉🎉
This was far more insightful than any of the guest interviews you guys had on
Are those numbers for the S&P Performance denominated in GBP? What about the exchange rate GBPUSD? What about when the Dollar is Strong and the GBP Weak, vs when the Dollar is Weak and the GBP Strong?
What about Exchange Rate Hedged Funds vs Exchange Rate UnHedged Funds?
Hi Guys, great content I use the HSBC Global ETF along with a few other Funds & Trusts / Equity’s- BTW where was the link to the Compound Growth Calculator 👍
Great Vlog guys very informative and you bounce of each other really well and make me smile, long may it continue 😀
A Global Fund is like a 60/40 , but 100% in stock. 60% USA / 40% ROW. Great idea for young people.
When an Index fund is reallocated is this not always 'after the fact' i.e. Vanguard or whomever would see a drop in one share price and so would reallocate funds based on the fact that everything else was relatively more valuable. So they are selling on the way down and buying on the way up? I've never got my head completely round the maths of this...
There is no "maths" to this... its in index fund. They continue to buy the stocks that increase in value thus increasing their value more with whats called "dumb money", and the things that go down, they buy less of and thus capital compounds following what's called "momentum". I.e. buy more of what goes up, buy less of what goes down. No one is selling anything, until the index says to sell it.
The index tracking PM or the index for that matter does not buy or sell more of anything just because of price movement. If it was just price movement he / she would do nothing at all. Its only cashflows in, redemptions, dividends, special cash or corporate actions that would cause an index tracking PM to trade.
@@Tetrapetaloudos1 Why even have a person do that? isn't it all automated given how dumb the role is for index tracking managers? I saw a video once on youtube of a very uninspiring person, but that's what we want from the index I guess, nothing to go off piste
You would have thought this was the case but not really. Vanguard, Blackrock, NT, SSGA, LGIM, Fidelity and all the main systematic fund houses employ hugely rewarded PMs to track indices. I guess if someone was managing a £100bn fund you would want them to be clever about how to manage all that money. For the record S&P, MSCI, FTSE/Russell, SciBeta, Solactive, Stoxx have still not to date managed to fully automate index reviews
@@Tetrapetaloudos1 Those are not systematic fund houses? They are passive tracking managers. I wouldn't any of these index managers to pretend to be clever when they aren't and just follow the index? I've invested in the index, not the managers... if I want manager skill I'll pick a proper manager. An Index manager is like the driver on the tube, just press start and stop, don't have to make any turns follow the rules. The size of the fund would be irrelevant for a passive manager, the rules dictate what I have invested in, not the manager. If he or she has 100bn in an active fund like a Ray Dalio, then yes that would be legendary. For a passive index manager it sounds like it should have been automated a long time ago, so we have even lower fees. The index review I expect not to be automated as that's where the hard work is, that's what I've invested in, not the index manger. The index manager should be automated because he or she is a button presser following what they have been told to follow, it comes out of our pockets for these passive managers inefficiencies in automation.
I love this channel and i wish more podcasts were like this, so educational ❤️‼️👍
Isn't "tech" just short for "high tech", which has a standardised definition? (companies spending more than 4% of their turnover on R&D are considered "high tech" by the OECD).
👕 watch him Damo, he's getting smarter 👍
He really is! 🤣
Does rebalancing happen for nations as well?
As in if US crashes over the next year and ends up going from ~ 65% of global stock market down to 45%.
Does the global index funds just continuously rebalance quarterly like the same as the do for companies?
Yes, if you go back to the world index fund in 1988 Japan was over 50% of the weight of the index. The index will add countries and remove countries that can't be traded etc like Russia. If the US crashes then it crashes, the index will reflect the lower value of the US. There isn't a person with a brain who thinks about these things and rebalances anything, its a bunch of automated machines and someone who isn't that bright to manage the process to make sure your fund is replicating the index you have purchased to track.
No, MSCI Index rebalancing would not itself cause the weight of US to go from 65% to 45%. You are confusing rebalancing with price movement. Price movement is the main cause of weight changes from year to year. MSCI ACWI rebalances will on average cause no more than 10% two way turnover per year. Weight changes due to price movements is many multiples of that
@@Tetrapetaloudos1oh dear
Interesting
👕Thanks guys, interesting as always 👍
👕 T dropping knowledge bombs 😅
Nailed it boys 👍
Loving the podcast lads. I've learnt loads and had a good laugh too, perfect blend. Appreciate you both. 👕
👕 Love all these chats 😊
Very interesting, old boy here studied History at university a long time ago, so the point about technology always applying absolutely correct, in the 1600s the Dutch could build a war ship in a year, unheard of, by wind power, than in the eighteenth century the British upset the world Apple cart by inventing a new social and economic order, industrialisation. Interestingly even today a lot of people here and abroad don’t realise that. Even as late as WW2 one Historian I read recently said the British had two thousand merchant ships at sea on any day. Too many to all sink, and a big Royal Navy, all down to tech.
Now re speed of tech, the first powered flight was 1903, the first man on the moon 1969, think about that, 63 years! From string and glue to space travel. Today’s tech is going to advance at a dizzying pace. It will create and solve many problems, but it will have a massive impact on all of us, and frankly people who are educated and don’t grasp that are dim. Here it comes, as it always has, the impact of that huge human brain through the things our species can re arrange and make and change, technology.
‘Here it comes as it always has’ loves this comment thank you for sharing your knowledge
Yes, but today's technology relies on oil. A currently hated commodity. If the green agenda continues to keep its momentum then oil might not be explored enough which will slow tech down dramatically
Thankyou love how you both present this information! Very relatable, you guys are contributing to such much positive change in peoples finances. Thanks
Love these podcasts!
T has got a great speaking voice...ever considered being an actor mate?
👕 keep em coming fellas
Love your work guys 👕
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So good with both of you bantering as we learn. Let’s have more
I just invest in the S&P500 because they have averaged around 10-11% returns for the past 50 years
About 45% in the last (I think) 100 years the USA underperformed the global index. So betting on that the States will continue to outperform in the future - based on the historical average - is barely better than a coin toss in my opinion.
@@RatgibbonI think over the long term the S@P will still give you a decent return on your money.
I do the same. Firstly, I'm ex-UK because with my house and job being here I'm already overweight in the UK economy.
Secondly, many of the largest businesses in the US have huge global exposure anyway. You are buying an Index of companies, not an Index of the economy of a country. The US is one of the best countries in the world for a business to operate from. I'm surprised Damien has overlooked this.
@@Ratgibbonwrong. You're betting that the businesses in the Index will continue to outperform. The country they're listed in is of much less relevance.
@midlifecarsis6420 this makes a lot of sense. It’s an interesting way of thinking about diversification that I’ll be taking on board. Cheers.
Can you do an updated video of what you have invested in
Nice way to mix up the format. Great episode 👕
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👕 Loved the laid back feel of this video. Very informative with some great bants too. Keep up the great work and these awesome podcasts.
Im not sure its a concern if you check what is inside an etf before you invest. Justetf really helps on a badic level. It gives countries, sector snd top companies in an etf, just need to pick a couple that fully encapsulate the actual world
👕 thanks guys
👕👕👕Enjoyed this, thanks for making financial content interesting :) 👕👕👕
If index funds grow up to make markets inefficient, then it creates opportunities for active funds and investors to profit off the inefficiency. Drawing money to active funds. Until it reaches an equilibrium.
It's nowhere near that level yet. And you don't actually need that many active investors to maintain market efficiency, market pricing. Passive funds aren't actually driving markets upwards. The asset management industry and active managers hate index funds, passive investing because they want people to invest in their active funds so they can make shed loads of easy money for themselves
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Next Bank Holiday can we have. British Bank Holiday special. Where the BBQ is going, flip flops are on and the Carling is on tap. Then the discussion can be UK investments for the working class.
That would be cool. I'm a bit of a contrarian and think there is still a bit of value left in the good old UK. Looking at the current prices I just bought a bit of a FTSE 250 fund as part of my "higher risk"/fun part of SIPP. Might be a good option for everyone? (Low price, good value, not "popular"). Obviously YMMV...
I’m for this, be good to see these guys outside and just having a gab round a barbie
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Even a global index is overexposed to America in my opinion. Even if it means more fees I prefer multiple funds.
If you buy many active funds then you basically buy the index at a high fee which is a mistake some investors fall into due to moving with trends and attempting to diversify. So my point is if 50 percent of market is passive index isn’t the combination of the other 50 percent actively managed funds basically an index albeit with large fees. Index’s won’t get you rich since they are not high conviction plays, a 7 percent annualised return after inflation is just not going to rock a lot of boats. I’m happy with it but lots of folks will want more.
10:35 "If I'm just buying America, I'm saying that Americsn dominance will continue". You're actually saying that American dominance will increase.
Good way of putting it.
Goon of fortune!
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+1 for the goon
Neck cracking in prep 😆
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I love Ts assertion that the Roman empire had reached the peak of civilisation because they had "sex parties"! 😂😂😂
It was all down hill from there
@@DamienTalksMoney 😂nah! Great vid. 👍🏾
@@clarenceishmael9615 I meant after the sex parties stopped! 🤣
@@DamienTalksMoney oh i get you now! 😂😂😂
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Shirts
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Nahh no way Captain Crypto said he wanted to limit volatility 😂😂👕
Goon truly is an australian cultural staple - peg that bad boy to a clothes line and you've got yourself a wonderful spinning game
Damo when are you going to cover eToro? It’s massive and advertised to British people.
I just don’t rate them as a broker at all. The isa offering is poor and the fees are unclear and high, I don’t give them the time of day as I wouldn’t promote a broker without a good isa offering
The Victorians certainly felt that they had reached the Zenith and there was little more to be discovered or improved upon
Great to see you having so much fun traching and learning together. But do you need a couple of women on your team to rebalance? Its getting a bit laddish - we need to move together an include the women's view too.
No they didn't need a woman, should they add a Muslim person and a trans person? I'm sure there are female finance influencers you could watch, would you go on their videos and say you need a man here it's too girly? They have their chemistry and vibe if you don't like it here there are many tens of women talking finance
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I use developed world index funds that excludes the UK ( the reason being my workplace pension is over weighted for the UK).
I also use all world 🌍 index funds but the fees are higher… so only about 30% in that
I am also building REIT exposure.. mostly USA.. but other countries as I find them… I am aiming for about 10%_20% of my portfolio over time… only started in April… so just £1,500 in it so far
I am 50/50 because I started S&P and went to all world should I just keep my S&P holding and continue to out number it with all world or sell it and be Sad that total return will look smaller on the graph
All world already has 50% Us, so you're going 75% 25%. The all world will rebalance itself if things change.
Will the US perform great in 20-30-60 years? Are you going to sell and buy everytime something changes? Global is good enough and safer.
If everyone invests in the same funds, like so many Ytubers keep harking on, such as us 500 or global funds. You have yet to live through a downturn and when your fund drops more than 20% it will take more than 20% to get to break even in fact its 25% before you are back to even. Why do these types of RUclips content never talk about how common it it to lose money. It stinks of the 1920s, ' You know when stocks are not worth buying when the shoe shine boy is telling you what to buy'.
Most of the influencers are young, they haven't experienced a big crash yet.
I remember the 08 crash, lost 30% of my investment. I know some people that lost over 40%. I came out of investing because of it.
Only over the last few years I have got back involved. The psychology part of it is the hardest part.
@@kinggeoffrey3801 yeah, I remember the 2008. I only 5k in thankfully but I asked the woman from the Halifax bank to pull my money. She effectively called me chicken so I left it in. It took five years to break even. I ended up with £50.00 over the 5k when I pulled it.
This is a really important point. Over the past ten years or so, the idea that you basically can't lose by investing in index funds has become very widespread. The inflow of cash has pushed prices of US stocks very high, by historical standards. People parrot the "average" returns as if the stockmarket is an ATM or a "free money" hack. But those excess returns ONLY appear because equity investments can be very risky. Historically, many people didn't have the stomach for 50%+ drawdowns. I wonder how many people today understand the risks they're taking on ? As someone clever once said, "it's called the equity risk premium for a reason".
you only realise a loss if you sell. The 2008 crash was the best time to invest more cash in the last 20 years.
@@contactjd well that's not quite true, it's like all markets, it depends on where and when you enter. I have made a killing with property and been wealthy for most of my adult life. However it was down to carefully choosing the right time and property. Stocks are similar but like property, if you over leverage and buy at the wrong time. Holding on for years after a loss won't give you a good return if you get hit hard at the wrong time. Time is the most important and detrimental cost to investments. Mainly, because we are limited to life.
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The magnificent 7 can’t be over hyped, look at their profits. AI is just starting
I have just started in 2023 and continuing into 2024 to invest in passive index funds predominantly around the SP500 and then the top 100 global tech. I have wondered if the SP500 is now so saturated with passive investors that the potential for growth will be greatly reduced. I mean in reality none of the top 10 have a price to earnings ratio anywhere near their current profitability or even future earnings potential. Unfortunately as I also look at my long serving funds that until the last few years were doing me proud the charges were extortionate in comparison with Vanguard and Legal & General trackers. I also think that the top 500 US companies might now be a bit too niche and the wider world needs consideration of potentially finding some unrealised golden goose companies that will give me growth like the AI companies have been recently.
Unfortunately I thought I would find that in Japan and after a year producing returns of 25% I thought the geographic diversification would be a protection however the last three years the funds have tanked and I'm sitting on 25% paper losses at the moment and debating to cut my losses and use the time in the index funds to make that money work elsewhere. But I hate realising my paper losses into real ones by cashing in.
Me personally I think it’s more risky not investing 100% in USA bc your missing out on 3-4% a year compounded and international markets are more risky investing in both have there own risks
The problem is you’re basing this off the previous few years. From a risk point of view you’re better off diversifying as much as possible, even though you might be losing out on a few percent in the current climate. Your statement of ‘it’s more risky’ isn’t actually talking about risk, you’re just talking about profit.
The big 7 operate globally, so your S&P is diversified. The political impact on a countries ability to prosper should be more important than the feeling that North America will underperform. Do you believe the UK will out perform the US in the next 100 years, the answer is a close to certainly no as you could imagine. China on the other hand, but since when did we think communism worked. So "diversify" all you want but the golden egg was hatched 300 years ago to create the best free market capitalism ever created and not much has changed since.
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There's only one problem with global index funds the performance is average at best. They are designed for people who aren't risk takers the snowflakes as we call them. 🙂
T junk and "magnificent"? 🤣🤣🤣🤣🤣🤣
No ones more pointless and annoying than his mate
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