This article is talking about diversification to reduce risk, which is unrelated to "timing the market" and which can be consistent with passive investing.
Some investors described in the article moved from market cap weighted indexes to ones that were disproportionately weighted to disfavor tech stocks, they believe that they're overvalued and that they can get out earlier than everyone else.
That's trying to time the market.
The firms mentioned in the article will be happy to charge you much higher fees than Vanguard for questionable longer term returns. It's basically a PR piece for managed investment.
Even if the average returns and risk are identical for each security individually, you can minimise your portfolio risk by investing equally across many different industries. If a downturn were to occur, different securities in a single industry will be much more correlated, as compared to different securities across different industries.
Yes, that makes sense. But that's entirely unrelated to what I'm pointing out here.
(Some of) the article is making the argument that investors should decide for themselves how over- or undervalued certain segments of the economy are.
So on one hand you'd have a diverse market cap weighted index where you buy into stocks representing the proportional to their portion of the economy.
On the other hand you might think you have special knowledge to layer on top of that. Are banks undervalued? By how much? Let's say 10%. Then let's sell something else to buy 10% more banks, now what's 10% overvalued? Tech?
I've yet to see any sort of compelling data that this sort of managed investing is a good idea, and that's what it is.
Just because you're not buying TSLA and instead just disproportionately buying "car stuff", or not selling AAPL but just selling "tech stuff" you're still trying to pick stocks and trying to beat other stockpickers doing the same thing. You're just picking subsets of the economy instead of individual stocks.
I don't think it's a good idea to guess what's over/undervalued. But equal weighting different industries is not quite the same thing. No matter how you weight things (by capitalization, by company, by industry, whatever) you are making assumptions about correlations. No dogma can tell you which is right a priori, because correlations change, especially in crises when it matters most.
Also...the total market, cap weighted, may be the optimal way to invest the whole world's capital - but that doesn't mean that it's the optimal way to invest, say, $50K. If you have $100B, say, you can't put it in a stock that's currently valued at $1B. But if you have $1000, you don't have that constraint.
Regardless of how the optimal portfolio may differ, when you're investing a relatively minute amount compared to the entire market, it's hard to imagine the optimum is not going to be different.
...You don't pilot your car under all the same constraints as an 18-wheeler, just because that's optimum for shipping large quantities.
>If you have $100B, say, you can't put it in a stock that's currently valued at $1B. But if you have $1000, you don't have that constraint.
Your argument is that there is a mispriced security somewhere that can be bought at a low price. There is currently only 1B$ of it available and so the professional manager with 100B$ to spend just doesn't bother to pick up that money. But you with just 1000$ can do it instead. What makes the professional manager pass up on that opportunity? He has at least as much money as you, why doesn't he invest at least that amount?
In reality that opportunity doesn't exist. Companies can't be consistently mispriced lower because there is too much demand for their stock. That's not how markets work for anything.
Every cap weighted fund has a cutoff where it omits companies that are too small. But even the stocks that are barely large enough to include don't contribute much to returns.
I don't think the small cap stock is "mispriced". Rather, it has a different value for different investors, and the market price is a compromise. That means different investors should probably have a different amount of it in a portfolio.
It's an abuse of theory to claim that since the market is efficient, you should ignore the things that make you different from the total market. For example, suppose you invest in tax-exempt investments when you are in a low tax bracket, or even when you are investing in a tax free account. Is that optimal because markets are efficient? Of course not. Because the value set by the market does not take into account the way in which you differ.
The reason to believe in index investing is because you understand your own lack of knowledge and are honest about it. That's a good thing, but it doesn't justify pretending you don't know things that you do know. People seem to have the same issue with probability, I find.
I'll be honest and admit that because of the WSJ paywall, I wasn't able to read the entire article. If an actively-managed-fund with much higher fees is trying to convince people that they can beat the market by cutting down on tech stocks, I agree with you that's BS.
However, if a passively-managed-fund with similar fees is claiming that you can lower your portfolio-risk by investing equally across many industries, that's an argument I find much more convincing. I had actually not considered this argument before, which is why I found the article interesting for bringing it up (perhaps tangentially).
That's trying to time the market.
The firms mentioned in the article will be happy to charge you much higher fees than Vanguard for questionable longer term returns. It's basically a PR piece for managed investment.