[throw0101a]

> Cue the famous quote: “The market can remain irrational longer than you can remain solvent.”

It's not necessarily about things being (ir)rational, but about 'psychology' and the multi-player system that is The Market™. Because it's all very well and good to buy and sell individual products (securities) on their merits, but one also has to take into account what other people's ideas on them is as well (as you are buying/selling from them).

This factor has been known about for almost a century:

> A Keynesian beauty contest is a beauty contest in which judges are rewarded for selecting the most popular faces among all judges, rather than those they may personally find the most attractive. This idea is often applied in financial markets, whereby investors could profit more by buying whichever stocks they think other investors will buy, rather than the stocks that have fundamentally the best value, because when other people buy a stock, they bid up the price, allowing an earlier investor to cash out with a profit, regardless of whether the price increases are supported by its fundamentals and theoretical arguments.

* https://en.wikipedia.org/wiki/Keynesian_beauty_contest

Of course other people know about this factor, so folks are judging others based on how they are judging others.

(Personally I'm just going with index finds (VEQT/XEQT/VBAL up here in Canada).)

[bryanlarsen]

Index funds won't necessarily save you. 7.5% of the S&P 500 is NVidia, 7% is Microsoft, etc. Almost 40% of the S&P 500 is in the top 10 stocks, and of the top 10, only #9 Berkshire Hathaway is not big into AI.

[arduanika]

Index funds aren't supposed to save you from a market setback. In a correction or crash, you will lose money. They merely save you from the total ruin that can come with leverage, or from thinking you can outplay the stocks or options market as an amateur.

I'm glad to see OP's comment voted to the top, b/c it models good thinking. He knows what he doesn't know, and so he sticks to index funds.

Also -- I don't know anybody who still buys S&P 500 funds, now that there are broader funds available. None of the funds for Canadians that GP listed is limited to the S&P 500, so it's unclear why you would respond as if that's the index he's talking about.

[bryanlarsen]

The OP still has the same basic problem.

- he's overweighted on Canada. Being Canadian themselves, that's a double risk. If Canada does poorly, the chance of his livelihood being affected is high. Investments should be anti-correlated from livelihood risks.

- despite being 30% in Canada, VEQT has 2.5% in NVDA. By itself that's fine, but once you add similar amounts for MSFT, GOOG, META, AAPL, BCOM, etc, it becomes a significant portion of the index.

The point of an index fund is to be diversified. If one sector crashes but other sectors do well you're still fine. The OP will lose significant money if either Canada or AI crashes, even if the rest of the world is doing well.

[throw0101a]

The Canadian funds like VEQT/XBAL/etc are overly concentrated in Canada on purpose because it reduces volatility:

* https://www.vanguard.ca/content/dam/intl/americas/canada/en/...

* https://benderbenderbortolotti.com/home-bias-in-the-vanguard...

Vanguard/Blackrock could set the allocation to whatever they wanted, but it's a conscious choice. Absolute returns are not necessarily the only consideration (if they are, perhaps buy a NASDAQ fund).

[supportengineer]

>> Index funds aren't supposed to save you from a market setback

That's what bonds are for!

[twic]

Depends on the index. The usual ones are indeed market cap weighted, and so adopt the overvaluation of bubble stocks, but there are indexes which are weighted otherwise, in an attempt to avoid that. One example is the RAFI fundamental family of indexes:

https://www.rafi.com/index-strategies/rafi-fundamental-indic...

They are pretty cagey about the exact formula, but they do say that

> Security weights are determined by using fundamental measures of company size (adjusted sales, cash flow, dividends + buybacks, and book value) rather than price (market cap).

The top ten holdings in their US index are (rank - company - weight):

  1 Apple 4.1
  2 Microsoft 3.4
  3 Alphabet 3.3
  4 Berkshire Hathaway 2.3
  5 Amazon 2.2
  6 Meta Platforms 2.2
  7 JPMorgan Chase 2.1
  8 Exxon Mobil 2.0
  9 Bank Of America 1.4
  10 Chevron 1.3

Whereas those of their benchmark, the Solactive GBS United States Large & Mid Cap Index, whatever that is, are:

  1 Nvidia 7.1
  2 Microsoft 7.0
  3 Apple 5.7
  4 Amazon 4.0
  5 Alphabet 3.7
  6 Meta Platforms 3.1
  7 Broadcom 2.4
  8 Tesla 1.7
  9 JPMorgan Chase 1.5
  10 Eli Lilly 1.3

[imakwana]

Glad to see a fellow fundamental indexer on HN! As a US based investor, I personally invest in the RAFI US broad market fundamental index (FNDB ETF) which does keep up with the Vanguard US total market over the past 10 years except the bubbly years of 2020/2021 & 2024/2025, even with a higher expense ratio.

Last 10 years comparison (VTI vs FNDB): https://www.portfoliovisualizer.com/backtest-portfolio?s=y&s...

In my case, after observing the Covid-19 craziness in market, I decided to dig further on value strategies and discovered this gem from Research Affiliates in Journal of Portfolio Management circa 2012, which completely convinced me on the concept of fundamental indexation as a superior alternative to market-cap weighted total market index.

Rebalancing and the value effect (JPM 2012): https://www.researchaffiliates.com/content/dam/ra/publicatio...

[anonymars]

2012 was a long time ago. I'm more inclined to Value myself, but has it held up?

I threw together a quick comparison with that tool (handy, thanks) of Vanguard Growth vs Vanguard Value and it's not too pretty. Sure, Value is less volatile, but...

https://www.portfoliovisualizer.com/backtest-portfolio?s=y&s...

I mean I guess we'll see what happens when the music stops again, but it resembles the same issue as being "right" about a market drop -- that you can be right, but the timing is such that it nevertheless would have been more lucrative to be invested the whole time anyway

[bryanlarsen]

My comment was originally much larger, but I trimmed it because it was muddying my original point.

Yes, you can choose an index fund that's not cap-weighted S&P 500. However, any index fund that didn't have a substantial portion of its investments in NVDA and friends did very poorly over the last few years.

So either way, you're screwed.

- If your index has a lot of NVDA et al, you're exposed to lots of risk.

- If it doesn't, your investment values are currently a lot lower than they otherwise have been.

So ideally you would be in cap-weighted S&P now and for the last few years, and switch just before the seemingly inevitable crash.

But that's no longer "put it in an index fund and forget about it".

[twic]

You're certainly right that indexes like these don't benefit from the bubble!

But it's not the case that they "did very poorly". Forgive the UK sources, but compare HMWO (an MSCI World ETF) [1] and PSRW (a RAFI All World 3000 ETF) [2]. These are world indexes, but that's 70% US or something. For the last five years:

  Date         HMWO   PSRW
  07/24-07/25  15.77  13.49
  07/23-07/24  18.46  14.35
  07/22-07/23  13.86  13.87
  07/21-07/22  -9.06  -4.93
  07/20-07/21  35.31  38.57

It's a small difference. For a set-and-forget investment that insulates you from an AI bubble collapse, it's absolutely fine.

Funnily enough, if you go further back, the RAFI index is actually further behind. No idea what that's about.

[1] https://www.fundslibrary.co.uk/FundsLibrary.DataRetrieval/Do...

[2] https://www.fundslibrary.co.uk/FundsLibrary.DataRetrieval/Do...

[bryanlarsen]

HMWO is 5.5% NVDA. It's not significantly different from the S&P 500. Any world cap-weighted index is going to have the same issue.

[twic]

Exactly, yes. HMWO is the "normal" cap-weighted fund here, PSRW is the RAFI fund.

[keernan]

The concentration isn't the 'fault' of indexing per se. There are two styles of indexes used by funds/etfs.

1. Most indexes are market capitalization weighted indexes... which can lead to the high concentrations we currently see.

2. There are also equal weighted indexes. These are less popular for a multitude of reasons, not the least of which is the expense associated with keeping the fund equal weighted (the fund has to periodically - eg quarterly - buy/sell stocks to bring everything back to 'equal'

I am currently in the process of moving a portion of my allocation into an equal weight sp500 fund precisely because I want to lower my exposure to the largest ten stocks in the sp500.

Another way to accomplish that would be to buy a market capitalization weighted index consisting of mid size or small cap stocks - thus avoiding the concentration of the top 10. But that changes the overall portfolio in other ways (small cap factor). I decided to use equal weighting a portion of my large cap holdings because I feel it is a more precise way to address the very specific problem I am addressing without adding other variables.

[throw0101a]

> Index funds won't necessarily save you.

So first off, picking individual winning stocks is hard because new information that determines pricing comes in randomly, so good luck getting information edge on your counter-party:

* https://en.wikipedia.org/wiki/A_Random_Walk_Down_Wall_Street

Further, <5% of stocks actually make up the vast majority of earnings:

* https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3710251

* https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2900447

* https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4541122

Those winning stocks also change over time: what used to be a winning choice can become a losing choice, so it's not like you can really set and forget things.

So index funds, buying all companies (especially if you go for more total market, like US Russell 3000), allow you to sidestep all of these risks. You are basically buying companies that service the entire economy, so as long as the economy is doing reasonably well the earnings of the companies will do reasonably well.

So yes, the S&P 500 is highly concentrated, but that is not the only index. Diversification is generally not a bad idea:

* https://ofdollarsanddata.com/do-you-need-to-own-internationa...

* https://www.youtube.com/watch?v=1FXuMs6YRCY

[supportengineer]

Check out RSP as an alternative to IVV.

[cyanydeez]

there's very little psychology left in most of the market.

There's computers and computer logic.