Author Topic: Value Index over Total Market??  (Read 1167 times)

BeanCounter

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Value Index over Total Market??
« on: April 26, 2019, 03:35:36 PM »
Went to see my financial advisor yesterday. (yes fee for service advisor) While he is still recommending a split of 70% US equity, 15% international and 15% bond and he is still pro index funds, he is recommending to switch from a total market fund (we use Fidelity FSKAX/FSTVX to a Large Cap value fund- FLVEX. His reasoning is that he believes that the total market is too tech heavy and therefore our portfolio has become too tech heavy and that the tech bubble is about to burst. Any thoughts on this?

Telecaster

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Re: Value Index over Total Market??
« Reply #1 on: April 26, 2019, 03:57:36 PM »
Hard to say.  Here are the top 10 holdings of FLVEX, which is 25% of the index:

XOM  EXXON MOBIL CORP
JPM  JPMORGAN CHASE & CO
JNJ  JOHNSON & JOHNSON
PG  PROCTER & GAMBLE CO
INTC  INTEL CORP
CSCO  CISCO SYSTEMS INC
CVX  CHEVRON CORP
PFE  PFIZER INC
T  AT&T INC
BRK/B  BERKSHIRE HATHAWAY INC CL B

Not counting biotech, I see three tech companies.

Here are the top 21 holdings of FSKAX (total market) which is 26% of the index:

Microsoft Corp.
Apple, Inc.
Amazon.com, Inc.
Berkshire Hathaway, Inc. Class B
Facebook, Inc. Class A
Johnson & Johnson
Alphabet, Inc. Class C
JPMorgan Chase & Co.
Exxon Mobil Corp.
Alphabet, Inc. Class A
Bank of America Corp.
Visa, Inc. Class A
Pfizer, Inc.
Procter & Gamble Co.
Intel Corp.
Verizon Communications, Inc.
UnitedHealth Group, Inc.
Cisco Systems, Inc.
The Boeing Co.
Chevron Corp.
AT&T, Inc.

_________

There are a few overlaps there, so the funds aren't that much different.    Of the tech companies like AMZN, MSFT, GOOG, AAPL, and FB, the only one that is in bubble territory is AMZN.   And it is only about 2.4% of the fund.   The others are high, but not nosebleed high, and AAPL is down right reasonable.   

So, I dunno.  You advisor could be right.  If you are worried about at tech bubble then FLVEX might be a tad safer.  But higher fees as well, and that's a guaranteed loss.   

 Personally I just fire and forget on FSKAX.   

MustacheAndaHalf

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Re: Value Index over Total Market??
« Reply #2 on: April 26, 2019, 09:13:56 PM »
In my view, you should never completely abandon the total stock market fund.  You can "tilt" or emphasize value in a part of your portfolio, but any deviation from that is a bet the market is wrong.

The fund you mention Fidelity Large Cap Value Enhanced Index Fund (FLVEX) has a P/E of 13.2 and a price/book of 1.84.  Compare that to the total stock market (FSKAX) with a P/E of 16.8 and price/book of 2.70.  You might find even better value characteristics in small/value.

FI-King_Awesome

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Re: Value Index over Total Market??
« Reply #3 on: May 05, 2019, 04:48:29 AM »
I donít want to move the thread in the wrong direct, but just confirm whether you are aware of the zero expense funds from Fidelity (such as FZROX)?   If so, is there a reason you are not considering these?

chasesfish

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Re: Value Index over Total Market??
« Reply #4 on: May 05, 2019, 05:19:55 AM »
What are your goals?  Have you completed an investment policy statement?

This may be appropriate - I'm not 100% Total Market Index Fund because its is volatile.  I'm willing to accept a lower return for a smoother ride and keep an allocation that is more suited to those outcomes.

The value fund has similar outcomes, but it really depends on what your long term goals are and go from there.


BeanCounter

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Re: Value Index over Total Market??
« Reply #5 on: May 05, 2019, 05:30:26 AM »
I donít want to move the thread in the wrong direct, but just confirm whether you are aware of the zero expense funds from Fidelity (such as FZROX)?   If so, is there a reason you are not considering these?
I was not aware! Thank you for letting me know. Iíll research the other zero expense funds to see how much of my portfolio I could put in the zero fee funds.

Just for the record he was never advising that we move completely away from the total market, just split some of our US stock portion between total market and the large value to pull the tech weight down a bit.

MustacheAndaHalf

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Re: Value Index over Total Market??
« Reply #6 on: May 05, 2019, 06:19:42 AM »
Where do you see historical evidence that avoiding tech companies provides better returns?  Are you thinking the dot-com crash will repeat?  Because that was caused by a lack of profits (or even income).  Apple sells cell phones, Google & Facebook sell ads ... the big tech companies all have significant income streams.

The distinction between "avoiding tech" and "value" comes up when you pick between two investments like these:

iShares Edge MSCI USA Value Factor ETF (VLUE) holds the same allocation to tech as total stock market funds, but has a 10.2 P/E ratio and 1.5 price/book.  Most investors consider those to be key characteristics of value stocks.  On morningstar, this ETF is listed as 62% large/value.

Compare that to Fidelity Large Cap Value Enhanced Index Fund (FLVEX) with 11% tech (total stock market has 22%), and the value story isn't as compelling: 13.6 P/E ratio and 1.9 price/book.  It's 9-box large/value allocation is 45%, matching it's weaker value characteristics.

BeanCounter

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Re: Value Index over Total Market??
« Reply #7 on: May 05, 2019, 11:39:05 AM »
Where do you see historical evidence that avoiding tech companies provides better returns?  Are you thinking the dot-com crash will repeat?  Because that was caused by a lack of profits (or even income).  Apple sells cell phones, Google & Facebook sell ads ... the big tech companies all have significant income streams.

The distinction between "avoiding tech" and "value" comes up when you pick between two investments like these:

iShares Edge MSCI USA Value Factor ETF (VLUE) holds the same allocation to tech as total stock market funds, but has a 10.2 P/E ratio and 1.5 price/book.  Most investors consider those to be key characteristics of value stocks.  On morningstar, this ETF is listed as 62% large/value.

Compare that to Fidelity Large Cap Value Enhanced Index Fund (FLVEX) with 11% tech (total stock market has 22%), and the value story isn't as compelling: 13.6 P/E ratio and 1.9 price/book.  It's 9-box large/value allocation is 45%, matching it's weaker value characteristics.
My advisor is suggesting that when we have a pull back , tech will be harder hit then other areas as he feels it's currently over valued. So then the total market will be harder hit because of it's weight in tech.
I'm not saying I 100% buy into this theory. That's why I'm looking for more insight.

Honestly if you're looking at P/E ratio, that would support selling some total stock as it appears over valued. But I don't understand why using the P/E ratio would be very accurate for evaluating index funds. Specifically the total market. I understand why it can be a useful indicator for individual stocks, but not index funds.
Would love for someone to shed light on that.

Telecaster

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Re: Value Index over Total Market??
« Reply #8 on: May 05, 2019, 01:34:59 PM »
I'm not saying I 100% buy into this theory. That's why I'm looking for more insight.

Honestly if you're looking at P/E ratio, that would support selling some total stock as it appears over valued. But I don't understand why using the P/E ratio would be very accurate for evaluating index funds. Specifically the total market. I understand why it can be a useful indicator for individual stocks, but not index funds.
Would love for someone to shed light on that.

Here are some tech stocks and their current P/E:

GOOG  23.96
Facebook 28.79
AMZN 79.97
MSFT  28.39
AAPL  17.66

S&P 500 22.5

The only one of those that looks wonky compared to the general market is Amazon, and it is only 2.6% of the fund.   Apple on the other hand is 3% and it looks attractively priced.  Is this really something that is worth worrying about?   


CoffeeR

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Re: Value Index over Total Market??
« Reply #9 on: May 05, 2019, 02:49:31 PM »
Of the tech companies like AMZN, MSFT, GOOG, AAPL, and FB, the only one that is in bubble territory is AMZN.
The P/E ratio of AMZN is high. Yet, the value conscious Berkshire Hathaway started buying it and morningstar.com opinion is that the fair value price of the stock is $2300 (17% higher than Friday's close) and many (not all) equity ratings services rate it a buy. Hmm... so I am not sure I should be worried that BRK started buying AMZN and this is a sign the "top is in" or if this just means that "nobody knows nothing" :-)

TomTX

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Re: Value Index over Total Market??
« Reply #10 on: May 05, 2019, 06:58:04 PM »
Went to see my financial advisor yesterday. (yes fee for service advisor) While he is still recommending a split of 70% US equity, 15% international and 15% bond and he is still pro index funds, he is recommending to switch from a total market fund (we use Fidelity FSKAX/FSTVX to a Large Cap value fund- FLVEX. His reasoning is that he believes that the total market is too tech heavy and therefore our portfolio has become too tech heavy and that the tech bubble is about to burst. Any thoughts on this?
Expense ratio of 0.39%? That's high.

BeanCounter

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Re: Value Index over Total Market??
« Reply #11 on: May 05, 2019, 07:33:06 PM »
Went to see my financial advisor yesterday. (yes fee for service advisor) While he is still recommending a split of 70% US equity, 15% international and 15% bond and he is still pro index funds, he is recommending to switch from a total market fund (we use Fidelity FSKAX/FSTVX to a Large Cap value fund- FLVEX. His reasoning is that he believes that the total market is too tech heavy and therefore our portfolio has become too tech heavy and that the tech bubble is about to burst. Any thoughts on this?
Expense ratio of 0.39%? That's high.
I felt the same.

MustacheAndaHalf

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Re: Value Index over Total Market??
« Reply #12 on: May 06, 2019, 10:02:41 AM »
Where do you see historical evidence that avoiding tech companies provides better returns?  Are you thinking the dot-com crash will repeat?  Because that was caused by a lack of profits (or even income).  Apple sells cell phones, Google & Facebook sell ads ... the big tech companies all have significant income streams.

The distinction between "avoiding tech" and "value" comes up when you pick between two investments like these:

iShares Edge MSCI USA Value Factor ETF (VLUE) holds the same allocation to tech as total stock market funds, but has a 10.2 P/E ratio and 1.5 price/book.  Most investors consider those to be key characteristics of value stocks.  On morningstar, this ETF is listed as 62% large/value.

Compare that to Fidelity Large Cap Value Enhanced Index Fund (FLVEX) with 11% tech (total stock market has 22%), and the value story isn't as compelling: 13.6 P/E ratio and 1.9 price/book.  It's 9-box large/value allocation is 45%, matching it's weaker value characteristics.
My advisor is suggesting that when we have a pull back , tech will be harder hit then other areas as he feels it's currently over valued. So then the total market will be harder hit because of it's weight in tech.
I'm not saying I 100% buy into this theory. That's why I'm looking for more insight.

Honestly if you're looking at P/E ratio, that would support selling some total stock as it appears over valued. But I don't understand why using the P/E ratio would be very accurate for evaluating index funds. Specifically the total market. I understand why it can be a useful indicator for individual stocks, but not index funds.
Would love for someone to shed light on that.
I would distinguish between two types of theories: those already studied by academics, with a historical track record going back decades.  People can debate if their is a "value" or "small value" premium, but at least there is historical evidence to back those up.

Trusting your adviser knows the market is not really a theory backed by historical evidence.  He doesn't run a mutual fund where we can see the past performance, and he doesn't have to report his mistakes.  So to me, I wouldn't use his recommendation even if it feels right, because evidence is needed to validate the theory.

If you read up on the "value premium" or value investing, often P/E is used to decide which stocks are value stocks.  Stocks expected to grow rapidly can fall much farther when they hit trouble, while value stocks already have trouble priced in.  So that's why value investors look for low P/E stocks - or ETFs that track stocks with low P/E values.  You can buy an ETF or mutual fund instead of picking the value stocks yourself.

harvestbook

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Re: Value Index over Total Market??
« Reply #13 on: May 06, 2019, 04:30:38 PM »
I'd ask the advisor what percentage he/she has in large cap value.  But then I wouldn't have an advisor in the first place. Plenty opf people give advice that they'd never follow themselves. And most of the tech companies could immediately start pulling in huge profits if they wanted, but they instead pursue ambitious long-term goals of growth and expansion. Amazon in particular makes it a point of pride to make no money at all. So how do you gauge such a P/E?

Andy R

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Re: Value Index over Total Market??
« Reply #14 on: May 06, 2019, 09:27:14 PM »
If you read up on the "value premium" or value investing, often P/E is used to decide which stocks are value stocks.  Stocks expected to grow rapidly can fall much farther when they hit trouble, while value stocks already have trouble priced in.  So that's why value investors look for low P/E stocks - or ETFs that track stocks with low P/E values.  You can buy an ETF or mutual fund instead of picking the value stocks yourself.

This is not necessarily correct. Value companies are priced lower due to some inherent risk, whether manager risk, sector risk, market risk, country risk, or any other of a whole host of risks. When the broader market takes a hit, these companies are often hit at least as hard and often harder than the broader market. The out performance of value companies tends to happen in boom times. It's not really about losing less in corrections.

It also depends on the type of crash. In the tech wreck, it helped due to part of the market (tech) was ridiculously over priced, but in the GFC it didn't help at all.

powskier

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Re: Value Index over Total Market??
« Reply #15 on: May 07, 2019, 12:36:01 AM »
If I payed someone for advice I would value their advice more than that of strangers on the internet.

However, if I payed someone for advice but didn't actually trust it or it didn't totally make sense, it would make me wonder more about my own motivations, doubts, goals , etc.
A lower cost totally diversified investment seems better to me long term than a more expensive less diversified one coupled with an idea about what the future will bring.

Car Jack

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Re: Value Index over Total Market??
« Reply #16 on: May 07, 2019, 08:36:53 AM »
Moving to value now?  Man, it that advisor skating where the puck has been.  Maybe a decade ago.  Everyone's bought value and small value, bringing up the cost of both.  Jack Bogle talked about this right before he died.  As he said, small value is currently over valued because everyone's been talking about it and putting money there and tilting.  Buy the whole freaking haystack, man.  Nobody knows what's going to go up or down.  If you buy the whole market, you get market returns.  If you tilt, you're saying that you know that this sector will go up.  If you know something that nobody in the market knows, then maybe you're right.  But if that's the case, I'd be worried about guys at my door with SEC ID's wanting to speak with me at their office.....right now.

CorpRaider

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Re: Value Index over Total Market??
« Reply #17 on: May 07, 2019, 09:13:58 AM »
I respect the guy if he's talking about just making a tilt into value.  Seems like he's willing to have difficult decisions.  Value as represented by the academic factors and most of the large index products has really just had a poor decade.  No guarantee it will come back, maybe it is different this time, but I think it is a good bet.