Passive Investors - What’s your reason for not putting all your funds into an All-World ETF?

Now people are saying one day tech stocks will underperform, but never give any compelling reason.

I think there’s a lot of compelling reasons to believe that tech stocks will underperform eventually. My struggle is finding a compelling reason to buy stocks at P/E ratios of 200x and P/B ratios of 50x. I’m not saying I wouldn’t invest in any tech stocks, I have positions in a few, but I don’t think the current valuations on a lot of these assets are reasonable.

If you were trading through the dot-com bubble, you must see the parallels.


It’s boring.


I respect those who put all into an all world fund. Makes sense in many ways. And the simplicity is very nice. There is a lot of upside in keeping things as simple as possible rather than making it more manual to save just a few basis points off the fees.

I’m seeking more alpha so only have about 30% in passive funds - mainly the L&G international index trust as my SIPP is currently with HL (but being moved to FT) and this fund is %0.08 on HL.

I’m also invested in Scottish Mortgage Trust. BG global discovery fund and a few other higher performing funds. Of course you can never guarantee future returns but I if you look at SMT it’s performed over 100% in the past year which is multiple times more than a passive world fund, therefore in order to maximise returns I’m looking for funds which have a good long term track record to help me beat the market. In other words whilst past performance is no guidance to future performance, I can take a well rounded look at a fund and it’s philosophy and anticipate whether it will continue to do well.

My concern regarding a passive approach right now as that we have a market where a small percentage of share a massively over performing and the majority of shares are not performing well - most of the rise in the S&P last year was due to FANGs and related shares, without these the market would have declined. Therefore it feels like we are in a disruptive environment where there will be companies who massively over perform the market due to structural change in the economy.

Does that mean passive is a bad approach? No not at all. For all the reasons advocates will be aware of it’s a good approach. The problem with today’s environment is due to a long bull market everyone thinks they are an expert but in the long term horizon passive approach recognises that the overall market performance is the optimal performance.


Yes but in 2000, all those companies were losing money. Today, MSFT and AAPL have very modest P/Es, below SPX as a whole. Here is the ratio, from 1990, with the exception of the boom/crash, any investor holding the ratio (buy NDX, short SPX) for over a year would be ahead, and holding for the full 30 years including 2000-03 would be 580% up.

My portfolio has been >50% LON:ATT for years.


Well, there’s two things to unwrap here I guess.

  1. I think good companies like AAPL, AMZN & MSFT with good fundamentals and proven business models will continue to perform. I have a pretty significant long position in MSFT and don’t see that changing in the near future. These are the stocks I was referring to when I said “I’m not saying I wouldn’t invest in any tech stocks”.
  2. On the other hand, there are companies like FSLY ($13b market cap, 21x P/B, not profitable), SNOW ($90b market cap, 17x P/B, not profitable), PLUG ($35b market cap, 40x P/B, not profitable), TWTR ($53b market cap, 7x P/B, still not profitable) and many with even worse fundamentals than them which have driven up valuations which are entirely decoupled from reason (unfounded optimism / speculation).

It is group 2 which I think will eventually meet gravity, and when that bubble bursts, I wouldn’t be surprised if we see a short-term shock to good tech stocks as a result. So, to be more clear, I think a time will come when tech stocks will no longer perform just based on the fact that they are tech stocks. Good companies will always perform in the long run, regardless of sector.

As far as I know, Microsoft were very profitable in 2000, and Apple probably would have gone bankrupt if not for the return of Steve Jobs (I wouldn’t have invested in Apple in 2000).


And GOOG and FB. It’s crazy that the top 5 (ex Amazon) actually represent better than average value from an earnings perspective just because they make so much cash. You can make defensible models for the top 5 achieving a historically sensible PE by 2025 based on current valuations and anticipated growth.

Then you have the 6th largest, which might achieve a PE of 200 by 2025, that concerns me.

Ultimately there are thousands of people around the world constantly analysing every new bit of information that comes out for each company and its implications for future earnings. Yes sometimes they will get that very wrong, but that’s newsworthy and the exception to the rule, it will either represent few stocks or a small timeframe, or both.

For the most part everyone’s collective decision making is quite good, which is why the deviations are so interesting.


Perfect. I agree with every word you say. MSFT were indeed profitable in 2000. Very.

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I did, and back then I lost when it popped.

Out of interest, how did people go about trading during that era, given that the internet had only really just started to take off? Was there platforms online, or did everyone who took part work for a company that had direct access to the stock exchange?

Everybody I knew had Internet access. I had ISDN to my home back in 1996, and dialup to pipex before. I had regular email/Internet/wais/gopher since 1988.

By 2001 we all had home Internet access, and I was playing multiplayer online FPS since 1996. (quake and later a WOW in space game called Mankind). It’s funny how I read about GenZ being the first Internet generation! It’s utter bolox :slight_smile:

There was an online trading platform I used. No idea what it was called. They also went bust. Their site was in html with frames.

I had shares in a telco that I cannot even remember.


One reason right now is related to the structure of such an ETF (a capitalisation-weighted fund) and the heavy weighting towards US and US tech specifically. The US market is incredibly top heavy right now and also near all time highs driven by just a few companies (concentration is not usually a good sign). If you look at the constituents of VWRL the top 10 are all US companies, mostly US tech companies, and it is very close to the S&P 500 for the top 10.77% of VWRL. Apple is leader making up almost 2% of this entire world fund!

EDIT, on looking at another source which is probably more up to date, it looks like Apple is now 3.45%, MS 3.29%, AMZN 2.18% and Alphabet has two listings at 1% each, so it has become even more concentrated in top US tech names, just as those prices reach a peak IMO (see Top 10 exposures at bottom):

US share prices are near all time highs, CAPE is near all time highs, and some would argue they have already started to decline from those highs, so buying VWRL could be buying into that long term decline at present. That is probably due to the massive monetary and fiscal stimulus recently employed and anticipation of the removal of that. If you think at some point that stimulus will be withdrawn as central banks are promising, in order for share prices to be maintained, they’d have to have massive increases in earnings to make up for that stimulus and money becoming more expensive.

So if you want a genuine balance of world companies, you’d have to work a bit harder (perhaps use country or region specific ETFs to get more of a balance as well as VWRL and avoid US). Something to be aware of when buying VWRL, though I think it’s a great choice for most people.

That said people are very bad at guessing what is going to happen (including myself), and this is why people choose passive income and ETFs like this which do all the work for them over the long term, so personally I think it’s a great choice.

A market cap weighted fund is by definition balanced, anything else is arbitrary and needs constant rebalancing.

Apple is the second biggest individual contributor in bringing down the S&P 500 p/e ratio (after Berkshire) and the same is almost certainly true for VWRL. So that first issue is actually remedying the later. If you excluded (or underweighted) Apple then you P/E would increase and then you’d be buying something even more overvalued!

All that said I still have tilts towards better value equity (Value Factor, EM, Korea), so I do sort of agree with the below.

It’s things like TSLA, NVDA that worry me because they are both very big and low earners, I don’t worry about big US stock in general like GOOG, FB, AAPL that are big but also earn so much money they bring the whole index P/E down.


A market cap weighted index is basically betting heavily on previous winners - sometimes that is great (last decade), sometimes not, but yes fees are a concern (though pretty low for eq-weight nowadays).

I think my worry with those is that they skew the index heavily toward US tech, and tech that Is highly dependent on advertising and consumer spending. Not sure everyone will be aware of this.

If for example anti-trust were used to break up one of these companies or privacy laws made advertising revenues fall the entire sector would be hit hard, which could trigger drawdowns in all stocks but esp. that sector. If the US economy craters or stimulus is abruptly cut it could have a similar impact.

As it is I find it hard to imagine meteoric growth like the last decade for any of these incumbents - the Chinese or Indian tech sectors are more likely to pick up that growth IMO. VWRL would eventually pick that up but it would take a while.

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If you tilt your portfolio to Value then you have some conviction that a sustained rotation into value will occur over the medium term. If you have no such inkling then a global tracker still does a good job as you still will benefit from holding lower value stocks even though the higher weighted stocks will fall harder. Its impossible to know when valuations will correct but history tells you that they do and bring the rest of the market down with it. Therefore a defensive move would be to tilt to value but I’m not so sure for the very long term

Not really (unless it’s a momentum fund and I agree it has been an incredible decade for that), market cap weighting treats a $1bn company equally if it has fallen from $2bn or grown from $0.5bn.

Equal weighting as a concept makes no sense to me at all, it’s completely arbitrary. Should I own 2X as much Alphabet because they have 2 tickers? If anti-trust measures break it up into 20 companies should I then buy 10X more of it?

Equal-weighting is basically a clunky way to get access to the small-cap premium, but you can get that just by tilting to size.


It’s interesting because it I think we have similar goals (tilting towards value + small cap - which are by far my biggest deviations from VWRL) but just going about it in slightly different ways.


I feel the same about cap weighting (why!!), but yes every weighting scheme certainly has downsides and equal weighting is to my mind just a way of removing the bias of size weighting which cap weighting brings. At present cap weighting will expose you to very high weight in certain key companies in one sector if you buy the S&P which is not ideal.

I prefer equal weighted ETFs in the niche Thematic realm. Otherwise the market cap weighted is superior

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Market cap weighting is basically buying 1/1,000,000th of every company and never changing that. That means you don’t trade and that your returns will match the aggregate of all other market participants (who do trade with each other).

Equal cap weighting means I buy 1/5,000,000 of Apple then 1/1,000,000 of Tesla then 1/2,000 of Bed, Bath and Beyond and 1/10th of Aerotyne International and those rates constantly change, so you are constantly trading. As a result you are decoupled from the aggregate performance of the market, for better or worse.

I understand the desire to introduce tilts and I’m not criticising that (I’d be a hypocrite if I did) but I always try to accept that market cap weighting is the neutral position and I am the one overweighting / underweighting and introducing bias - not the other way around.


I’ve heard someone say that anything that isn’t a Global ETF is actually active investing. :thinking:

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US PE ratio is currently around 28, but VWRL at 31 August was declared by Vanguard to be around 17.2, which is closer to longer-term averages (14ish). So maybe VWRL isn’t so bad.