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GMO White Paper: The S&P 500: Just Say No

edited August 2017 in Fund Discussions
FYI: Pension Trustee Smith: I recommend to the committee that we liquidate our International
equity assets and index our equity exposure to the S&P 500. US stocks have outperformed
for the last 20 years, and I see no reason why that should not continue. Everyone knows
that the US is the strongest economy and market in the world.
This is a somewhat fictionalized version of a comment or conversation that has gone on in many
committee discussions over the last several years in one form or another. And why wouldn’t it?
Being a US equity investor over the past several years has felt glorious. The S&P 500 has trounced
the competition provided by other major developed and emerging equity markets. Over the last 7
years, the S&P is up 173% (15% annualized in nominal terms) versus MSCI EAFE (in USD terms),
which is up 71% (8% annualized), and poor MSCI Emerging, which is up only 30% (4% annualized).
Every dollar invested in the S&P has compounded into $2.72 versus MSCI EAFE’s $1.70 and MSCI
Emerging’s $1.30. Diversification theoretically sounds good, but as Yogi Berra said, “In theory there
is no difference between theory and practice, in practice there is.” Diversification in this particular
instance seems good in theory but not so much in practice.
So, shouldn’t we agree with Trustee Smith and throw in the towel, index all of our equity exposure
to the S&P 500, and call it a day? If our goal is compounding capital for the long term, which it is,
we would not just say “No,” but something akin to “Hell no!”

MarketWatch Article:


  • Yes, let's follow the herd and dump domestic mid and small cap, and dump any international we might have that we didn't already dump. And then, when the S&P 500 has a drop of 10-15%, we will all sell at the low point, just as we did about 10 years ago. Unfortunately, that's why lemmings have such a bad reputation.
  • @BobC. Not so sure. I lost half my portfolio in dot com bust. I lost 22-23% in Financial Crisis. Only because I sold.

    It is true I also didn't enjoy the gains after 2008 that one would have done simply buying and holding. However, I'm not sure I am worse for it. I'm more objective now because I was more "active". Sometimes that's better than deer caught in headlights.

    I need to read the whole GMO paper. I'm not going to say anything about people's ability to predict. However I do manage my allocations systematically. I was a 100% invested until last week in my retirement accounts, now I'm not. One doesn't have to make 100% on/off moves, but for me taking some money off the table and trying to deploy it somewhere else or gradually putting it back in does make sense.

    Also, sometimes I keep a list of things I "want" (not "need") and if I take gains, I will go buy something. After all, that's why we invest.

  • edited August 2017

    For what it is worth ...

    It is the many perspectives, strategies and thoughts put into action that make the markets. And, yes I invest to put coins in my pocket to improve my standard of living. From my own experience you have to get beyond the fear of loosing some money along the way to become a winner and enjoy the benefits of success. I have found that, for me, it is best to harvest profits from my portfolio along the way to keep the unrealized gains from becoming vaporized in stock market downdrafts. And, also to have a sell down (not sell out) strategy in place as the markets decline to raise some cash if one is short of it within their asset allocation.

    I feel it better to maintain a well diverisfied portfolio over just being invested in the S&P 500 Index. But, in just investing in the 500 Index through the years can make you a winner even though it is not my preferred way. In investing the concept is to grow your principal over time while in trading it is to make profit over short time spans.

  • Well said, Old_Skeet.
  • Hi Guys,

    Put together a group of market forecasters and the forecasting outputs will vary all over the map. Historically, GMO tends to be conservative and its projections are typically on the lower end of expected returns.

    What action should be taken in response to these forecasts? Here is one recommended approach: "If you want to be a successful investor, you should forget about your gut feeling, hunches, intuition or somebody’s else’s opinion about what the market will do, because that will be worth zero,”

    That hard to implement bit of wisdom was extracted from a recent MarketWatch column. We often seek and are strongly influenced by the action of the crowd. Here is the Link to that article.

    As always, your best action is one that makes you comfortable, and hopefully just a little more wealthy. Good luck!

    Best Wishes
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