Do global index funds have a problem?

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0:34After your trial, you'll save an extra£5 a quarter on the subscription, which is exclusive to Making Money listeners. And that's moneyweek.com forward slash money. But there's a link in the description if you just want to click that. Hey, Demo. All right, mate. How you doing? I'm good. You having a good night last night? Yeah, yeah, yeah. Me and Will, one of the producers, went and had an Indian just outside the U.S. Wait, it's a Himalayan. Nepalese. Himalayan. Himalayan. Himalayan. It was a Nepalese, which I think is a good curry, right? Like, you know. How's your stomach feeling today? Six out of 10.

1:06Oh, so decent curry then. Yeah, it was all right. And it was more the beers as well. Do you know what I mean? And I was sitting there thinking like, I shouldn't be eating spicy food and beers. We got Martin Wolf on later and I'm just going to be sat here like sweating.

1:21You might have to like take the reins. Yeah, it's going to be a nice light. Take the wheel, mate, you drive, which I think is happening in this episode. I'm doing it right now. Let's do it.

1:34Sometimes I get bored, stop watching YouTube basketball videos, and I check out your videos. I watched a recent one on index funds, global index funds, which is a big topic, especially for us. You always talk about them, you invest in them. You got me started in them. We actually did a video on how to invest in global index funds, which we will link in the description, so check it out. It gives you a step-by-step guide. But yeah, it was a decent video. give it five out of 10, got some tips, you know, it was great video, really funny. Good, good information in it. What actually inspired you to make the video?

2:06So just before we go into the video and the listener questions, let's just quickly go over why I buy a global index. So I buy a global index because I'm basically betting that the world keeps spinning long-term. And that's a really easy thing for me to do, to invest in. it's like the off the shelf version of like investing the global index is like something where it's like okay I can just buy the biggest businesses in the world I can continue to invest into that on a monthly basis and long term that's been a sensible thing to do in the past so this video I did look to concerns around global index investing so there's just a lot of articles that I saw circulating around that are basically saying you know that the global index funds have a problem.

2:51I take this very personally, you know, it's like someone telling me my team is no good or whatever. It just seemed that there was a prevalence of these articles saying that global index funds have an issue and that everyone should be worried and blah, blah, blah. And someone sent me the article going, is this true? And I was like, okay, I'll make a video. What's the main issue? It's this argument that you buy a global index fund because you want wide diversification, but actually because of the dominance of a handful of businesses in the global stock market, mainly in America, that you're not getting that.

3:23And that really you're overexposed to just a few companies. You're meant to be diversified by investing in a global fund, but it's like these world funds are mainly like American world funds, like the world is America. Yeah. And within them, they're mainly like seven company funds. like so you're buying hundreds and hundreds of companies, but actually it's all really going to a handful of businesses. So I think it's a genuine concern. And I think we should always ask ourselves, is what I'm doing the right thing? And, you know, has what's got us here going to continue to get us where we want to go to?

3:57So I think that's kind of what we want to explore today. And you asked for some questions, didn't you, or something? Yeah, I tried to ask us listeners, what do you want to know about global index funds? I asked them. You didn't do squat. I reposted it on my Instagram story to my 1 ,500 followers. Clout. Yeah. That's where we got all the responses from me, mate. I got 190 ,000, mate. Your rookie numbers. It's not a pissing contest. It wasn't a second ago until I whipped out a bigger one. Let's get started with these listed questions. They'll save me quickly.

4:34Pedazo de Torpedo.

5:01Yeah. So the conclusion of the video that I made was like, there's this like, if we take it from just away from stats and numbers, and we just look at it from like a human perspective, this argument that we're reliant on tech and that we've become too reliant on tech, it's kind of, it ignores the fact that we've been reliant on tech since the day we first sliced some bread or smashed a rock against something, you know? And maybe this is just the most modern iteration. It kind of makes me, I mean, I just think it's maybe a bit silly to say, we have tech businesses. I would argue that every business at its heart is a technology business in some way, shape or form.

5:39You know, technology gets the goods to them. They use technology to produce and manufacture. They use technology to facilitate sale. It's like we call Google and Apple tech businesses, but then we say that, I don't know, a manufacturing company isn't when they are, you know, they're using robots to make stuff. But I do think that if you say, if we accept this label of technology and we say that that's a specific set of businesses. By going all in on those businesses, it just seems like why, you know, this is a brave bet. It would have paid off in the last few decades, but it just seems like why ignore all the other businesses?

6:13And when we go into things like recessionary markets or there's downturns, other businesses tend to do well, dividend stocks and safer businesses. You said it's quite, in the video, it's quite cyclical. So like there was like the energy boom and then now it's like the tech time. and then before was like housing or property or something. So like it, do you think we're reaching the end of this tech cycle or you think not technology cycle or this Google stuff, or do you think it will keep going for a while? I think what happens is a new technology emerges, replaces the old and then we stop calling that thing technology and we call it like - The new thing.

6:47Yeah, like we call the new thing tech in a sense of like the automotive industry was a technological revolution in the sense of it completely changed the world. and maybe one day we'll call Google like a boring thing that isn't tech. And it'll be like this AI kind of thing. That's like, everyone's like, oh, holograms. I don't know. These little robots walking around. Yeah, yeah. Give us massages while we're on the podcast. Yeah, yeah, that's nice. That'd be right, everyone wouldn't mind that. Yeah, I bet you wouldn't. But you know, what the question is actually asking is why wouldn't I just go all in on the businesses that have delivered the returns recently?

7:21And what I would say is maybe 40, 50 years ago, someone was saying, why wouldn't I just go all in on General Motors because they're producing all of the returns? Well, that would, you would have missed out. I just think that people always ask the question of, well, if these guys are driving the returns, why don't I just buy those? But if you ask that question at different times throughout history, you will have seen that it would, at some point that would have run dry, that kind of, that thesis or narrative. That leads us nicely onto another question from Hengis Bluetooth 7882, who wrote in, any way of having a global fund that specifically excludes the tech sector or at least the Magnificent Seven.

8:00The IT sector is massively overhyped at the moment, reminiscent of my days during the dot-com boom because of AI. For the listeners, do you want to reel off what the Magnificent Seven are? Microsoft, Apple, Amazon, Alphabet, NVIDIA, Tesla. Do we say Meta? Do you say Amazon? We said Amazon. Do you say Meta? I don't think you did. Meta is in Facebook. You get the gist. Yeah. About those, the big tech businesses. But you know, this whole thing of like, it's overhyped. I don't know that it is. You know, I personally wouldn't exclude them from the mix because they just keep seeing, they seem to keep finding new gears.

8:43Yeah. You know, like. You've got to think about how you, when like in your daily life, do you use these things? And like I use Google all the time. This is a good point. It's like, it's ingrained in my day-to-day life. And they make money. So like the comparison to the.com bubble is that it was overhyped, but people just had domain names like pets.com. There was not even a business there or there was no revenue meaningful and they weren't making any money and people were just launching cash into them because it was like, this is the future, bro. Whereas Alphabet and Nvidia and these companies have the revenues.

9:18They have cashflow, they generate profit that underpins their values. And whilst they might seem to be, you know, overvalued or undervalued at certain points, whatever, I don't think it's a fair comparison to say that they're like the tech businesses of the past of the dot-com bubble where people were just, if you had a good domain, you could raise millions, but not have a business. SCFC underscore 151 asked, well said, the S &P 500 has performed well for years and years, but for a 30-year investment, is a global fund safer? I think safe is a weird word. Like, yeah. Someone said in the comments recently, like I thought it was quite well put that a global index investment is still an American bet, but you're kind of hedging the downside or limiting the downside because you're not completely exposed.

10:12So if America goes down and you're only in America, you're going to feel that down 100%. Whereas with a global exposure, you're still betting 65p in every pound on the American market. But if America tanks, you've got kind of like protection on the downside because you've got all these other countries in there. You're going to accept a lesser return when America is dominant like it has been. You know, I think, I mean, I'm just pulling figures out the air here. So don't quote me on these. But I think last year it was like over 20 odd percent for the American market. But the global market might produce 15 to 16 percent.

10:45So that's a big difference. That's a big difference. And that's painful to see that you've not juiced, got the full juice out the squeeze, but risky. I mean, you could say that not backing the winner is risky, you know, like in the sense of coming second place or not producing the best returns. What I would say is that having this like view that America will always be dominant, that America will continue to do what it does forever is in my eyes risky, or at least doesn't acknowledge the fact that that hasn't always been the case and that times change. So if I'm just buying America, I'm basically saying that I think American dominance will continue.

11:28I'm not that confident that that will be the case. If I just buy the UK, it's the same. If I buy individual stocks, I need to be valuing these businesses. All of this stuff is not things that I have time for in my life. What I think I'm good at is sitting here and yapping away. I'm world-class yapper. Have a nice little chin work. Yeah, I'm a world-class yapper. So, you know, that's, I should focus on that and then park my money in a global index because I believe the world will keep turning. I believe the world will keep delivering value. And I believe long-term that markets trend upwards, you know.

12:01But you invest a little bit in the S &P 500. No, well I do through my global index. I don't - Oh, but you don't directly? No, there's no point because I get that exposure through the global index. by putting, that's risky in my opinion, by going, oh, I don't know if America's gonna win or the globe, so I'll go 50-50, you're overexposing to America because you're putting more chips on the number. I think a 50-50 approach gets you nearly to like 80 % America. Yeah, because you've got 100 % American, the S &P 500, then you've got 65 or so. Yeah, yeah, yeah, exactly. So actually by doing that, you go overexposed.

12:34I get people in the comments all the time going, you know, why wouldn't, you know, why do you want America to fail? Why do you think America's gonna fail? I don't, I want America to win, but I also just have this kind of like belief that the world is more than just America. Maybe it's because I live on a tiny little island that is well above its station, thinks it's a superpower. And conquered half the world. Yeah, yeah, yeah, yeah, yeah. We didn't, we can't even conquer this like podcast mate. Like, but you know, what I mean is maybe it's because I'm not from America that I'd like to believe that the rest of the world has some potential.

13:09I mean, there's like parts of Europe that are spitting out businesses that are incredible trading two-one-twos from Bulgaria and they're like, they're doing great. There's like very capable people all over the world, you know, and I just, again, it's not really a thesis. It's more of like a belief that it's not, I know that America's set up in a way that helps its markets and that helps companies thrive. But I just think the rest of the world has some potential as well. And I think if you look back over a hundred years, it hasn't always been the case that, you know, the country that has been dominant stays dominant.

13:44I point to Japan again. I was actually about to say Japan. I think that they're the next biggest country in the, in the like global index funds. There was a point when they thought that Japan would overtake America as the most dominant like market and then it did really well, but then it imploded in this like spectacular bubble that's taken like decades to recover. And, you know, I think recently Japan has been a good investment, but it was certainly, it was a bad investment for a while, right? I think they're like 6 % of global funds, like global index funds. Is that the allocation to Japan? Yeah, like around 6.1%.

14:20Okay, look at this guy. He's done his reading, hasn't he? I do my research, you know. You've got it written on your hand now, aren't you? That's your only stat. Stop giving away my secrets, mate. That's your only stat. Is that what he's got? A lot of technology comes from like Japan, South Korea, Asia, but that's not really reflected in - Well, it's an interesting thing, isn't it? Because the size of the economy doesn't reflect the size of the stock market per se. The stock market is not reflective of the GDP of the country. Because if you think about it like this, how many corner shops are there in the UK?

14:50You can't buy a slice of them on the stock market. You know, there's thousands, if not millions of businesses that are not represented in the global stock market. The stock market is just really a handful of like massive companies. Even the small companies are big by like, you know, the standards of a corner shop. And the economic output of a country is not reflective necessarily in the stock market in the same way that India is probably a tiny percentage of the overall stock market, but it's a massive economy, you know, if you add up all its parts. So America just has, is much better at getting businesses to market, big businesses.

15:28And I think that's why. So in a way, like the stock market is kind of separate from the economy in a way, you know, like in that sense. Last time we recorded, Tomei, and you were having some real dramas with your accountant. So how's that been going, mate? They're sacked. So drama sorted. They're a big corporate firm. They didn't really reply to my emails very quickly, like took a week or two at times. And they charged me way too much. I mean, And yeah, they were charging me thousands. They saved me some money, but yeah, I had to move on. Slow and expensive. Pretty much, yeah. This is one of the reasons that we're really happy to be partnering with TaxApp.

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16:34If you need to file a self-assessment this year, give TaxApp a try. We've left a link in the description and use the code MONEY10 for 10 % off your first tax filing. That code is MONEY, M-O-N-E-Y 1-0. So Mr. O 'Carolet, I hear you are a salesman. Elite salesman, yes. One of the best, they say? I've got a little bit of experience in the game, yeah, I could say. You've done a few deals. Bill, Bill. What would your compliance team say about you? They would say that I am always nagging them and that essentially I just have beef with compliance. I love the team. Compliance slows down all my deals because every time I get to the finish line, they've got to check documents, KYC, GDPR, and it's just a nightmare.

17:18It slows the deal down by like two, three weeks. It's always on both sides as well, isn't it? Sometimes it can be blocked on the other side. Well, that's where today's sponsor can help. Indeed. Vanta helps companies of all sizes get secure and compliant fast. And they stay that way. They do it by automating compliance with over 35 security and privacy frameworks like SOC2, ISO 27001, and HIPAA. Yeah, all of them. And this saves businesses so much time and money. According to a recent IDC study, Vanta customers save over half a million dollars a year in costs. Not bad. And they also help you complete security questionnaires up to five times faster which is great because everybody hates filling out forms.

17:56If you're a business that needs to prove security and compliance, visit Vanta.com forward slash making money to sign up for a completely free demo today. That's Vanta.com forward slash making money. There's a link in the description though, so you can just click that. Next question is from Kingy Graham, who wants to know the solutions to overexposure. So does an equal weighting ETF beat a market cap ETF? So we'll just explain what they are first of all. Yeah, first of all. Let's say, just to keep the numbers round, let's say you've got an index fund or ETF that buys a hundred businesses, yeah?

18:31In an equal weighting, each business would get a pound every time you invested. So they're equally weighted. So it doesn't matter what the size of the business is. Every time you invest, the same amount of money goes into each. With a market weighted or, you know, capitalization weighted index, the size of the business dictates how much they get. And this is what most people buy when they buy an index fund. So in that example of 100 businesses, if one business is 5 % of the total value of the index, they get£5 in every 100 that you invest. So this is the case with a global index at the minute.

19:07Whenever I put a hundred pounds in, even though I'm buying 3 ,000 businesses, four to five pounds goes to Apple, four to five pounds goes to Microsoft. Before you know it, these magnificent seven have got 25 % of the cash every single time. So it's this argument of, is it better actually to go, everyone gets the same. I hope that makes sense first of all. Yeah. So we've done a bit of research here and I've got some data here that isn't our own. I think it's better to see what other people have said about this. So the S &P have put together a chart. If we're in video, we'll put it up in the screen so you can see it.

19:45That basically tracks equal weighted versus market capitalization weighted. And they showed an equal weight index over the last 20 years has produced 11.48%. Whereas the S &P 500 in its traditional sense, the one that everyone buys, has produced 10.29%. So actually the equal weight has done better than the market or capitalization weighted over 20 years. So, you know, yeah. Change what you're doing, everyone. Abort mission, abort mission, change. We were wrong. No. Yeah, but this is over the last 20 years. Yeah, look at this guy. That doesn't guarantee over the next 20 years it's going to be the same.

20:23It's not a long time, is it? Yeah, 20 years is very short, short time period. It's not. It is a long time, but it's not a long time in the investing sense. And it's not a long time over 40 years plus. I also, in my video, I looked at a study, I think it was from Goldman Sachs that said that over the same time period, that the returns were pretty much identical, but the draw downs were bigger, the risk. So within an equally weighted index, you saw more volatility over the time period. It was a wilder ride, if you will. Yeah, and we're trying to limit volatility out here. Yeah. We're trying to limit stress anyway.

20:58I don't mind a bit of volatility. I don't mind it. But if you're gonna say that you take a crazy ride to end up at the same place, that doesn't make all that much sense. But it's interesting that the equal weight has outperformed. That isn't what I would necessarily expect. But I'm not gonna change what I do because I just think then I start to sit there thinking, well, should I go back? Is it gonna change? And like you pointed out, 20 years is a big time period. It's not forever. Yeah. So look to the S &P 500 iShares equal weighted and the fees were 0.2%. Whereas for the market cap, it was 0.07%.

21:43So. It is significantly more expensive. I think the returns would still be better off on that basis, according to this, the S &P report in an equal weight. But again, it comes down to this thing of If you're making these decisions to switch, it's always in the back of your mind of, should I switch back or should I not? I don't want that kind of, I don't need to get the very best return from my investments. I don't need to, I'm not an individual stock picker. I'm not Warren Buffett. My reputation doesn't rely on me getting market beating returns or the very best out of all the possible returns.

22:19And no one else knows the return I get. I just need something that outruns inflation that makes me richer long-term, a good place to park my wealth. And I think the biggest thing that impacts my ability to do that long-term is chopping and changing and questioning my approach. So that's, I'm gonna sound like a broken record. I stick with the market weight, and I stick with the approach that's produced that returns long-term because that's what will get me where I need to be. And maybe I'll get 9 % pre-inflation or maybe I'll get seven and someone else will be like, well, I got 14, mate. and I'll just be like, well, I don't give a shit.

22:56I still did all right. I'm retired. I'm doing okay. I'm still balling out of control. Yeah, I'm doing okay. Yeah, yeah. Semi-balling. Semi-balling. Yeah. I also looked at the MSCI World Equal Weighted Index and it's only 41 % US companies as opposed to like 70 % or 65. So if in the equal weighted, if America does continue to be a superpower and - You'll get left behind. You get left behind, right? So you've also got the risk of missing out on the American returns if they continue to ball out and continue to be a superpower. It's just any decision that deviates is like you're making a bet. So one question that came up from a lot of listeners is how do funds rebalance?