Aggregates

I woke up this morning thinking about activity.  Activity is the thermodynamic concept of non standard behavior in a chemical solution.  As solutions become concentrated the A + B =AB relationship become x*A + y*B = z*AB  where xyz are a kind of fudge factor which describes real behavior instead pristine theoretical behavior in chemical solutions.  The variability is due to how charge, solubility and entropy changes local environments for molecules instead of just viewing their behavior in a dilute solution.  The local matters in the real world.  

Blood is an aggregate of hemoglobin contained in corpuscles and a kind of dirty proteinacious water called plasma.  The hemoglobin is highly soluble to O2.  You can stuff a whole lot of O2 into hemoglobin especially hemoglobin contained in corpuscles, but not so much in plasma or free hemoglobin in solution.  Your cells crave ATP and the ONLY way to efficiently make ATP is to deliver enough O2 to the cell mitochondria.  Not enough O2 = RIP.  So life itself depends on this method of hemoglobin aggregation.  Dis-aggregate the hemoglobin, and even though the amount remains the same the effective O2 delivery is so poor you will die. 

I was reviewing the nature of VTI.  VTI is a total stock market tracking ETF.  People own VTI as a proxy for owning all the stocks in the US market.  It is commonly published there is some comfort that “all the stocks” are “more diversified” and therefore “safer”.  Actually the majority of diversity is achieved in as little as 20 stocks.  1000 stocks only provides 5% more diversity.   VTI as a tracking vehicle has as its portfolio 1560 stocks.  The total us market has a bit over 3800 stocks, so VTI is only 41% of “total stock market”. 

Ya Ya blablabla so what?  Well the point of activity was to account for the non standard behavior of solution with high concentration.  Index funds make up 29% of the market.  That’s called an aggregate and I would call that a high concentration.  The behavior IMHO is not random but actually quite concentrated, and the measuring tool is just an estimate.  The “tracking fund” just estimates the actual total market.  In normal times it estimates beyond good enough.  But what about abnormal times?   The point of owning index funds is the so called safety of diversity.  If you sell VTI and Vanguard doesn’t have cash on hand it will have to sell 1560 stocks to raise the cash to pay you.  This causes a distortion in the tracking.  There is now downward momentum on those 1560 stocks in excess of normal market swing.  Remember you actually own VTI not the total market, so the value of your portfolio is the actual price of VTI not the price of the total market.  Now what if half of the 29% who owns the “index stocks” sell.  What happens to balance of the the index?  What happens to the value of your portfolio?  My impression is xyz kicks in and all of the “formula” which rely on say “8% long term market gain” goes out the window as momentum forces dynamic distortion onto the system, and the distortion will be worst in those 1560 stocks you own since those are the ones being most sold at fire sale prices.  The robots don’t care.  You give them a sell order, they sell sell sell, damn the torpedoes.

The point, the point?  Jack Bogel worries about this.  I’ve read it over and over in his writings but I don’t see it anywhere in the usual Bogglehead boilerplate.  Is your “diversity” really diverse or merely an illusion because your diversity is actually a part of an aggregate and therefore captured in that aggregate and not free to oscillate independently?  This is why some real bond mix like 60/40 IMHO saves you, because bonds are truly independent with a correlation of 0, and not captured as part of an aggregate.   Lemme see all ya gotta do is 4 x 25 in low cost index funds…  

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