Did I choose too many funds?

JayZed

Just a comment about the OP's question regarding number of funds. I also have a Standard Life personal pension through work. I have a vague recollection that there is a limit to the total number of funds you can invest in over the life of the pension (something like 20 funds). So if you start with, say, 12 or 13 funds, that gives you fewer options to change or further diversify your investments over the years; whereas if you start with 6-8 funds, you can make quite a few changes and/or investments in additional funds before you hit the limit.

This is all from memory - I can't remember the details and I may be wrong, so don't take the above info as gospel - when I have a bit of time I'll have a look at my policy docs and post here again.

jon3001

JayZed wrote: »

I have a vague recollection that there is a limit to the total number of funds you can invest in over the life of the pension (something like 20 funds).

Yup - that's what was in the booklet.

I think the funds I've chosen are going to be pretty much core ones for me so I don't expect too much chopping and changing.

jon3001

dunstonh wrote: »

You should also build your fixed interest sector into the portfolio because that is important when it comes to rebalancing and making sure your risk is consistent.

When I apply the 80/20 weighting it looks like this:

• 20% Cash/Bonds
• 24% UK Stocks
• 24% International Stocks
• 16% Property
• 16% Commodities

dunstonh wrote: »

You have property share at 20% and commodities at 20%. Both of those fall under specialist investments giving you an exposure of 40% to specialist investments. The highest risk portfolio I build has 13% allocated to specialist. Specialist is also the area you tend to diversify the most as it contains all the "different funds" such as property, country specific, niche funds focusing on certain areas like tech, media, bio, commodities etc.

How are you measuring risk?

The Gibson book I read back-tested the portfolios using over 30 years of historical data. The ones providing the highest returns with the lowest standard deviation were deemed the least risky. These weren't the stock-heavy portfolios but the ones making appreciable use of alternative asset classes.

Consider how three portfolios behaved since 1973:

Portfolio A:

• Number of negative years: 4
• Standard deviation: 9.00
• Compound Annual Return: 11.45
• Future value of $1: $ 35.77

Portfolio B:

• Number of negative years: 6
• Standard deviation: 9.81
• Compound Annual Return: 11.21
• Future value of $1: $ 35.33

Portfolio C:

• Number of negative years: 6
• Standard deviation: 10.96
• Compound Annual Return: 10.92
• Future value of $1: $ 30.57

The rational investor would choose Portfolio A. It had the highest return and the least volatility.

Now here are the portfolios. The book was aimed at a US audience and these portfolios where at a 70/30 split.

Portfolio A: (Greater Diversification)

• 10% Short-Term Debt
• 12% US Bonds
• 8% Non-US Bonds
• 25% US Stocks
• 17% Non-US Stocks
• 14% Real Estate Securities
• 14% Commodity-Linked Securities

Portfolio B: (Moderate Diversification)

• 10% Short-Term Debt
• 14% US Bonds
• 6% Non-US Bonds
• 35% US Stocks
• 15% Non-US Stocks
• 10% Real Estate Securities
• 10% Commodity-Linked Securities

Portfolio C: (Limited Diversification)

• 10% Short-Term Debt
• 16% US Bonds
• 4% Non-US Bonds
• 49% US Stocks
• 9% Non-US Stocks
• 6% Real Estate Securities
• 6% Commodity-Linked Securities

So - his 70/30 portfolios featured 14% in each of commodities and property (28% total). As I'm prepared to take on greater risk (80/20) I've increased these proportionately to 16% each (32% total). I also went for an even split on domestic/international stocks in line with some other literature I've read.

The Guy Fraser-Sampson book examined even more esoteric asset-classes such as private equity and hedge funds. I think the book may have been geared more at institutional investors as I'm not sure these asset-classes are well developed in terms of choice and history for the private investor; hence I've not read it as much. However the message is basically the same: MAC investing offers better risk-adjusted returns.

He contrasts a typical UK public portfolio of 2005:

• 22% Bonds
• 43% UK equities
• 28% Foreign equities
• 7% Property

with a model MAC sterling portfolio:

• 8% Bonds
• 19% UK equities
• 19% Foreign equities
• 18% Property
• 18% Hedge funds
• 18% Private equtity

Again - appreciable amounts are being allocated to alternative asset-classes to offer the greatest diversification.

The main rationale for not choosing MAC investing seems to be tracking error. When your neighbour's stock-heavy portfolio rockets 30%, you don't want to be the one who only made 10%. When your neighbour's stock-heavy portfolio slides 20%, you don't want to be the one who made 10%. (Well maybe you do - but don't gloat too much )

DebtSniper

Fascinating thread.

I was actually changing the fund selections on my occupational pension scheme yesterday. Decisions, decisions!

I have also opted for what I hope is a medium/high risk portfolio. Might have overdone the UK equities a bit though because the global fund I selected - in addition to a UK fund, amongst others - actually contains a 50:50 UK/Global split.

But at least I get the choice with this plan. Previous schemes that I have been part of did not offer such a choice, and I'm not even sure if we were advised of the composition of the funds' investment vehicles. In that case, how do I assess a risk profile across several plans? Would it be sensible to make assumptions about the likely composition of the schemes about which I have no knowledge? And if so, what assumptions should I make?

waltzer

As some of you may know, I'm currently looking at moving out of SL SH lifestyle profile plus WP. I'm furiously researching fund choice/allocation prior to going to discuss with IFA. Having come across this fascinating post I thought I'd ask if recent developments have forced any changes to the fund choices/allocations that you all had in place 3 months ago? Unless you had the foresight/luck to move into safer ground I would guess not due to the broad nature of the hit across all markets/sectors? Is this so? Also, I spoke to SL today and they have said I will be penalised by c 1% for moving my WP pot into funds. Does this sound feasible? It doesn't seem like much of a penalty.

MikeJones_2

waltzer wrote: »

...I'm currently looking at moving out of SL SH lifestyle profile plus WP...

Fascinating thread, and one which I've obviously missed. Waltzer's comment reminded me of this news article (posted here just for information purposes - and no relection on waltzer's comment):

- Pensioners hit by equity losses due to lifestyling (Citywire)

As a general comment in respect of jon3001's original post, I am left wondering whether new employees at his place of works are offered direct access to the IFA who deals with the company's pension arrangement. I also wonder whether the new employees are encouraged to sit down with the IFA and discuss their personal aspirations and financial situation.

I couldn't see anywhere that jon3001 had been asked what his attitude to risk was (specifically in terms of (t)his retirement provision).

This post serves to demonstrate the diversification of ways that people plan for their retirement. Some take a very active interest, whilst others may not.

Mike

I work in the field of Pension Education and Pension Guidance in the UK. I am a member of the Specialist Pensions Forum as well as being a Voluntary Adviser for The Pensions Advisory Service. I work with scheme members, employers, trustees, scheme administrators and advisers on most things to do with employer sponsored pension schemes. The views expressed by me in this thread are my personal opinions. You should seek professional advice from an appropriately experienced and qualified adviser. I am not an IFA.

Lokolo

Just to add to this thread so I don't look too noobish writing a new thread...

Equity are shares? So when someone says UK equity or international equity they mean investing in UK or international stock??

MikeJones_2

Hi Lokolo,

Lokolo wrote: »

Equity are shares? So when someone says UK equity or international equity they mean investing in UK or international stock??

Yes.

Mike

I work in the field of Pension Education and Pension Guidance in the UK. I am a member of the Specialist Pensions Forum as well as being a Voluntary Adviser for The Pensions Advisory Service. I work with scheme members, employers, trustees, scheme administrators and advisers on most things to do with employer sponsored pension schemes. The views expressed by me in this thread are my personal opinions. You should seek professional advice from an appropriately experienced and qualified adviser. I am not an IFA.

waltzer

Thanks Mike. Like most others I've always went with the flow re pensions and didn't bother to get involved because I saw it as too complicated. However, recent events have made me sit up and pay attention. I started by looking at how my setup was configured. At first, gut instinct told me that I wasn't configured effectively but the more I looked into things online I began to realise that indeed this was the case (along with input/opinion from others on this site...thanks again). I was never offered the chance to speak to the works IFA and ended up going along with the info in the booklet from SL which tended to focus on lifestyling as the easiest and safest way for pension dummies like me to go. However, I might be a pension dummy but I don't think I'm stupid and if I'd had access to the IFA and had been asked a few qs re risk I'd have been doing then what I'm trying to do now....ie make my own informed choice come what may. For the last 2 weeks I've been ploughing through info on funds with a view to speaking to the IFA and I've concluded that it's not too complicated after all if you're willing to be baffled occasionally. As well as my finding that sources everywhere appear to find WP inappropriate for some people I realised that my recent losses will start to be locked in as of next year (10 yrs to go). I'm willing to go high-ish risk anyway so lifestyling ain't for me even if we hadn't had our recent events. So...I'm going to get out while the goings bad and try to move into funds while they've taken a hit and gamble on things getting better over the next 8 years or so. Obviously try to monitor things and choose in an active rather than passive way when to lock in. My only problem at the moment is that the choice of funds available to group SH appears to offer limited possibilities re balancing things across sectors. That is, the majority of funds offered appear to be very similar in their make up (different variations of the same fund...broad geography and broad asset) so that even if you tried to diversify you'd end up with loads of UK, US, Europe etc and little hope of exposing yourself to specialist, emerging, small cos etc. However, I'm going to carry on researching and eventually speak to the company IFA. Basically, if you feel you'd like to have a go or if you're dubious following recent events (as many apparently are) why not have a go yourself? It's daunting sure but once you get into it it's actually very interesting and enjoyable!

MikeJones_2

waltzer wrote: »

...and I've concluded that it's not too complicated after all if you're willing to be baffled occasionally.

Spot on. I've been in pensions for 25 years now and there isn't a week goes by that I don't learn something new or read an article that gives me a different perspective on a pensions issue that I thought I'd fully understood.

waltzer wrote: »

...once you get into it it's actually very interesting and enjoyable!.

I couldn't agree with you more. The challenge we face today is making the majority of people feel the same way about retirement income too, but we need to take the politicians out of the equation (see Pubs, pints, pensions and MPs if your interested), simplify the jargon and make people feel 'engaged'.

We also need to fully reconsider the whole pensions arena and to acknowledge the difficulties employers are facing with providing pensions for employees.

I'd start the discussion with the merits of whether we could (or should) provide access to a national defined benefit pension scheme.

Mike

I work in the field of Pension Education and Pension Guidance in the UK. I am a member of the Specialist Pensions Forum as well as being a Voluntary Adviser for The Pensions Advisory Service. I work with scheme members, employers, trustees, scheme administrators and advisers on most things to do with employer sponsored pension schemes. The views expressed by me in this thread are my personal opinions. You should seek professional advice from an appropriately experienced and qualified adviser. I am not an IFA.