Index Trackers when interest rates are low

happywarmgun

lukekelly wrote: »

Neither represents a diversified portfolio.

The question was which is the more diversified portfolio. The answer was B. The point was 'diversified portfolio' is a relative term - dependant upon the scope of the word 'portfolio' which varies depending upon the context in which it is used.

So to be clear - when I used the term 'portfolio' at the start I was talking about that chunk of my assets (which was about 15% but is now more like 10%) that I hold in tradeable stocks or funds (UK or overseas). Nowhere at all did I suggest that I would put all my money in a FTSE 100 tracker - simply that a FTSE tracker was one option I was looking at. The point of the thread is not to have a sixth form economics style debate on the meaning of the word 'diversified' (though thanks for your input on that) - but to show that their are lessons from the Japanese experience over the last 30 years that look to be relevant to our current economic situation and that turn 'conventional wisdom' about stock market investment on its head.

dunstonh

not to an investor based in Japan, which is the OPs point I believe

But this is a UK site for UK consumers. We are not in Japan.

No it wouldn't! Look at the graph. Had you have started a 10 pound a month fund in 1982 and stuck with it through all the ups and downs for the last 27 years on the basis of the well worn logic that drip feed investment allows you to 'average down' as well as up - the reality is you would still be spectacularly down on your investment 27 years later.

Only if you were in Japan. We are not and why would you want to stick 100% in a single fund and not rebalance and diversify?

Remember - an index is a diversified basket across every sector in a whole economy.

Not necessarily. It depends on the index. The FTSE100 is a woefully limited index and that is far from being diversified.

There are lessons from the Japan experience that apply to those thinking of investing in the UK at the moment that turn conventional stockmarket 'sales' wisdom on its head.

The lesson is not to put your eggs all in one basket.

simpywimpy

I was looking at a guaranteed bond with legal and general through nationwide BUT what I didnt understand fully was if the investment was protected should legal and general go under.

I'm looking to put £3000 away for a child but don't want to sign it into childs name only till 18 so I have scope to move it around as necessary. I may also want to add to this on a regular basis.

gozomark

We are not in Japan.

how do you know where I am ?

happywarmgun

dunstonh wrote: »

But this is a UK site for UK consumers. We are not in Japan..

There is a phrase 'He who does not learn from history is doomed to repeat it'.

Recent Japanese history is very relevant to the UK situation at the moment.
If you don't want to take heed of that - your call. I apologise for trying to share an insight and putting it up for debate (and challenge). Didn't realise all insight on the market situation had to be gleaned from the UK experience.

dunstonh

I was looking at a guaranteed bond with legal and general through nationwide BUT what I didnt understand fully was if the investment was protected should legal and general go under.

It is but its a rubbish product.

We are not in Japan.

how do you know where I am ?

Perhaps I was using the Royal we

Recent Japanese history is very relevant to the UK situation at the moment.

It is a potential scenario that could occur.

If you don't want to take heed of that - your call. I apologise for trying to share an insight and putting it up for debate (and challenge). Didn't realise all insight on the market situation had to be gleaned from the UK experience.

No problem about debating the issue but anyone investing in a single area is just asking for trouble. Proper investing should be diversified. So, pointing out would could happen to those that are single sector investing (UK for example) is valid. However, for those that are diversified the risk of suffering a Japanese style event are much reduced. Still possible but less likely as global economies are all at different stages.

Your post opened by suggesting that investing was limited to one area. I am making the point it shouldnt be if you want to do it right and protect yourself from this sort of thing.

thrupence

happywarmgun wrote: »

My modest portfolio has taken a battering over the last 18 months (mainly due to what was 10k of HBOS shares now being worth about 200 quid). I've finally decided to pull my finger out and get back on top. Now, I don't think you need to be nostradamus to predict that we're in for a few rough years of likely sustained low rates of interest and very hesitant consumer demand. This got me thinking about Japan through the 90s which lived through similar circumstances (albeit at least boyed with global demand holding its exports up).

And I found this graph:

http://www.chartsrus.com/chart.php?image=http://www.sharelynx.com/chartstemp/free/chartind1CRU.php?ticker=^N225

It's astonishing. Can you imagine going to see a financial advisor in Tokyo in say 1982 and getting the "stock market is ALWAYS the best investment over the very long term" speech. And then the "Tracker funds, keep out the money manager commision and you get a return consistant with the market in the long term" speech. And then signing up. And then 29 years later be staring at a loss. In fact if you had jumped on board and held for any year at all since 1982 you would still be looking at a real loss, that's before you factor in inflation or opportunity cost of modest % returns in a savings account.

Now if you try to plot where the UK is on our similar journey we are probably at the equivalent dip in that graph circa mid 1990 - then factor in that we don't have the luxury of much global demand for our exports (what with them mainly being financial services!) - then maybe I might not by at FTSE Tracker after all....

Any thoughts?

My strategy is long term investment in Asian countries and commodities through funds and ETFs and short term trading of US/UK stocks.

tradetime

Any thoughts?

Well from the original title and post, and then how the thread has proceeded, with people expressing the thoughts you requested, and your reponse to them, I'm left wondering just what is the point of your thread?
To sumarize, if you had put all your money in an Index tracker that tracked the broad Japanese market in the late 80's, you'd be unhappy? No !!!!!!. (of course if you'd put it in in 82 and took it out in 90, you'd have a wry smile)
Given that experience you shouldn't put all your money in a tracker that tracks the FTSE? No !!!!!!.
I'm not sure if you're having a go at Japan, Japanese financial advisors, Index trackers, the FTSE or what exactly?
How exactly do the general terms "Index trackers" and "Low interest rates" have a great deal of bearing on each other, I personally use many index trackers, is there a message in here somewhere, other than diversification, which I guess by now you know all your respondents are familiar with.

happywarmgun

dunstonh wrote: »

Your post opened by suggesting that investing was limited to one area.

It didn't. I was looking at a FTSE tracker as one possible investment and never said anything about it being the only one. However, somewhere along the line someone read it that way and a side debate has developed about the meaning of the word 'diversify'.

The point was only that people need to be wise that financial advisors (independent or otherwise) will, if they are offering you tracker products - as part of a 'diversified' portfolio or otherwise - come out with spiel along the lines of:

"Over the long term the stockmarket will always offer the best returns, you can pay a fund manager to pick the best stocks, but it is hit and miss if you get the right fund manager, and past performance is no guarantee to future perforrmance - however, the market as a whole averages out on the upward trend and by buying a tracker fund you will get a normalised return inline with the market return, without gambling on- or paying a premium to - an individual fund manager. Beacause, your investment is spread accross the entire [FTSE 100, 250, Allshare or whatever] you are much less exposed to the extreme variances in individual sectors that happen from time to time." etc. etc.

Now given the FTSE is at a many year low - lots of people will be tempted by going for a tracker now on the old adage "buy at lows sell at highs". Having looked at the Japanese experience I don't think we are in fact anywhere near the low - so I've changed my mind and am giving this one a miss. Everyone can do their own analysis and make their own call. I just thought I would share mine....

happywarmgun

tradetime wrote: »

How exactly do the general terms "Index trackers" and "Low interest rates" have a great deal of bearing on each other,

The link was I was thinking at getting a FTSE tracker. I am guessing we are going into a long period of low interest rates. I found another developed economy that has lived through a decade or more of low interest rates. I looked at that and decided against a tracker as a result.

But that said I can see now that the thread title was poorly chosen by me and has contributed to people missing my gist!