S&S ISA: The Layman Investors Dilema

Lokolo

dunstonh wrote: »

To be honest, with £3600 you are better off going to HL and DIY by picking three funds that average out to match your risk profile.

Although I agree with you it is quite hard to do this! I know for you its pretty easy if I said I can handle 40-50% loss for 10 years and I want to go medium or high risk. But to me at the beginning I was like !!!!!! (!!!), with asset allocation and different fund sectors after 10 months I still hardly know a thing and a lot of it is guesswork. This is where I think the problem lies.

The software you have for asset allocation and risk basis etc. isn't freely available, I am relying a lot on morningstar and looking at the areas they say I am investing in, the risk of the fund as well (they say 1 of mine is high and 1 is medium-high). Soon enough I am going to pick another fund as I will be working and can afford to put in the extra money. But after these 3 funds have finished I have no idea where to then look, whereas I bet if I came to you, you could dash up a few ideas etc. But getting this information isn't free for me, and to start off with you, wasn't free either.

jamesd

Worth considering that this IFA could easily end up doing a better job than DIY. It doesn't take much extra performance to cover the fees and for this amount the cost looks very reasonable. Wouldn't be for much larger amounts, but that's not what we have here. Remember that even something as simple as annual rebalancing to preserve sector allocation percentages is expected to deliver about 1% a year in extra growth.

dunstonh

But getting this information isn't free for me, and to start off with you, wasn't free either.

Virtually all the software IFAs use require an annual or monthly contract. Its actually quite scary how much the cost of software adds up to each month.

So, if we caome back to the costs of using an IFA then you are looking at an expensive example in this case as already mentioned as he is a CFP. A better half way house is to get an IFA who isnt CFP. However, as James says, annual rebalancing is important and can easily pay for itself. It really comes down to what you class as value for money.

Lokolo

Yeh I agree but thats the next thing. I have no bloody idea how to rebalance. If I want to learn I could take courses (which just cost a lot of money, £135 for one level!!!), or go and see an IFA and pay every year (or PM you until you tell me the answers )

I can understand all of is work but I don't want to pay £100 every year on my funds for someone to swap them around and I don't want to pay £300+ on courses to tell me, I want the information out there available at a resonable cost (resonable for me ).

By all means I look after my money and I want to learn more. I would just rather scab the learning resources from someone that has done CeFA so I could learn myself rather than pay £135 a level for a qualification I don't need but want the info as a hobby.

jamesd

How to rebalance:

1. set your desired percentage splits.
2. one year or six month later, find the total amount you have and work out what the value of those percentages would be for that amount.
3. adjust your monthly contributions so that in one year or in six months they will restore the target percentage.

3 is cheap, generally free, since no extra buying or selling is involved. It's reasonable for six monthly balancing, a bit slow for annual. To do it faster and as a more pure rebalancing:

4. sell the extra of the one you have most above the target amount in and use that to buy more of the one you have most below the target in. If there's excess, use for the next low one and so on working your way up the list. Repeat for the next one above the target.

Say you're at Hargreaves Lansdown and you have four funds, one that's 200 over target, one 90 under, one 60 under and one 50 under. You'd do a sell and buy other funds transaction and give 200 as the value to sell. Then you'd put in 90, 60 and 50 amounts for the three funds you need to adjust upwards. HL will sell the first and then use the proceeds to buy the other three. The balancing won't be perfect because you'll lose a little bit in buying costs, but it's close enough.

barny_100

jamesd wrote: »

How to rebalance:

.......

Apologies for the numpty question here but in terms of desired percentage splits I assume are we talking % of value and of between sectors/investment types rather than individual funds.

Say I had dripped cash into 4 different sector funds over a period of time as I wanted 25% investment distribution in each area. Due to the differences in performance over time however the value distribution will definitely not be 25% in each. So, as long as I still want 25% in each, I should take some of the profits from the over performer(s) and buy the under(s) to get the distribution back to my aim?

jamesd

barney_100, yes, it's by sector first. If for some reason you have multiple funds within a sector you'd also want to balance within the sector.

For anyone who doesn't know why rebalancing helps, it causes you to take money from areas with good performance and move it to areas with less good performance. An extreme example would be moving some from emerging markets to corporate bonds during a boom, then back from corporate bonds to emerging markets during a bust. Because the corporate bonds move up and down less than emerging markets this leaves you ahead - you lost less than all of the growth and bought more of the emerging markets ready for the next boom.

Without rebalancing (what the raw markets are doing):
year one, start with 1000 in each, total 2000
year two a boom, EM grows 100% to 2000 bonds 20% to 1200 total 3200
year three bust, EM drops 50% to 1000, bonds 16.7% to 1000 total 2000

With rebalancing:
year one, start with 1000 in each, total 2000
year two a boom, EM grows 100% to 2000 bonds 20% to 1200 total 3200
rebalance, EM 1600, bonds 1600
year three bust, EM drops 50% to 800, bonds 16.7% to 1333 total 2133

After the boom and bust with rebalancing you now have a gain of 133 even though the markets are right back where they started.

You do need to do it even when times look terrible. It's supposed to push you to sell some during a boom at high prices when nobody wants to sell and buy during a bust at cheap prices when nobody wants to buy.

tradetime

Sounds great, except, what I don't get is if you're smart enough to time boom and bust like that, why rebalance in that manner, why not simply go to cash or cash equivalents (treasuries / gilts) for the bust and not bother sacrificing the 50% from £3,200
Then again I suppose you aren't talking about timing boom and bust, it just happened that a bust occurred right after the rebalance in your example, but then boom and bust don't occur on yearly cycles either. I do understand the theory, but I'm not sure it works that well in practice, that said since none of us can time boom and bust that effectively I suppose it offers best protection, though if your bond choice were treasuries / gilts wouldn't they increase during a bust, which would give the figures a better look.

jamesd

Right, the underlying assumption is that people in general are not going to be willing to sell at the higher points and buy at the lower points, because that is directly contrary to the mood at the time. So they decide in advance what they will do and stick to it, an easier choice. Easier still if left to a pro to take care of it for them.

Someone who really has the self-discipline to buy when there's panic in the air and sell when everyone is rejoicing wouldn't have any need of the help.

I didn't suggest that the boom and bust were perfectly aligned, just that there had been a boom before one rebalancing, that may have faded or not, and a bust, that may be partial or into recovery, before the second. So I actually wrote "during a boom" and "during a bust".

tradetime

jamesd wrote: »

Right, the underlying assumption is that people in general are not going to be willing to sell at the higher points and buy at the lower points, because that is directly contrary to the mood at the time. So they decide in advance what they will do and stick to it, an easier choice. Easier still if left to a pro to take care of it for them.

Someone who really has the self-discipline to buy when there's panic in the air and sell when everyone is rejoicing wouldn't have any need of the help.

I didn't suggest that the boom and bust were perfectly aligned, just that there had been a boom before one rebalancing, that may have faded or not, and a bust, that may be partial or into recovery, before the second. So I actually wrote "during a boom" and "during a bust".

Yup, understand what you're saying, makes sense. I never hold anything that long, which was why I was curious, cheers..