Market Collapse

baldbloke_2

EdInvestor wrote:

Baldbloke

OK let's get a bit more scientific and have a look at the basics: your attitude to risk, and how your money should be allocated to reflect that.

Have a fiddle around with this calculator and let us know the results.

Then we can break down the fund universe a bit, into categories which suit your allocation requirements.That will make it a lot easier to pick the top- rated ones.

Thank you for the opportunity for an objective assessment of my 'dilemma'

With a couple of tweaks the outcomes on the Calculator were -

Large Cap 22-25%
Mid Cap 12-13%
Small Cap 8-9%
Foreign 11-12%
Bonds 15-18%
Municipals 0%
Cash 26-29%

This is very useful I feel.
I am still unclear about one basic issue - does the word Cash mean basic cash accounts be they the best on the high street or cash trusts from a fund manager?
And ... Does Foreign mean all non UK investments?
And ... Are Gilts & Bonds really better than decent cash investments at a time when many knowledgeable people seem to say steer clear of them?

So many questions!

Basically - as you can see - I am like a child being taught the abc - but the sums are relatively small and I have found all of this has given me a great deal of pleasure since I started looking into it.

If a possible guide to the division of my ongoing investment can be given without going in to specifics of course then I would be very appreciative. Thank you for even taking the time to read through and respond to what I have written.

Alan

baldbloke_2

kittie wrote:

Don`t give up baldbloke. Ishares are a good substitute for funds. There is a good uk dividend ishare, which gives a dividend 4 times a year. The dividends can roll up to add to your investment the following year. Ishares carry no stamp duty and can be traded like shares. The particular uk dividend ishare has a charge of 0.4% per year

I invested in this particular ishare a few days ago. If you want the name of this ishare then pm me as I don`t think I can mention particular vehicles on this board

Thanks. Do you have a link that I could use to read up more on this? I have never heard of ishares I'm sorry to say.

dunstonh

ps: I am just not that convinced that FOFs are that good in practice. At the beginning of the thread, it was mentioned that many managed funds just track down an index (but with higher charges). Hence, a FoF might just end up beeing a very expensive equivalent of an index tracker.

I am not sure how a fund of funds that invests in mid cap, large cap, equity income, europe, japan, us, property, specialist etc can be classed as a tracker. A tracker follows an index. A fund of funds covers the the sectors. Perhaps you are mixing up blend funds with FpFs. Blend funds are like fund of funds but focus on one sector.

Also, take the jupiter merlin income portfolio fund. A cautious fund with about half the volatility of a FTSE all share tracker. That invests into around 14 other investment funds. You would need around £25,000 to be able to get the splits in that fund with building your own funds to match their asset allocation.

But I have been unsettled by the new advice regarding Equity Income Funds and FoFs all of which look well worth considering next time round.

Asset allocation has been round for years. However, the tools and funds to do it havent been available to average retail investors. Equity income funds have been round just as long but people can often forget equity income in periods of sustained growth because they focus on performance and equity income funds will generally under perform growth funds in those periods. However, equity income funds are great in volatile times or periods of decline.

Every time I read that Trackers are the best introduction and need less 'managing' by the investor I realize that someone else who is very knowledgeable has an alternative type of fund that merits equal consideration.

I know the articles you mean. You find them at MF and other places. They are cheap but it doesnt make them any good in isolation. I couldnt even guess at how many people who have read those articles and stuck all their money into a single tracker following a single index. Years ago MF used to rate the FTSE100 tracker and that has made nothing in the last 6 years. Now, if you had put £1000 into four different trackers following 4 different indexes (and not just UK) then you would have made money. That sort of spread is a low level asset allocation. Its not a case of managed versus tracker. Its a case of either putting all your money in one place or spreading it over different areas.

FoFs are designed for the smaller investor because the choice of funds, asset spread and sector allocation is all done for you making them ideal for the new investor. A tracker does none of that and requires you to do all the work.

I have a number of reservations about using an American Asset allocation tool which is designed for Americans. They dont look at the world the same way as us but then again just look at the focus we have on the UK with our investments. Do you think Germans think about having a UK fund in their portfolio?

You should disregard cash in the asset allocator tool and perhaps replace it with property and perhaps the domestic spread could include european funds as well.

Are Gilts & Bonds really better than decent cash investments at a time when many knowledgeable people seem to say steer clear of them?

Many knowledgeable people are not saying that. They are saying you shouldnt be heavy in them. As in having 100% of your money. They are the perfect investment to hedge against. They have also been performing better than most equity funds over the last 2 weeks and that is what they are designed for. To counterbalance the risk.

That is another thing about fund of funds. Over a 5 year period of growth, the stockmarket funds will go up more than the gilts, other bonds, zeros etc. That means that a spread of say 75%/25% at the start may look like 82%/18% after a period of growth. The FoFs will keep it at 75/25 meaning the growth is pocketed into the low risk side so when a drop comes, like we have just had, you only had 75% exposure and not 82%. It also then allows them to feed money back in after the drop to benefit from the recovery.

Portfolio rebalancing can happen on ISAs with individual funds with some of the fund supermarkets but it tends to occur once a year. FoFs, being managed, keep doing it throughout the year.

baldbloke_2

Thank you Dunstonh

The first quote is not mine but the other three certainly are. You have given me a good deal to think about and I am very grateful for that.

The time & thought you have given to answer my question reflects very highly on how you presumably approach your professional responsibilities.

I am thankful in a way that I have some time to consider the options. As I have said - my current investments are limited to the ISA allowances and I have no real worries about them. But I see the need to consider moving cash from High Street accounts/Bonds over the coming year in order to make the most, in the longer term, of the money I have put so much effort into saving. It is at that point - together with future ISA and next-generation ISAs -that I shall be trying to put this good advice to some use.

I shall read up more on the specific areas you have identified. Many thanks.

PS Did I mention that I live in Norwich?;)

Alan

dunstonh

PS Did I mention that I live in Norwich?;)

Stick the kettle on and get some nice biscuits in then.

moneytroll

"I am not sure how a fund of funds that invests in mid cap, large cap, equity income, europe, japan, us, property, specialist etc can be classed as a tracker. A tracker follows an index. A fund of funds covers the the sectors."

Maybe I made a poor comparison. I meant that a blend of average funds within fund of funds, covering various geographical areas, could work out similarly as a blend of various trackers...

Anyway, the main disadvantage of fund of funds, and this is an important one, is that the charges are very high (over years, it will make an enormous impact on the performance) and one has no control over funds within the funds of funds. It´s a "lazy" way to invest (which can already quite a lazy activity in itself :-)

Investing can be fun too. One doesn´t have to be an "expert" to be able to invest "wisely". I would suggest 1st thing is to get a little common sense about the markets which should ease some of the anxiety either during times when markets are falling or when it comes to investment choices (people often fear what they don´t understand..)
a). I would read Malkiel´s book "Random Walk Down Wallstreet"
b). Read FT as regular as possible.

(What I write below is arguable and not the only way to invest so please don´t take it as direct advice and it helps if you also do your own research)

If it was me :-) , I wouldn´t go overboard with investing. It´s very good that you had the discipline to save some cash over time and you want to grow it slowly but steadily over time (over 10 years as you mentioned that you are 10 years away from retirement..)
I would use your full yearly maxi ISA allowance and buy funds on dips.
Regarding asset allocation, I would have a look here (you can click on various allocation models and pick one that you like): http://www.bestinvest.com/planning/portplan/index.htm

Once you decide on asset allocation according to your risk profile, you can start looking for a cheap broker to buy your funds from (Me, and many others here get them from https://www.hargreaveslansdown.co.uk)
When it comes to picking funds, it´s important to pick one that is run by a manager who has a long and solid record (as you probably know, most funds will underperform trackers and most managers who have an exceptional shortterm record, were simply lucky). Here (http://www.bestinvest.com/fundmanagers/fmpro?-db=webprices.fp5&-format=index.htm&-token=&-token.1=99&-token.2=5&-token.3=3&-view)
you can pick the best managers for any sector.
After that, I would register and use https://www.morningstar.co.uk portfolio tool to monitor your funds. It has a very useful X-ray tool to look what each fund is made of + how it´s balanced etc)
Then, I would check the performance few times a year and rebalance between asset classes when one sector becomes under/overweight.
This is a simple but IMO relatively hasslefree, easy-to-understand way of investing for a novice (or "sophisticated" - what a meaningless word in this context - investor)
If you can´t be bothered with any of it, you could always pop in to see Dunston I suppose, he´s extremely helpful/knowledgable on this forum and is one of the few IFAs that work on a new model basis (meaning, he will not overcharge you unnecessarily :-)

There maybe are more things to consider like your tax situation etc which is why it also might be worth seing an IFA but generally, investing isn´t rocket science.
Good luck and hope it hepls.

Debt_Free_Chick

Another tool for you - the Fidelity Portfolio Planner. You may need to register to use it, but it's quite sophisticated.

Once you've worked through it, at the end, it gives you a range of funds that match the portfolio you've created. Not just Fidelity funds but others from the Funds Network.

Well worth a try.

Redbedhead

Just wanted to say a thank you to all the people who have posted advise on this thread.

I am new to stocks and shares and have just taken out my first stocks ISA. My current intention is to split any spare money I have 3 ways:

To my cash ISA
To my Shares ISA
To overpay my mortgage

By doing this I will stay under the £7k allowed in ISA and I felt have a reasonable spread so I am not over exposed in any one area.

The Shares ISA I picked was the Fidelity UK Index Moneybuilder, which had the lowest fees I could find and seemed to perform consistently at a slightly better rate than the FTSE All Share. I can however choose to make topups in to other funds, so I will be considering that as a way to spread risk.

Is the FT still the best place to check on market conditions? I have been lucky in that my first investment has gone in to my ISA just as the FTSE 'appears' to have bottomed out (I say that cautiously as I am well aware it could still drop further) so I am still showing gains.

For a newbie to investments this thread has been really helpful, so thanks :T

EdInvestor

baldbloke wrote:

Thank you for the opportunity for an objective assessment of my 'dilemma'

With a couple of tweaks the outcomes on the Calculator were -

Large Cap 22-25%
Mid Cap 12-13%
Small Cap 8-9%
Foreign 11-12%
Bonds 15-18%
Cash 26-29%

Very good, now this can be boiled down a bit more. The first two, large and mid cap UK shares can be described as Medium risk.The second two, Small cap and Foreign, fall into the High risk category and the last two are nil or very low risk.

So your profile works out like this - I've adjusted the figures a little so they add up.

High risk 20% ( small companies, foreign funds, commodities funds )
Medium risk 40% (Most UK equities funds)
Nil or very low risk 40% (Cash,basically )

So that's how your total savings and investments should be split to match your risk profile. Does that feel about right?

This asset allocator doesn't however mention property funds: they fit in between low risk and medium risk - probably one reason why risk averse UK investors like them so much

I am still unclear about one basic issue - does the word Cash mean basic cash accounts be they the best on the high street or cash trusts from a fund manager?

All cash is included.Many people don't bother with gilts and bonds for their very low or nil risk investments these days, just use cash..

And ... Does Foreign mean all non UK investments?

We are talking about shares/equity funds, though the risk involved in foreign property is also much higher than with local property.

And ... Are Gilts & Bonds really better than decent cash investments at a time when many knowledgeable people seem to say steer clear of them?

No they aren't IMHO, as above.

There is a bit of further tweaking one can do in the Medium risk and Low risk area. For instance, growth funds and trackers are more risky than the equity income funds I mentioned before.

And property funds are a bit more risky than cash.

So what quite a lot of people do is reduce the equity risk a bit by going for the equity income funds I mentioned before, wheich means they can afford to put a bit of their cash into property funds because the one bit of lower risk should compensate for the other bit of higher risk.

That way you end up with four categories:

High risk (Small cap, foreign, commodities)
Medium-high risk (UK growth shares, special situations funds,trackers)
Low-medium risk (UK equity income shares, commercial property funds)
Nil risk (Cash)

This is a more typical asset allocation for the UK, just vary the percentage amounts in each asset class for the investor's risk level.

BTW, Baldbloke if you have a pension it should be included in your overall asset pile along with your cash savings and share ISA so we can get the percentages right.