Safe investments!!!!!!!!!

moneytroll

"[I am not a fan of foreign shares because of the extra risk and because you get plenty of foreign exposure from the big multinationals on the FTSE.Most people just don't have the expertise to pick good investments in foreign markets.]"

Are you sure that´s wise in terms of overall diversication? One would miss out on global growth in foreign markets. Having 1-2% in emerging markets and the same in one or two specialist funds could provide good balance, IMO.
But also what about the bigger global economies? europe, japan, usa, asia pacific?
There are also a few good managers with consistently good records (10+ years) in these areas. (https://www.bestinvest.com has more info)
If one only focuses on FTSE companies, one might be better off with a HYP (surprised you haven´t mentioned it yet ;-)

Chrismaths

If one only focuses on FTSE companies, one might be better off with a HYP (surprised you haven´t mentioned it yet ;-)

Ed, I'm hugely impressed!

EdInvestor

Well, you guys said it,not me

Indeed an HYP would be very suitable for Pobby's medium risk equity component, now we've pinned him down a bit on his risk profile and asset allocation.

What is an HYP?

Certainly a much better idea than a tracker.And a lot cheaper than an Equity Income fund, which is the unit trust equivalent.

dunstonh

Certainly a much better idea than a tracker.And a lot cheaper than an Equity Income fund, which is the unit trust equivalent.

But not as diversified, less downside protection and greater risk.

moneytroll

I am not 100% clear on how funds are categorized in terms of risk.
Ed , you mentioned that foreign stocks carry higher risk, but then won´t a European large cap fund carry less risk than UK small cap for example? But i think it would not be as as risky as emerging europe. I also am not sure where Asia Pacific belongs to (there´s distinction between Asia Pacific leaders and Emerging Asia Pacific for example). Also you get a UK opportunities fund and Special Situations - not sure which one is riskier..

Is there a site which clearly sorts all the different fund varieties into various risk categories?

Also how can you find out whether a property fund invests into bricks/mortar and not into property-related shares? (as i gather, the latter would be riskier and more correlated with the general equity market)

dunstonh

Ed , you mentioned that foreign stocks carry higher risk, but then won´t a European large cap fund carry less risk than UK small cap for example? But i think it would not be as as risky as emerging europe. I also am not sure where Asia Pacific belongs to (there´s distinction between Asia Pacific leaders and Emerging Asia Pacific for example).

You are correct. A European growth fund will actually be on equal risk to a FTSE all share tracker and below an opportunities/spec sits fund.

Is there a site which clearly sorts all the different fund varieties into various risk categories?

For consumers, morningstar has a grading system which isnt too bad.

Also how can you find out whether a property fund invests into bricks/mortar and not into property-related shares? (as i gather, the latter would be riskier and more correlated with the general equity market)

You look at how the fund invests and see if it mentions property shares.

Bernard_Coleslaw

dunstonh wrote:

typical FSA approach. Give no guidence to advisers and wait until they decide someone has done something wrong and then make an example of them leaving all the others to quickly change the way they do things) .

Crikey - that's the TCF handbook, isn't it? :rotfl:

EdInvestor

dunstonh wrote:

But not as diversified, less downside protection and greater risk.

This is unlikely. The rule says that a unit trust must have at least 10 shares in it, a classic HYP has at least 15 and some have more. Studies show you don't reduce risk much by having more shares after you get to the 15-20 level.

HYP shares are supposed to satisfy a number of risk criteria - eg very large cap, weighting of all shares the same at the start, diversified across many sectors, high dividend cover, history of rising dividend and low debt.

Most equity income funds are in fact more risky if you look at what they're invested in than a properly constructed HYP.

Ed , you mentioned that foreign stocks carry higher risk

Yes because of the currency risk. For instance you may have noticed the pound sterling has appreciated significantly against the US$ in the past month or so.If this remains the case, then US funds will have a bad year in UK terms, nothing to do with the performance of the US stockmarket just the fall in the dollar. Of course big multinationals listed in the UK are exposed to currency risk, but they can hedge it so UK shareholders are not affected.

, but then won´t a European large cap fund carry less risk than UK small cap for example?

You need to compare like with like. In this case the currency risk could negate the protection offered by the size of the companies.

Also how can you find out whether a property fund invests into bricks/mortar and not into property-related shares?

Sites like https://www.trustnet.com will give you info about the main investments of each fund they list.

Chrismaths

This is unlikely. The rule says that a unit trust must have at least 10 shares in it, a classic HYP has at least 15 and some have more.

There is not a single UK equity income fund that has less than 30 shares in it, and most have at least 70

Studies show you don't reduce risk much by having more shares after you get to the 15-20 level.

Agreed, although the figures are 20-25, and you have 10-15.

Most equity income funds are in fact more risky if you look at what they're invested in than a properly constructed HYP.

Most? No. But funds have to make a statement about what their investment policy is. Some look exclusively at shares that yield 110% of the All-Share, some take a 'barbell' approach (very high yield at one end, low yield growth at the other), some pick the 30 best stocks they can think of and equally weight them, and some crappy ones are quasi-trackers. You have to judge them in the context of what they say they intend to do.

Yes because of the currency risk. For instance you may have noticed the pound sterling has appreciated significantly against the US$ in the past month or so.If this remains the case, then US funds will have a bad year in UK terms, nothing to do with the performance of the US stockmarket just the fall in the dollar. Of course big multinationals listed in the UK are exposed to currency risk, but they can hedge it so UK shareholders are not affected.

Foreign shares have an additional currency risk, this much is true, but this risk goes two ways. In addition, it is another type of risk, and therefore adds to the diversification of your portfolio, which can reduce overall risk. You mentioned the USD, but what about Japanese Yen? The Euro?

Think of a German export company. If the € weakens, then your holding is worth less in £ terms. But the effect of the € weakening is to increase the competetiveness of its products overseas, enhancing earnings - they can balance each other out.

Further studies have shown that over any decent length of time the cost of the hedge outweighs its benefits. It is for this reason that almost all UK multinationals do not hedge currency risk.

As I have said before, risk is only additive if it is the same type of risk - if they are different types of risk, the effect is more complex, and properly used can reduce overall portfolio risk.

All the best, Chris

EdInvestor

Studies show you don't reduce risk much by having more shares after you get to the 15-20 level.

Agreed, although the figures are 20-25, and you have 10-15.

No, the classic HYP has at least 15, which along with all the other filters gets rid of much more risk than the average EI fund ( or at least the ones I've looked at). For instance a classic 15 share HYP should only have one utility in it, because this is a higher risk regulated industry. Most EI funds have far more than that.

If someone is just trying out the concept with a smallish amount of money, then 10 shares @1k each is OK then expand it later.

Anyone saving up in an HYP will obviously have fewer than 15 shares while building it up.

It also depends a bit on your attitude to risk: I have 25 shares in mine, as I like all my risks to be calculated and it's quite a large amount of money. Some people will say I have compromised too much on the "high" but I prefer a slightly lower yield and more safety.You're making an extra 1.5% a year through not paying any charges anyway, so why not?