rebalancing my portfolio

jem16

Rollinghome wrote: »

Someone who had drip-fed consistently throughout would be just below breakeven ignoring dividends.

Surely it would be foolish to ignore dividends? A 3% yield on dividends would see an increase of 34.4% over 10 years.

dunstonh

Someone who had drip-fed consistently throughout would be just below breakeven ignoring dividends.

£100pm for 10 years is £12k invested.

In the L&G Index fund that would be worth £14,724 at close last night with income reinvested.

It would be worth £12.754.93 with income withdrawn.

Dividends should never be ignored.

What is actually interesting is Invesco perpetual Japan would came out at £14,724.24 in that same period. Just 6p different to the FTSE tracker. (although if we had looked at these figures a month ago, the Japan fund would have been £16,129)

xyy123

jon3001 wrote: »

A diversified portfolio of uncorrelated assets produces better risk-adjusted returns. It's the basis of Modern Portfolio Theory.

In my opinion, Modern Portfolio Theory is broken. (I am not convinced it ever worked actually.)

As far as I am concerned, the basis and starting point of correct portfolio theory is benchmark selection, whether it be FTSE 100, FTSE All Share, MSCI World, Cash, Gilts etc.

Imagine taking a trip from London to Edinburgh: Without a benchmark is like setting off without considering what road(s) you're going to take, how long it should take and would also have no idea of where Edinburgh was (although you think you'll know what it looks like when you get there). A benchmark sets out the main roads you will be taking in your portfolio. You should only deviate from that default setting if you think you know where there will be some traffic or you know a shortcut. Because if you get it wrong, you will take longer to get to your destination, or may not even reach it at all.

Deciding on the correct asset allocation has to take this into account. Its not a question of correlation coeffecients. Its the opposite. You need the assets/constituents in the benchmark, in your portfolio, and hence exactly/closely related to whatever benchmark you choose so that your portfolio does roughly what the benchmark does.

i.e. If your investment objective is 10 Year+ and only growth, you should have a 100% equity benchmark like FTSE All Share or S&P500. The benchmark will do the work for you. The more you deviate from this, the higher the risk of you not achieving your goal. No doubt people will come up with this objection to this:

"But the last 10 years in equities have been worse than bonds!"

To that I say what I have said on another thread:

Over longer time horizons (ten years or more), equities historically provide the greatest return, outperforming bonds in 98% of the 20-year rolling periods since 1926. Even at only ten years, equities beat bonds nearly 90% of the time.

Having any permanent element of bonds/cash then in a long-term growth portfolio is basically saying that you think the next ten year period will be one where equities underperform bonds. In other words, a 10-1 bet. The odds are therefore not in your favour.

If your objective is 1-2 years growth with high potential cashflow needs, your benchmark should likely have a 100% cash, or near cash, benchmark. Having equity exposure increases the risk you will not achieve your objective.

As far as I am concerned, this is the correct and most effective way of managing portfolios. Rather than the standard and static 'balanced portfolio' which asks the client their view on market risk. In the car example, its like hiring a taxi/chauffer to your destination, and them asking you all along the way what roads you would prefer to take, to which a sensible person would reply...

"Just get me there as soon as possible without breaking the speed limit."

jon3001

xyy123 wrote: »

Is far as I am concerned, the basis and starting point of correct portfolio theory is benchmark selection, whether it be FTSE 100, FTSE All Share, MSCI World, Cash, Gilts etc.

Imagine taking a trip from London to Edinburgh: Without a benchmark is like setting off without considering what road(s) you're going to take, how long it should take and would also have no idea of where Edinburgh was (although you think you'll know what it looks like when you get there). A benchmark sets out the main roads you will be taking in your portfolio. You should only deviate from that default setting if you think you know where there will be some traffic or you know a shortcut. Because if you get it wrong, you will take longer to get to your destination, or may not even reach it at all.

Deciding on the correct asset allocation has to take this into account. Its not a question of correlation coeffecients. Its the opposite. You need the assets/constituents in the benchmark, in your portfolio, and hence exactly/closely related to whatever benchmark you choose so that your portfolio does roughly what the benchmark does.

I disagree. There's no reason to expect a diversified portfolio, especially one heavy in alternative assets such as commodity futures and property, to behave like any particular benchmark. So what's the value in benchmarking the whole porfolio against a narrow index? The purpose of the porfolio is balance risk and return; not target some arbitrary benchmark.

If you want to assess individual assets within the porfolio against a benchmark (e.g. to see if a manager is adding value) that could be worthwhile. As a corollary you could produce a weighted benchmark of the underlying indexes. But if you're already doing it at the asset level then I can't see what value that holds for the private investor.

xyy123 wrote: »

i.e. If your investment objective is 10 Year+ and only growth, you should have a 100% equity benchmark like FTSE All Share or S&P500. The benchmark will do the work for you. The more you deviate from this, the higher the risk of you not achieving your goal. No doubt people will come up with this objection to this:

You don't specifiy how much growth of the portoflio is required. Clearly somone only wanting, say, 50% growth can achieve their goals with less shortfall risk by introducing a healthy amount of bonds and making other portfolio adjustments.

As mentioned, the purpose of the porfolio is balance risk and return; not target some arbitrary benchmark.

xyy123 wrote: »

"But the last 10 years in equities have been worse than bonds!"

To that I say what I have said on another thread:

Over longer time horizons (ten years or more), equities historically provide the greatest return, outperforming bonds in 98% of the 20-year rolling periods since 1926. Even at only ten years, equities beat bonds nearly 90% of the time.

To paraphrase:

But the last 10-years in a diversified portfolio has been worse than the FTSE-100.
[I doubt a decent one has but I'll just use your benchmark]

Over longer time horizons (ten years or more), portfolios containing uncorrelated assets provide the greatest return and the least risk, usually outperforming any individual consistuent asset.

xyy123 wrote: »

Having any permanent element of bonds/cash then in a long-term growth portfolio is basically saying that you think the next ten year period will be one where equities underperform bonds. In other words, a 10-1 bet. The odds are therefore not in your favour.

You keep focusing on performance when for many people controlling volatility is important. A small amount of bonds can dramatically decrease volatility with only a small performance price.

xyy123 wrote: »

If your objective is 1-2 years growth with high potential cashflow needs, your benchmark should likely have a 100% cash, or near cash, benchmark. Having equity exposure increases the risk you will not achieve your objective.

What's the value in benchmarking cash funds you're about to spend? Most private investors would look for a decent interest rate and security and maybe other factors (ease of access, etc).

xyy123 wrote: »

As far as I am concerned, this is the correct and most effective way of managing portfolios. Rather than the standard and static 'balanced portfolio' which asks the client their view on market risk. In the car example, its like hiring a taxi/chauffer to your destination, and them asking you all along the way what roads you would prefer to take, to which a sensible person would reply...

"Just get me there as soon as possible without breaking the speed limit."

You've obviously had some odd experiences with the management of your portfolio.

Rollinghome

dunstonh wrote: »

Dividends should never be ignored.

Quite so. Which was the reason why I made it very clear that just looking at the FTSE didn't take account of dividends.

The reason I didn't include dividends is that the actual return depends on how much they are reduced by management charges. The dividend return on the FTSE is about 3.5% on shares held directly which is reduced to 3% by the charges for a low-cost tracker fund such as you mention.

But the active unit trust funds that pay financial advisers the best commission may have annual TERs of 2% plus other costs which reduces the dividend to just 1.5% or less. There may also be further commission and charges to pay upfront on purchases that I didn't include to reduce the return further. Additionally, there may be wide manipulation of spreads when the investor wants to sell. The small print for L&G permits them to manipulate spreads by up to 5% for some managed funds - which they regularly make use of.

What you say is a reminder that if the returns on equities are low as many expect over the next few years, then paying over half the dividends back in high charges and commissions will be even more punishing.

But that wasn't the point I was trying to make was it? The point being that we should beware of salesmen who pretend that timing doesn't matter: "Just sign there on the dotted-line sir". Timing certainly matters.

Someone who bought into the FTSE All share 10 years ago will find it 11% down now. Whereas someone fortunate enough to have delayed buying and instead bought in 3 years later would find it up almost 40%. So it's not just time it's timing. Similarly more recently. Someone buying in March after the crash will already have good returns. Someone buying now, having missed the rise, will be considerably less lucky. Timing.

The last time I heard the sales line "It's not timing the market but time in the market" was from an especially naff bank salesman. Because that's all it is, a sales line to overcome objections to buying into high-priced markets and one used a lot by iffy advisers to persuade prospects to invest just before the markets crashed 18 months ago. Any adviser using it is either inept or thinking more about his commission than his client's best interests.


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dunstonh

But that wasn't the point I was trying to make was it? The point being that we should beware of salesmen who pretend that timing doesn't matter: "Just sign there on the dotted-line sir". Timing certainly matters.

it is not the remit of any financial adviser to guide you on timing. No-one has a crystal ball and can tell you when its right to invest or not.

People should be wary of those that tell you they know when its right and wrong to invest as they dont.

Someone who bought into the FTSE All share 10 years ago will find it 11% down now.

Figures do not support that. L&G UK Index fund invested on 11/11/99 to 11/11/09 would be 16.37% up in value.

One assumes you are just looking at the index value but then people dont invest in that.

Whereas someone fortunate enough to have delayed buying and instead bought in 3 years later would find it up almost 40%.

Same fund invested 7 years ago would be up 69.49%

However, go back 7 and 10 years. How would you have known 10 years ago that 3 years later would have been better to invest a single premium?

Similarly more recently. Someone buying in March after the crash will already have good returns. Someone buying now, having missed the rise, will be considerably less lucky. Timing.

Again, how would anyone have known that March would have been the final low point?
How do we know that the final low point in this cycle has occurred?

The last time I heard the sales line "It's not timing the market but time in the market" was from an especially naff bank salesman. Because that's all it is, a sales line to overcome objections to buying into high-priced markets and one used a lot to persuade prospects to invest just before the markets crashed 18 months ago. Any adviser using it is either inept or thinking more about his commission than his clients best interests.

It is not their remit to tell you when to time the market. Statistically the longer you are invested. the less chance you have of having a financial loss. You may not catch the best period or the worst but they are not allowed to tell you to wait 3 years to invest or tell you when to exit. They do not have any crystal ball and should not be expected to have one.

Why were you not posting on the board in October 2007 telling everyone to get out of the market that day as its all downhill from there? Was your crystal ball not working that week?

bendix

dunstonh wrote: »

It is not their remit to tell you when to time the market. Statistically the longer you are invested. the less chance you have of having a financial loss. You may not catch the best period or the worst but they are not allowed to tell you to wait 3 years to invest or tell you when to exit. They do not have any crystal ball and should not be expected to have one.

Why were you not posting on the board in October 2007 telling everyone to get out of the market that day as its all downhill from there? Was your crystal ball not working that week?

:rotfl::rotfl::rotfl:


Strike one to dunstonh

Hindsight makes us all experts, doesn't it?

Browntrout_2

My point on 'timing the market' versus 'time in the market' was meant to illustrate the tendency retail investors have to tinker. Once you have decided on a balanced portfolio then stick with it or not. Any single investment may be timed badly, it is best to stagger investment to remove this risk. However once you are invested. Say you wished to avoid what you thought was a looming crisis in June2007 and sold out completely, when would you have gone back in?

This is a circular discussion depending on where you start, however if you're objectives are to beat the MCSI world equity index then why sell out completely ever...

The original poster asked about re-balancing, lots of replies and questions and spin-off debates but the original poster has not replied any further.

Rollinghome

dunstonh wrote: »

People should be wary of those that tell you they know when its right and wrong to invest as they dont.

Nor should they tell clients that timing doesn't matter. It certainly does. The secret of the best fund managers is that they do get their timing right more often than wrong. And there were a few who got it spectacularly right in 2007 while others got it very wrong.

If as you say no one can judge the time when stocks are better or worse value then it seems to follow that there is no point in paying for fund managers when tracker funds are available. (Unit trust managers are only able to do that with individual stocks, while Investment Trusts have the benefit of being able to use gearing.)

Figures do not support that. L&G UK Index fund invested on 11/11/99 to 11/11/09 would be 16.37% up in value.

The All share stood at 3200 ten years ago and is at 2700 now. I haven't looked that fund but as it's a tracker it will be roughly in line with the index it tracks. The 1.6% average annual return over 10 years you mention presumably includes dividends which will depend on management and other charges of between just 0.5% or less for a tracker fund but up to 2% pa or more plus front end charges, commission, spread etc. for managed funds

How would you have known 10 years ago that 3 years later would have been better to invest a single premium?

You seem to not understand the point being made. The simple point is that that timing should not be declared to be irrelevent - as many salesmen do suggest for obvious reasons. You won't get the same return if, whether by good luck or good judgement, you invest at the top of the market rather than at the bottom. That goes for equities, property, gold, or any other investment. It's no good, except perhaps for the adviser's commission, pretending otherwise.

It is not their remit to tell you when to time the market.

Nor should it be their remit to dishonestly pretend that timing is irrelevent if they are supposedly acting in the best interests of the client. It's probably true than many wouldn't be very good at reading the markets, which is why they're of the sales side rather than the investment side.

Was your crystal ball not working that week?

Seeing as you mention it, if you look back at my posts I was warning people to be very cautious, which of course was exactly the opposite of what you were doing wasn't it?

Advising caution was as much as anyone should do even though I'd moved substantially to cash myself. I certainly didn't pretend to have a crystal ball by telling everyone in April that all the falls were behind us and that they were missing the bounce as one prolific poster here was saying - just before the biggest falls a few months later. That was very much your line too wasn't it, even encouraging people then to invest money available to them by taking out a mortgage. It wasn't exactly a secret that there was turbulance ahead - even for the likes of a simple soul like me.

But then you are a financial adviser and if your clients withdraw their investments you lose commision don't you? It's only by persuading punters to invest and to stay invested that you get paid. The more time they're in the market the more you earn even if they are less fortunate. Personally, I'd give a wide berth to any adviser using that line.


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dunstonh

You seem to not understand the point being made. The simple point is that that timing should not be declared to be irrelevent - as many salesmen do suggest for obvious reasons. You won't get the same return if, whether by good luck or good judgement, you invest at the top of the market rather than at the bottom. That goes for equities, property, gold, or any other investment. It's no good, except perhaps for the adviser's commission, pretending otherwise.

It doesnt matter. Research done by mutliple sources over the years has found marketing timing as a very low impact on overall returns for long term investments.

Brinson, Singer, Beebower (1991) found that the most dominant contributor to the variability of total portfolio returns is the asset allocation of the portfolio. 91.5% was down to asset allocation, 4.6% stock selection, 1.8% market timing and 2.1% - other.

But then you are a financial adviser and if your clients withdraw their investments you lose commision don't you?

No.

It's only by persuading punters to invest and to stay invested that you get paid.

no.

That was very much your line too wasn't it, even encouraging people then to invest money available to them by taking out a mortgage.

no

You make too many assumptions.