Advice for first time pension planner

mickflynn39

Anyone who bases their investing strategy on All Share trackers deserves the return they will get. Anyone who advocates other people use that strategy is grossly irresponsible.

It could be argued that it is grossly irresponsible to advise someone to pick an actively managed fund from the thousands that are out there rather than an index tracker. According to the reports in my previous post the odds of picking a managed fund that will perform better than an index fund are at least 4/1. I'd rather have those odds in my favour when picking a fund to invest in.

Linton

mickflynn39 wrote: »

Hindsight is a wonderful thing. Historically it has been virtually impossible to pick the best performing funds. There are far too many variables at work and none of us have a crystal ball. Well done if you guessed right but that is what everyone does when they make an investment decision.

Let me try and explain it to you. There isnt one universe of funds out there. Funds are divided into sectors which behave quite differently. So when you choose a fund, you dont randomly pick, one day having a cautious managed general fund and the next day one that happens to invest in India.

The sensible policy is to pick the sector first. 10 years ago it was obvious to me that emerging markets and raw materials were the way to go. This has proved to be extremely successful. If I had taken your advice and gone for a FTSE tracker I would have been many £1000s poorer.

Having chosen a sector then find a fund. Normally there is only limited choice, once you have disregarded the permanent dogs. If the trackers look reasonable, fine, if not go for a managed fund.

Your policy is to decide to have a tracker first, then I guess you choose one at random - does it matter to you what the sector is? Or do you always go for a FTSE All Share tracker? Either way this means that you cannot invest in a wide range of potentially lucrative investments, simply because there is no meaningful index to track.

To take one such sector at random. European Small Companies - there are no trackers, and its not clear what they would track as there is no European Small Company Index. The mid point fund in this sector would have given you a return some 75% higher than the average FTSE AllShare tracker over the past 5 years.

Take another example sector - Technology. To me, this is a no brainer investment, you must have some exposure there. According to Trustnet there are 7 funds in that sector that have been around for 5 years. Two of these are trackers, one at position 3 the other at position 6. They track different indexes. The better one has twice the return of the other. Little evidence in this sector whether a fund is a tracker or not is a sensible criterion for choosing a fund.

Your advice to go for a FTSE AllShare tracker is I believe fundamentally flawed because of the nature of the FTSE AllShare Index. It is dominated by the large FTSE100 companies - IIRC they form 80% of the Index. The FTSE 100 constituents are pretty random but do tend to be unduly influenced by flavours of the day.

For example if you had chosen a FTSE All Share tracker in 2000 you would have made the choice to buy a significant tranch of very small loss making tech companies - something any rational investor would have seen as a major risk. Again in 2007 you would be overly invested in banks, and we know what happened there.

Another downside to FTSE trackers - they are often regarded as "safe" investments suitable for novices. Look at the record - over the past 10 years they have fluctuated pretty wildly and the index hasnt returned to the heights of 10 years ago. IMHO the returns do not match the risk.

If you want a safe fund with limited fluctuations you wouldnt want a tracker - what you would need is a managed fund.

I will agree with you on this - if you have determined your investment needs are for a broad FTSE based investment then you may as well go for a tracker. Its just that I dont understand what investment needs could lead you to that point.

mickflynn39

Linton, you are obviously very knowledgeable and have been very good at deciding where to invest. My advice is in the overall context of this thread. For a novice investor an index tracker to me is the obvious place to start. Once you become a bit more knowledgeable about things then maybe you could diversify into the more risky funds if you are happy to gamble a bit more and are happy to take the losses if they come your way (and also the higher charges). I however would always invest in a tracker fund based on the evidence presented in my previous posts.