Help me rebalance my failing S&S ISAs Portfolio - Sept 2011

jabbahut40

Thanks for the feedback. I moved my fidelity special sits into marlborough special sits yesterday. Just waiting to assess the best time to make the other moves as planned above. Comments welcome.

Jabba

jabbahut40

Hi All,

Now wishing I moved 20% of my portfolio into safer income based funds in August. Suspect it is too late now as my portfolio has dropped 15% in the last month.

Still worth moving or should I ride it out?

Jabba

BLB53

Looks all fine and dandy on paper, asset allocation, rebalance, diversify etc etc. My guess would be you are paying around 1.5% - 2.5% in fund charges every year which will be a big drag on your returns over time.
Most of the FTSE 100 companies earn a large percentage of their profits from trading in many parts of the world.
FWIW, my advice would be to move to low cost trackers and/or investment trusts such as City of London, Murray Income and Murray International - reinvest the dividends to boost returns and focus on growth of dividends rather than the ups and downs of the markets.
Over the long term (10 years+) you should see very good results.
Sorry if this is !!!!ing on your parade, but just passing on what works for me.

BLB

gadgetmind

jabbahut40 wrote: »

Still worth moving or should I ride it out?

Definitely ride it out UNLESS you think that the whole Western economy is about to collapse, and keep feed money in if you can afford to, but target it carefully.

I'm currently moving slowly out of cash and into equities!

Ark_Welder

jabbahut40 wrote: »

Hi All,

Now wishing I moved 20% of my portfolio into safer income based funds in August. Suspect it is too late now as my portfolio has dropped 15% in the last month.

Still worth moving or should I ride it out?

Jabba

Recent article from Trustnet: Why emotions and investing don’t mix


Don't let hindsight dictate your decisions. But what you can do is use the experience as something from which to learn. You might still decide that you want more in the way of income funds, but that could be from new cash being invested rather than a wholesale reinvestment - but only if it is the direction in which you still want to move.

I tend to subscribe to the theory that the Retail Herd tends to overshoot market directions - both up and down - so read into this what you will... Investors turn their backs on equity vehicles

Whilst there is nothing wrong in being more defensive, try to anticipate what you think is to come rather than what has already gone.

MrMalkin

jon3001 wrote: »

• The Four Pillars of Investing, William Bernstein (a lighter read).

This really is an excellent book for anyone who wants to learn how to build a portfolio.

Quite frankly I'm surprised that on a website called MoneySavingExpert, so many of you investors have bought managed funds with high charges. There's been tons of research done that shows that if you buy managed funds, after expenses you only have around a 20% chance of beating the baseline index for the asset class. Some funds will beat the index but it's impossible to predict in advance which ones and even the ones that have outperformed in the recent past have no guarantee of continued outperformance.

A much better strategy is to buy index funds which typically have a much, much lower Total Expense Ratio. For example, HSBC have an excellent range of tracker funds which only charge 0.25% annual fees, which translates to between 0.27-0.5% TER.

My portfolio looks like this (all accumulation where possible):

Equities:
25% HSBC FTSE All-Share Index
12.5% Marlborough Special Situations (an exception to my indexing rule, because there are no funds which track small company indices yet AFAIK. This fund has one of the lowest TER in its class which is the main reason I picked it)
12.5% HSBC Pacific Index
12.5% HSBC European Index
12.5% L&G Global Emerging Markets Tracker

Bonds:
12.5% Scottish Widows Overseas Fixed Interest Tracker
12.5% Royal London Gilt Trust

Aside from the Marlborough fund, none has a TER above 1% and most are less than 0.5%. I use pound cost averaging and annual rebalancing to boost returns, and as I get older I'll allocate more of my portfolio to bonds, keeping to an approximate 'age in bonds %' goal.

If I had significantly more money in my portfolio I'd be tempted to switch over to index tracking ETFs because they generally have even lower charges, but they're not economical for ongoing monthly purchases so they'll have to wait a few years.

Ark_Welder

Not all managed investment vehicles have high charges. Not all managed investment vehicles will have to be fully invested in falling markets. Index trackers can work for well researched and liquid securities, but a good manager can add value in under-researched and illiquid markets.

there are no funds which track small company indices yet AFAIK

There used to be a good few years ago - some investment trusts (HSGC Index), so they didn't even have to worry about investor inflows and outflows. Eventually got incorporated into managed ITs because the trackers were such poor performers compared to the managed trusts.

But if you want underperformance in smaller companies and don't mind RBS as a counterparty risk for a fixed term, then you might want to read this: http://ukmarkets.rbs.com/MediaLibrary/Document/PDF/ProductDocuments/GB00B6HZ3W28/GB00B6HZ3W28_EN_Factsheet.pdf


For me, though, performance of 'the market' (whichever market that might be) whilst of interest, is not overly relevant.

MrMalkin

Ark_Welder wrote: »

Not all managed investment vehicles have high charges. Not all managed investment vehicles will have to be fully invested in falling markets. Index trackers can work for well researched and liquid securities, but a good manager can add value in under-researched and illiquid markets.

Taking your points one by one:

1. Very few managed vehicles have charges as low as index trackers, maybe none of them.

2. Trying to get out of falling markets and then back in as they recover is market timing, which has been proven to be pretty much impossible, and there's no evidence that fund managers can do it either. Gotta take the rough with the smooth to get the best overall long-term return, and periodic rebalancing helps in this regard by forcing you to buy cheap and sell dear.

3. How do you know in advance which managers will add the value? Past performance is no guarantee, so you're effectively trying to pick the best coin-flippers.

I will point out that some of the world's largest investment funds have largely ditched active management in favour of a passive approach, so if it's a good enough for people managing hundreds of billions, it's good enough for me.

Thanks for the link to the RBS HGSC index thing, I had heard of it before. I have to say it looks terribly unappealing. What I really want is just a bog standard fund that tracks the same thing, but I think index funds still haven't really caught on in the UK in a big way yet so I'll have to keep on wishing.

Ark_Welder

MrMalkin wrote: »

Taking your points one by one:

1. Very few managed vehicles have charges as low as index trackers, maybe none of them.

If failing to match an index is your thing, then fine.

MrMalkin wrote: »

2. Trying to get out of falling markets and then back in as they recover is market timing, which has been proven to be pretty much impossible, and there's no evidence that fund managers can do it either. Gotta take the rough with the smooth to get the best overall long-term return, and periodic rebalancing helps in this regard by forcing you to buy cheap and sell dear.

Try some searches on 'capital preservation' - they are reasons why tracking a market is not important for everyone.

MrMalkin wrote: »

3. How do you know in advance which managers will add the value? Past performance is no guarantee, so you're effectively trying to pick the best coin-flippers.

You don't know. Just as you don't know whether an index will flatline for the next ten years.

MrMalkin wrote: »

I will point out that some of the world's largest investment funds have largely ditched active management in favour of a passive approach, so if it's a good enough for people managing hundreds of billions, it's good enough for me.

This would largely depend upon what the investor's aim is. And that isn't necessarily the same for everyone.

Aegis

MrMalkin wrote: »

This really is an excellent book for anyone who wants to learn how to build a portfolio.

Quite frankly I'm surprised that on a website called MoneySavingExpert, so many of you investors have bought managed funds with high charges. There's been tons of research done that shows that if you buy managed funds, after expenses you only have around a 20% chance of beating the baseline index for the asset class.

This is the only part I really wanted to address here. The rest is a sensible approach to investing as long as you've decided in advance to exclude the vast majority of managed funds, however I'd like to ask for your source on the claim.

In isolation it doesn't really mean much, as it doesn't indicate the timescale. If it's 1 year, then it's demonstrably false, and even over the much longer terms trackers in the UK markets tend to come out roughly mid-table in the majority of sectors, so I'm very curious as to which studies show that trackers come out better than, say, 75% of managed funds (to account for tracking error and charges) over a given timescale.

For the record, most studies are done in the US, where investors are taxed on the internal transactions of their funds, thereby favouring portfolios with longer average holding periods. Under those circumstances, a manager either has to hold stocks for longer, in essence becoming a closet tracker fund with higher charges, or he needs to significantly outperform the market just to break even on taxes. As such, the US system offers an immediate advantage to a passive investor.

My own recollection is that on average a managed fund in the US will outperform the index before taxes but will underperform after taxes on a yearly basis. As time passes, the bias will cause a more marked underperformance, which might explain the 20% level you mentioned.