How to invest on a (weeny) budget

gadgetmind

Lokolo wrote: »

But you suggest all newbies get a UK FTSE 100 Tracker?

I'd much rather they had a global tracker and in either case they also need bonds.

Come on gadget, equities risk isn't for everyone and because of all the threads you comment about trackers and that trackers never under perform gives the wrong impression to a lot of people who read this forum.

Trackers can't significantly under-perform but of course that doesn't make them low risk, hence the need for long timescales and asset balance.

The fact is, without caring about T vs. M, a newbie should not be coming on this thread, reading that article and thinking "You know what, lets open a S&S ISA and shove £50 a month into this HSBC tracker they go on about.".

It would be very easy to do far worse things.

gadgetmind

Lokolo wrote: »

https://forums.moneysavingexpert.com/discussion/3742829

I haven't commented on that thread and the poster has clearly not read this thread.

Lokolo

gadgetmind wrote: »

I'd much rather they had a global tracker and in either case they also need bonds.

Trackers can't significantly under-perform but of course that doesn't make them low risk, hence the need for long timescales and asset balance.

It would be very easy to do far worse things.

Not much worse. A lot of newbies do come on here and want investment advice. Unfortunately it does turn into a P vs. M argument a lot of the time, but I'd rather some users (not you in particular) stop telling people that trackers are the only way forward.

In jamesd post he refers to research and gives examples of what the investor should be doing. You and your passive pro users constantly go on about why trackers are better and nothing else (and I know you don't do it in particular but you follow along the posts of someone else that does) should ever be considered. If newbies pick this up, they don't do their own research, they don't fully understand everything and IMO this is wrong.

Your previous post in response to jamesd's says "And you really think a novice is going to do this?" and I just think, what else should they do? Have a list of tracker funds and throw a dart?? They SHOULD research, not just pick a tracker and go for it. And I am sure you don't mean for it to be like that but your posts do come across that way.

jamesd

gadgetmind wrote: »

I don't know how to break it to you, but that really isn't the same thing.

I know. But it is better than every published study that I've seen at handling manager changes at least half decently instead of just ignoring them.

gadgetmind wrote: »

Yes, but by limiting yourself to the short term and a single sector, you've not really demonstrated a working strategy.

Picking one of the top ten funds in 2003 produced upper half performance for at least the next three years except for one fund in the third year. Three of the eight without a manager change were in the top decile for all three subsequent years and two of those didn't leave the top ten for all of those years.

That was a viable working strategy for that sector for at least some years, including years after I first looked at the sector.

What do you make of the degree of persistence seen there and the observation that the most common cause of a fund leaving top half performance was a manager change? All 80% just lucky for two years and 70% lucky for all three?

gadgetmind wrote: »

This is the point at which we have an empty list.

You can do better than that. Just pick the trackers that charge 1.5% instead of 0.15% to get started. That'll usually be a non-empty list of funds that consistently underperform.

gadgetmind wrote: »

They seem to suggest that momentum investing works until it doesn't. How do you know exactly when it's ceased to work?

When you stop outperforming I suppose. Time periods for rejigging vary from annual to monthly, maybe faster. I doubt that such approaches did well in 2011, because of the volatility. I expect that it would work better in markets that were less volatile.

gadgetmind wrote: »

Sorry, is this supposed to be a strategy for beginners? Is a novice with a small budget going to do that, and keep reviewing the situation looking for manager changes, and make macro-economic calls? What are their chances of 1) doing it in the first place, 2) getting it right, 3) beating a tracker?

It's part of our discussion. For a beginner I'd go with Jupiter Merlin range or a tracker or three.

gadgetmind wrote: »

My evidence-based view is that over the long-term the manager will perform identically to the previous one. The one (debatable!) exception here is for *very* small niche areas, where the manager has direct and relevant knowledge of the area in which the companies operate.

Mine based on the evidence of what happened in global growth is that it's not limited to just small sectors for UK funds. But how often that would be a result isn't something I've studied and maybe the period I looked at was unusual - it was a time of fairly consistent market moves.

A larger study would be nice, though. It's frustrating to me that the academic studies just ignore what real investors using active funds do and should do.

gadgetmind

Lokolo wrote: »

In jamesd post he refers to research

I'm still trying to track it down.

Have a list of tracker funds and throw a dart?? They SHOULD research, not just pick a tracker and go for it.

No need for a dart with trackers, that's for active fund pickers. And I do regularly point people towards Hale and Bernstein.

Lokolo

gadgetmind wrote: »

I'm still trying to track it down.

No I mean he said that people should research funds themselves.

gadgetmind wrote: »

No need for a dart with trackers, that's for active fund pickers. And I do regularly point people towards Hale and Bernstein.

No, I am talking from all sort of trackers - theres UK equity, US equity, UK small cap etc.etc. The only way a newbie can decide where to invest is through research. Part of this research will involve P vs. M. A lot of the posts here just say "invest in a tracker" and the article you posted (which I know you've said against investing in the UK tracker) mentions nothing about research and just to shove the money in a UK equity tracker. No mention about research about geography or asset type.

gadgetmind

jamesd wrote: »

I know. But it is better than every published study that I've seen at handling manager changes at least half decently instead of just ignoring them.

There are lots of studies that have tried and failed to find any long-term out performance that's due to management skill.

That was a viable working strategy for that sector for at least some years, including years after I first looked at the sector.

There are lots of strategies that might seem to work for a few years in one sector, but what's needed is a strategy that's been shown to work across multiple decades, and all kinds of market conditions, across many sectors.

What do you make of the degree of persistence seen there

What do you make of the lack of persistence seen in longer-term studies?

You can do better than that. Just pick the trackers that charge 1.5% instead of 0.15% to get started.

Touche!

When you stop outperforming I suppose.

If we knew when a certain market was ceasing to outperform so we could exit gracefully, it would be us that had the yachts rather than the active fund managers.

A larger study would be nice, though. It's frustrating to me that the academic studies just ignore what real investors using active funds do and should do.

There are plenty of multi-fund funds around, where a skilled team decide which underlying funds to buy based on their performance and macro-economic factors. Guess what their long-term out-performance is?

gadgetmind

Lokolo wrote: »

No I mean he said that people should research funds themselves.

Most won't, and those that do will get little or no benefit from it over the long-term. (That "little" was me meeting active investors half way, so be grateful for it! )

No mention about research about geography or asset type.

I'm happy to do that research but most aren't. I personally think that a FTSE tracker plus bonds is erring too far on the side of simplicity, and that a global balanced managed fund might be able to out-perform it as they could use the benefits of small cap, value and EM equities to increase returns. However, picking such a fund is less than easy, which is why most IFAs use multiple funds within each sector, even such well understood sectors as UK/US equities.

jamesd

gadgetmind wrote: »

There are lots of studies that have tried and failed to find any long-term out performance that's due to management skill.

If you read them carefully what you'll find is that by the word "manager" they really mean "management company", not human beings.

It's the major systematic flaw of just about all academic studies of the field, presumably because there isn't really good long term systematic data on when human managers change.

What people using active management normally mean when they say manager and change of manager is the human beings. Notably for the common sell when the manager changes advice. Even if the management company is the same.

gadgetmind wrote: »

There are lots of strategies that might seem to work for a few years in one sector, but what's needed is a strategy that's been shown to work across multiple decades, and all kinds of market conditions, across many sectors.

I disagree. I've no need for such a strategy. All I need is something that works for a while and some way to have a clue to switch.

For the period covered by the look at the global growth funds one good approach fund managers could have used to outperform was leverage. That would have failed starting in mid 2008 and a switch to more cautious funds was fairly clearly what was appropriate then.

gadgetmind wrote: »

What do you make of the lack of really persistence seen in longer-term studies?

I haven't seen any long term study that controlled for manager changes in any adequate way so it's hard for me to take them seriously as studies of active managed funds.

Mostly I regard them as nice studies for proponents of trackers to use to fool people who haven't looked at the studies well enough to see their systematic flaws.

gadgetmind wrote: »

Touche!

Been a long time since I did that in real life... For a few decades my mother used to carry around a medal I won in her handbag...

But don't stop there. Think of what it implies for any study that claims not to show persistence. How can you explain why it can't show persistence of underperformance when you and I both know that there is a convenient and easily accessible method we can use to predict it? You and I can do that, why didn't it show up in the studies? That's where it gets interesting and where averages start to become apparent as a distorting factor even for trackers.

Or maybe you have some other thoughts on why we both seem to believe we can predict future underperformance and why that doesn't show up in at least some studies?

If we really can both predict relative underperformance that means that we can also predict relative outperformance by eliminating from consideration the underperformers, so it's not a small question.

gadgetmind wrote: »

If we knew when a certain market was ceasing to outperform so we could exit gracefully, it would be us that had the yachts rather than the active fund managers.

I don't need certainty. Just good enough to act, often enough to do reasonably well.

gadgetmind wrote: »

There are plenty of multi-fund funds around, where a skilled team decide which underlying funds to buy based on their performance and macro-economic factors. Guess what their long-term out-performance is?

There's a reason why I quite often mention the Jupiter Merlin fund range. It does in general have a record of outperforming in spite of the inevitable extra costs. This definitely isn't true of the sector as a whole.

Though it is of note that in discussing multi-fund funds you added an extra layer of costs that investors don't have to pay. The funds of funds have to outperform by more than their extra costs, not just outperform, so they have an extra hurdle compared to consumers.

gadgetmind

jamesd wrote: »

If you read them carefully what you'll find is that by the word "manager" they really mean "management company", not human beings.

No, they have tracked actual managers to see if any do have persistent "hot hands".

For the period covered by the look at the global growth funds one good approach fund managers could have used to outperform was leverage. That would have failed starting in mid 2008 and a switch to more cautious funds was fairly clearly what was appropriate then.

In hindsight, yes.

How can you explain why it can't show persistence of underperformance when you and I both know that there is a convenient and easily accessible method we can use to predict it?

Please explain.

we both seem to believe we can predict future underperformance

Do we? I know which investment strategies have been shown to work best over the long term but I don't have a clue which active funds will do best/worst over future decades.

If we really can both predict relative underperformance that means that we can also predict relative outperformance by eliminating from consideration the underperformers

Ah yes, the "never back a horse that's going to lose" principle.

The funds of funds have to outperform by more than their extra costs, not just outperform, so they have an extra hurdle compared to consumers.

And it just the same way, the funds themselves have to outperform the market by more than their costs. So, if adding layers of management doesn't seem to work ...