How to invest on a (weeny) budget

gadgetmind

Lokolo wrote: »

The 2 are completely uncorrelated. Someone without a large amount of capital is completely able to pick out funds if they have the skills and knowledge.

What skills and knowledge let someone pick a winning fund? History shows it's a "magic dart" because performance isn't "sticky", so the only non-losing strategy is to buy into a selection of funds, but this is hard with a small monthly contribution.

As for shares, stock picking is IMO easier than picking those who can pick stocks, and this is at least partly because you won't be donating half of your dividends to the stock picking industry.

Lokolo

gadgetmind wrote: »

What skills and knowledge let someone pick a winning fund? History shows it's a "magic dart" because performance isn't "sticky", so the only non-losing strategy is to buy into a selection of funds, but this is hard with a small monthly contribution.

As for shares, stock picking is IMO easier than picking those who can pick stocks, and this is at least partly because you won't be donating half of your dividends to the stock picking industry.

But still has nothing to do with the amount you have spare to invest with......

The article is titled to those that have very little to invest (£50-£100 a month). And yet concentrates only on tracker funds. They aren't the only option available to those that have small amounts to invest with. Ignoring any knowledge required - you can still invest in ETFs, Active Managed Funds, Shares without considerable cost to the investor. The title of the article should be "Passive Investing for the Small Investor" as that's what the article is about.

gadgetmind

Lokolo wrote: »

But still has nothing to do with the amount you have spare to invest with......

Don't most funds/platforms have a minimum monthly contribution? As dog funds abound, I guess people would need 10+ to achieve diversity, which spreads that monthly payment a bit thin.

Sorry, but I still think the article had the right approach; keep it simple, stick to the passive core and ignore fancy-pants active satellites.

What was the other alternative? Suggest the 10 to 20 (or 30?) active funds small investors should be using? What if one of those in a key sector was one of the all-too-common dog funds, those that are the shiny new stars, but which soon after HL drop from their wealth 150 like a hot potato, where the manager gets fired shortly after, and years later the last dregs of the fund are wound-up or pulled into another fund as a shame hiding exercise?

Those with ninja skills at picking the golden funds in advance, and knowing exactly when the shine is starting to tarnish, may scoff at this, but mortals such as myself who lack the ability to read the future, need approaches more aligned with their meagre abilities.

jamesd

That's a pretty poor article. Poor asset allocation, all UK and 40% in gilts when they are in a bubble.

Perhaps the best way to do it on amounts of £50 a month is to pick one of the Jupiter Merlin fund range and let them take care of the big picture and rebalancing. But the article eliminates from consideration all actively managed funds and hence badly limits the sector allocation that can be used.

Nice focus on fees, shame they threw the big picture out and focused just on that small part of the whole picture.

Pretty poor education for beginners, who need to learn about getting asset allocations and rebalancing right and not on focusing just on the easy to see costs.

gadgetmind wrote: »

What skills and knowledge let someone pick a winning fund? History shows it's a "magic dart" because performance isn't "sticky"

History does not show that. Critics of active funds make that false claim, which is false even for passive funds.

Studies have commonly found that underperformance is sticky, even those like the one funded by the FSA that's been used often to promote passive funds. So with both active and passive investing you can shift the expected results in your favour by eliminating funds with consistent underperformance. With passive funds one popular way to do that is to eliminate the ones with the highest charges. What's less sticky is out-performance, though even that has stickiness once you stop looking at averages and ignoring things like manager changes and changes in the economic situation that should cause both passive and active investors to adjust sector allocations.

If you want an easy indication of stickness of outperformance for passive funds just go and compare the Virgin FTSE tracker with the BlackRock institutional or Vanguard equivalents. Completely obvious sticky outperformance there.

There is one notable piece of stickness: studies that fail to properly control for significant factors when trying to compare active and passive funds. That's because it's hard to do a decent job with the controls for active funds and easy for passive, so the studies almost inevitably end up favouring passive because of the poor controls. Even worse for US studies which don't control for taxation differences, then get applied to places like the UK with different tax treatment. The practical difficulties mean that just about every study has this stickiness problem, particularly the use of averages, ignoring manager changes and ignoring how much money investors have in the funds being studied.

Lest you be tempted to suggest I'm only saying you're making a false claim because I use active funds, you might note that I'm a heavy user also of passive funds, including currently significant money in passive Vanguard and passive leveraged and unleveraged ETFs.

It is easier to compare passive funds and see which have sticky underperformance and outperformance but you still have to try to get the asset allocation right and that is not so easy.

Derivative

As for shares, stock picking is IMO easier than picking those who can pick stocks, and this is at least partly because you won't be donating half of your dividends to the stock picking industry.

I think that the latter part of that comment is a bit of a red herring.
While you might save on management charges, generally individual investors suffer from high frictional costs due to flat fees charged.

I would say that yes, if you plan to go for active funds, you may as well pick the stocks yourself. That way if you underperform, it's on your own shoulders and there is no question as to what went wrong.

jamesd

EdgEy wrote: »

I would say that yes, if you plan to go for active funds, you may as well pick the stocks yourself. That way if you underperform, it's on your own shoulders and there is no question as to what went wrong.

Know any good sources for researching smaller companies in Indonesia, Taiwan, Panama and Chile so I can decide which to buy? Who do I need to know to get in to investing in a new business in Kazakhstan? What are exchange rate and dealing costs like in £100 chunks while I'm diversifying with lots of holdings in each of those markets and only say a £100,000 total budget for all investments? Any idea who I can cost-effectively hire to check the sales a Chinese company is making through its distributors when I'm trying to check whether its overall sales figures aren't grossly inflated?

I pay fund managers for a reason. There's too much investing world for it to be practical to research the useful places to invest adequately and it's important to invest in the right places, not just stick to the easy ones because they are easy and practical for individual investors to use.

For some places it's a bit easier to do it yourself, though I have my doubts that many UK private individuals would do well in researching say the US smaller companies area just because of lack of familiarity with even that major economy.

gadgetmind

jamesd wrote: »

Who do I need to know to get in to investing in a new business in Kazakhstan?

By a complete coincidence, I know someone who has just done exactly that, but it's currently unlisted.

I'm getting global smaller companies exposure via a Vanguard Small Cap tracker, but do use the odd active fund to pursue certain themes. However, those on a small budget, who don't have time or inclination to play "do you feel lucky?" with active fund selection, will find the simple tracker+bonds to be a very good long term investment strategy.

Lokolo

gadgetmind wrote: »

By a complete coincidence, I know someone who has just done exactly that, but it's currently unlisted.

I'm getting global smaller companies exposure via a Vanguard Small Cap tracker, but do use the odd active fund to pursue certain themes. However, those on a small budget, who don't have time or inclination to play "do you feel lucky?" with active fund selection, will find the simple tracker+bonds to be a very good long term investment strategy.

Yes but that's not what the article title is! And that's not what you are saying in this thread!

You are basically saying that anyone that doesn't have enough money should only ever buy a couple of tracker funds. And anyone who isn't biast would know this isn't the only option!

I am not saying it's a good idea for a newbie investor with £100 a month should invest in Lloyds shares, but what I am saying is that THEY CAN CHEAPLY. You are completely dismissing this idea by saying "Oh well they can't get diversification", well I !!!!!!!' know that, but that's not the whole point of an article titled "How to invest on a small budget".

The article should be unbiased and talk about all investment areas, not just passive investing. You are being as much a fool as smeg or whatever his name was by saying everyone should invest in gold.

Be open minded, without the discussion of Passive vs. Active there are options available for those on a low budget.

jamesd

Yes, for someone who wants to leave things alone trackers can beat active, though the Jupiter Merlin fund would give trackers a good run for the money since they do actually have a consistent record of outperformance, unlike some funds of funds. Even so, I wouldn't want someone to use even those without checking at least for manager changes once a year or so. If someone wants that then, with regrets, trackers are the way to go.

Whether we like it or not we are pretty much forced to use funds for many areas, just because of the practicalities and how much money we have available to investor time available to use. Tracker or active, being there matters more, since sector choice makes the bigger difference.

gadgetmind

Lokolo wrote: »

You are basically saying that anyone that doesn't have enough money should only ever buy a couple of tracker funds.

No, I don't think I am. I think that buying into a tracker, or ideally a few trackers, will give better long-term results with lower risk than buying a few active funds, but active is certainly an option. However, I will admit that I have never really tried the monthly drip into active funds - what are they usual minimums?

I am not saying it's a good idea for a newbie investor with £100 a month should invest in Lloyds shares, but what I am saying is that THEY CAN CHEAPLY. You are completely dismissing this idea by saying "Oh well they can't get diversification", well I !!!!!!!' know that, but that's not the whole point of an article titled "How to invest on a small budget".

A lot of high risk things are possible, individual shares, only one or two active funds, but is this really a direction in which a smaller investor should be steered?

Be open minded, without the discussion of Passive vs. Active there are options available for those on a low budget.

So how would you advise someone with only £50pcm to invest?