How to invest on a (weeny) budget

darkpool

kharne wrote: »

To conclude, there is little to no point people (and sorry I've picked on the guy above, I really mean no offense) claiming one way or another what might be best for others-it doesn't make for fun reading, and isn't particularly informative for anyone in the position of wanting to get started investing!

LOL! no offence taken, i think with investment you have to take actions that increases your chance of success. i'm not saying that trackers/ direct shareholdings will beat every single unit trust. but the cold hard facts is that unit trusts on average underperform the relevant tracker.

of course unit trusts might be suitable if you want exposure to a specific market/ geography. but are they worth the fees?

A lot of people here put forward theories about how they pick winning trusts. but they are only theories, they have produced nothing but anecdotal evidence.

I could put forward the theory that the Prime Minister is an alien from the planet Zorg, but without evidence it's just a theory.
Just like all those madcap theories put forward by people with methods of picking unit trusts.

If world stockmarkets are forecast to produce 5% a year in real terms do you really think it wise to pay 2-3 % in yearly fees?

gadgetmind

Maverick_Money wrote: »

For a more diversified trust, RIT Capital Partners (RCP) in the Global Growth sector has an excellent long-term track record

I have a few £k in RCP, and have done well overall, but 2011 wasn't kind to them.

gadgetmind

darkpool wrote: »

A lot of people here put forward theories about how they pick winning trusts.

Did you see the list of funds recommended by an IFA in the "windfall" thread? I'm not familiar with the specific UK/US funds, but they all look fairly general, and there were three UK funds and four US ones. Maybe the IFA didn't trust himself to pick just one fund?

Ark_Welder

gadgetmind wrote: »

Maybe the IFA didn't trust himself to pick just one fund?

In the same way that some individual share investors will pick more than one company that has the same business model? And they rely on historic performance data to predict that their selection will contine to perform - which relies on the historic performance of the management, even when it has not changed.

gadgetmind

Ark_Welder wrote: »

And they rely on historic performance data to predict that their selection will contine to perform - which relies on the historic performance of the management, even when it has not changed.

While that might work for the management of a company, the evidence is that it's deeply unreliable when choosing stock pickers and/or market timers.

Linton

Take a FTSE100 tracker,Gadget would claim that a managed fund that only invested in FTSE100 shares would not beat a tracker in the very long term.

One major problem: how many managed funds are there that only invest in FTSE100 shares for sole the purpose of maximising long term return, rather than maximising dividend income or minimising volatility? After all these are the only managed funds that can sensibly be compared with a FTSE100 tracker on the basis of performance. I think you may have a problem finding any. Which somewhat calls into question any evidence you may believe exists.

Now a more complex point, but one that I think has some merit...

A tracker holds shares on the basis of the total market capitalisation. The market capitalisation being the number of shares times the price per share. All basic stuff.

Where does the price come from? Its fixed by the market from supply and demand. Where does the demand come from? Mainly I would suggest from fund managers, either running retail funds or working for the internal operations of investment companies. Prices are fixed by the average demand of all fund managers using the money available to them after the deduction of fees and expenses.

So the average managed fund's performance should equal the performance of an equivalent perfect tracker - the price setting mechanism must adjust to ensure this. Which, oddly enough, is roughly what we see from the data.

Over the long term one of two things must be true..

1) Individual managed fund performance is random about the average. So over the long term a managed fund performance, after fees etc, should approach the average - ie a tracker.

2) Individual managed funds out perform others. In this case those outperforming funds will outperform trackers in the long term.

In neither case does a tracker provide a long term advantage.

psychic_teabag

Linton wrote: »

So the average managed fund's performance should equal the performance of an equivalent perfect tracker - the price setting mechanism must adjust to ensure this. Which, oddly enough, is roughly what we see from the data.

Over the long term one of two things must be true..

1) Individual managed fund performance is random about the average. So over the long term a managed fund performance, after fees etc, should approach the average - ie a tracker.

2) Individual managed funds out perform others. In this case those outperforming funds will outperform trackers in the long term.

In neither case does a tracker provide a long term advantage.

I've heard this before, expressed in terms that the out-performance of managed funds is a zero-sum game. But I thought it was the average *before* fees that (by definition) equaled the market average, so that once fees are deducted the average must be below the market average. Trackers which merely aim to return the market average therefore outperform the average of all active funds.

However, if you can reliably eliminate the no-hoper funds which consistently do badly, the average of the remainder (before fees) may beat the market. The trick then is to pick one of the some-hope funds and pray that it's its turn to beat the average.

gadgetmind

Linton wrote: »

Gadget would claim

I'd actually point you at evidence that makes a strong argument for it, but never mind.

So over the long term a managed fund performance, after fees etc, should approach the average - ie a tracker.

Sadly, they don't do that well, and their before-fee performance matches a tracker, but their post-fee performance is worse by the amount of said fees.

In this case those outperforming funds will outperform trackers in the long term.

Circular argument. Also, which funds those are over your chosen time-frame cannot be predicted in advance. You're just as likely to pick a one-time star that then regresses to mean.

Rather than arguing with me, why don't you invest some time in reading the background research?

gadgetmind

psychic_teabag wrote: »

However, if you can reliably eliminate the no-hoper funds which consistently do badly

No need. These funds get quietly side-lined, or merged into something else, and thus looking at the current crop will suffer from "survivorship bias".

One might think that this would reduce the number of funds below the 3000 available in the UK (well, dunstonh recently said he could access 17,000, but that just makes my head hurt!) but sadly no: there is always some great new fund launch, which the likes of Hargreaves Lansdown peddle to their fund-hungry punters, with the spice of "last chance to get in a launch" and such tripe. A star manager's name in lights, with a unconstrained remit to invest with a clean slate in the hot market de jour, what could possibly go wrong?

Rinse and repeat.

Ifts

Interesting thread and some great posts. Agree or disagree up to you but one thing for sure I like the way the two posters below have summed it up:

kharne wrote: »

There is no right or wrong in investing, and no clear cut decisions-otherwise we would all be rich. What works for one person (based on personal finance, attitude to risk, understanding of the markets), may not work for someone else.

Ark_Welder wrote: »

I am quite comfortable with how I invest, and to such an extent that I am able to respect the fact that others might choose to do things differently.