Ok then - How do I choose a S&S ISA!

Judwin

StevieJ wrote: »

With regard to risk, if you only had a choice of the funds above, would it be less risky to use just the Invescu Perp fund 4.3 or to spread the funds between them all (ignoring cash for now) i.e. does diversifying your portfolio reduce risk even if you are diversifying inti riskier areas?

Good Question. Been wondering about that myself.

The way I saw it, if I was going to invest in very high risk areas, it was better to spread that risk around the world so that no natural or (single) man made effect could take all 3 out. Hence 3 geographically separated funds, one in China, one in Russia and one in Latin America (actually 80% Brasil). It's got to be riskyer to lump all your eggs in one high risk basket, than spread it over 3 IMHO. However, a war between China and Russia over Corned Beef would ruin my day.

But that doesn't answer your question. Is it safer/less risky to have all your money in a single 4.3 fund, or split it over several funds with a higher risk ? I'm not sure. My gut feeling is that the multi fund approach is safer even though the individual components are riskyer, as long as you spreads the risk across multiple countries/sectors. I just don't know how to quantify it mathematically.

Obviously, an even safer solution would be to spread the risk between many different 4.3 rated investments, spread across different sectors/countries.

Cheers,
Judwin

dunstonh

It would be less risky to use just the Inv Perp income fund. Diversification reduces risk on one front but if you pick top end risk funds to diversify into then you are increasing the risk.

The problem here is that it is £1000 going into each. If you have £400 going into each of the higher risk funds and then a greater amount into the lower risk funds then the extra risk would be diluted and it wouldnt be such a problem. However, at £1000 each, it becomes a high risk portfolio.

With most consumer past performance charting stopping at 5 years, many people are not seeing the potential negatives that can occur with these funds as they have only really seen growth in that 5 year period (not saying its the case here). So, what often happens when it's like that is people pick higher risk funds then they normally would do because all they see on their charts are good years.

Risk gets underestimated more and more the longer something goes on that has good returns. Endowments always hit target and the risk got forgotten and then look what happened. Mortgaged buy to lets have made lots of money but that can turn easily enough. We have had a good run on the stockmarket and some of the really top end risk stuff has performed really well for a number of years. It's easy to forget how volatile these funds can be. 6.1 is your tech stocks level and if you went in at the high point on those you lost 90%. Just remember the negatives will occur at some point and when they do, they will be higher than a 4.3 fund.

Judwin

Dunston,

Ok, but, how do you quantify the risk between holding all your eggs in one 4.3 grade fund, or splitting it so (for example) you hold 25% in four different 4.3 grade funds in diffenent sectors/countries?

To my mind 4 different funds lowers the total risk of the portfolio, but to what? If each individual component is still 4.3, can the overall risk be lower than that? Does it then become a 4.2 or a 4.1 portfolio?

Cheers,
Judwin

StevieJ

dunstonh wrote: »

It would be less risky to use just the Inv Perp income fund. Diversification reduces risk on one front but if you pick top end risk funds to diversify into then you are increasing the risk.

The problem here is that it is £1000 going into each. If you have £400 going into each of the higher risk funds and then a greater amount into the lower risk funds then the extra risk would be diluted and it wouldnt be such a problem. However, at £1000 each, it becomes a high risk portfolio.

With most consumer past performance charting stopping at 5 years, many people are not seeing the potential negatives that can occur with these funds as they have only really seen growth in that 5 year period (not saying its the case here). So, what often happens when it's like that is people pick higher risk funds then they normally would do because all they see on their charts are good years.

Risk gets underestimated more and more the longer something goes on that has good returns. Endowments always hit target and the risk got forgotten and then look what happened. Mortgaged buy to lets have made lots of money but that can turn easily enough. We have had a good run on the stockmarket and some of the really top end risk stuff has performed really well for a number of years. It's easy to forget how volatile these funds can be. 6.1 is your tech stocks level and if you went in at the high point on those you lost 90%. Just remember the negatives will occur at some point and when they do, they will be higher than a 4.3 fund.

What about cash you have previously made the valid point that only holding cash is like suffering a major market correction every X number of years (due to inflation), but you make cash 4 times less risky than a spread of equity income that over the same period will very likely show a profit after inflation.

pjala

StevieJ wrote: »

Ask EXXON about Venezuala.

Ok, I understand what you are saying, but if you look behind the Exxon headlines you find this:

quote "Experts say, however, that fears that Chavez, a close ally of Cuba’s Fidel Castro, is seeking to drive out private investment are exaggerated because Venezuela needs the technological expertise of Western oil majors to develop its vast deposits in the Orinoco belt.

Few state oil companies have the expertise to upgrade the extra-heavy oil and tar-like bitumen found in the Orinoco into lighter, marketable oils.

Notably, Exxon Mobil continues to hold a 41.7 percent stake in the 120,000-barrel-day Cerro Negro heavy oil upgrading project in the Orinoco along with partners British Petroleum PLC and PDVSA.

It is also partnered with PetroCanada in the La Ceiba field, each holding a 50 percent stake."
ref: Associated Press, March 30th 2006

So the downsides currently are tempered by a need for the Oil companies resourcing capabilities, it's like a kind of partnership at the moment! It just means that the companies that can successfully negotiate their way around the restrictions in the region have a stable environment physically in which to operate. Strikes? Are there any? The local population feel and are wealthier economically so there is a broad agreement with the economic process that is ongoing. That counts for a lot. I am sure that companies operating in this region also adopt this kind of language of "partnership" etc.

Again, keeping this as a comment on risk.

Alternatively I would see Russia as a greater risk, not equivalent. It is rife with corruption, plus there are still those who previously had a much better lifestyle under the old regime. Witness ex Russian millionaires who escape from the country to avoid "getting caught". It seems to be a much more closed system. Perhaps that means it is more under control, but I personally see this as more of a risk problem. There are problems with adjacent countries, and relationships with surrounding nations. The appearance is supposedly better, but the reality is less so.

So I am really asking, is the risk side of it open to wide interpretation, or is it really well quantified and argued out. If it is based on figures, how long do those figures from the region have to be taken back to to quantify the risk successfully? I am sure that a lot of UK companies shares, hence funds, did really badly around 2001 to 2003, so the stock market itself is risky even the UK.

I really like the discussion around this, and appreciate the output on risk factors etc., I am attempting to quantify risk levels of funds where I feel comfortable.

StevieJ

Yes they do have strikes in LA, I think their was one in Chile or Peru recently in the mining sector (where most of the funds are concentrated). I have to agree with you about Russia, I think the profits are there to be had but by whom, look at poor old Shell.
The simple fact is these places are unstable and therefore very risky. To be honest Chavez seems a decent guy and loved by his people but until these countries can be trusted to honour signed contracts not just when it suits them, they will remain high risk.

zag2me

Just remember you can diversify too much trying to spread risk. I have found that having one very good fund over a period of time has done far better than the 4 I had a few years back where a few did well and others did not.

But then again I might have just got lucky with my fund selection

stphnstevey

How about discount brokers -
from Martin's article (which I note might not have been updated in a while), he seems to suggest that buying more than 4K worth of funds might be better through a fee charging broker.

However, H&L's discount structure is fairly clean cut
- Almost all Initial charge on most funds
- 0.25% off most Annual Charges

Where as Cavindish Online charges are alot less clear cut. Initially it appeared they discount 100% of Initial and Annual charge, but I later found this to be only 100% of their commision they receive and not the charge itself. After speaking to them I finally got that they can discount:
- 0-2% off Initial charges + £10 fee
- 0.5% off most fund Annual Charges + £20 fee

As Initial charges are around 3-5% and Annual charges ~1%, surely the H&L route is the better option?

Can anyone explain the charges of any othe other discount brokers?

jamesd

If buying through Hargreaves Lansdown, do note that by phone they do not have the 1000 Pound minimum that their online system uses. For popular funds, probably including any discussed here, they will take trades for almost any small amount, even a few pounds, because they combine the trades of all of their clients. 250 Pounds is easily big enough. You can usually completely ignore the fund manager's minimums for order sizes for purchases, additions or regular investments. For uncommonly traded funds there might be more limitations, check on the phone with the name of the fund you want to trade.

If you're after a nice sector allocation this is a very useful capability - so exploit it! No need to wait until next year to buy in 1000 Pound chunks to even things out.

stphnstevey

Thanks for the advice and it's useful info

I am investing £7K for me and £7k for my wife. I will invest £1k in each of 14 funds. For me that is enough diversification to give me a spread geographically and by sector.

Ultimately I think I am trying to invest in the top funds and at the same time invest in enough funds to give me my spread above. Investing in too many funds can dilute any good performance (and also the converse). At the extreme I could invest a small amount in every fund, but would not achieve my goal.