Vanguard Life Strategy

TCA

minimumcost wrote: »

A Flock of Sheep and TCA, I've been investing for a long time and I've been in the trading and risk management business for many years. The evidence is overwhelming that passive investment has an higher probability of making more money that active over the average life cycle of a typical investor.

I'm a believer but my own strategy is to run separate active and passive portfolios and see how they play out.

A_Flock_Of_Sheep wrote: »

So why aren't all the traders simply investing in VGLS and stop trading on shares, buying and selling like there's no tomorrow? Maybe they are just total ninnies.

Because they are not content to earn the "market return" and strive to beat it. Plus they get paid large fees in the process for trying!

Freecall

TCA wrote: »

Because they are not content to earn the "market return" and strive to beat it. Plus they get paid large fees in the process for trying!

True.

The really interesting thing though is are these two reasons related?

TCA

Freecall wrote: »

True. The really interesting thing though is are these two reasons related?

Fund managers will largely get their fees regardless of how they perform. Some will get even bigger payments because of contracted performance fees if they exceed certain targets. Win win situation.

minimumcost

TCA wrote: »

Fund managers will largely get their fees regardless of how they perform. Some will get even bigger payments because of contracted performance fees if they exceed certain targets. Win win situation.

That is a win win situation for fund managers and lose for the investor.

The thing to understand is that governments and companies issues bond and shares in return for funds to grow. This growth is the only place value is created. Stock exchanges (E.g. LSE, NASQAC etc.) take a cut and depress the returns. Brokers, mutual fund managers, IFA's etc take their cut. Over the long run, e.i. the investment lifecycle of an individual investor the probability of making more money indexing over active management is profound.

If you actively invest you're betting against the sentiment of your fellow investors in the market not against the performance of the assets being traded and in doing so you are playing with a lower stake that a passive investor.

I strongly recommend Tim Hale's Smarter Investing and Malkiel's A Random Walk Down Wall Street if you want to start understanding how the markets really work.

TCA

minimumcost wrote: »

That is a win win situation for fund managers and lose for the investor.

Yes, that's what I meant

minimumcost wrote: »

I strongly recommend Tim Hale's Smarter Investing and Malkiel's A Random Walk Down Wall Street if you want to start understanding how the markets really work.

Not sure if that's directed at me but as I already said, I'm a passive investing believer. I just like a few side bets as well! I've read Tim Hale.

minimumcost

TCA.... not at you at all...with you 100%. I think we violently agree. Between you and me, if it's only you and me we really want lots of lunatic speculators to maintain the market for us.

I must admit I don't get Tim's 'tilts' idea and the only way active investing seems to make sense is the way Buffet does it.... investing in individual companies and then playing a active role in driving operational performance.

Other good reads are Thinking Fast and Slow [Kahnaman] and anything by Nicholas Nassim Taleb. Have you read the Random Walk?

Freecall

Freecall wrote: »

True.

The really interesting thing though is are these two reasons related?

I think that we can all agree that they are not.

Linton

minimumcost wrote: »

That is a win win situation for fund managers and lose for the investor.

The thing to understand is that governments and companies issues bond and shares in return for funds to grow. This growth is the only place value is created. Stock exchanges (E.g. LSE, NASQAC etc.) take a cut and depress the returns. Brokers, mutual fund managers, IFA's etc take their cut. Over the long run, e.i. the investment lifecycle of an individual investor the probability of making more money indexing over active management is profound.

If you actively invest you're betting against the sentiment of your fellow investors in the market not against the performance of the assets being traded and in doing so you are playing with a lower stake that a passive investor.

I strongly recommend Tim Hale's Smarter Investing and Malkiel's A Random Walk Down Wall Street if you want to start understanding how the markets really work.

I think you are setting up a false dichotomy.

By "active investing" you seem to be referring to trading where you hope to make short term gains. Here I would agree that you are betting against your fellow investors in what is more or less a zero sum game.

Then you put as the only alternative "passive investing" where you stick with an index (if you are a true believer it doesnt seem to matter much which one) and say that is a better option than "active". Yes, agreed at least if the index is sensible and well diversified.

However there are other options. I see no good reason why allocating your investments on the basis of market capitalisation should be an optimal strategy, I personally regard small and mid-sized companies as worthy of investment as large ones. Some indexes by any normal investment criteria are poorly structured or diversified - look at the FTSE100 or some of the Pacific area ones. Some investment sectors have no meaningful index (eg dividend income) and in some sectors blindly following the index would lead to poor returns (eg investing in the FTSE SmallCap index).

Different sectors can behave very differently, but all investments in any particular sector tend to be fairly highly correlated. So the "third way" I would advocate is to allocate your money to investment sectors according to some strategy and then choose appropriate funds (or individual shares) to match that allocation. In some areas you may choose trackers in other areas you wont or cant. Having implemented your strategy you hold it for the long term, the only changes you make are to rebalance from time to time.

minimumcost

Linton wrote: »

By "active investing" you seem to be referring to trading where you hope to make short term gains. Here I would agree that you are betting against your fellow investors in what is more or less a zero sum game.

By 'passive' I mean investing in the broadest portfolio of index funds representing the whole market of investment possibilities (within reason). The experts (Hale, Bogle et al) say this gives the highest probability of maximum returns and I think that is what you're advocating. And that's is what VGLS is trying to do.

The only variable then is how long you invest for before you have to draw on the fruits of your investing. Hence VGLS's different bond/equity options.... oh and my original question about the charges the like of HL and it's competitors levy to execute your strategy. In my case the range of charges across the various supplies is worth over £2k per year... a significant sum when compounded over the rest of my investment and draw down life. I wish I'd known this in my 20's. (now mid 50's). I'd now be over £200k richer!!

Linton

minimumcost wrote: »

By 'passive' I mean investing in the broadest portfolio of index funds representing the whole market of investment possibilities (within reason). The experts (Hale, Bogle et al) say this gives the highest probability of maximum returns and I think that is what you're advocating. And that's is what VGLS is trying to do.
....

But it doesnt do it. Look at the equity country allocation:

UK - 34.76%
US - 33.10%
Japan - 5.91%
France - 2.67%
Australia(!!!) - 2.65%
...
...
China/HongKong - 2.48%
Germany - 2.39%

Look at the sector allocation: Finance at 22% is twice the next sector.

For a small investor, in my view, VGLS is perhaps the least worst option, but I cant see anyone with sufficient money to construct their own portfolio coming up with an allocation that looks like VGLS100.

In my own long term portfolio for geographic spread I aim to make UK, US/Canada, non UK EU, and Far East similar %s and then add a fair amount of other Emerging Markets. VGLS allocates >2/3 of the investment to UK and US. Do you believe that these two markets present a >2/3 chance of providing the best returns? If you do then VGLS is the investment for you.