An IFA who knows Monkey with a Pin

mj62mj62

gadgetmind wrote: »

1) I'm 80% plus passive in most portfolios and 90%+ in my largest one.
2) My overall fees are sub 0.5% and it's mainly the fees of active management that I object to more than the approach itself.

I think this is where I got a bit stuck. The book mentions that a mere 15% of fund managers beat the market, but at the same time says quotes Deutsche bank (and also Barclays i think?) in saying that buy-and-hold can't work over the next decade and only active management has potential for gains.

gadgetmind wrote: »

3) However, I really CBA trying to predict tomorrow's superstar and the evidence shows it's just as likely to be today's has been as anyone else, and vice versa. Most I know who have been investing over multi-decade periods also tend to share this POV and therefore concentrate on low-fee passive investing.

Me too. I'm only in this situations after moving one of my pensions from a company scheme to a SIPP -- an uninvested lump sum awaiting a decision.

I don't know the next superstar, but I haven't yet determined a good move due to these 2 factors:

1. People debate how low the FTSE is going to go based on historical trends, and therefore it's not a good time to by equities
2. People talk about the bond bubble and therefore it's not a good time to buy bonds.

Such things suggest waiting, but it's hard to put off such big decisions.

The book suggests that in some cases, a savings account is better long term (I'm generalising here as he clarifies this in more detail) and therefore bonds seem like the thing most similar to that. But then he warns that bond fund management fees eat up bond returns.

As you can see, it's easy to go in mental circles, especially when so much of it is a matter of opinion.

gadgetmind wrote: »

I recommend you read Hale's "Smarter Investing" and Bernstein's "Intelligent Asset Allocator" and after that decide if you're happy doing your own asset allocation, rebalancing, and selecting of investment vehicles. If you don't after reading those two, then perhaps you never will, but if you do, I'm sure you'll get loads more advice hereabouts.

Thanks :-) Someone else on the thread didn't like Hale but at least it's another source of information where I can get started.

In many ways I like the concept of 'passive' investing in that I don't want to spend my life worrying and watching the news to hear about the markets. Also as a concept, I like the idea of bonds being available as easily as stocks, but that isn't the case today -- bonds pay out regularly and so even if the company goes under, you've had some payout over the years. Some argue you can use savings accounts instead but such things aren't available from within pensions.

They say stocks can outperform bonds but if 85% of managers underperform the market then how do you know which is a good one?

So many questions...I will need to read more I think. Thank you for your guidance :-)

dunstonh wrote: »

The IFA is more about planning, management of tax wrappers, risk profiling doing due diligence on the investments, rebalancing investments and maybe the odd tweak when required.

Thanks for the clarification :-) That explains a bit more about my current IFA. (still probably not the IFA for me but your post helps me align my expectations).

Given all of these excellent posts, including links and books, I think I need to spend even more time reading!

gadgetmind

dunstonh wrote: »

You would expect an IFA to have knowledge of these things but IFAs are not investment managers. We cannot be.

Agreed, but I also think that few clients appreciate this.

you should not expect an IFA to tell you when to time the markets.

I'd have hoped an IFA would tell people not to even try.

I do more than a little of what I euphemistically call "dynamic rebalancing", which is really value investing at an asset class and territory level with a strong focus on buying what's serious stinking the place out, but widows and orphans should perhaps use more mainstream methods.

If you want micro-management then you need a discretionary investment service.

I'd suggest that most people need that like they need a hole in the head. Let's just say that I have personal contacts in that industry and wouldn't trust them with any of my money.

Mind you, I'm an increasingly curmudgeonly old sod who treats pinstipe suits as a warning sign. (I nearly used to word "aposematic", because I like words like that.)

Lokolo

mj62mj62 wrote: »

Thanks :-) Someone else on the thread didn't like Hale but at least it's another source of information where I can get started.

You'll find a number of us are more pro active investing than passive (I don't think anyone believes one should always be used though).

In many ways I like the concept of 'passive' investing in that I don't want to spend my life worrying and watching the news to hear about the markets. Also as a concept, I like the idea of bonds being available as easily as stocks, but that isn't the case today -- bonds pay out regularly and so even if the company goes under, you've had some payout over the years. Some argue you can use savings accounts instead but such things aren't available from within pensions.

Please don't think passive investing gets rid of risks about the markets!!!

If the markets crashed tomorrow, passive investors would be in the s*** just as active investors. Passive just aim to follow the markets. Active aim to beat.

An active fund manager could limit his losses. Passive can't. An active fund manager can specialise in an area he feels there is growth, and could (sometimes massively) outperform the market. Passive can't.

The opposite is also true though (a fund manager could increase his losses, say if they had a large holding in banking compared to the index, and the banking sector crashed, would lose a lot more than a passive).

Given all of these excellent posts, including links and books, I think I need to spend even more time reading!

You can also get peoples views on here, although we are limited in what we can say (no ramping allowed).

dunstonh

I think this is where I got a bit stuck. The book mentions that a mere 15% of fund managers beat the market, but at the same time says quotes Deutsche bank (and also Barclays i think?) in saying that buy-and-hold can't work over the next decade and only active management has potential for gains.

Trackers are typically mid table when you look at discrete performance. They are consistently mid table. However, fund managers have different risk attitudes and different objectives as well as different skills. Plus, some fund houses (typically banks and insurers) often run closet trackers or computer management models which leave a lot to be desired.

A managed fund that is higher risk or focused on a smaller area will typically beat a tracker fund when the risk pays off or the niche area is the area that is doing well. They will underperform the tracker when the risk doesnt pay off or the niche area is not the place to be. Problem is that the managed fund has to invest in the area of its remit. Even if that area is the wrong place to be. A tracker is a buy and hold bit it track the index regardless. Over the long term, the mid table consistency will see the cumulative returns push the trackers up the performance tables as the managed funds zig zag around.

If you can keep an open mind and not get drawn in by the pro managed or pro tracker brigade, you will usually find a combination of the two is best.

A lazy investor is better in trackers or a portfolio fund. The use of single sector managed funds needs the investor to be willing to pop into the fund for a period and then come out again. Some sectors make perfect sense to only use a tracker. Other sectors have little or no decent tracker coverage and a managed fund can make more sense.

You should use investments that suit your knowledge and your future activity.

dunstonh

I'd have hoped an IFA would tell people not to even try.

I do more than a little of what I euphemistically call "dynamic rebalancing", which is really value investing at an asset class and territory level with a strong focus on buying what's serious stinking the place out, but widows and orphans should perhaps use more mainstream methods.

Timing the market usually ends up in lower returns than the buy and hold for the average investor. So, it it typically a poor option. However, like you, the rebalancing models I use do tweak the asset allocations based on assumptions and economic data. Although you tend to find IFA models look at actual volatility history to risk rate whereas consumer models look at target volatility. Targets are often missed. Although history is no guide for the future. IFAs also have to deal with a regulator who changes rules and backdates them and changes opinion on a whim as well as an ombudsman that assumes that the average person is a dimwit and cautious in risk unless shown otherwise. An individual DIY investor doesnt have any of that and those things can constrain an adviser. That constraint for most people is a good thing but for someone that likes to dip in and out and play with their own allocations, it can be frustrating to see an IFA not match that.

gadgetmind

mj62mj62 wrote: »

but at the same time says quotes Deutsche bank (and also Barclays i think?) in saying that buy-and-hold can't work over the next decade and only active management has potential for gains.

So, they have a crystal ball that let's them know which approaches will and won't work over the next decade?

Tosh.

They are saying that to serve their own interests, make themselves sound smart, or both.

an uninvested lump sum awaiting a decision.

Your choices are -
1) Do nothing.
2) Invest now.
3) Drip feed into the markets over (say) 6-12 months.

Whichever you choose to do will be wrong. Sorry, but that's the way things work. (And if you pick the right one, hey you're really smart, until the next time!)

Accept that, decide your asset allocation, choose your underlying investment vehicles, and select which approach you feel the most comfortable with.

1. People debate how low the FTSE is going to go based on historical trends, and therefore it's not a good time to by equities
2. People talk about the bond bubble and therefore it's not a good time to buy bonds.

There have been better times to buy equities, and much better times to buy bonds, but each is currently valued at what the market as a whole is prepared to pay. Is the market really that wrong?

(As it happens, I think it is with many bonds, but I could also be very wrong.)

As you can see, it's easy to go in mental circles, especially when so much of it is a matter of opinion.

You obviously don't want to blunder in, but as Sun Tzu said "cleverness has never been seen associated with long delays."

Do not let searching for the perfect solution prevent you from proceeding with a perfectly adequate approach.

mj62mj62

Lokolo wrote: »

An active fund manager could limit his losses. Passive can't. An active fund manager can specialise in an area he feels there is growth, and could (sometimes massively) outperform the market. Passive can't.

dunstonh wrote: »

Problem is that the managed fund has to invest in the area of its remit. Even if that area is the wrong place to be.

I was surprised to learn about the remits. You can buy a Japanese Equity fund (for example) and even when the fund manager knows the Japanese market is going to crash, he can't 'limit his losses' as Lokolo said above - they are controlled by the remit of the fund, which often dictates only a small percentage can be put into cash.

If he/she knows of a company that is going to take a dip, yes they call sell out in time but on that same note, if most fund managers fail to beat the market, then it follows that most fund managers aren't making the right decisions...

Lokolo

mj62mj62 wrote: »

I was surprised to learn about the remits. You can buy a Japanese Equity fund (for example) and even when the fund manager knows the Japanese market is going to crash, he can't 'limit his losses' as Lokolo said above - they are controlled by the remit of the fund, which often dictates only a small percentage can be put into cash.

If he/she knows of a company that is going to take a dip, yes they call sell out in time but on that same note, if most fund managers fail to beat the market, then it follows that most fund managers aren't making the right decisions...

You don't necessarily have to dive to cash to limit your losses. You can move to other areas (within the remit).

Unfortunately its been over a year since I learned the remits for equity type funds, but you usually have enough leeway to minimise losses. Obviously there's a limit to what you can do (and how much minimising can be done) - it takes time to trade, you can only buy and sell what's available.

mj62mj62

Hi Gadgetmind, Thank you again for your contribution.

gadgetmind wrote: »

So, they have a crystal ball that let's them know which approaches will and won't work over the next decade?

Tosh.

They are saying that to serve their own interests, make themselves sound smart, or both.

Sounds like you're as distrusting as I am ;-)

gadgetmind wrote: »

(As it happens, I think it is with many bonds, but I could also be very wrong.)

Perhaps i'm a low risk investor as I really like the concept of bonds, but I can see it as a strange time to buy in -- bond funds have been in demand and pushed prices up but if interest rates go up then the current bonds will have a lot less worth, and more so if the herd gets out of bonds and into equities again.

You obviously don't want to blunder in, but as Sun Tzu said "cleverness has never been seen associated with long delays."

gadgetmind wrote: »

Do not let searching for the perfect solution prevent you from proceeding with a perfectly adequate approach.

Thanks again :-) That sounds like very good advice. I think I have a bit of anxiety as so much of the news is about what not to do at the moment rather than what to do. Even in gold people seem concerned that gold is behaving in an unusual way and following equities! lol :-)

No one has a crystal ball...

Linton

mj62mj62 wrote: »

I was surprised to learn about the remits. You can buy a Japanese Equity fund (for example) and even when the fund manager knows the Japanese market is going to crash, he can't 'limit his losses' as Lokolo said above - they are controlled by the remit of the fund, which often dictates only a small percentage can be put into cash.

If he/she knows of a company that is going to take a dip, yes they call sell out in time but on that same note, if most fund managers fail to beat the market, then it follows that most fund managers aren't making the right decisions...

The point is that no-one really knows. If people knew the market was going to dip, it would have already dipped because people would have sold shares beforehand. If I want to invest in Japan that's my choice, that's why I buy a Japan fund. I dont want a fund manager saying I'm wrong. If I did want a fund manager deciding what is going to do well and what is going to do badly I would buy a general managed fund.

This thing about "most fund managers failing to beat the market" is very simplistic. The world is full of markets. Which market dont most fund managers beat? In some such as large US shares or UK FTSE100 its pretty random. In others such as UK Small Companies most managed funds beat "the market", if you judge the market to be represented by the FTSE Small Cap Index. In other sectors there arent any meaningful markets.