Balanced Portfolio help

mrsweep

After much consideration I decided to spread my investments. I had most my investment in a FTSE tracker. Having read some good books and been referred to the Monevator website I have started to balance my portfolio. My investment horizon is about 5 years.

I now have a mix of low cost trackers and funds investing in both UK and Developed Markets, and small and value companies.

But I have stopped short of buying Emerging Markets, and Commodities. Originally I planned 10% portfolio allocation to each. But both look like they are taking a nose dive and starting a bear cycle. I am thinking of changing my allocation so it is all in UK and Developed market equities.

Is this short-sighted of me and should I stick to my planned allocation even if the outlook for these asset classes looks bleak in the near term?

bowlhead99

One thing to note is that EM funds might be more volatile than developed markets and you might prefer to avoid entirely depending on your risk profile. My thought on that, is that on a long term view, they have significant growth potential and most people should not ignore them as most people are going to be alive in 20 years time to enjoy the spoils.

But nobody is suggesting you invest all your assets into EM, in fact you are only looking at 10%. If the portfolio plan you developed is as a result of you going through what types of assets you want to hold and what your growth objectives and risk tolerance is for the overall pot, then it would seem strange to suddenly throw it away and engage in some market timing decisions.

The idea of having a balanced portfolio is that you spread your eggs over several baskets and then if the percentage splits between the baskets change significantly over time away from your target allocation, you rebalance some of the overweight ones and buy more of the underweight ones. If something reduces in price somewhat, you should be topping it up rather than dumping it all until you perceive (based perhaps on some crystal ball) that the 'bear cycle' is over.

Of course, this is not to say anyone has to have a balanced portfolio including every asset class under the sun, and you might feel you know which direction all the different bits of the global markets are going, and have concluded that the FTSE (rising from 5500 a year ago to 6800 last month and now back at 6300) or the S&P500 (rising from 1340 to 1640 over a year) are safe havens which have no chance of falling from their all time highs, while for emerging markets the only way is down. Others would disagree.

Personally I would note that EMs are typically cheaper than they were over the last couple of months (due to perceptions of the outlook for growth in China etc falling - but the growth there is still significantly higher than here) and in some cases no more expensive than they were this time last year. Or at least, no more expensive than they were in December/ January, while the Nikkei, the S&P, the Dow, the FTSE etc etc are all higher. If you had started your balanced portfolio 6 months ago you would likely now be thinking you were getting a bit overweight in some of the developed stuff.

So, IMHO yes this is shortsighted of you. It is a common beginner's error to dump something that is getting cheaper in favour of buying more expensive assets at all time high prices. For buying individual shares, at some point you may need to cut your losses and exit, because the company may go bust. It is less likely that a fund or set of funds will go bust, because they have diversified holdings.

This is not to say they could not fall 50% from here in addition to what they have fallen recently, but the FTSE and its developed-world friends - being kept afloat by endless quantitative easing and investors' search for something better than minimal interest rates on bonds - could be in for a rough ride at some point too.

I am not telling you that you should go out and buy a couple of EM funds, because anything you are nervous about buying is perhaps unsuitable. However if you believe the good books you say you have read about portfolio construction, and you have come up with a portfolio plan based on that, and you have some capacity for loss, then I would go with that plan rather than rumour and speculation. If you are going to avoid EMs (and commodities because of perceived reductions in future demand from emerging economies) for a while in case they go down, then you should also extend the market timing argument to FTSE and Wall Street equities, bonds, etc etc and buy nothing.

For interest I posted these charts on the 'emerging markets tanking?!' thread a few days ago which compared some investment trusts SST (Scottish Oriental Smaller Companies), TEM (Templeton Emerging Markets), JII (JPM India) with FTSE 100 since the FTSE market bottom in 2009 and also since 2000.

My reading of them is that it's dumb to avoid markets which can outperform so spectacularly, as long as you can handle the volatility. The fact that they might sometimes move in different directions from the FTSE for different periods of time is a good thing in a portfolio, as this is what we mean by 'balanced'. But if you really think they are going down, or you don't think you can handle big swings either emotionally or financially, then who am I to tell you not to stay in cash - please don't take this as advice to buy in, or to use those specific investments I mentioned.

Ark_Welder

mrsweep wrote: »

My investment horizon is about 5 years.

This tends to suggest that you have a specific deadline in mind. If this is the case then the usual suggestion is to progressively reduce exposure to volatile assets by periodic sales and putting the proceeds into less volatile assets, which might be cash, or it could be funds that have a capital preservation mandate. historically, it would have included moving into bonds too - and they do still have a place - but that does open up a whole new barrel of apples for discussion.

Note that emerging markets assets, both equities and bonds, have also been affected by QE (surplus cash looking for a home with a yield/return), so any slowing and/or unwinding of this will affect these markets in addition to developed markets. And as some EMs can be smaller and less liquid than developed markets, this could show up in proportionally higher falls. If your timescale was greater than 5 years, though, EMs ought to still be considered so long as the potential volatility could be stomached.

bowlhead99

Ah, I must have missed the 5-year horizon. The problem with that is, as you can see from the charts, 5 years is often not really long enough for an investment to go up a bit, go flat for a bit, go down for a couple of years, then take a couple of years to back up to where they were. Generally you'd want to think about something less volatile than EM as Ark Welder says.

However, bearing in mind that all equities and bonds could crash in 2-3 years as we exit a low interest rate environment and QE winds up, it doesn't necessarily mean you should pile the 10-20% saved into developed equities either. Arguably the more pies you have fingers in, the better, but even with inflation more than cancelling out a savings account return, your cash in a savings account may still be worth 90% of what it's worth in real terms today, without using investments at all.

So if you really need the cash for something specific in 5 years, worth considering the very safest options. If you had such a goal, I would have said your previous "all in FTSE 100 tracker" approach was terrible - at least you've moved on from that !

People give different suggestions for minimum holding periods for equity investments versus cash, some would say 5-8 years, others 7-10 years, others 10 years plus. Typically if you have a 5 year objective you should be investing pretty cautiously.

However, what you might mean is that you are going to put money away for at least the next 5 years in a portfolio (as nobody necessarily knows how their life will be looking in more than 5 years time) before then deciding what you are going to do with it over the next 5 or 10 or beyond.

If you have no fixed goal (e.g. house deposit, or new car at a specific price, or university funding), then you may well be satisfied withdrawing the future equivalent of the £80 which you invested in the other bits of your portfolio, and not really worry about whether the emerging markets £10 or the commodities £10, each turned into £5 or each turned into £10 or each turned into £20. If you can let them ride for longer than the 5 years, you are much more likely to avoid a bad result.

Totton

SST was hit by a double whammy of Susie Rippinghall leaving and EM's declining.

bowlhead99

Totton wrote: »

SST was hit by a double whammy of Susie Rippinghall leaving and EM's declining.

True but the Rippingall event had been announced a year in advance, and over the 2 months after she left (i.e. during April and May) the price stayed pretty constant, even moving up a bit before falling back down.

The premium reduced by 1.5% or so over that time but not out of line with the sector, and the premium/discount is always moving - I bought in August last year when it was a discount of 6.5%, and that was about 5 months after she was known to be leaving and 7 months before she actually did. So although a discount has opened up again in the last few weeks, I think Rippingall is a bit of a red herring in terms of a driver for price falls, although it will be interesting to see how Tulloch and team do without her from their Scotland base rather than being physically on the ground in Asia.

They do seem to know emerging markets and AsiaPac pretty well. I thought it interesting that Tulloch was saying last month in terms of some of their funds, they are looking increasingly at Western companies with EM presence rather than pure EM companies; these days there is a lot of connection and consolidation between Western and emerging companies and you can't really invest in isolation - and also the quality of some of the bigger companies in the EM indices is just not high enough in terms of governance or evidence of their being able to adapt to tough economic circumstances. There has been some rumour that they might change the categorization for their Global Emerging Markets Leaders fund to simply IMA Global rather than IMA Global Emerging Markets.

badger09

@ Totton & bowlhead99 - and with apologies to OP for going further off topic

This is fascinating stuff, but do most investors have the time, inclination, or intellectual capacity to follow events such as the departure of a fund manager (correct terminology?) or to predict what the likely impact of that departure on their investment will be?

Isn't this precisely why Hale recommends passive investing through trackers?

But trackers are not the best choice for immature (again correct terminolgy?) markets, so where is a newbie supposed to look for guidance?

Time for another glass of red - tomorrow is another day for research

Wonder what the sheepdog thinks :cool:

A_Flock_Of_Sheep

The sheepdog doesn't hold any trackers.

badger09

A_Flock_Of_Sheep wrote: »

The sheepdog doesn't hold any trackers.

Not convinced by Hale's argument then?

MoneySaverLog

A_Flock_Of_Sheep wrote: »

The sheepdog doesn't hold any trackers.

The dog is tracking you by stealth, then just when you think you've got away, you find yourself all penned in with the flock.

A_Flock_Of_Sheep

badger09 wrote: »

Not convinced by Hale's argument then?

Not sure I havn't asked the sheepdog and it's his night off. He's out roaming the fells.

The sheepdog doesn't reveal to me all of his portfolio.

He does have LSE: EDIN and shares. The shares I know he does have are Easyjet, Falkland Island Holdings, Hyder Consulting, NYSE: MasterCard and NYSE: Visa, National Grid, Rexam and he also has PIBS.

I have been thinking about emerging markets but the sheepdog feels it's wise to hold on a bit.

But the dog is taking me to Edinburgh for the AGM of the Edinburgh Investment Trust. Neil Woodford is speaking there and they lay on a fancy buffet too apparently.