Asset Allocation

Graeme7777

Hi,

I have some money to invest in a fund(s).

How does one allocate money between all of the different types of funds - global, Europe ex uk, high yield bonds etc?

As a UK resident, should I be thinking about investing most of my money in UK assets, or instead allocating most of the money to funds that focus on foreign markets?

Thanks!

richto

However you want. It all has a different risk versus reward profile.

Try throwing a die if you can't decide?

bigadaj

Graeme7777 wrote: »

Hi,

I have some money to invest in a fund(s).

How does one allocate money between all of the different types of funds - global, Europe ex uk, high yield bonds etc?

As a UK resident, should I be thinking about investing most of my money in UK assets, or instead allocating most of the money to funds that focus on foreign markets?

Thanks!

You need to do some reading, initially on your attitude to risk which will determine the split of assets between bonds, shares, cash, property, commodities, gold etc. once you have a good idea about that then splitting the shares regionally, most people will be uk heavy I'd investing here, neutral would only be 10% or so in UK and maybe 40% in us! people will generally have legs in us and mOre in UK, but that's still a big chunk to posit between emerging markets, Europe, Asia etc.

This is one aspect that time hale covers quite well in smarter investing, a new edition is due out in the near future and it'll be interesting to read his view on bonds which many believe are in bubble territory.

Linton

What you do depends on how much money it is and when you will want to access it. Assuming you know nothing about investing and dont want to take on a major gamble:

I suggest you approach it like this, the numbers used could be argued with, but they are a reasonable ballpark figure.

1) before you think about investing ensure you have an emergency fund in accessible cash deposits - say 6 months living expenses.

2) If you need the money in 5 years or less investing is very risky - put it in a bank deposit account.

3) If its < £10K buy one or two general funds - perhaps a global tracker or a general managed fund, possibly one that balances bonds and shares.

4) If its >£50K seek advice from an IFA

5) In between its more tricky. The amount of money is significant in that you wouldnt want to make a serious mistake, but you can probably do better than putting it all in one very general fund.

To answer your specific questions:

A) Allocation

What I do is firstly decide what I want from the portfolio in what sort of time frame at what sort of risk.

(i) a steady income stream that will last me for decades and cant risk running out of money.

(ii) a pot of money for when I retire in 20 years time and to retire I must have more than £x.

(iii) no foreseen need for it, and so am prepared to take significant risks to achieve maximum return over the long term.

Those considerations will need to particular sectors. For example Emerging markets could be good for (iii), a possibility for (ii) and not so good for (i). For (i) one would want to be more cautious perhaps investing in a mixture of large company shares covering the developed world and bonds. You could put together a portfolio yourself or there are funds available that will do it for you. To make the decision on sector allocation needs knowledge of the characteristics of the various sectors preferably backed up with experience.

In all cases you need to plan carefully for diversification so that you are not overly dependent on any one share, sector, geographical area, type of investment etc etc.

B UK assets?

If you are a <£10K investor I would see nothing too wrong in putting all your money in a FTSE All-share Tracker. Many larger UK companies are major world players that just happen to have an HQ in the UK or they may be foreign companies that would rather be listed on the London stock exchange. Also these days with global markets all the worlds major stock exchanges normally tend to rise and fall together, at least in the short/medium term.

With larger portfolios when one is wanting to have a more focused allocation of resources investing explicitly in particular countries or sectors is useful.

BLB53

If you are young and will be investing for many years you need to decide whether you are happy with all of your investments are to be 100% equities as historically these have produced the best returns.

Hale suggests allocating 4% in equities for each year you will be investing.

Many of the FTSE companies generate a big percentage of their profits from overseas but many like to diversify into global funds/trusts.

Also, as well as geographic diversiying, you may want to consider smaller companies as part of the mix.

Further reading on asset allocation on diy investor http://www.diyinvestoruk.blogspot.co.uk/2013/03/asset-allocation.html

FatherAbraham

BLB53 wrote: »

If you are young and will be investing for many years you need to decide whether you are happy with all of your investments are to be 100% equities as historically these have produced the best returns.

Historically the best returns? Well, it depends which piece of history you look at.

In recent history, equities haven't been that great. The rise of the "cult of the equity" (think of the Motley Fool's appearance at the end of the 1990s) has pretty much hammered equity returns by pushing prices up, eating into the risk premium.

There have been long periods where bonds have outperformed equities (but these are fewer in number than the long periods where shares have done better than bonds).

Given that sequence-of-returns risk (http://wpfau.blogspot.co.uk/2013/09/lifetime-sequence-of-returns-risk.html and http://wpfau.blogspot.co.uk/2013/09/you-cant-control-when-youre-born.html) is so devastating for investors, it makes sense to try to use diversification to avoid extreme outcomes.

Successful long-term investing is about damping unrewarded risk, and time alone simply will not do that as well as diversification (although Pfau warns sharply that individuals cannot diversify sequence-of-returns risk away).

(By "successful" I mean reaching one's reasonable financial goal, not being excessively rich. For most people, the important financial goal is having enough income once one stops working for good).

Warmest regards,
FA

Eponym

You could always buy a fund which gives you exposure to a number of different markets.

For example, the Vanguard LifeStrategy and BlackRock Consensus funds both invest in numerous geographies and in bonds to certain extent. Therefore they take care of the asset allocation for you.

Both funds have a number after them which represents the percentage of the fund in equities as opposed to bonds - the Vanguard LifeStrategy 60, for example, is 60% equities and 40% bonds, whereas the 80 version is 80% equities, 20% bonds.

You decide which option suits you best based on your risk profile and how long you will stay invested for.

gadgetmind

FatherAbraham wrote: »

In recent history, equities haven't been that great.

Those who've kept on drip feeding and rebalancing have done pretty well over the last decade or two but I guess it depends on what you mean by "recent".

FatherAbraham

gadgetmind wrote: »

Those who've kept on drip feeding and rebalancing have done pretty well over the last decade or two but I guess it depends on what you mean by "recent".

I'd agree with you on drip-feeding, and the effects of currency-cost averaging, combined with rebalancing. However, that didn't seem to be the flavour of the comment I was responding too.

In particular, if all the assets are put into equities, then there's no alternative asset pool to rebalance from.

Wamest regards,
FA

gadgetmind

Two good books.

http://www.amazon.co.uk/Smarter-Investing-Simpler-Decisions-Financial/dp/0273785370/ref=sr_1_2?s=books&ie=UTF8&qid=1381237017&sr=1-2&keywords=smarter+investing

http://www.amazon.co.uk/Intelligent-Asset-Allocator-Portfolio-Maximize/dp/0071362363