Fund advice needed for newbie!

dunstonh

I'd probably look to invest around 400 quid in each every month...

What you are doing is massively overkill and overcomplicated with such a small amount. Until you get to around £10,000 it doesnt really make too much difference and there is little point trying to run a bespoke portfolio on less than say £25k.

Since my aim is capital growth I would probably give an even allocation to all the funds. I don't mind the risk involved in these funds as I plan to hold them for a long period of time (10 years min).

It should be noted that for a regular monthly contribution, 10 years is not considered long term. Only one contribution is going to be in there 10 years. The rest will decrease on a monthly basis and the bulk of the money will be invested for a relatively short to medium term.

I thought that buying 5-6 funds which are focused on different geographical areas and companies would mean not putting all my eggs in one basket so to speak?

A low cost self balancing multi-asset fund would be more efficient and until you get to a decent amount invested. Maybe two or three of those if you really fancy (such as a passive multi-asset fund and a managed one). You would not be putting your eggs in one basket as it would be multi-asset.

Also, as mentioned, your asset allocation is US style but applied to the UK market. The UK stockmarket had a good year but historically, it is an underperformer. What has attracted you to a US style asset allocation and applying it to the UK?

skillboy

Thanks for your feedback.

No specific reason why I choose a US style of asset allocation. I just thought it makes sense to invest in companies of different sizes as smaller ones will do better when the economy is good and the larger ones will be more defensive.

So are you saying that since my monthly amounts are pretty small, I should really just be investing in a smaller number of funds for example?

HSBC FTSE 250 tracker
Vanguard Life Strategy 100% equity
A UK smaller companies fund
A European shares fund

I appreciate that this is mainly a UK focused set of funds but I have to start somewhere and plan to add other funds later as I get more experience.

I could actually put in about 5k in each one right at the start but it was suggested that drip feeding is better as it means you neither buy at the top or the bottom?

Thoughts, comments?

Linton

skillboy wrote: »

So are you saying that since my monthly amounts are pretty small, I should really just be investing in a smaller number of funds for example?

HSBC FTSE 250 tracker
Vanguard Life Strategy 100% equity
A UK smaller companies fund
A European shares fund



I could actually put in about 5k in each one right at the start but it was suggested that drip feeding is better as it means you neither buy at the top or the bottom?

For £400/month you may as well just go for a single global fund for the first 2-3 years. The Vanguard Life Strategy is one, there are others.

One reason not to stick with a single global fund is for educational purposes. Experiencing the ups and downs of various sectors is far more valuable in my view than simply reading about it. I wouldnt go for the choice of funds you are suggesting. Most UK "small companies" funds have a significant part of their holdings in FTSE 250 companies, so there would be a lot of duplication. The VLS fund invests in Europe amongst all other mature regions so there isnt a lot of point in going for an additional Europe large companies fund, unless you think the VLS Europe % is too small for your needs.

If you go for the VLS fund I would suggest you look for extra funds in sectors where it is weak. Small companies is one - what about Europe or US small companies? Another area where VLS is weak is emerging markets, and some of the already emerged markets of SE Asia. Finally there are funds focused on particular industrial areas, Technology and Biotechnology are examples.

Drip feeding has the advantage that when the market is down and prices are cheap you get more fund units for your money than you "lose" when prices are relatively high. For example a 50% fall in prices means you get twice the number of units. A 50% rise means you get 2/3 the number of units.

bowlhead99

In case it's not clear what Dunstonh is saying re a "U.S." style of investing.

Effectively, for the Yanks, half the world's investible market is on their doorstep. From the oil and financial and tech giants to the minnows who would like to be giants in fifty years in a completely capitalism-driven society. If you are an American you might take the view that you should have some large caps and small caps and mid caps and some dollar bonds. And you're all set up, because America rules the world, U.S.A.! U.S.A.!

Then the less patriotic among you, or the risk seekers, might say, what the heck, I'm young, I can handle a bit of risk, and I know half the world's equities are not listed in New York after all, so I'll add some "international" shares to my portfolio with a general global fund.

Even though I know the market in the next biggest country, Japan, has been rubbish for a couple of decades [as of a year or two ago] so I'm not sure about this global investing malarkey, but I'll add a general global fund because there might be growth in Asia or bargains in Europe or whatever. It's kinda higher risk because it's not all in dollars like the rest of my life, and I don't have a passport so I've never been to any of these overseas places, but screw it lets go put some money down on that there "global" fund to maybe balance up my returns.

So the American (and excuse the casual racism, but there is some truth in such generalizations) will go largecap midcap smallcap bonds and international. Oh and maybe real estate. And the US websites and forums will say that's fine.

By contrast:
The Uk listed companies make up, by market cap, only 9% of the developed world economy and even less when you consider emerging economies. And the big companies here, though globally facing, are not represented in all sectors. So you need to take a different view to get a properly balanced portfolio.

But what you have done is say, well I hear the FTSE 250 is more UK focused than the 100 with maybe better growth prospects, while more stable than smallcap. There's my start point.

Then you realize it's only <20% by value of all UK listed companies. So you put some money into the listed giants in the FTSE100 which pretty much make up the other 80%.

But then you're still not done with the UK because you saw sexy returns from small caps last year and you want some of that action. So you put another fifth of your portfolio in the small-caps which only make up 1-2% of listed companies by value.

Then you think oh crap, the FTSE 100 doesn't really have an equivalent of Google or Twitter or Facebook or their Chinese or Russian equivalents, or Apple or IBM or Microsoft or Phillips or LG or Sony or Samsung. And as I don't have any Chinese or Russian or U.S. or European or Japanese or Korean stocks, I should probably fix that by spending another 20% of my portfolio on Global Tech. Because few would argue that technology will change the world, and hopefully the fund manager will find some firms whose world-changing destiny is not already priced in.

And then you're left with a fifth of your portfolio in which to fix your heavy overallocation to UK and technology. This is impossible to do with only 20% of your portfolio to play with. But you pick a random global fund because the American would, with the last fifth or quarter or half of his portfolio, have perhaps done that.

So, I can completely see how you came up with your five way split of "small, medium, large, international, specialist". But it is definitely not a portfolio for all seasons.

We often exhibit a bit of home bias when building a portfolio. However, if you showed it to someone from another country (not USA), they would wonder how you came up with only 20% being invested anywhere in the 90% of the world that lies beyond your shores and which wasn't stuffed into a hot-topic sector like tech. You could change the tech for healthcare or natural resources or clean energy or any other theme, but basically your overall approach for £5k a year of new investment seems over-complex and could be re-written from scratch imho.

I'm not going to try and do that because there are a billion posts on portfolio construction here or on other sites, and Dunstonh's idea to use a couple of multi asset funds seems fine.

Likewise, whether to pile in to the market with a lump sum over drip feeding has been covered by me, him and many others over the years. Essentially the market generally goes up in the long term so mathematically you should do better by deploying your capital earlier and having more months invested on each of your pounds.

This can produce a larger shock if the market goes down soon after you invest, than if you drip over time and buy some cheaper. So pound cost averaging is heavily promoted by some investment groups who want you to get comfortable with risk and sign up to an affordable-sounding plan rather than scare you off by the thought of trusting them with £20k in one go. Clearly however if the market is rising, as it does in the long term, then if you "pound cost average" upwards you will have a higher entry cost and thereby worse returns.

For me, I'm technically drip feeding but that is because I'm investing out of my salary each month and so actually I'm investing each pound as soon as I have it available... the "time in the market, rather than timing the market" cliche that you hear so often.

Good luck and enjoy your returns, positive or negative!
EDIT: w00t, thanked in 600 posts (70%+). Glad it's helping someone...
:beer:

mark55man

That was me 2 years ago - I don't think I have ever seen a better post explaining portfolio construction as usually practiced by people who have started to learn about investment but aren't professional investors


I think what you always have to remember is that for every layer of complexity you are adding to your knowledge and your practice there is always another one. You also have to remember that some of these layers don't matter until you have a lot of money or you cannot afford to lose any of your money or you have to live off the income

dunstonh

Excellent post bowlhead.

I could actually put in about 5k in each one right at the start but it was suggested that drip feeding is better as it means you neither buy at the top or the bottom?

Pound cost averaging allows you to average out the ups and downs. If the market falls, over the period you pay, you benefit. If it rises, you miss out. Statistically, growth periods outnumber negative periods. So, playing purely the odds game and nothing else, you are more likely end up with less than going in on a single go.

I appreciate that this is mainly a UK focused set of funds but I have to start somewhere and plan to add other funds later as I get more experience.

Why not start with someone simple like a multi-asset fund and then wait until you get to £25k plus and then look to add in things. It will also give you a chance to understand investing. You are looking to use trackers but you are choosing the allocations and sectors. So, that in effect turns it into management. What research are you doing that makes you think you will outperform with your sector allocation and amounts in each one?

If you put £100pm over 10 years into different funds then you would get similar results (bid/bid based over 120 months with £10pm invested on 1st month (total invested into each fund £12000 - From end Nov 2003 to end Nov 2013)
L&G US index: £19808
L&G UK Index: £18134
HSBS 100 index: £17414
L&G worldwide: £17250
HSBC 250 £22736

Until year 8 there was only £500 between them and in year 9 there was £1000 between them. Divergence occurred more after year 8. The reason being that until you have a large enough amount in the funds, then any difference in performance is going to be small. A 2% difference on £5000 is just £100

Thrugelmir

skillboy wrote: »

I am not concerned with income, only capital growth over 10-15 years...

Don't discount reinvestment of income as an investment strategy.

atush

I drip feed, mainly as I am investing from income, not lump sums. When I have had them, I have invested lump sums. I have invested in good times, and bad times. And yes, you do better (in the long run ) with lump sums in a rising market.

But I personally (now- though I used to in earlier times) don't like to watch the markets too closely as it can increase anxiety and even panic when things go badly for too long (as in the credit crunch). Twice in bad market turmoils I have been in places where I had no internet access and could not watch things closely enough therefore decided that I was not allowed to panic as I could do nothing really.

Other market turmoil hasn't lasted as long, as the reasons for the downturn were different and more complex this last time.

And it is debatable if political manipulations (ie saving banks rather than letting them fail as before) caused more harm than good. As the costs for doing so are only now coming out. I am well educated, but not enough in economics to say yes or no, but I can see both sides incl the huge problems a total run on the banks would have had.

I thought that buying 5-6 funds which are focused on different geographical areas and companies would mean not putting all my eggs in one basket so to speak?

The problem is, you have 5 funds that are 3 UK and 2 global. So aren't truly diversified.

I would have thought, one UK all share FTSE, one UK small cap and the other 3 on Global, Euro, and emerging markets might have been a more widespread allocation?

skillboy

Thanks for all your excellent feedback, I have really learned a lot from all your comments.

One question.. can you give some examples of a multi-asset fund that you would consider investing in?

atush

Vanguard?????