My first portfolio

A_Flock_Of_Sheep

The hardest part about investing I found when I began just over a year ago was:

Switching off from noise
Ignoring daily market movements
Acting on share recommendations and tips
Acting on adverts on HL for the latest and best funds
Being drawn into the latest investing fashion or trend thus losing sight of your overall investing reasons leading to gambling on the system

Good luck.

boglehead

yatinsardana wrote: »

4) Might still keep the EM index as it's low cost and it's had a bad year so they say it MAY be a good time to get in.
5) I just want to think about small cap funds - what to do about it (the marlborough one). .

4) VLS80 has 6% invested in EM... thats about the size those markets represent in reality - keep it that way, unless you want to try beating the market :-)

5) Here again - can you get over 8% return over the long term.. definitely should be able to... just be mindful that you will have to accept the risk. Your TER will significantly higher - so make sure you get the right return for it... I'd be careful in investing more than 10% on that though.

SlapShot

boglehead wrote: »

4) VLS80 has 6% invested in EM... thats about the size those markets represent in reality - keep it that way, unless you want to try beating the market :-)

Not strictly true. From the Credit Suisse 2014 Yearbook: "Today [EMs] comprise 13% of the free float investable universe of world equities and 33% of world GDP. These weightings are likely to rise steadily as the developing world continues to grow faster than the developed world, as domestic markets open up further to global investors, and as free float weightings increase."

I like VLS80, I invest in it myself, but it is underweight on EMs, and its asset allocation is a little arbitrary (e.g. recent changes in weightings). You could make a strong argument for increasing the EM weighting in proportion to investable global market cap - e.g. 13% or 13*0.8=10.4% in an 80/20 portfolio. Compare this with 17.8% in the 7IM Adventurous, or 16.3% in L&G Multi Index 7, both of which have a TAA overlay.

Correction: 7IM Adventurous also has 4.7% in Frontier Markets

boglehead

SlapShot wrote: »

boglehead.

I don't disagree with much of what you say, but I do think you're missing a key point here, which is I'm not saying that there's alpha or that you might be able to spot it, rather you might use active management to gain exposure to factors that you can't otherwise get in efficient markets (e.g. particularly value & size being the classic ones); also to get exposure to less efficient markets where that kind of zero-alpha result doesn't hold (e.g. small caps in smaller markets, emerging markets). Additionally, tactical asset allocation has been show to improve returns if well done. (e.g. there's a Vanguard paper on this).

It goes back to the point I made earlier... In spirit you might want to go and invest in stocks that are not in the index - but my point is that statistically you have very little way to pick the right stocks - or the ones that will enable you to beat the market.

As mentioned earlier, less than 1% of the managers beats the market over the long term - which means that beating the market is pure luck.

Additionally - in truly large index fund/ETF ("VT" or "VWRL" for example) - you already cover over 98% of all listed values and over 99.8% of all market value worldwide... chances are, if you're missing some of the very few small caps not on the index, they will represent less than 0.2% of the total world market cap... so very unlikely to provide you any return that would help you beat the market significantly... You better off finding a cheaper ETF/Fund, that will save you 0.20% of expense ratio. That would drive more return.

SlapShot

boglehead wrote: »

It goes back to the point I made earlier... In spirit you might want to go and invest in stocks that are not in the index - but my point is that statistically you have very little way to pick the right stocks - or the ones that will enable you to beat the market.

As mentioned earlier, less than 1% of the managers beats the market over the long term - which means that beating the market is pure luck.

This is subtle, but what the studies show is not that less than 1% of funds don't beat the market, rather less than 1% of manager display alpha (...and this is the critical bit...) after correcting the fund performance for "risk" factors (size, value, beta, momentum, typically). That's to say, if you want to outperform the market, you can do so by getting exposure to these factors, but this is not management skill per se, it's a biasing of fund composition towards, e.g. small-cap, value stocks.

E.g. the less than 1% figure came from a study called "False discoveries in mutual fund performance" (google it, I can't post links!). They use a 4-factor model. The article's conclusions are more subtle than the headline, though. They find that 75% of funds are zero-alpha net of fees, and 24% are negative alpha, with the remaining ~1% positive alpha. But a surprising proportion of these managers do display meannigful skill, it's just outweighed by fees! (I.e. you can beat the market if you don't pay for it!).

An article called "The Surprising Alpha From Malkiel's Monkey" is also a good read - they show that a simple equal weighted S&P portfolio outperforms the S&P500 by about 2% per year, and that's from a combination of size & value effects (i.e. an academic "risk-adjusted" study would claim this is no outperformance/alpha, ignoring the point that one investor has done better than the other!).

boglehead wrote: »

Additionally - in truly large index fund/ETF ("VT" or "VWRL" for example) - you already cover over 98% of all listed values and over 99.8% of all market value worldwide... chances are, if you're missing some of the very few small caps not on the index, they will represent less than 0.2% of the total world market cap... so very unlikely to provide you any return that would help you beat the market significantly... You better off finding a cheaper ETF/Fund, that will save you 0.20% of expense ratio. That would drive more return.

This is slightly misleading, because portfolio weightings count. The bulk of the studies on fund management focus almost entirely on larger developed markets (particularly the US); there are very good reasons to believe that this zero net-alpha result may not hold in less efficient markets, in addition to any small-cap additional return you might reap from investing in smaller companies.

The risk in all this is that factor returns may change (particularly over shorter time periods), although they have persisted historically for a long time.

Going back to the hierarchy of increasing sophistication: TAA; factor investing; inefficient market strategies. These are all valid and rational approaches but require more effort, cost, and execution risk to reap any reward from. Note that "identify a star fund manager" doesn't feature there! If you can think about portfolio in these terms, you'll do well, if only to recognise that you might not want or need anything more than straightforward index tracking SAA.

Best wishes,

Daniel

boglehead

Slapshot - very pertinent points you make. I shall read those articles. Thanks for sharing. Though admittedly the original post was geared toward a novice investor... the (mostly valid points you make, are really the next level of detail !

Totton

I held VLS for awhile but found performance to be mediocre and easily beaten by some very simple to select funds and IT's. It is correct to say the majority of funds under-perform but you don't need to be very clever to pick those funds that are likely to do better than others.

JJforever

This is a very interesting debate.

I've bought many active funds over the years to the point where I have too many. I am going to have to start selling off some funds and working out a proper asset allocation but frankly I don't know where to start. Any ideas welcomed please.

If I was starting out again I would definitely go the tracker route as the amount in charges that I have paid out over the years must have been astronomical. I'm only now realising this.

Sobryma

JJforever wrote: »

This is a very interesting debate.

I've bought many active funds over the years to the point where I have too many. I am going to have to start selling off some funds and working out a proper asset allocation but frankly I don't know where to start. Any ideas welcomed please.

If I was starting out again I would definitely go the tracker route as the amount in charges that I have paid out over the years must have been astronomical. I'm only now realising this.

One obvious start point is Hale's Smarter Investor now in 3e - but its a little tricky to implement especially with OEIC's.

A simpler approach would be to get a copy of another UKcentric book by Lars Kroijer (an ex Hedge fund manager) Investing Demystified - its cheaper than the Hale book too. Lars argues if you dont have 'edge' (which few private investors have) buy largely World Equity and Government bonds for a 'fit and forget' portfolio. I have adapted this easily for my pension using Blackrock Consensus 100, Vanguard Global Small Co etc. etc.

boglehead

I actually only have 3 values on my portfolio which are all invested monthly through Youinvest regular monthly savings £1.5 per trade...

80% vwrl (world equities) 0.25% ter
10% slxx (corp bonds) 0.2% ter
10% vgov (gov bonds) 0.12% ter

Overall TER: 0.23% and no plateform charge... Difficult to beat this outside the US market