active vs passive?

Jaguar_Skills

So following on from some of the advice you lovely people imparted, I began to read the monevator site in a lot more detail.

I came across the passive investing part and found it really fascinating. I then looked at the lazy portfolios, I like the idea of only have a few things invested in as I plan to use high interest cash accounts and also get hopefully a few BTL properties in the future.

Is there any reason why I couldn't just passive invest in some trackers?



I really like the simplicity of ricks core four but does this make it a little too risky?

Would swensens be better?

Can anyone explain why they actively invest over this approach? ??

dunstonh

Is there any reason why I couldn't just passive invest in some trackers?

You can. However, without knowing the amounts involved, it may not be suitable. e.g. there is no point running a bespoke portfolio on say £10,000 or regular contributions. It would be massive overkill. A multi-asset fund solution would be more suitable.

I really like the simplicity of ricks core four but does this make it a little too risky?

Its missing global bonds and corporate bonds. Plus, the property allocation is property share and not physical property. It mentions volatility but doesnt give it a volatility rating. Its an option but again, it depends on the amount you intend to invest.

Would swensens be better?

its a higher risk spread. The high risk property share fund influences that. It is also missing global bonds and UK corp bonds. Its overweighted to UK compared to global but that is not uncommon.

Can anyone explain why they actively invest over this approach? ??

These are also active solutions. The people involved are making management decisions on how and where they invest and areas they do not want to invest in. They are just using passive investments in the areas they want exposure. So, they cant really claim to be passive investors as they are trying to be their own fund managers.

This doesnt mean they are wrong. However, are their resources and knowledge and experience enough for them to make these decisions. Are their allocations going to adapt to the changing economy or are they static?

Some of those spreads appear to have a US flavour to them but have been adapted for UK. US is very inward looking and tends to focus more on its home market. Some people try to replicate that using UK allocations instead of US ones. However, the UK investing market tends to be more global in its outlook.

Why do you think these are better than say the Vanguard Lifestrategy funds, L&G Multi index funds or Blackrock consensus or asset allocations built by actuaries?

Linton

There is no reason why you shouldnt just invest in a few trackers if your investments are a fairly small % of your total wealth. Under those circumstances it doesnt matter too much what you do as the results are unlikely to be life-changing as long as you dont do something stupid, and buying a few trackers isnt stupid. But I would suggest that rather than picking a few at random you adopt a strategy and buy specific trackers for specific considered reasons.

Whether a portfolio is too risky or not depends on
1) Your timescale - the shorter the timescale the less risk you can take if yo dont want to endanger meeting your objective. Anything less than 5 years is too short term for investing - you should be in cash. Anything less than say 10 years you should have a significant amount in cash and safer investments.
2) Your attitude to risk. Even if you have a very long timescale you may panic if the market falls say 50% and be unable to stop yourself selling at a loss. If that is the case make sure that no matter what happens your investments are extremely unlikely to drop by 50%. Have significant bond and another non-equity based investments that wont drop with the general share market.

I hold individual shares, active funds, and a few passives. My investment portfolio is over 50% of my total wealth and I also hold significant cash. As I am retired I need my investments to supply my living expenses consistently for the next 30+ years. The portfolio needs to be specifically constructed to provide an acceptable steady income, a degree of medium term safety, and as much growth as possible to satisfy the longer term income requirements. With that size of investment portfolio and complexity of requirements one cant just invest in a few trackers and accept what happens.

To meet that sort of requirement one needs tighter control of what one invests in than simply 60% domestic equity,30% developed world, 10% gilts. The ability to allocate specific amounts of money to particular countries, industry sectors, company sizes is impossible with the standard broad brush trackers. The nature of trackers being allocated mainly on company size makes investing in some very useful sectors difficult.

In my case getting the portfolio balance right is worth far more than the odd fraction of 1% in charges.

One comment on those portfolios - in my view they all include far too high a % UK investment compared with the rest of the world. Many industries important globally and even many important in the UK, being foreign owned, are not included in a UK tracker. Those types of allocation are common in the US which of course has a much larger and more varied domestic market. Judging from their names I guess they are simply an interpretation of US gurus' recommended portfolios simply converted to the UK.

bowlhead99

There are many ways to skin a cat, and investing is no different; there are no right answers. But you have to be careful when basing your investment strategy off one website or one book that has a particular mindset.

In theory, holding a fund that follows an index and not paying a manager very much to make active decisions will get you a return that is reasonably close to the index. However, deciding what index(es) to follow in what proportion, is itself an active decision.

When you look at the individual indexes - most affordable indexes are market capitalisation weighted. So for example the top 10 companies in the FTSE All-Share make up 33% of the movement of the whole index, even though you might think you're going to be broadly exposed to 2000 companies. The index is heavily skewed to banking, oil, and big pharma which make up the giants at the top end. The index is light on tech firms for example, we don't have an Apple or a Samsung or a Google or Facebook, Twitter, IBM, Microsoft. 5-6% of the index is in tech and communications and half of that is just one company, Vodafone. You have twice as much in HSBC as you have in Lloyds. You have 500x as much in HSBC as you do in Premier Foods.

This means your holdings are not at all diversified into a nice balanced mix of sectors. You'll be mostly invested in banks and financials before the credit crunch crash, you'll be mostly invested in dotcoms right before the dotcom bubble bursts, etc etc, and your returns are dictated by key events that affect the type of companies that make up most of the weight of the index.

There is an argument that says that if one person invests in an index and one person invests randomly(rather than follow the cheap and easy instructions to "hold whatever the index holds")... the random person might 'win' but they will lose just as often and they will pay a higher fee each and every year so why bother; any outperformance by deviating from the asset mix of the entire investible market, is probably due to taking extra risks. Of course it is a bit of a cheat on behalf of the index fanboy to define risk as the extent to which your returns deviate from 'the entire investible market' thereby making their own pick of a cap weighted index seem less risky.

Some people may take comfort from the fact that their own returns are broadly similar to what they hear the FTSE 100 or FTSE All-Share has just done when they hear the daily headlines. However, the return of the FTSE is not something you want to get when it is negative and it is not necessarily something you would be satisfied with when it is positive and other strategies are more positive. Others will look past that and may have other goals - such as a more even balance between industry sectors, a preference for income, etc.

Index investing is ever more popular in the developed world and has some decent basis in theory, given it is rooted in the fact that developed markets are efficient, everyone has perfect information etc, and it should be just as hard to pick a 'lucky' manager as it is to pick an individual stock. If things are fairly valued there is no point shopping around and paying high management fees to a guy, instead of just buying the index of everything, right ?

If one guy buys you Sainsburys and it goes up and another guy shuns Sainsbury and buys Tesco which goes down, it's easy to pick who you would have liked to invest with, but only after the fact. So you would have to buy both to get an average result. Then you are paying active management fees to achieve the average gross return so you might as well have bought the index, with much lower fees; so goes the logic.

The logic doesn't always work where the markets are less than perfectly developed ; for example smaller companies, emerging markets etc. Where information is imperfect, specialist investment teams can conduct diligent research and avoid buying the rubbish, and avoid having a high weighting to an expensive company just because it's big. In theory they can beat the market time after time, even if they couldn't do that on a market like the S&P500 or FTSE100.

Ultimately, 'passive investing' - to buy and hold more of the biggest companies and follow the index - is only one strategy; and even those that follow it do not always follow it in all markets.

Following models that seem to be popular online is not foolproof. Example, some of the research that supports index investing comes out of the US where there can be performance advantages from having lower 'churn' in a portfolio due to the way things are taxed over there. Doesn't translate to over here. And some of the 'model portfolios' you see will be based on prominent US investment bloggers or academics with some sort of conversion to find equivalent UK funds which may be a bit flawed.

E.g. there is one on your screenshot 60% domestic, 30% rest of world, 10% bonds. In the US maybe it is fine to have two thirds of your equities in your home country because your home country has half the market capitalisation of the developed world. While the UK is less than 10% of the companies listed across the planet, so as a Brit, putting most of your equities money into them to the exclusion of others is maybe too much of a leap of faith.

I would say that 'core 4' portfolio is quite high risk. Clearly, the high bond component makes it safer than putting all your money in equities - at the expense of long term returns of course. You might like that (even though the bonds are all domestic government bonds and not a balanced mix between that and overseas and corporate bonds of different risks and maturities...). But the other equity holdings on a 2/3:1/3 split between domestic and international is not what I would choose, as 2/3 of your equities money is in a single index in a single small regional market, when that index is such a weird balance (as I outlined in an earlier paragraph), does not make a lot of sense.

Whether you want to use 7 trackers or 4 trackers or zero trackers is up to you. Some people love trackers and make it the bedrock of their strategy. Some will use an off the shelf mix of them out of a book or a website and rebalance between them, or even buy an fund that just holds a relatively fixed ratio of a bunch of indexes without any manual work needed by the investor to do the rebalancing.

However, others will not, because they will have looked at the different types of assets they want to hold, and the different weightings across sectors and geographies that they would like, and find it difficult to find a combination of trackers that meet their needs. Or they will find different active fund managers with particular investment approaches that can be used together to meet their goals, which are often more complex than 'achieve some sort of exposure to markets, with low annual fee'.

Long story short (? OK, not so short) - there is absolutely no reason why you couldn't "just invest in some trackers" if you want to achieve the results of holding those trackers going forwards from here. However, you may find that the trackers give you inadequate exposure, or overexposure, to certain sectors, certain risk/reward profiles, certain opportunities. Many people have goals which are more complex than just 'buy this and watch it follow the index up or down and get off at the right point'.

TheTracker

OParticularly if you like Rick Ferri's suggestion you should read his book(s). And Tim Hales Smarter Investing.

Re "However, you may find that the trackers give you inadequate exposure, or overexposure, to certain sectors, certain risk/reward profiles, certain opportunities." The portfolios above are designed to ameliorate those risks. Don't buy trackers for the sake of it. Construct a passive portfolio that is implemented through trackers where possible. I'm closely aligned to Hale's Portfolio 4 which is 60% equities and about 90% of that in trackers, the other 10% a value tilt.

Monevator is an excellent resource for passive and active alike. Their weekend newsletter is excellent.

Ryan_Futuristics

Also, as this was posted here the other day, I think Trustnet's ongoing look at closet tracker funds being sold as actives could be quite enlightening

http://www.trustnet.com/News/564091/everyone-has-missed-the-real-enemy-in-the-passive-vs-active-debate/2/1/

They've uncovered something I've always felt tended to play out, which is that the 'very active' active funds return consistently higher than the average inactive ones ... 7.5% for very active vs 4.8% for closet tracker

A good manager (I personally count Neil Woodford and Bruce Stout as fine managers who I'm happy to put trust in) can make a huge long-term difference by rotating your regional and sectoral exposure to suit different market conditions ... The idea people can't do this is held with fervent religiosity by some investors, but they've perhaps been sold a fairly crude view of the figures

Actually I'd personally say avoid those Monevator portfolios ... They're interesting reading from a historical perspective, but they use many assets which are not considered such safe havens today, and which likely don't provide the diversification away from market movements that they used to ... They're a snapshot of investing in those specific eras ... Things change ... My question would be: when you find a top investment trust (a complete portfolio) that's doubled market returns for decades, with very low volatility, and a team of researchers steering it on track, why deviate from that?

TheTracker

Bill Miller. Bill Gross. Anthony Bolton.

Now Neil Woodford.

Someone has to be lucky. Someone has to perform better than everyone else in a game of chance, no matter If it's a 1 year or 25 year timescale you measure against.

I would recommend to the OP to read a broad range of literature and make up your mind as to how you wish to invest afterwards, consulting an IFA too if that gives you a happy ending.

Ryan_Futuristics

TheTracker wrote: »

Bill Miller. Bill Gross. Anthony Bolton.

Now Neil Woodford.

Someone has to be lucky. Someone has to perform better than everyone else in a game of chance, no matter If it's a 1 year or 25 year timescale you measure against.

I would recommend to the OP to read a broad range of literature and make up your mind as to how you wish to invest afterwards, consulting an IFA too if that gives you a happy ending.

This was a controversial idea put forward by Malkiel, in his 1973 book A Random Walk Down Wallstreet

The thing is this position never stood up particularly well to scrutiny ... Warren Buffett challenged Malkiel in the early 80s (in The Super Investors of Graham and Doddsville) by simply categorising investors by investment style

Buffett identified that within active investment (a large universe of approaches ranging from near-trackers to highly contrarian, conviction portfolios) those who followed value principles (particularly those of Benjamin Graham) had no problem consistently beating the index at all (Buffett's average annualised return over 50 years had been 20%, after all)

Malkiel never responded - if you can break figures down like this, and find consistent results, it destroys the 'random' argument

Today, active funds fulfil all sorts of different investor criteria ... We all know a FTSE 250 tracker beats the vast majority of UK funds (and trounces a FTSE 100 or All Share), but most people don't want that level of volatility (where rough patches can last 8 years) - your typical retirement investor isn't looking for a high conviction growth fund, with 5 holdings ... You can't lump 'active' funds together as if they're all trying to achieve the same thing any more than you can lump F1 cars and Smart Cars together to say anything meaningful about modern engine performance

Thrugelmir

TheTracker wrote: »

Bill Miller. Bill Gross. Anthony Bolton.

Now Neil Woodford.

Someone has to be lucky. Someone has to perform better than everyone else in a game of chance, no matter If it's a 1 year or 25 year timescale you measure against.

Most very successful fund managers invest in a theme before the herd arrives. When the herd arrives. Then it's back to being average again.

Companies life spans often aren't 25 years.

TheTracker

Whether or not Santa Clause exists (shh, I think not) I think it worth the OP reading up and making a decision on more information than a bunch of forum spruikers, myself included.

TheTracker

Thrugelmir wrote: »

Most very successful fund managers invest in a theme before the herd arrives. When the herd arrives. Then it's back to being average again.

That may well be true. I'll sit at the head of the peloton, herd if you prefer.