Funds Return/Performance

Thrugelmir

bowlhead99 wrote: »

In this way, you are selling UK while it is high and buying emerging markets while it is cheap.

Indexes such as the FTSE are driven by market capitalisation of the companies contained in the index. So isn't an indicator of whether the market is cheap or expensive.

bowlhead99

Thrugelmir wrote: »

Indexes such as the FTSE are driven by market capitalisation of the companies contained in the index. So isn't an indicator of whether the market is cheap or expensive.

Well, I didn't mention indexes or what drives them at all.

We are talking about the particular funds we selected to buy, or that exist in our universe of funds that we could buy.

Funds are expected to grow over time because economies generally grow. And we know that the funds will not grow evenly. If we aspire to hold a balance of funds over time to manage our risk of ruin and take an exposure to all sectors, we may need to buy and sell. For example if equities grow at compound rate of 20% a year averaged over long term and bonds grow at 1% a year forever averaged over long term, yet we do not want full exposure to equities, our 50/50 portfolio will eventually turn into a 99/1 portfolio which is undesirable. So we will want to trade periodically to manage exposure.

Ideally, we would buy at the 'optimum' points but nobody can predict them. However if we invest in two separate funds and the underlying holdings (market value) of fund A goes up 10% and the market value of fund B goes down 10%, instead of them each going up 5-6% (which is their average direction), then while we cannot know that either is expensive on an absolute all-time scale or cheap on an absolute all time scale, what we can say decisively is that on relative merits, it is not a worse time to be selling A and buying B than it was last year when A was cheaper and B was more expensive.

It mustbe a better time to be selling A and buying B, relatively, because you can get more for selling A while what you pay for B is less than it was. So in selling A to buy B you have not bought at the worst time you could, because last year is an example of when it would be a worse time to have sold A to buy B. So, we know we will never catch the absolute best time to buy and sell. But we know that the time we caught, to execute the trade in that direction in year two, was not the worst time. That is not perfect but it is a start. Sell high buy low.

Linton

Thrugelmir wrote: »

Indexes such as the FTSE are driven by market capitalisation of the companies contained in the index. So isn't an indicator of whether the market is cheap or expensive.

As Bowlhead said plus...

If you are worried about your investments getting overvalued against say cash over the next 25 years, keep say 20% of your portfolio in cash. Once a year if funds go higher decreasing the % cash sell enough of the funds to rebalance. On the other hand when the funds crash compared with cash use the excess cash to buy more funds. So no difficult decisions or market timing, just regular automatic selling high to buy something comparatively cheaper.

LXdaddy

bowlhead99 wrote: »

Yes it should be another thread. But here goes:

Like Linton said, you consider what weighting you want to have in a particular sector given your own risk tolerance and goals. As you suggest, past performance or assumptions based on the performance of similar types of funds can give an indication of the risks you face with a particular fund.

<snip>

They then go and buy a fund or a set of funds which give them those allocations.

After a year they look at the portfolio again. <snip>

So in summary it is not all a big load of guesswork of what to switch. ... you are not trading in and out every day. You will make money over time if you follow a sensible target allocation ... That initial allocation is key and there are plenty of websites and books dedicated to it.

Bowlhead99 - what a great lesson.
Obviously you don't switch in and out every day but is once a year the right period or would you review once a quarter maybe?
You say there are websites and books dedicated to finding your own target allocation... suggested links please.

bowlhead99

LXdaddy wrote: »

Bowlhead99 - what a great lesson.
Obviously you don't switch in and out every day but is once a year the right period or would you review once a quarter maybe?

I think once a year or once every six months is probably adequate. Typically if you were paying an IFA for ongoing servicing they would look at your holdings once or twice a year for you to see if things were on track. Once a quarter would seem overkill as a twenty year investment period has 80 quarters in it and that is a heck of a lot of twiddling. You are unlikely to want to pay someone else to do that at market rates, but I guess you might want to do it yourself if you think you can add a lot of value. I would say not as economic cycles last very much longer than a quarter, you will have little you can add.

If you want to benefit from 'compound returns' it seems like you are not doing that if you have a high performing investment fund and every time it performs for a week you cut the profit off and take it back to square one to make it perform again from the original low base. So I like the idea of letting things run for a while before interfering.

If my macro portions are 70% equities and 30% bonds I might take a look at bringing them back in line if the equities gets over 80% or below 60%. But I'm a relatively easy going guy and quite relaxed about the fact I will never have an 'optimum' mix because there is no such thing without a crystal ball.

If there was a particularly strong swing and the equities got up to 85, is it the end of the world? Not really, but 15% bonds is low if you are aiming for 30 so I would feel I shouldn't leave it much longer than that even if my full year of waiting to fiddle is not quite up. But at the end of the day, if you have high equities because they have done very well and given you a better than target return you could afford for them to fall back a bit before you noticed and reallocated. It will not turn you into a pauper if you fail to catch the top of the market. You are not expected to.

My target allocation is just a rule of thumb so I am quite relaxed. Others might be more picky. If they try to hold 15 separate funds of only a few percent each, they will have a harder job trying to monitor those arbitrary individual allocations and see when they are "out of line". One way to do it is just to hold a couple of multi-asset funds where an active manager or a computer formula does all the reallocations over time. The Vanguard 80% Equity fund will aim to be close to 80% equities every day. Another more actively managed fund in the "40-85% shares" sector will let the mix vary up and down with the ebb and flow of the markets and his strategic or tactical view of what mix is appropriate for the coming month or year or cycle.

I will sometimes buy things on a hunch or a whim because I have a pool of cash outside my core portfolio that I can play with and buy individual stocks or funds with no harm done if it goes wrong. So I have some part of my portfolio which doesn't need much hands on treatment and another part which is more of a hobby and I look at more often. Everyone has their own approach. But I would say if you are not a hobbyist and not trying to pick individual stocks and trade them, there is really no need to dip in very often. Pick the mix and keep feeding it with new money and come back at the end to take the returns.

As to websites and books, if you do a search on asset allocation on this forum there are various threads or posts that will give you pointers. Here endeth the lesson!

Radiantsoul

bowlhead99 wrote: »

Funds are expected to grow over time because economies generally grow.

Even in a world without growth you would still gain from holding shares/bonds, as otherwise people would simply hold cash.

bowlhead99

Radiantsoul wrote: »

Even in a world without growth you would still gain from holding shares/bonds, as otherwise people would simply hold cash.

True, the interest or dividend or capital growth is your reward for providing capital at risk.

However for a company to generate some wealth for themselves they must be taking it from someone else. With no growth, potentially they are taking the wealth from another organisation which is also funded by risk capital and may only be able to give a negative return on that risk capital. So if the whole system isn't growing, and you generally provide risk capital to everyone (because you don't know who is providing the wealth and who is receiving it), you will not necessarily make any money.

Whereas if the economies are growing (with more people being born and doing productive work and harnessing resources) then it is easier to see where your returns on capital are coming from, because you can have a scattergun approach to deploying the capital and generally still make money.