Critique my Investment Strategy

JohnRo

Keep it simple from the start then, you can always add layers of complexity later if that feels worth your while.

Personally I don't see anything wrong with investing substantial sums in an appropriate, single VLS fund of your choosing. They incorporate a comprehensive large cap regional allocation model developed by one of the globe's leading investment companies and are designed as a complete investment solution in their own right.

The elements missing, as you're aware, are things like small cap and property, which can be easily added alongside. How you do that is for you to decide.

I used to hold individual, actively managed, regional smaller company funds but ditched them all in favour of Vanguard's global small cap tracker some time ago. I'm not suggesting that's a good thing to do, it was simply me putting my money where my mouth is regarding passive investment (in that portfolio)

Good luck with it, at your age you won't go far wrong as long as you don't pile in with wads of cash you're likely to need in a hurry, just make a plan, keep disciplined and don't start chopping and changing it much once you've got started.

HSVX

JohnRo wrote: »

Keep it simple from the start then, you can always add layers of complexity later if that feels worth your while.

Personally I don't see anything wrong with investing substantial sums in an appropriate, single VLS fund of your choosing. They incorporate a comprehensive large cap regional allocation model developed by one of the globe's leading investment companies and are designed as a complete investment solution in their own right.

The elements missing, as you're aware, are things like small cap and property, which can be easily added alongside. How you do that is for you to decide.

I used to hold individual, actively managed, regional smaller company funds but ditched them all in favour of Vanguard's global small cap tracker some time ago. I'm not suggesting that's a good thing to do, it was simply me putting my money where my mouth is regarding passive investment (in that portfolio)

Good luck with it, at your age you won't go far wrong as long as you don't pile in with wads of cash you're likely to need in a hurry, just make a plan, keep disciplined and don't start chopping and changing it much once you've got started.

Thanks, very helpful. Think I will adopt that strategy then, I am definitely a believer in passive over active funds!

Marazan

Ryan_Futuristics wrote: »

I'll say what I always say, which is: You don't have a strategy until you understand valuation and asset allocation

Valuation is how to tell if you're buying something at an historically high price, or at a cheap price ... I'm very cautious about Vanguard LS myself because its two main asset classes (US equities and bonds) are at unappealingly high valuations

If we use average market data, your US stocks should return about 2% (real) per annum over the next ten years, while bonds return 1% ... The actual figure could many times higher or lower either way, but this is the median value you're looking at

Property is another potentially overvalued asset ... As you know, London is not looking attractive, outside London may have some growth left in it, but look back over 10+ years at commercial property values - the dips can be quite painful ... Property prices may be fairly inflated from years of aggressive QE - and a few years more may simply delay a capital-destroying drawdown

Now don't mistake me for being pessimistic - just understand that over your investing timeframe, you'll probably have at least one asset go through a severe drawdown - so you want to be properly diversified ... There have been times historically when equities have under performed bonds for as long as 68 years

Some of the best portfolios in the world are the Yale and Harvard endowment funds ... These may surprise people who read blogs which suggest equities and bonds are your bread and butter assets ... These often have very low allocations to bonds, and often only 30% in equities ... They invest in property, but also in commodities, agriculture, private equity and alternative investment strategies (like Absolute Return funds) ... Making money on the markets is easy when everything's rising; not losing it when they aren't is the secret

Two of the best books I think you can read on portfolio construction are Global Value and The Ivy Portfolio, by Meb Faber ... And also Global Asset Allocation, which you can get on Kindle for about £2

Trust Tim Hale's Smarter Investing at your own peril (just my opinion)

The issue with the Harvard/Yale endowment fund strategy, as I understand it for the retail investor, is that the have access to investment vehicles and prop plays that the likes of you and I do not and as a result attempts to follow their strategy with retail funds have been less than successful.

Ryan_Futuristics

JohnRo wrote: »

Personally I wouldn't bother, they're overrated imho. It's been said elsewhere, the only thing absolute about absolute return funds is how absolutely bad the returns are.

Well I used to take this for granted - the Telegraph's written articles on how worthless absolute return funds are, based on 2-3 year performance (as it always does)

I won't try and sway you on them, but I had to look again when I saw how many of the most successful funds in the world use them as core holdings

What they do give you is access to greater diversification - Standard Life's Global Absolute Return fund (one of the largest funds in the world) employs 30 different investing strategies, giving you access to futures/derivatives trading, long/short strategies, fixed income, currency, etc ... and the important point is we don't know what stocks, bonds or commodities will do for the next 60 years

Here's two of the most popular AR funds over 10 years - both comfortably in line with the FTSE 100, but more importantly, they'd probably be doing comparably if the FTSE 100 hadn't picked up after the crash (some markets take 30 years to pick up again)

Ryan_Futuristics

Marazan wrote: »

The issue with the Harvard/Yale endowment fund strategy, as I understand it for the retail investor, is that the have access to investment vehicles and prop plays that the likes of you and I do not and as a result attempts to follow their strategy with retail funds have been less than successful.

Well the other problem is their whole investment strategy goes against a great deal of modern investing academia - so they've got their critics

But the basic model still provides equity-like returns with bond-like stability, and is very future-agnostic - being about 20% each: domestic equities, foreign equities, commodities, bonds, property

The main things they had access to that average investors didn't were top-rated hedge funds and private equity funds ... Since the 2009 crash, absolute return funds have become more widespread and available (although I'd stick to the big 2 or 3) and Woodford's Patient Capital *may* be a very cheap way into a fund with private equity-like performance now ... So that's where they've added Alpha

Ryan_Futuristics

HSVX wrote: »

Thanks for the alternative view.

Just for a bit of background, I am economics student and will be working in finance so I have an adequate amount of knowledge in this area. However, I am of the view that it is very very difficult to predict when something is going to crash, and doesn't drip feeding into a (relatively) diversified investment like Vanguard LS 80 help to 'insure' against crashes that might happen? Because if, in the unlikely event, that it falls 40% in one year, you are still dripping the same amount in (and this amount is likely to see subsequent higher gains after a crash has happened). I could be off the mark here but would be good to know your thoughts.

I recognise the need for diversification and Absolute Return funds are definitely something I would look into more. Are there any other fund types I should look at in particular to try and achieve as much diversification as possible?

Thanks for the book recommendations - I'll take a look!

Drip-feeding is a great way to avoid making a big mistake - I'm basically a fan

However, if you put £5k into overvalued assets, that's still £5k that may not be earning you much over the next 10-15 years - it may have been better in a much more conservative investment

The risk as I see it today is with more quantitative easing being introduced - and the prospects of another round from the US if things start to slide - we could be stuck with high valuations for just the *wrong* length of time ... You could spend 10 years drip-feeding, and still have only bought at high valuations ... Which could be effectively the same as lump-summing on a peak (albeit a very artificially stretched peak)

EDIT:

I'd recommend 10-15% in P2P lending - I use RateSetter and Funding Circle ... The investment world's still cautious about it, but in an age where income's so hard to come by, and valuations are a bit precarious, a steady 6-8% return is a very useful thing to have

masonic

Ryan_Futuristics wrote: »

Here's two of the most popular AR funds over 10 years - both comfortably in line with the FTSE 100, but more importantly, they'd probably be doing comparably if the FTSE 100 hadn't picked up after the crash (some markets take 30 years to pick up again)

Yes, performance looks much more like a popular strategic bond fund...

Ryan_Futuristics

232607 wrote: »

Off topic slightly but could you sum up (briefly) why you're not keen on Tim Hale's Smarter Investing.

Thanks.

If you look back over any decade in the last century, there's always been a prevailing, popular investing strategy - and it's always been based on what's worked for the previous 10 years

I think the book is certainly one of the more rational of these - and anything that gets investors disciplined and away from making emotional decisions is great ...

However I think being so focused on recent markets, it gives investors a false sense of certainty about future asset performance ... Look back and you can find very long stretches of weak stock market performance, and very long stretches where bonds have lost you money ... The only safe portfolio is an agnostic portfolio ... Cap-weighted indexes and 'efficient markets' could be the worst investment strategy over the next 10 years

masonic

Ryan_Futuristics wrote: »

However I think being so focused on recent markets, it gives investors a false sense of certainty about future asset performance ... Look back and you can find very long stretches of weak stock market performance, and very long stretches where bonds have lost you money ... The only safe portfolio is an agnostic portfolio ... Cap-weighted indexes and 'efficient markets' could be the worst investment strategy over the next 10 years

It uses data going back to 1900 to backtest. Is that really too recent?

Ryan_Futuristics

masonic wrote: »

Yes, performance looks much more like a popular strategic bond fund...

They're diversifiers - not extreme Alpha generators

Buy Newton, GARS and Troy Trojan and you've got about 50 different strategies, and almost every asset class under the sun - and a total exposure of about 15% to bonds

Buy a strategic bond fund and you're 100% exposed to bonds ... The whole point of these funds is that they're not reliant on any one type of market, and are unlikely to crash when a single asset class does