Passive Funds

Zippeh

I think you misunderstand my question about the FTSE100 tracker. It was merely to gain knowledge that two finds trackig the same index would behave the same

richyg

Zippeh,

Do yourself a favour and trot off to monevator or bogleheads websites and do some reading there. Mrmoneymustache also if you are of a frugal nature is quite a good read also.

Personally (and this means imho) you will do allright and could do a lot worse. I spent a few years in my 20's paying into funds that charged 5% initial load to the salesman and 1.75% annual cost. It was such a headwind to get over - with my Financial adviser sitting on your sofa saying the charges are only 2% its not v much. 0.3% in something balanced is better than lots of stuff around.

There is a lot of passive investment bashing - but if it makes sense for you turn off the noise , set up a regular investment and go for it.


Try https://www.youtube.com/watch?v=Tk1woz1OQrc

colsten

I second the suggestion to read monevator.com.

Also a host of other reading materials: https://forums.moneysavingexpert.com/discussion/5043692

Glen_Clark

dunstonh wrote: »

You dont need two funds doing the same thing.

....Unless you want to sell some of one and put it in the other to use up your CGT allowance

noggin1980

dunstonh wrote: »

Not strange at all. It is heavily weighted to a limited range of companies and industry spread giving your poor diversification. Historically, it is one of the worst performing indices in the Western world.

Data until October 2014:
Last Month Rank: 20 out of 23
Last Year Rank: 23 out of 23
Last 5 Years Rank: 20 out of 23
Last 10 Years Rank: 21 out of 23

Doing poorly over 10 or 15 years isn't enough to suggest it's a poor performer though. The previous 15 years have been very up and down, The 15 years before that though were very good, how did it compare to others then? what about the 15 years before that?

dunstonh wrote: »

The term "lazy investor" indicates someone that doesnt want to do their own research. I am not calling anyone lazy. Just using the phrase.

Sure but my point was even if you are willing to do the research it's perfectly reasonable to take the decision that I'm not able to make a better go of it than vanguard.

Mistermeaner

Does the l&g multi suite fall in the 'lazy / passive' pile

I have that alongside vls and see them as broadly similar, although l+g has property and in understand is slightly more actively managed than vls rigid ideology. L+g also has property.

For reasons I can't explain I prefer the l&g fund, that said I hold roughly equal amounts of l+g / vls

princeofpounds

Doing poorly over 10 or 15 years isn't enough to suggest it's a poor performer though. The previous 15 years have been very up and down, The 15 years before that though were very good, how did it compare to others then? what about the 15 years before that?

Actually dunstonh has a point.


FTSE 100 total return since end 85 (when I have data from) - 1410%
FTSE all share total return since end 85 - 1539%


Those are two big numbers that make it look like a small gap, but it still represents more than an additional doubling of your initial stake.


This is precisely what my longer post above is about. People plunge blindly into passive investments without understanding they are still making totally active decisions.


There are good reasons for this structural underperformance of the FTSE 100 - it contains no small and mid-caps, and these tend to outperform over time (we can argue about whether that is due to better growth prospects or higher risk, most likely both; and these are active choices).


Yet FTSE 100 ETFs remain far more popular than FTSE 250 or All-Share investments. Largely down to brand name and media promotion.


It raises the natural question of why we should allocate our investment capital to companies just because they are big?


In fact, why should we invest on the basis of free float weighted market capitalisation - the standard methodology - at all? Is it logical to allocate capital based on how large a company is and how public?*


Let's look at the total return of the S&P and Dow Jones since 89 (again, the longest period I have data for). The S&P is the market-cap weighted index. The DJIA is weighted according to a seemingly even more arbitrary and antiquated price-system.


S&P - 914%
DJIA - 1108%


An even larger difference, over a shorter timespan.


I will say it again; there is no such thing as passive investment, only passive investment instruments.






* Edit to add - there is technically a reason under modern portfolio theory why you might choose to do things this way; you are simply trying to recreate the portfolio that holds a 'bit of everything', called the market portfolio. This is supposed to provide an optimal balance of risk and return, and it's a theory that underpins much of passive investing theory.


But it is interesting that the theory doesn't translate at all into practice. FTSE all-share volatility isn't that distinguishable from FTSE 100. DJIA volatility is actually lower than the SPX (at least since 05, when I can run data from).


I have never been sure that free float market cap indices actually do recreate a market portfolio, but it's convenient to forget that modern portfolio theory is actually likely rather incomplete in the way it describes reality, for all its other merits (black swans being one other famous issue).

noggin1980

princeofpounds wrote: »

Actually dunstonh has a point.

I track the allshare and the vanguard fund tracks the allshare so it's a bit of a moot discussion but if you accept (and you seem too) that the allshares small and midcap holdings increase the risk then it's not really fair to say the ftse 100 has been a poor performer compared to the allshare.

I agree that choosing your asset allocation is an active decision which is why someone may well think it's best to have vanguard (or someone else) take that decision for them (other than the bond/equity mix which is still the investors decision)

The whole smart beta discussion is really interesting but I don't think it does someone a favour who just wants to get started to burden them with it.

princeofpounds

I track the allshare and the vanguard fund tracks the allshare so it's a bit of a moot discussion but if you accept (and you seem too) that the allshares small and midcap holdings increase the risk then it's not really fair to say the ftse 100 has been a poor performer compared to the allshare.

I think you still don't quite get the core of my argument.


It is totally fair to say that the FTSE 100 is a poor performer.


Because it *has* been a poor performer.


That might theoretically be down to a difference in risk taken. (The fact that practically-speaking it has not been higher risk is mere an aside). But the specific reason is entirely immaterial to my point.


The point is that there *is* a difference. A significant difference.


And choosing between those differences is, and always will be an active decision. And yet people, as a generality, give precisely zero thought to it despite the fact that it can be a bigger deal even than whether to choose passive or active funds (and I use that simply as a point of reference given it is so widely discussed, even though I don't really care about that debate at all).


This isn't about so-called smart beta. Though that is one potential approach to tackling the problem (and a whole other discussion in itself), it is not a product category that actually rose from this kind of universal insight. This is about the fact that:


a) there is no such thing as passive investing, only passive investment instruments, and


b) the industry, and most end investors, rarely seem to understand this.


We don't actually disagree, given you have said this:

I agree that choosing your asset allocation is an active decision

but I have serious issues with this:

someone may well think it's best to have vanguard (or someone else) take that decision for them (other than the bond/equity mix which is still the investors decision)

given that:


- the end investor rarely looks to see what decisions are being taken in their name, which is very different to a traditional fund where stock choices are measure against a specified benchmark. Ultimately, the question becomes - how do you benchmark a benchmark itself?


- it is not entirely clear that vanguard themselves consider questions like this for this product, and certainly they have no knowledge of their customer's individual circumstances.


In one sense, all this is a rather technical and philosophical discussion that's probably above the heads of customers who might do ok bunging all their money into a prepackaged strategy.


In another sense, this is actually important given the vast scale of the different outcomes that result from choosing even benchmarks that are superficially very closely related.

noggin1980

princeofpounds wrote: »

In one sense, all this is a rather technical and philosophical discussion that's probably above the heads of customers who might do ok bunging all their money into a prepackaged strategy.

Lets agree on that and leave it there because I don't think we are being helpful to the OP with this discussion.