Big mistake with ISA. How do I sort out this mess?

colsten

Take a diversion and read some of what Monevator has to say http://monevator.com/category/investing/passive-investing-investing/?

You can always go back to Tim Hale to verify the practice (as discussed on Monevator) against the theory (as discussed in Smarter Investing)

redux

Damage wrote: »

From reading what he says regarding actively-managed funds, and noting the statistics he quotes, I can't understand why anyone would consider doing anything other than take his advice. What motivates people to do otherwise, I wonder? It seems to be an almost guaranteed (relative) failure to do anything but take his advice!

I haven't read his work yet, but if it's along the lines of 80% of fund managers fail to beat the index, the question to ask oneself is shall I go for an index tracker or try to pick from the other 20%.

Damage

colsten wrote: »

Take a diversion and read some of what Monevator has to say http://monevator.com/category/investing/passive-investing-investing/?

You can always go back to Tim Hale to verify the practice (as discussed on Monevator) against the theory (as discussed in Smarter Investing)

Okay, thanks, I'll have a look as well. I do intend to read beyond Tim Hale's book, to look for some alternative perspectives.

I am currently in two minds as to whether I did the right thing in (blindly, at the time) choosing actively-managed funds for my stocks and shares ISA at Hargreaves Lansdown. If I read anything to put my mind at rest with that I'll be quite happy. It's now £188.70 down on where it started last week (yes, I know I shouldn't be watching it every day)!

Damage

redux wrote: »

I haven't read his work yet, but if it's along the lines of 80% of fund managers fail to beat the index, the question to ask oneself is shall I go for an index tracker or try to pick from the other 20%.

Yes, that's more or less what he is saying. And yes, that suggestion of picking from the other 20% makes sense, but the point Tim Hale makes is that managers change jobs so frequently that even if you could find the right one, the chances are of them staying in one managment position during when you need them are very slim. Furthermore, he makes the point that as well as changing jobs, they are likely to have retired and left the industry within a typical long-term investment period.

He's basically saying it's an impossibility to find a successful manager (for the required period).

Porcupine

Damage wrote: »

Thank you, I'll look into those alternative asset classes as well. From reading Tim Hale's book (up to page 190 so far) I'm beginning to get an idea of which way I ought to be heading with this. From reading what he says regarding actively-managed funds, and noting the statistics he quotes, I can't understand why anyone would consider doing anything other than take his advice. What motivates people to do otherwise, I wonder? It seems to be an almost guaranteed (relative) failure to do anything but take his advice!

The trouble with the usual statistics in favour of passive funds is they're usually somewhat selective:

• They often only consider the US. In the US passive funds have a tax advantage compared with active funds, which don't apply to other markets (eg us in the UK: doesn't even apply to a US fund from a UK fund house).
• They include all the lame bank funds that are sold by their tied advisors - no sane investor would dream of buying those, but they drag the average down
• The models assume investors are dumb automata. For example, the assumption is you put all your money in on day one and never touch it. That has good and bad sides - if you buy high (hot tip from the paper) then panic and sell low, you'll do worse. If you sell high and buy low (ie rebalance) then you can do better.
• They assume efficient markets (like the US) - somewhat less so in Nigeria (for instance). The value a manager can add to the US large cap is small (tricky to avoid buying Apple no matter what your outlook), while a manager in Nigeria may have to pick more carefully because some companies are good, some are corrupt, valuations are suspect, shares are illiquid, political risk, etc etc.
• Active can have downside protection, if that's within the fund's remit and the manager calls it right (a big if). Passive has to track the index all the way down.

One approach is mix and match: passive for big developed markets, active for niches (emerging, smaller companies, etc) where managers have value to add.

The human risks are well worth pointing out though: there's an innate tendency for humans to buy high/sell low (greed is good/loss is bad), and are we deluding ourselves that our management (eg deciding what to buy next) is adding value?
Would the 'monkey with a pin' (to name another book) do better? Or do the statistics simply not take into account sensible investing behaviour (as opposed to rules followed by the dumb automaton in the model)?

Eco_Miser

Damage wrote: »

From reading what he says regarding actively-managed funds, and noting the statistics he quotes, I can't understand why anyone would consider doing anything other than take his advice. What motivates people to do otherwise, I wonder?

Lots of reasons, like believing that they can pick the winners, not wanting to put most of their money into a few very large cap companies, or wanting high dividend income to live on. When you read advocates of other approaches, you may become equally convinced of the indisputable correctness of their system too.

Apodemus

redux wrote: »

I haven't read his work yet, but if it's along the lines of 80% of fund managers fail to beat the index, the question to ask oneself is shall I go for an index tracker or try to pick from the other 20%.

He also assumes that the prime motive of most investors is to beat the market. That may or may not be true, but it is doesn't feature in my motives. Like most, I want to preserve capital against inflation and get sufficient return to supplement my income. I really don't care if others are doing better or worse by accepting a different level of risk.

I may also have old fashioned views about investing, where I want to have my own (albeit small) stake in industry and the economy and a sense of shared ownership in the commerce of the country.

There is also the element of investing as a hobby and while that may have many in here spluttering in their tea, I would think that contributing to a forum such as this suggests that for most of us it is about more than simply chasing market-beating returns.

Damage

Thank you all.

All points noted, and I clearly need to read more widely before I make any big decisions.

I must admit that I was disappointed to read the expected long-term returns for equities and bonds (5% and 2% respectively). I feel that I could probably do better than that simply by buying and selling things that I do know about. I was expecting to be reading a figure of perhaps 10%, so I was miles out in that respect!

Damage

I forgot to add, I have an update on the original subject of this thread (the ISA problem).

M&G have cancelled the ISA for me (the one that occurred unexpectedly after the online application problem), and I now have my money back. To their credit, their customer service was very good, so I have no complaints there.

So, my sole ISA is with Hargreaves Lansdown. Once the novelty has worn off I'll stop looking at it all the time, but it has bounced back from being £188.70 down yesterday to £63.98 down today.

Porcupine

Apodemus wrote: »

There is also the element of investing as a hobby and while that may have many in here spluttering in their tea, I would think that contributing to a forum such as this suggests that for most of us it is about more than simply chasing market-beating returns.

Also if the market declines 40% and your fund declines only 35%, those are market-beating returns according to the dumb automaton, and your fund might be top of the table. But in the real world putting cash under the mattress would have been better still.

Unfortunately it isn't quite as simple as that - deciding when to put it under the mattress and when to withdraw it and reinvest is a decision a human will almost certainly call wrong. But it does highlight that 'the market' is not the entire investment universe, it can be very narrowly defined.