stockmarkets -are we nearing the bottom or is there further to go ??

masonic

BananaRepublic wrote: »

In general you cannot time the market. Your £200,000 devalues while sitting in the bank waiting for the markets to crash. During that time, investing in a decent active fund could increase the value by much more than the loses during the crash. That is why it is advisable to drip feed. Prior to the last crash, for years people were saying to avoid the markets, while others made good money.

That said I have often piled in during crashes, and made a little killing, such as during the last crash.

Well, quite - and that's where asset allocation and a rebalancing strategy can serve an investor well.

But, like you, I really don't see the merit of trying to sell up everything when you suspect a crash is coming (as advocated by some), and then giving yourself the challenge of trying to buy back in at an appropriate time. You might reasonably expect a significant downturn once every few years. Differentiating between a 10% correction, a 20% crash or something more significant, and between a V-shaped correction and a U-shaped depression, is next to impossible on the way down, so that's a lot of selling and buying that has to be done. Depending on what you are investing in, that could be quite costly - trading costs, spread, stamp duty, or even in some cases a dilution levy could come into play. Plus the opportunity cost of sitting in cash at historically low rates as you mention. I can see how such a strategy could be quite profitable from someone, but that someone is probably not the "investor" who is dipping in and out of the market.

BananaRepublic

masonic wrote: »

Well, quite - and that's where asset allocation and a rebalancing strategy can serve an investor well.

I presume that a fund manager takes care of that, to make sure the fund does not become overweighted in banks say, after a surge of growth in banking stocks. That of course is the potential problem with a tracker, it blindly follows the herd, and thus only sells banking stocks after they drop precipitously.

masonic

BananaRepublic wrote: »

I presume that a fund manager takes care of that, to make sure the fund does not become overweighted in banks say, after a surge of growth in banking stocks. That of course is the potential problem with a tracker, it blindly follows the herd, and thus only sells banking stocks after they drop precipitously.

I was thinking more along the lines of rebalancing between equities and other asset classes (e.g. cash, bonds, property, or, god forbid, shiny metals).

bowlhead99

Procrastinater wrote: »

You say that a (your Estimate) 50% gain (gross) over 16 years is something to be savoured !

You said the (gross) loss was 20% and showed a picture of it. Not realising that the index pays dividends which are reinvested, changing the story entirely from a loss to a gain, and your picture was not representative of that, because your picture assumes the 3-4% dividends every year are thrown in the bin rather than spent or reinvested.

The 'my estimate' of the gross gain of 50% was because it was half way between the gain of about 40% on the FTSE UK 100 and the gain of about 60% on the FTSE UK All-share. You had just referred to a 'footsie tracker'. As I mentioned, the UK 100 is a poor and unbalanced index in terms of industry sectors which most people would not use as their portfolio. Even the All-share is not much better because 80% of it is just the 100. Any independent financial adviser would almost certainly suggested a broader international portfolio, which would have delivered a better return and not be so focused on one part of the world. A FTSE World tracker, instead of the FTSE UK 100 which is less than a twelfth of the World by total market size, would have delivered +80% from 1/1/2000 to today, instead of +40%.

Still, assuming for the sake of argument that we are talking about the poorly performing FTSE100 index. You said it loses 20%. It does not. It gains 40%. You scoff and say that is not something to be savoured. I'm not saying it was a great investment compared to a more balanced portfolio. Entire life savings in a FTSE100 tracker is stupid. However, your original contention was that the public are muppets because they don't realise that investment managers will put them all in the FTSE and it will lose them 20% from 2000 to today, which is patently false.

If I'd started with £100k in the index on 1/1/00, you were telling me I end with £80k. However, the correct graph shows me ending with £140k. £140k is 75% more money than the £80k you said that I would have. I think we can agree that an extra 75% is a materially larger amount of money, and perhaps something to be savoured. Sure, the overall return is not very good compared to the best options. But if you are going to cherry pick the worst option over the worst time frame as an example of why the investment business is full of crooks and thieves, please at least get the basic facts right and don't be off by 75%.

Whilst you take into account a rather dubious estimate of dividends,

Well, the dividends are unquestionable and not a dubious estimate. The FTSE capital and total return figures (including dividends), are published by FTSE themselves which is the source of the figures in my graph (courtesy of trustnet.com). You can see an explanation of exactly how FTSE treat the dividends from each of the constituent companies on page 13-15 of this document:
http://www.ftse.com/products/downloads/FTSE_UK_Index_Series_Guide_to_Calc.pdf?450

Feel free to believe it is all a sham and I am pulling the wool over your eyes, but I am not.

you do not appear to take into account fees

The total expense ratio (management fee and other operating costs) on a simple tracker fund such as the iShares FTSE100 ETF (ticker on the stock market is "ISF" if you'd like to look it up) was 0.35% a year when it launched a few months into the year 2000.

That level of costs successfully came down over time, as a consequence of competition and economies of scale (it is easier to run a fund cheaply per pound invested when it is a billion than a few hundred million). Today, the fund is over £3billion in size, and cheap to run, with annual total costs including management and administration of just 0.07%. Yes you read that right: only one fourteenth of a percent per year.

Here is a picture of the total returns from the tracker fund against the total return of the actual index.As you can see, the fees and some natural tracking error causes the fund returns to deviate from the pure return over time - by the time it's been going for 15 years it is falling visibly behind. But is still quite close, because the fees are only a fraction of a percent.



As this particular fund only launched at the end of April 2000 the graph only runs from that point. But we were originally looking at 1/1/2000 to this week. So just to keep things comparable: over the first four months of 2000, the FTSE100 fell ~8%. So really as this graph doesn't start until end of April you would have to take about 8% off the final 'since inception' return of the fund (45.3%) to leave what you would really have got if you had invested in a tracker (perhaps with a different fund manager) all the way since January. Your net return would be about 37% then.

So, that's not as good as the 40%ish I initially claimed when looking just at the pure return of the index. But it is close - certainly the same ballpark and over a long period of time it is neither here nor there. Particularly when as mentioned, the choice of assets in the first place will have changed the 40% in the FTSE UK100 to be 60% in FTSE UK All-Share or 80% in FTSE World; asset allocation differences have way more of an effect than fees. As such, the returns weren't very good because you had cherry picked the worst market as an example of where people typically put their money (which they don't) not because it is inherently expensive to be in that market.

or indeed taxation.

There are two types of relevant taxation. One is a capital gains tax, CGT, and the other is tax on dividends.

Each person gets an annual CGT exemption, currently in 2015/16 it exempts the first £11,000 gains they cash in during a year. Back in 2001/2 it was £7500 and has gradually gone up each year. It also used to be the case that you could get 'taper relief' allowing the tax on the gains to taper down to incur a lower percentage tax if you held the shares a few years - though that extra relief has gone away in favour of a lower flat overall tax rate instead.

So anyway, if you'd wanted to stick £200k in a portfolio it would have been standard practice to 'cash in' some gains each year, to make use of the free allowance before buying back the fund or a very similar one from another manager. So this would mean you were not sitting with large gains on the full £200k and worrying about how to pay tax on all of them at once.

Also each year you would take some cash out of the investment and put the resulting cash in an ISA (£7000 a year allowed back in 2000/01, it has gradually increased to £15,240 a year by 2015/16) and purchase the same investment inside the ISA. So although you can't stick £200k in an ISA in one lump... by gradually moving it over piece by piece once a year, you could have sheltered about £145k over the last 15 years. Someone with a spouse or partner could therefore do £300k between them in that timescale. The portion of the tracker fund which you hold inside the ISA rather than outside, has all the growth and all the dividends tax free forever and you no longer need to worry about capital gains tax calculations.

The other tax is dividend tax. Your £200k investment in the FTSE100 would have been giving 3-4% dividend income every year, maybe £6-8k (but less in some years). Nil rate and Basic rate taxpayers would pay nothing on it at all and could just reinvest it, although higher rate taxpayers would pay at a rate of one quarter before being able to reinvest the remainder.

Of course, the dividends earned inside your ISA are tax free, so even if you are unfortunate enough to be a high rate taxpayer, over time the effect of dividend tax is reduced. If this is a long term plan there are other useful tax-favoured vehicles such as pensions which can invest in the exact same or similar assets, with which to reduce or eliminate the bill. Again, investment professionals know this, but perhaps you don't because you think you should not talk to investment professionals because they are expensive and/or crooks, because you read it in a book about customers yachts from three quarters of a century ago.

Ok accepting in theory what you say and putting it into place on my £200k we have now made £100k over 16 years? or was that calculated to the last peak ?

Thanks for "accepting in theory" what I say when it is entirely solid fact backed up by published data

And no, it wasn't looking at the last peak, it was using the full date range you suggested. I'm not trying to cherry pick timescales to suit an agenda. Gross it was about 40% for the UK-100 or 60% for the UK-Allshare. Net, as shown earlier it was about 37% for the UK100, call it 55ish% for the Allshare. So the £200k would have made net gains *net of expenses, not gross* of somewhere between £75k and £110k, at a guess.

Against which we have ( my quoteation from the IFA) £4k + 15 @ 2k - so £34 to deduct

Well, there are two flaws in that.

Firstly, you were saying 'if you had put your money in a footsie tracker'. If you already know what product you want, you can just go and buy it. As shown by the graph earlier, the fund delivered a return only a small amount lower than the raw return of the index. You don't need to deduct £34k from the returns for management fees and fund running costs and advice; the management fees and fund running costs were already deducted in declaring the £75k-£110k profits, and you don't need to pay for advice because you already know that what you want is the return from an index tracker, so you just go and buy it off the shelf from a broker who charges you £20 (back in 2000) or £5 (today with the competitive online market)

Secondly, let's say that you didn't necessarily know that you wanted that simple specialist tracker, because you didn't really understand enough about investments back in 2000 when there wasn't so much of this stuff online, or you're generally uncomfortable with making a big decision on your entire lifesavings. So you *did* need to pay the £34k for IFA advice and accept the management fees of a more expensive product.

The thing is, the IFA would have evaluated your needs, and then pointed out that putting all of your £200k into a FTSE 100 index tracker is a terrible thing to do for the average investor. As mentioned in previous posts:

- it allocates all your money 100% to equities rather than bonds, properties and other asset classes which diversify and smooth your returns.

- within those equities it allocates them all to the London stock exchange rather than the other 90% of global markets.

- within the London market it focuses on relatively few companies (ostensibly 100, but in reality the top 10 take 40% of the money and the bottom 10 only take 1%, so it's heavily skewed) and entirely ignores the other 1900 companies available in the same UK market.

- the weighting to relatively few companies means it is heavily skewed to certain industry sectors. For example in the dot-com boom of 2000 it was high in telecoms. Pre credit-crunch in 2008 it was high in banks. Last summer it was full of oil and resources companies. And it is only looking at the very biggest companies so the returns from smaller high growth companies over the nice long 15 year period are completely excluded from helping you grow your wealth.

The FTSE100 is a terrible index for someone wanting a home for their lifesavings. So the IFA would have found you a less-terrible and more appropriate blend of investments. By working across sectors and asset classes and looking globally, these would have avoided the undesirable shocking volatility of a single sector specialist index. Even if you had wanted 100% equity, the effect of using the FTSE World index of companies instead of the FTSE UK 100 index of companies would have been to increase your total gross return from 40% to 80% over the time period.

The IFA would not be restricted to indexes and in an attempt to decouple your returns from these volatile pure market-capitalisation numbers, would have looked at funds from a whole range of sectors. For example, if it seemed suitable for your needs, he could have allocated a portion of your wealth to the popular 'equity income' sector and bought Invesco Perpetual High Income, a quite popular fund which returned not 40% or 80% but 350% over the period from 1/1/00 to now (even after falling 8% in the last 3 to 6 months).

So, the IFA would have taken his fees, but you would get something for those fees. You would have avoided putting all your money into a specialist single sector index and having a wild ride by not knowing much about the nature of investing. It is quite possible, likely even, that by using a proper multi-asset approach you would have got better returns net of the IFA costs than going your own and doing DIY. If you did do DIY though, and just bought the FTSE tracker, you would have saved the advice fee.

and assuming you're a standard tax payer, tax on the difference of c 20% say £13k leaving around £50K or an optimistic 25%.

As explained earlier: there is a capital gains annual exemption that started at £7200 a year plus taper relief at the beginning of the period under review and is now over £11k a year. In total around £150k of allowance that could have been used to cover your gains.

As a 'standard tax payer', the tax rate on dividends has been zero throughout the period under review. Going forward from next year, everyone gets an allowance of £5k dividends a year and the excess is only charged at 7.5% for a 'standard tax payer'.

And as mentioned, any potential tax on gains or dividends and any HMRC paperwork could have been eliminated by gradually moving your assets into ISAs

So, while you think that a basic rate taxpayer would need to pay 20% tax on the net profits of your investing adventure, the answer is far from it; they would likely pay £nil on the gains outside the ISA (because of annual allowances), £nil on the dividends outside the ISA (because HMRC give basic rate taxpayers a great deal on dividend income), and £nil on any gains or dividends inside the ISA (because ISAs are tax exempt).

Again assuming you did not need any of the money for anything else

Yes, surely we are assuming you did not need the money for anything else, or you wouldn't have been committing it all into stockmarket-based investments, which are inherently long term in nature.

AND that you held your nerve (stupidity) and watched 40% of the value of your "Investment" disappear over a year or so !

What you would have learned from the IFA if you had paid him, or from an online education source or public library if you had not wanted to pay him, is that if you don't want to watch 40% of the value of your investment 'disappear' (albeit, only on paper, because you still hold the share certificates) over a year or so: do not invest all your money into an investment which can easily lose 40% of its value once in an economic cycle (and 20% perhaps several times a decade).

Both the IFA and textbook portfolio allocation theory would have told you not to be greedy and avoid putting all your money in one place, and to instead spread your money across asset classes, geographic regions, market sectors etc. Different types of assets and companies and regions perform differently at different times, and so a diversified portfolio containing un-correlated assets is key to reducing long term volatility and making decent long term gains over time.

Can you put an already extant investment into an ISA to limit that ? I don't know !

Fortunately, this forum is full of education. Maybe it would have been worth finding out what tax rates people pay on investment income or gains and how ISAs work, before mouthing off about how the returns are terrible because of all the tax you pay.

but £50k on £ 200k over 16 years with much of that time watching your value descend to parity and for the first 6-8 years be well below - sounds like a junk "investment" to me !

I have never said the investment in a FTSE100 tracker was recommended. But it seems you fundamentally misunderstand the nature of investments, their costs and their taxes. As such, you may think that something is junk when it is OK, even if it is not the best choice because in trying to prove your point you have not bothered to seek out the best choice.

Wait for a decent bottom and then buy the index - IF it goes to 4000, My £200k will be in there like a shot - IF it turns around above 5000 as the other guy reckons - I'll miss the turn and keep looking for a decent investment elsewhere !

Congrats on not understanding how investment funds, costs or taxes work but still knowing what is the best level to buy an index at.

There's a lot of downside risk - irrespective of some saying that "they wouldn't listen" to anything they don't want to hear !

There is certainly always downside risk in local and global markets. That is of course why people demand to be compensated for the risk when they make investments. Investment returns are the reward for investment risk. That is why someone is able to put away 15% of their salary into a pension for 40 years and retire to live on substantially more than 15% of their salary for the next 40 years without a job. If you want the money back tomorrow, probably not best to put it into something that could go down 2% or 10% or 40% tomorrow.

Your last line is insightful though. There are indeed people who don't want to listen to things they don't want to hear. Internet forums are full of people who think they are right. We are all guilty of that sometimes. Being able to recognise when you have made a mistake and change your world view, is a good quality, because we always have things we can learn.

BananaRepublic

masonic wrote: »

I was thinking more along the lines of rebalancing between equities and other asset classes (e.g. cash, bonds, property, or, god forbid, shiny metals).

That is the same thing, but using a 'technical' term. You have to guess when the market is about to tank, then move to cash, gold, fluffy toys, or whatever you choose, then guess when to move back into the stock markets. Get it wrong and your money stays in cash while stocks and shares are soaring. Maybe some people have the skill to do this, but I recall so many totally wrong claims by the 'experts' over the last 20 years. I sometimes wonder why the term 'financial expert' is allowed, it should be banned and replaced with 'financial sooth sayer'. I'm not kidding either. (And yes some do know what they are talking about, most seem not to, or more accurately, they can only make intelligent guesses.)

masonic

BananaRepublic wrote: »

That is the same thing, but using a 'technical' term. You have to guess when the market is about to tank, then move to cash, gold, fluffy toys, or whatever you choose, then guess when to move back into the stock markets. Get it wrong and your money stays in cash while stocks and shares are soaring. Maybe some people have the skill to do this, but I recall so many totally wrong claims by the 'experts' over the last 20 years. I sometimes wonder why the term 'financial expert' is allowed, it should be banned and replaced with 'financial sooth sayer'. I'm not kidding either. (And yes some do know what they are talking about, most seem not to, or more accurately, they can only make intelligent guesses.)

Well no, you decide on a target asset allocation and stick to it. Taking the very simple example of Harry Markowitz, this could be 50% in global equities and 50% in government bonds. But of course, you might opt for more in equities, or to include other defensive asset classes in addition to (or instead of) bonds.

So, for Procrastinator's £200k that is currently sitting in cash, it could have been invested 5 years ago: £100k into, say Fundsmith Equity (since you seem to like active funds) and £100k into M&G Optimal Income. But over those 5 years, the equity fund has grown 100% to £200k, while the bond fund has only grown 30% to £130k, so one would sell £35k of the equities fund and use it to top up the bond fund. Now you have £165k in both funds.

But, as Procrastinator predicted, a terrible crash is just getting started at this point. So, the equities fund falls 40% to £99k, while the bond fund falls just under 10% to £149k. So, you rebalance by selling £25k from the bond fund and use it to top up the equities fund. Now you have £124k in each fund.

Then, in a couple of years, global markets have rallied from the crash and so equities are up 67% and bonds are up 11%... so you rebalance back to 50:50.

This is not equivalent to trading in and out of the market. You are merely maintaining a chosen asset allocation (and therefore risk level). Failing to do this means that your portfolio will necessarily increase in risk over the long term. The net effect of doing this is that you are buying into equities when they are relatively cheap and selling them when they are relatively expensive. No powers of prediction required.

Alcorn60

I hope it has hit bottom as I am begining to really panic,my pension value with Aviva has droped dramatically last couple of months over 11k in total . Plus my Isa investment is down about 4%. in the last month. Really not sure what to do ,wait it out or transfer. ?
Ive saved for years and contributed to a private pension all my Life to enable early retirement finished in March last year aged 59 . Now!! really not sure why I bothered with a pension ,I think I would have been better of just saving my money ..:(

Drp8713

Alan_Corner wrote: »

I hope so as I am begining to really panic,my pension value with Aviva has droped dramatically last couple of months over 11k in total . Plus my Isa investment is down about 4%. in the last month. Really not sure what to do ,wait it out or transfer. ?
Ive saved for years and contributed to a private pension all my Life to enable early retirement finished in March last year. Now!! really not sure why I bothered

If you have contributed to a pension all your life then you would have seen the ups and downs of the stockmarket many times over.

Why is this time so different?

If you are using drawdown then ideally you should have a cash buffer for this sort of thing.

If you are taking just the natural yield from your investments, then assuming you have an income orientated fund(s) you should be fine.

If you really dont want any risk, then buy an index linked annuity.

BananaRepublic

masonic wrote: »

This is not equivalent to trading in and out of the market. You are merely maintaining a chosen asset allocation (and therefore risk level). Failing to do this means that your portfolio will necessarily increase in risk over the long term. The net effect of doing this is that you are buying into equities when they are relatively cheap and selling them when they are relatively expensive. No powers of prediction required.

Fair point. So we put £100,000 in shares, £100,000 in bonds. They grow to £200,000 and £130,000. Redistribute to £165,000 in each. Then the stock market drops 20%. So you now have £330,000 total. Then 5 more years, same growth as before, so you have £330,000 + £165,000 * 1.3 = £544,500.

Had you kept it all in shares, you would have £400,000 *0.8 = £320,000 after the crash, then 5 years later £640,000. Had you kept all the money in bonds, you'd have made £260,000 * 1.3 = £338,000.

Of course this is a simplistic example, as in practice you'd rebalance more often, but it illustrates the point.

So that makes sense if your aim is to smooth out your losses and gains and reduce volatility at the cost of overall long term gain. Or put another way, you get some exposure to the more volatile asset but reduce the risk. Which might make sense if you need the money at a given date i.e you cannot wait for the stock market to recover.

BananaRepublic

Alan_Corner wrote: »

I hope it has hit bottom as I am begining to really panic,my pension value with Aviva has droped dramatically last couple of months over 11k in total . Plus my Isa investment is down about 4%. in the last month. Really not sure what to do ,wait it out or transfer. ?
Ive saved for years and contributed to a private pension all my Life to enable early retirement finished in March last year aged 59 . Now!! really not sure why I bothered with a pension ,I think I would have been better of just saving my money ..:(

This is par for the course. Just clutch your teddy, and wait. In a year or two you'll be flush again. It pays to have a cash reserve to dip into to avoid 'crystallising your losses' as they say, so you can draw from your pension fund once it has recovered. The general approach is to gradually move pension funds into less volatile assets as retirement approaches. But now there is no need to taken an annuity, so it may make sense to leave some or most assets in volatile funds to get long term growth. (Just my personal views, I'm not a pension advisor. )