Funds for the Less Financially Able or Enraptured

Chris75

Over a pint a friend & I debated the following & I would be interested in the thoughts of others.

First the assumptions we debated (correct or otherwise):
1. Unless we think that the UK economy and/or the £ are going to outperform the world there is no real logic in overweighting the UK in a portfolio. We could, in fact, see that it would be dangerous to argue to do so.
2. We do not want to spend a lot of time selecting equity investments as history has proved that unless we are really on top of the subject we are likely to make worse decisions than by doing little. Most investors (probably - almost certainly in fact - this includes most us) fall into this category.
3. Many private investors pile in at the top & drop out at the bottom ready to buy something else that it at the top.
4. There are very few funds that you don't need to keep a very close watch over & could simply buy & forget.- see 2. above. Even the best funds change managers or other key personnel.

All this led to a conclusion that for the equity part of a long term stress free portfolio that you could safely leave to your not very financially informed spouse if the unexpected happened it might be a good idea to simply hold a mixture of 3 low cost index funds tracking:

1. MSCI World Index say 85%
2. MSCI Emerging Markets say 10%
3. MSCI Frontier Markets say 5%

Is this a stupid idea for the less financially enraptured where it generates sufficient income when added to other sources?

Chris

eskbanker

Surely the logical conclusion to that argument is investing in a single multi-asset fund, in that selecting multiple products and nominating a split between them requires a greater degree of skill or knowledge than the multi-asset model that's intended to deliver diversification without specialist knowledge?

dunstonh

1. Unless we think that the UK economy and/or the £ are going to outperform the world there is no real logic in overweighting the UK in a portfolio. We could, in fact, see that it would be dangerous to argue to do so.

Not quite. Investing in the UK does not suffer currency fluctuation. So, it is not just economics that you need to consider but currency fluctuation. The UK is really poor with large cap but very effective with small and mid cap.

2. We do not want to spend a lot of time selecting equity investments as history has proved that unless we are really on top of the subject we are likely to make worse decisions than by doing little. Most investors (probably - almost certainly in fact - this includes most us) fall into this category.

Most investors still use advisers. However, for DIY, then if you plan to be a lazy investor then multi-asset solutions are usually best.

3. Many private investors pile in at the top & drop out at the bottom ready to buy something else that it at the top.

No they dont. Most punch through any volatility and do not try and time it.

All this led to a conclusion that for the equity part of a long term stress free portfolio that you could safely leave to your not very financially informed spouse if the unexpected happened it might be a good idea to simply hold a mixture of 3 low cost index funds tracking:

Not really as you would still need to rebalance them. Plus, a random allocation is a management decision. So, whilst you are using trackers, you are bringing in a management decision because you think you are better than alternatives.

Multi-asset seems to fit the objectives you have created. Not a handful of single sector funds with a random/made up allocation.

Chris75

Eskbanker
Not really unless you know of a low cost multi-asset fund that is world wide and know of an index that would support it.

I agree about the split being an issue but we couldn't see any way around having to choose.

Dunstonh
I am not sure why multi asset would meet the objective. The aim of this was to give a reasonable & broadly based investment that could be managed with great simplicity - which includes rebalancing.

Other than including gilts why is a multi asset fund any easier long term than any other fund which holds a limited group of funds at the discretion of a manager who may or may not stay?

racing_blue

It seems that you have a beautifully simple and clear plan, but wait - is that some dirt on the windscreen?

If you are happy with 100% of your investments being in equities, why not keep it simple and go 100% world cap weighted index?

Why is 85% + emerging markets better? Why not 75%?

Why emerging markets rather than commodities, corpoprate bonds, or leveraged short cotton?

PS if you find out the answers, please tell me. My head says keep it simple but like a cat, I just can't stop tweaking and playing...

Chris75

racing_blue wrote: »

It seems that you have a beautifully simple and clear plan, but wait - is that some dirt on the windscreen?

If you are happy with 100% of your investments being in equities, why not keep it simple and go 100% world cap weighted index?

Why is 85% + emerging markets better? Why not 75%?

Why emerging markets rather than commodities, corpoprate bonds, or leveraged short cotton?

PS if you find out the answers, please tell me. My head says keep it simple but like a cat, I just can't stop tweaking and playing...

My head keep saying that I should keep it simple as well.
This was not about the absolute best that we would never actually find and which might leaves our spouses with a mess but rather about a strategy that would give a good result and better than most + be understandable to a non expert

The percentages are arbitrary but we thought a reasonable starting point for discussion. I have no problem with a world index fund. One less thing to worry about.

We have deliberately kept bonds, classic cars etc out of this and have concentrated only on the equity element even though we knew that the equity/ non equity split would need considering.

Reading this it comes down to the question of are global index funds, or a slightly preference adjusted version of them, an easy and sensible route to trouble free investing.

racing_blue

Sure. Global index funds are an easy and sensible route to trouble free investing. Have you visited bogleheads? It's a way of life over there.

Of course, if that's all you do, you'll never know what could have been had you taken a different, more active approach. This nagging doubt is the reason I choose to put only half my equity investments in a global index fund (VWRL), and to meddle with the other half.

But you seem to have risen above that, and I suspect 100% cap weighted global equity is the passive investor's Nirvana

Chris75

racing_blue wrote: »

Sure. Global index funds are an easy and sensible route to trouble free investing. Have you visited bogleheads? It's a way of life over there.

Of course, if that's all you do, you'll never know what could have been had you taken a different, more active approach. This nagging doubt is the reason I choose to put only half my equity investments in a global index fund (VWRL), and to meddle with the other half.

But you seem to have risen above that, and I suspect 100% cap weighted global equity is the passive investor's Nirvana

Going to have a look at bogleheads.

I am not sure that "risen above" it is appropriate. You do reach a point where simplicity is a necessity.

Yes it is nice to keep a bit to speculate that you afford to do badly with but hope to achieve wonderous things. The problem is that speculation without knowledge is surely a mugs game.

Going to see what bogleheads is about!

Linton

Chris75 wrote: »

My head keep saying that I should keep it simple as well.
This was not about the absolute best that we would never actually find and which might leaves my spouse with a mess but rather about a strategy that would give a good result and better than most + be understandable to a non expert

The percentages are arbitrary but we thought a reasonable starting point for discussion. I have no problem with a world index fund. One less thing to worry about.

We have deliberately kept bonds, classic cars etc out of this and have concentrated only on the equity element even though we knew that the equity/ non equity split would need considering.

Reading this it comes down to the question of are global index funds, or a slightly preference adjusted version of them, an easy and sensible route to trouble free investing.

Classic cars are hardly in the same league as bonds. Globally bonds are a much larger market than equity. The advantage of the multi-asset funds is that they include a range of different types of bonds and also property increasing diversification. The purpose of increasing diversification is that you get less volatility for a given level of long term performance. Multi asset funds arent a collection of other funds that the manager happens to like. They are balanced across the asset types for a purpose.

I would have thought it is reasonable to believe that your target customer would be more sensitive to volatility than the average investor.

dunstonh

Dunstonh
I am not sure why multi asset would meet the objective. The aim of this was to give a reasonable & broadly based investment that could be managed with great simplicity - which includes rebalancing.

Other than including gilts why is a multi asset fund any easier long term than any other fund which holds a limited group of funds at the discretion of a manager who may or may not stay?

Multi-asset funds can range from 0% equity to 100% equity. The diversification is within the sectors too (US, UK, Europe etc).

Multi-asset funds will be built with defined asset allocations. Those asset allocations will get structured based on research and analysis and adjusted to suit the economic cycle and some opinion on long term values.

Multi-asset fund of funds can be fettered or unfettered and made up of passives, managed or a combination. Some multi funds do the lot in house.

You gain structure, rebalancing and a varying degree of professional opinion with multi-asset.

We have deliberately kept bonds, classic cars etc out of this and have concentrated only on the equity element even though we knew that the equity/ non equity split would need considering.

Although bonds/gilts and property should be included for most people (it is estimated that the average UK consumer is cautious - you may not be but if we are talking most people, then you would include them). Classic cars is speculative and unconventional and not what we are talking about here.

Chris75

dunstonh wrote: »

....................... Some multi funds do the lot in house.

There are so many funds. Are there such things as global index trackers that include both bonds & equities?


The cars were included lightheartedly although I have seen them used as investments.