180K Investment

bowlhead99

MonroeM wrote: »

The reason I sold this fund was I decided that I wanted to keep my overall UK exposure in my investments to around 7%. That is why I ruled out the VLS80 fund because I believe the UK exposure is about 24% and in the case of the Royal London 27%.

MonroeM wrote: »

In my case I chose the VWRL because it covered the world markets and only had about 7 per cent in the UK.

jdw2000 wrote: »

Those were all among my reasons too.

If you have a plan and a strategy driven by some sort of logic (even if it's not a logic shared by everyone else), you're not necessarily wrong; only you know what your needs and wants actually are.

"About 7%" is a strange amount to aim to invest in the country in which you live. It basically means you think the best way to deploy your funds over the course of your retirement is to invest thirteen pounds in other countries for every one pound that you invest in your home country. There are not many people in the world that do that because it doesn't really follow any kind of common sense.

You can't meet someone down the pub and say out of the blue, "hey, I always make sure I have thirteen pounds invested overseas for every pound I invest at home", and expect people to not think you're some kind of freak.

The people who do select that exact ratio are just methodically following some theoretical construct that they read about, which told them that if you looked at the biggest five thousand companies in the world, 6-7% of the value of their market capitalisation was in the UK, so you should definitely invest only 6-7% of your own assets into the UK. This disregards for example the fact that your future spending needs and cost obligations will probably not be split exactly 7% UK to 93% overseas by currency and producer (although that in itself is a tricky question because obviously a lot of expenses are driven by world market forces).

They adopt the mantra because it's easy, but it doesn't make it the "correct" thing to do. If you are someone with a separate pot of decent wealth, perhaps more like Monroe than jdw, then you have more flexibility in what you are investing in and more capacity for risk, and having a high proportion of an ISA invested overseas can be fine if the rest of your estate is at home.

jdw2000 wrote: »

It is far less time and hassle to simply choose a world wide fund with a proportionally-correct representation of the various stock markets and to just leave it to do it's thing over the long term.

It is certainly less time and hassle to do that. But it won't necessarily get you a useful result based on your needs and goals.

For example, if you allocated your capital among financial assets in line with the size of the available markets capitalisation, you would probably have more than twice as much of your investment portfolio allocated into fixed interest opportunities or commercial real estate debt and equity as you do into public company equities. However in your own case you decided you actually wanted nine times as much in equities as in bonds, so you decided to split your investment between a 100% equity product (vwrl) and an 80% equity product (vls80). So on average you are 9:1 equities:bonds instead of 1:2.

Why would you do that? It's because you realised that the relative size of the markets are simply driven by companies and governments making investments available and then individuals, companies and other institutions coming up with a price and deploying their own investment capital into the opportunities in a way that suits their respective needs. And as your own personal needs are quite different from the needs of some of the institutions that make up the global pool of invested capital, there are a lot of loud voices to disregard when coming up with your own asset allocation. Which is presumably why you ended up with 9:1 instead of 1:3.

So then when you look at the equities allocation between countries, should you go ahead and just blindly follow the market, like you didn't do with the top level asset allocation?

The market participants, like an insurance company in Bolivia or a pensioner in Indonesia or a non profit foundation in Tasmania, do not have a large proportion of their investments in UK equities. They probably don't care one iota about the performance of WHSmiths or M&S, because they don't drop in there to pick up a magazine and a sandwich ahead of their train journey to Bognor. However, as someone who is paying the over the counter prices for goods and services from WHSmiths and M&S, I might find it more useful to also be an owner of those businesses, rather than "diversifying" and buying into Latin American transport cafes.

Likewise when California's public employee retirement system is deploying their $100bn of assets and keeping $0.5bn of it in cash to supplement their liquidity pool, they may only need $40-50m or so in sterling. "No more than 10% of your cash in sterling" seems reasonable for Calpers and most of the world's population given that 99% of the world's population does not live in the UK. Is that how you would or should choose to allocate your own savings? I suspect you don't.

So, yes throwing all your money into a world equities index is cheap and easy, if all you want is to ride the rollercoaster of the index through equity-only exposure to mostly largecap overseas listed businesses. But as there are lots of other opportunities - such as smaller overseas listed business, domestic listed businesses of all sizes, and a whole load of non-listed global businesses, and real estate, and commodities, and domestic and international corporate and government bonds etc - it is a fallacy to say that you have bought "diversification" when you just hold a world equities tracker whose constituent markets are largely well-correlated.

What you have bought is something "cheap and cheerful". If "lowest cost" was all there was to it, that would be fine. But as the returns from different asset classes can differ by 40% in a given year, it can be a false economy to buy a world equities index to save the odd 0.25% a year.

Darkidoe suggested investing was all about asset allocation. I concur, and IFAs would no doubt agree with that too. You (jdw2000) suggest that this means darkidoe is claiming to be able to "beat the market with his knowledge and wits". I'm sure that is not his claim whatsoever. What he is seeking is a return that differs from the 'global equity market' and is more suitable for his needs. Most other experienced posters do that too.

jdw2000

Well, we know that we can expect passive funds to double every 10 years (7% growth). £100K invested in 2016 will be £200K in 2026. Passive funds such as VLS80 and VWRL I would expect will perform along the same lines.

The experienced members of this board outperform that then?

JohnRo

BH, devil's advocate time.

Do you accept that broad market based equity investment is a valid proxy that provides broad exposure to what might otherwise be niche and perhaps illiquid asset classes?

I'm finding it difficult to agree with the refrain in your post. Global small caps are correlated with global large caps, so disappointingly there's not much to be gained there if historic patterns remain consistent. Likewise bonds and equities appear to be increasingly correlated in recent times, even the historic relationship between their fortunes is far from clear or consistent.

Assuming business the world over is more or less trying to achieve the same thing, grow a profitable enterprise, and that we're in a world where that's set to continue then you'd surely want geographic exposure broadly in line with where business is being done?

VWRL as one example provides the following equity based exposure

Basic Materials 4.8%
Consumer Goods 13.7%
Consumer Services 10.7%
Financials 21.8%
Health Care 10.5%
Industrials 12.7%
Oil & Gas 6.8%
Technology 12.1%
Telecommunications 3.5%
Utilities 3.4%

That to me looks like a reasonable level of diversification and certainly more than just cheap and cheerful although I'm not disputing it is also both of those things. Internal rebalancing and Vanguard's access to data, analysis and expertise, the likes of which most DIY investors can't even begin to imagine, all add to the appeal imho.

MonroeM

I had an interesting conversation with a good friend and business contact who works in the city for a global banking and financial services company and works in derivatives. She was asking how I was getting on (I live up North) and if I needed any advice or help. I explained to her that I was trying to sort out my investment portfolio and was initially starting with my S&S funds.

I told her that I'd sold my UK equity funds and move the funds into a full world tracker. She said that a lot of people in the city (after Brexit) have moved out of UK equity (her included) and invested in mainly global funds although she herself has not chosen a tracker but has a definite preference to active funds. She has offered to email me some suggestions on property and bond funds although in her case she is happy with a 100% equity allocation. I found this quite amusing because she is quite cautious in her spending habits (especially as she's in quite a high paid job!) so I thought she would have a very balanced asset allocation portfolio?

AnotherJoe

MonroeM wrote: »

She said that a lot of people in the city (after Brexit) have moved out of UK equity (her included) and invested in mainly global funds although she herself has not chosen a tracker but has a definite preference to active funds. She has offered to email me some suggestions on property and bond funds although in her case she is happy with a 100% equity allocation. I found this quite amusing because she is quite cautious in her spending habits (especially as she's in quite a high paid job!) so I thought she would have a very balanced asset allocation portfolio?

Depends on your definition of balanced. There are numerous ways you can allocate money all of which could called balanced but i doubt there is an objective measure especially once you bring into play currencies, for example if China is 10% of the worlds economy (made up number) according to whose valuation of their currency is that determination made and how good is that valuation ?

Also depends on her timescale. Looking 25+ years out is 100% equities unreasonable? Not necessarily for me, I'd say overall that would do best.

And you say she's not in property, but does she own a house? There you go then. Do bonds look good for the next 25 years? Maybe not.

As long as you can stomach the wilder swings 100% equity will give you, and as long as you arent hamstrung into selling at a particular time, that seems reasonable to me. Also depends on her attitude to risk, there was a frantic poster here a few days ago practically screaming because her £20k funds had dropped to £18.5k. No doubt your friends wouldn't be phased by that and understands the risk and can cope with the downsides and is happy to ride out falls.

BTW she isn't necessarily an expert just because shes in derivatives, and she will have no more view into the future than you or I either, look up Long Term Capital Management :eek:

JohnRo

I've reduced my UK equity exposure since June, expecting the foreseeable future will be an unstable and uncertain one for the UK economy and business as things stand. How that will affect the UK equity market is unknown but in the mid term I don't see the prospect of much if any upside, whether it proves to be a wise decision longer term is anyone's guess at this point.

I'm comfortable holding global equity and not concerned with GBP currency gyrations.

My only active investment input, entirely arbitrary, is with a global income portfolio project I've been wrestling with for the last three and a half years, so still early days, which in comparison with VWRL's geographic allocation is overweight Asia/Emerging and UK(reduced), about on par with Europe and underweight US/NA(increased). How any of that matters will have to be seen.

I hold VWRL in a separate index tracking portfolio alongside WOSC which I'm not convinced will add much to the mix in terms of performance but willing to let it run the course and find out.

MonroeM

AnotherJoe wrote: »

And you say she's not in property, but does she own a house? There you go then. Do bonds look good for the next 25 years? Maybe not.

BTW she isn't necessarily an expert just because shes in derivatives, and she will have no more view into the future than you or I either, look up Long Term Capital Management :eek:

Yes, she does own her own house in a nice part of London so I suppose that's her property investment.

In fairness, she did tell me that nobody could predict future markets and that I need to do my own research. I was still a bit amused about her being 100% equity especially as she usually plays safe with her cash when shopping or on night's out!

darkidoe

jdw2000 wrote: »

So, in short, you think that you can beat the markets with your knowledge and wits. Perhaps you can. And perhaps the enjoyment you get from actively managing your portfolio is in itself worth something to you as a hobby.

But experts say that you are unlikely to be able to. And if you do, it's more by fluke than design. There is even an investor I read on this forum who said that he would likely have done better had he took the opposite of all the decisions he had taken!

It is far less time and hassle to simply choose a world wide fund with a proportionally-correct representation of the various stock markets and to just leave it to do it's thing over the long term.


But, as I said above, this doesn't factor in the hobby aspect. If you derive pleasure from actively managing your investments and this in itself is worth something to you then that's a reason to do it.

I don't believe I can beat the markets. But if you understand the shortcomings of Market Cap Weighted Indexes you might have to reconsider the risks, cue the Dot-com bubble.

As mentioned, everyone has their own logic and always DYOR.

JohnRo

MonroeM wrote: »

..I was still a bit amused about her being 100% equity especially as she usually plays safe...

Unless capitalism is set to collapse, which isn't worth a second of anyone's time entertaining, sensible collective global equity investment has proven over time to be about as safe an option as their is, in terms of wealth preservation.

The greatest risk by far (imho) with equity investment is the attitude and behaviour of the investor in the face of the inevitable periods of adversity.

bowlhead99

jdw2000 wrote: »

Well, we know that we can expect passive funds to double every 10 years (7% growth). £100K invested in 2016 will be £200K in 2016.

There is no reason to particularly expect that figure. That is the folly of taking some historic observation and extrapolating it. I would say it is more likely that the returns over the next ten year period will not come out at 7% compounded, as they usually don't.

If you take for example FTSE World index. Over 10 years to Friday, an investor in London putting in £500 would have got total returns (capital and reinvested income) of £1190 back; a profit of £690 or 138%. This is 9% a year annualised and compounded. So, more than doubling your money over the 10 years. However, imagine you were an investor in New York putting your money into the exact same basket of global stocks. On 2 December 2006 they would have cost you $990 instead of £500. Today, you would look at them as being worth $1511 instead of £990. Your gain is $521. Which is not a 138% gain for the decade, but merely 53% , which annualised is 4.3% not 9%.

During the ten year period to end of November, the dollar investor's largest peak-to-trough fall as published by FTSE was 57.6%. And the eventual return of well under 5% is a lot lot less than doubling your money in the decade. An investor in Paris would have got somewhere between the GBP and USD returns, when measuring the FTSE World in Euro, but would also have seen less than 7%.

So, an investor picked at random buying a global equity index on a random date should not 'expect' 7% return compounded for the decade that follows, because quite clearly they are not all getting it.

Extrapolating the future based on the past is something that only works until it doesn't. For UK investors the returns from the '50s to the early 70s were great. Then there was a serious mood change with the oil shock of '73 and big market crash of 74. Another mood change in the early 80s, this time for the better, when there was a very nice bull market from about '82 to 2000 before people lost half their money with everything from dotcom bubble bursting to Enron fraud and Worldcom bankruptcy and 9/11 etc etc over a period of a few years. Then a further period of attitude changes in 2008 as the world began to adapt to survive the financial crisis through easy money printing, tax changes and the lowest interest rates in recorded history. And now over the next decade those of us in the UK have a a period of political and economic change coming via Brexit, whether you invest at home and have domestic upheaval or you invest overseas and have exchange rate upheaval.

A century ago, USA was looking to overtake the British Empire as the largest economy, having had a lower GDP per capita and arguably being an emerging market. Now it is already emerged, and is 65% of your all-world tracker. As the world will change again over the next century, one should not expect the same growth rates as we once observed.

So, believing that a global tracker will double in the next 10 years because that would be similar to some average of what it did over some very different sets of circumstances in the twentieth century, is perhaps misplaced faith. For a start, a lot of global equities are currently valued at a higher average multiple of their recent earnings than they were for the last 50 years or so. So if you do believe in pulling up old statistics to support the idea of what you'l get over the next decade, statistically you would not expect returns to be as high as the long term average.

The current prices are not in themselves outrageous if you consider the fact that there is a lot of cheap debt available and compare them to the price of other investment alternatives such as bonds. People are paying more for equities because they would have to pay a lot for bonds instead. But the price of bonds can't keep rising. If you extrapolate historic rates of change into the future you get strange results which will probably not happen, like saying that in a few decades every person in the UK will be clinically obese. Tabloid headlines rather than a rational view. Bonds have perhaps already topped out. So you have to consider that things will not always go on for the next 10 years in the same way as some old average.

Passive funds such as VLS80 and VWRL I would expect will perform along the same lines.

Along the same lines as each other, in terms of yes they will broadly move in the same direction as each other, because most of what they both invest in is global largecap equity.

However, as one is 0% bonds and the other 20% bonds, and one has 25% of its equities in the UK and the other has 6.1% of its equities in the UK, you would certainly not expect them to deliver the same exact return, other than by complete fluke.