180K Investment

jdw2000

bigadaj wrote: »

Good luck with that.

Non prime area, interest rates will rise, not may, and with wage inflation lagging we presume you are relying on a rapid influx of Arab sheikhs, Russian oligarchs or Chinese entrepreneurs into the east end?

You mean like the Arab Sheikhs and Russian Oligarchs of Clapham South (to name but one example area) where the cheapest 2-bed house currently is £675K.

To assume that parts of east London will get to that level in 10-15 years is hardly an outrageous claim.

bigadaj

jdw2000 wrote: »

You mean like the Arab Sheikhs and Russian Oligarchs of Clapham South (to name but one example area) where the cheapest 2-bed house currently is £675K.

To assume that parts of east London will get to that level in 10-15 years is hardly an outrageous claim.

Fairly outrageous, I certainly wouldn't bet my house on it.

jdw2000

bigadaj wrote: »

Fairly outrageous, I certainly wouldn't bet my house on it.

You'd have said that at any point in the last 20 years. And you'd have been wrong each time.


I know a very smart bloke who had properties in London and Sydney. Sold them and bought shares as he waited for the crash to happen. That was 10 years ago. He gets prickly when asked about it.

bigadaj

jdw2000 wrote: »

You'd have said that at any point in the last 20 years. And you'd have been wrong each time.


I know a very smart bloke who had properties in London and Sydney. Sold them and bought shares as he waited for the crash to happen. That was 10 years ago. He gets prickly when asked about it.

You would be better off with multiple properties, particularly in different locations, as you have some diversification.

The returns from property and equities are frequently similar, the buy to let advantage is that you are gearing the asset, so liabilities are larger than with investments, so gains or losses are magnified.

If your friend was diversely invested he won't have lost out, once you get up to a certain level of wealth you want full diversification which would include property whether directly owned, directly held by funds or by shares in property companies depending on your preference.

bowlhead99

jdw2000 wrote: »

bowlhead99 wrote: »

I'm not doubting prices in 2021 or 2026 could be more than they are today.

I'm doubting the 7% compound, which you said you were 100% that it would exceed.

Well, I don't doubt it at all. My house in east London is £360 in 2016. This house will be worth £600K by 2026.

OK, so 600k/360k is a 66.7% return, over the decade to 2026, which represents 5.24% compounded.

So, on the face of it, you are not at all 100% sure that it will be 7% return, in fact when you try to come up with an estimate you are suggesting 5.24% yourself.

One day it will be worth £1m (probably around 2040 or so).

1000k/360k is 2.78 x its current price, which if it takes 24 years to achieve by 2040 would be a 4.3% return.

If it had achieved 7% it would not be at a million, but instead 1.826 million. Your estimated £640k profit is somewhat short of the £1466k profit you would need to hit that target. In fact it is less than 44% of the total growth you would have been expecting on a 7% annual run-rate.

That is quite interesting actually:

In the earlier post, you said 7% was your expectation (or at least, a rule of thumb) for global stockmarket returns over the next 10 years. I pointed out that anyone from the US investing in the FTSE World global index of stocks over a 10-yr period ending this week, would have achieved a total return of 4.3% compound which was nowhere near 7%.

It is quite feasible that the return on equities over the next decade is 'only' 4.3%, or even less, if that is what the largest group of investors in the world (by value) have achieved in the last decade - even where the capital value of their own stockmarket today is almost at all-time highs. So the results of the last decade were flattered by finishing on a high and the next one is starting from a high so it is tough to see that the 'rule of thumb' 7% will be achieved. There is significant risk that it will not.

You said that if that was the case, and those were the returns on offer, there was not much point bothering with equity investment, because property in London would 100% exceed 7%.

But now from your own figures you are actually only expecting your London property to go up by 5.2% over the next decade and 4.3% over the next quarter century: the level at which you said equity investment was pointless.

What this shows is that:

a) it's sometimes hard to get your head around growth rates and timescales and levels of total nominal return. Good job we weren't trying to do the even-more-complex additional calculations involving inflation estimates.

b) it's perfectly reasonable to suggest that global equities via an index fund, or a mixed asset portfolio invested actively or passively, or London real estate, will not achieve 7% over the next decade or two. There seems to be consensus on that because you are only estimating 4-5% for London property going forward.

Conclusion: don't expect to double your money in global largecap equity or London property over the next decade.

cashbackproblems

just to give you my experience of S+S investing, i started at 22 and have been drip feeding small amounts since then each month via HL, i work in finance so have some knowledge of markets but of course I'm no financial expert. While its true you generally don't want/need overlap with funds like you have, its not the end of the world and you can rebalance quite easily now, some negative people on here always comment that someones fund selection is "random" and has no rationale but this is individual to everyone and while getting a diversified portfolio (by sector, geography and asset class) is scientific, theres no right or wrong way.

I have started switching my funds more towards passive index funds e.g L+G and Vanguard and have about 4 passive and 4 active funds currently. Some index trackers for south american and country specific exposure are non existent so i use active managed e.g. Aberdeen Latin America and India. I have recently switched my investco perpetual high income to Vanguards UK tracker 1% v 0.08%. But i agree investing heavily in the UK over the next 10 years is not the way to go, with low growth/brexit/inflation, stick to emerging markets or US.

I only have a small portfolio 30k currently as i only drip feed 250pm, but have a overall gain of 15% using my random methods.

bowlhead99

cashbackproblems wrote: »

I have started switching my funds more towards passive index funds e.g L+G and Vanguard and have about 4 passive and 4 active funds currently. Some index trackers for south american and country specific exposure are non existent so i use active managed e.g. Aberdeen Latin America and India. I have recently switched my investco perpetual high income to Vanguards UK tracker 1% v 0.08%.

Just in case it's of interest, iShares do an MSCI Latin American tracker ETF. It has a little less in Brazil and more in Mexico than the Aberdeen fund but for example they both have 4.5% of their assets in Ambev. Lots of the other holdings are different though, e.g. Aberdeen has about an extra three percent in Banco Bradesco vs the index.

Also the closest Vanguard equivalent of Inv Perp (which is an equity income fund) would have been their Vanguard FTSE UK Equity Income Index fund which is about 0.2% fees, if what you're looking for is exposure to UK stocks paying higher dividends. The capitalisation-weighted index you bought would potentially produce quite a different return (well, more than the 0.1% of saved fees). Although personally I am not a fan of using indexes for income - as the construction methods seem somewhat 'artificial' - but then I don't hold a FTSE all-share tracker either because I don't like the industry concentration and size mix.

Anyway, good luck with your investing journey and I hope the 'random methods' turn out randomly good or randomly average rather than randomly bad

JohnRo

bowlhead99 wrote: »

No, it is not a good proxy for niche and illiquid asset classes. VWRL is a proxy for a very non-niche asset class called 'the equity of large capitalisation companies' which all meet the criteria of having a high level of liquidity and are listed on major international stock exchanges. It gives you a heavy exposure to certain of those markets and individual companies. If that is what you want, fine.

The point I'm making is that they don't exist in a vacuum. Mega and large cap companies employ the services and/or actively acquire a whole slew of lesser businesses, they partner and collaborate with others, they procure and develop supply chains with others. Some of those businesses are niche and otherwise difficult to invest in. They also employ a large workforce directly who contribute to and prop up entire regional economies.

MonroeM

bowlhead99 wrote: »

No, it is not a good proxy for niche and illiquid asset classes. VWRL is a proxy for a very non-niche asset class called 'the equity of large capitalisation companies' which all meet the criteria of having a high level of liquidity and are listed on major international stock exchanges. It gives you a heavy exposure to certain of those markets and individual companies. If that is what you want, fine.

It is true they are broadly correlated - for example if one is up it is unlikely that the other is down. However the pace of value change can be different. In some decades, smallcaps have massively outperformed largecaps (although it does vary from market to market and in certain markets there is not much between them). In other decades, the largecaps performed better. So, we have two types of assets that have a track record of giving different relative performances at different times. That is the sort of thing that can be used in a program of 'buy two asset classes and rebalance' rather than 'buy one asset class and hope it was the best of the two'.

But you can look at the concept of those two types of financial instrument and determine that fundamentally they are very different investment products which logically give different financial returns to their investors.

One of them is buying a known fixed return which will continue for a fixed or indefinite period to the extent that the business or government issuing it to you is able to remain in existence, paying you in priority to giving a return to the business owner(s). Meanwhile the other is giving you voting rights to control a company and you get to keep all residual profits or assets after you have paid out the annual contractual returns to the bondholders. The profile of the return and the risks associated with them are fundamentally different.

All that has happened with your 'bonds and equities are getting increasingly correlated in recent times' it seems, is that you are standing in the harbour and observing that as a result of some external factor (e.g. the rising tide), all the boats are getting closer to the height of the moorings. As it is with QE and other stimulus such as low interest rates, making all non-cash assets more attractive and expensive.

The movement of the boats are correlated - as when a wave moves one, another will bobble too, perhaps a different amount because of the different relative sizes and shapes and weights. However the owner of a superyacht is probably going to get to his destination quicker than the owner of a rowboat. Though the owner of the superyacht may attract greater interest from pirates. Consequently you still need to decide whether the best thing for your needs is a superyacht or a rowboat and whether a blend (both) is useful for your fleet. Who knows, they may complement each other, as the superyacht is going to have a heck of a problem docking in some ports, and you may find it useful to take both on your international travels for a blend of speed and versatility.

It is true that business is happening everywhere, and the economic returns per unit of currency invested in a particular year might be absolutely excellent in a Mexican fruit-and-veg packing business compared to the returns made by a UK wind farm, so should not be dismissed out of hand just for being international.

However, the output of the UK windfarm is something that I have to pay for when I buy my electricity. Energy production is a regulated industry and the government can change the rules, but I can vote for new members of my government every few years. Ultimately I need to have money to pay my leccy bills whatever the price and production cost is, but it might be nice that a company I own is the recipient of those leccy bill payments.

By contrast if I own the Mexican packer and some other country votes Trump in and he cancels NAFTA which used to cover 85% of Mexico's trade, and the company's revenue falls through the floor and their costs rise because it uses a lot of energy to ship to China instead... maybe I don't want that exposure to risk, because I am not much of an eater of imported peppers and asparagus anyway.
Well,
a) The VWRL fund is not internally rebalanced to a specific level of exposure to anything. If Apple goes up in value 50% overnight and other stuff doesn't, the exposure to Technology goes up and the exposure to USA goes up. As a proportion of the portfolio, the exposure to stuff that is not Apple, goes down.

It is a laissez faire strategy and there will never be any selling of Apple to bank any unrealised profits from year to year. When Apple eventually goes out of business, all the money will have been lost (unless before that time, Apple successfully generate and dividend out all of the value that their market capital currently represents - will take approx 50 years at current dividend rate, and will be a different amount of years for you as a UK investor than for an American or a French investor, because fx rates will fluctuate over that time).

So, forget 'internal rebalancing' as an advantage of VWRL because they are deliberately not rebalancing it because it would take them out of whack with the index they are offering you.

b) You refer to VWRL taking advantage of Vanguard's access to data, analysis and expertise, that we can't imagine, and which should add to the appeal.

Vanguard receive the data (the list of All-World constituents and weights) from FTSERussell or an intermediary each quarter. They conduct no analysis on the likely performance of any of the companies over the forthcoming decade, and do not use their enviable expertise to determine what asset classes, industries or regions the investors may prefer to allocate their capital towards. They buy the index. They do some analysis to see if there are any companies they can get away without buying to still get roughly the same result - but can't really use judgement, analysis or expertise. What you pay for is for them to do as little as possible and deliver the result of any other fund manager's FTSE All-World tracker, with low tracking error and low fees.

To employ a manager to do as close to nothing as possible, and pay him as close to nothing as possible, presupposes that you have already determined that the specific mix of assets offered by the FTSE All-World is going to be suitable for your needs.

There are quite a lot of people on this form that seem happy with VWRL or a similar All-World tracker and there are so called 'experts' on sites such as Monevator that tend to back up this theory. However, others (and i don't know if this includes you?) prefer to choose their own single sector funds and asset allocation rather than rely on passive trackers and I'm sure there are 'experts' who support this view as well.

At the end of the day its everybody's personal choice and opinion but I'm sure if anybody on here invested in an All-World passive tracker say 5 years ago then they will be more than happy with their return on this investment.

bowlhead99

JohnRo wrote: »

The point I'm making is that they don't exist in a vacuum. Mega and large cap companies employ the services and/or actively acquire a whole slew of lesser businesses, they partner and collaborate with others, they procure and develop supply chains with others. Some of those businesses are niche and otherwise difficult to invest in. They also employ a large workforce directly who contribute to and prop up entire regional economies.

Right, they don't exist in a vacuum but if you invest in a large corporate who uses a small niche player in his supply chain, you are not getting exposure to the profits or assets of that small niche player. The profits and assets of the niche player are that bit of the value chain that you don't get access to via your largecap investment.

Example, regional farmer has a dairy cow and milking machine and has overall costs of 30p for a litre of milk. He sells it at the farm gate to a milk processing firm for 25p and takes a loss. The processing firm pasteurises and boxes it incurring costs of 9p and sells it to a supermarket for 35p making a penny of profit. The supermarket incurs costs of shipping it around and marketing it and retailing it of 5p and sells it for 43p making 3p profit.

So, when you buy the index and it contains a large retailer like Tesco, who has 'developed supply chains with smaller niche businesses that are difficult to invest in', do you get exposure to the profits and assets of dairy farming and milk processing?

No, you don't get to 'enjoy' those losses of 5p which you'd have had by investing in a cow-rearing and teat-pulling business. You don't get to enjoy the profits of 1p from the milk treatment and packaging business. You don't have assets of milking machines or packaging machines, they are a liability if anything because they are an outsourced service for which you must pay to keep your milk supply going to allow you to make the 3p profit on your retailing business.

You can have the same analogy for a big brand manufacturer that employs a small graphic design agency. It might be nice to feel that by buying the stockmarket index you are helping out small designers in some way and getting exposure to their profits.

But what is happening is just that the company you own is agreeing the price for a service, and giving money to the designer, and the money going to the designer being the profits of its design business is the money that you don't get access to: it's the money that your business left on the table for the design agency. Your returns are very different from the returns of a design agency, in which you can't invest because it's a niche private business which happens to be selling its services to you but could just as easily sell it to someone else.

So, you are not getting exposure to those 'niche and illiquid asset classes'. Investing in Tesco is not a proxy for investing in a hillside farm, nor is investing in Samsung a proxy for investing in a logo artist.

It would be like saying, instead of investing in a mortgage company which lends money to someone secured on a house (and owning a portfolio of asset backed loans which earn fixed interest returns), I will instead buy a house and let it out, borrowing money from a mortgage company in order to finance it. In that way I am 'partners' with the lending firm in my property purchasing business, so in a sense, by owning equity in the property purchasing business it is a proxy for investing in the whole supply chain, so it is just as good as investing in the lender. No it isn't. It's exposure to a totally different set of risks and rewards and I don't get exposure to the lender's business (fixed income investing with credit default risk).

So, the fact that a mega cap company props up a local economy by giving jobs to a workforce, or a mid-cap company collaborates with private enterprise or local government, does not let you say that you have an economic exposure to that private enterprise or the future wealth of the citizens. If your business is a Brazilian mobile phone company, then your relationship with your workers and suppliers might be seen as an inverse one. For every BRL you pay them, they get it and you don't. If you give them a job, great, but they don't reward you by buying another mobile phone, because they already have one. You are not 'buying exposure to their fortunes', you are merely exploiting their labour.

So, rather than waffling on further, bottom line is I don't think that buying a global tracker is proxy for actually going and buying all the businesses that are not in the tracker and might have a significantly different profile of returns.

Further, even if it were true that buying the big companies somehow gets me exposure to the profits of their suppliers, I don't see that taking exposure by buying a tracker such as VWRL gets me 'better' exposure than by buying equities through an portfolio of separate funds or more active funds.

For example VWRL gives me $5 of Apple for every $2.50 of Johnson and Johnson and $1 of McDonalds. An active manager might prefer a ratio of $3:$3:$3 for these multinational globally-trading businesses. Apple is in the business of dealing with RFID chip material suppliers. McDonalds is in the business of dealing with potato chip material suppliers. Johnson&Johnson is in the business of cutting down trees to make toilet paper while McDs is in the business of cutting them down to graze cattle. They are all quite different businesses, so no doubt you want exposure to all of them.

What VWRL has going for it is the low cost due to lack of thinking about what it is that you might want. It doesn't magically create a suitable portfolio, and it doesn't necessarily give you the returns of being a beef farmer or a niche circuit-board printer unless those businesses are also well represented directly in the index.