Multi-asset fund vs own allocation

jm78

I started investing in funds about four months ago now through an HL S&S ISA, slowly adding money month-by-month. At first I invested in funds recommended by HL, which have proved quite volatile, then read up on Monevator, here, and other places and came up with a balanced asset allocation (UK/US/world-ex-UK/dev-world trackers, bond trackers, international property tracker and the First State international infrastructure fund) which I've now structured my investments around.

Currently I have half this year's ISA allowance in this self-planned asset allocation, but am hesitating over whether to continue with this allocation for the rest of my allowance, or to go with a multi-asset fund such as Vanguard LS (which I fear is too UK-exposed) or HSBC global strategy (less UK exposure).

The crux of my dilemma: while my own choice of allocation is performing well and has much higher dividend yields than any of the multi-asset funds, I can't help thinking that the experts behind these multi-asset funds must know better than me! However, I am also wary of putting a lot of my eggs in one basket by investing heavily in a single fund.

As a fairly new investor, would I be better off going with a multi-asset fund, or persevering with my own allocation?

(A difficult question to answer, I know, but I'd just like to get some feedback on whether I'm completely crazy to be allocating my own assets when I'm relatively new to all this!)

Thanks for any advice.

AnotherJoe

jm78 wrote: »

I started investing in funds about four months ago now through an HL S&S ISA, slowly adding money month-by-month. At first I invested in funds recommended by HL, which have proved quite volatile, then read up on Monevator, here, and other places and came up with a balanced asset allocation (UK/US/world-ex-UK/dev-world trackers, bond trackers, international property tracker and the First State international infrastructure fund) which I've now structured my investments around.

Currently I have half this year's ISA allowance in this self-planned asset allocation, but am hesitating over whether to continue with this allocation for the rest of my allowance, or to go with a multi-asset fund such as Vanguard LS (which I fear is too UK-exposed) or HSBC global strategy (less UK exposure).

The crux of my dilemma: while my own choice of allocation is performing well and has much higher dividend yields than any of the multi-asset funds, I can't help thinking that the experts behind these multi-asset funds must know better than me! However, I am also wary of putting a lot of my eggs in one basket by investing heavily in a single fund. If you are in a fund thats across global sectors like the two you mention, Vanguard and HSBC, they might be each be single fund but the point is they are invested in literally hundreds to thousands of companies, so as long as you like their allocation, theres no need to do worry that its one fund.

As a fairly new investor, would I be better off going with a multi-asset fund, or persevering with my own allocation? Well that would depend what your allocation is. If its similarily balanced to say HSBC or Vanguard, its long term going to perform worse due to higher costs, and be more hassle to rebalance every so often. So, as an experienced investor (note, not necessarily the same as good!) thats why I've been gradually moving away from my own allocations into more general global funds.

(A difficult question to answer, I know, but I'd just like to get some feedback on whether I'm completely crazy to be allocating my own assets when I'm relatively new to all this!)

Thanks for any advice.

The difficult thing to get your head around is that, by and large, they dont.

However, just because you have done well over 4 months is of no matter either. Even 4 years is barely long enough to start making a comparison.

darkidoe

The problem with any asset allocation you pick for yourself is that you need data to compare to benchmarks of other portfolios/funds that others have picked. 4 months of data is not that significant in terms of long term investing and there will be reasons for the deviation. Unless you are a professional or a very keen investor, trying to work out why this may be and how you can make use of this is pointless. I reckon you need several years data before you can make somewhat of a comparison, by then which the boat would have sailed to change anything.

At the end of the day, the reasons you pick your allocation and the 'research/data' that is behind the multiasset funds can both be true or valid methods and it just depends on what you believe in. I personally think its actually just a flip of the coin which will do better because we can only compare retrospectively.

More important to focus on investing fundamentals,i.e. minimise trading, lowering costs, reinvesting dividends, time in the market, diversification, emergency cashflow and keeping a sane head.

fwor

One issue that, at 4 months in, you probably haven't had to deal with yet is rebalancing (as alluded to already by dunstonh).

I started my self-allocated investments 3 years ago, and the allocation quickly got out of shape - and I have not been diligent enough to keep fixing it, so it's quite a long way away from my original allocations now.

It's not a massive issue, but you do need to account for the costs in terms of your time and trading fees. Whether it's worthwhile depends to a certain extent on how much you have invested - the cost of rebalancing is built into multi-asset funds, and their economy of scale is such that DIY can't compete below a certain level of investment.

I'm starting to look at mixing and matching multi-asset funds to get what I feel is a better distribution than just going with one - for example adding one of the L&G multi-index funds to balance what I feel is a slightly too large US and UK bias within the Vanguard LS series. I've moved part of my DIY allocation into this type of mix & match, and if things look Ok after a year or so, I'll probably move everything to multi-asset other than a small amount to play about with.

seacaitch

The weakest components of most investment portfolios is the investor themselves. In most cases, the more that investors can remove themselves from the picture the better. Farming things out to a well chosen, well priced, sensible process that removes nearly all the decision making from the individual investor will very often turn out to be a good choice. It's not the only choice but for many it will often prove the best choice.

jm78

Thanks, everyone, for the valuable feedback! A few responses:

dunstonh wrote: »

HL recommend them as the fund houses have paid to get their fund on that list. It isnt a real recommendation. It is marketing. Many of the funds are highly volatile specialist funds that should not be in a novice portfolio.

Thanks, this is something I'm definitely picking up on!

dunstonh wrote: »

How has your asset allocation model been built? i.e. what actuarial data have you used? What is the target volatility range of your model? (need to know that if you want to compare it to multi-asset funds or other models)

I'm afraid I haven't gone into this kind of detail and my model is basically based on a Monevator model portfolio, with tracker funds chosen based on low ongoing charges and ratings from Morningstar, Trustnet and HL (although I realise HL don't tend to rate funds with low ongoing charges very highly!!).

dunstonh wrote: »

You started badly by going with the HL list but you recognised this and moved to single sector funds but have you done enough on the actual allocations? How often are your asset allocations modified for economic data? How often do you/will you rebalance?

The message I got from reading through Monevator was that passive investing doesn't require much rebalancing (and that there is even an argument never to do it). So I don't intend to spend a lot of time tweaking, but would sell and buy now and again to reallocate where an asset class was becoming over-represented in my portfolio.

Am I taking the Monevator / passive investing approach too seriously?

jm78

AnotherJoe wrote: »

Well that would depend what your allocation is. If its similarily balanced to say HSBC or Vanguard, its long term going to perform worse due to higher costs, and be more hassle to rebalance every so often.

Actually the ongoing charge would be higher for one of the multi-asset funds than for my portfolio of trackers. This is another reason I'm tending to favour sticking with my own allocations.

Linton

jm78 wrote: »

........
The message I got from reading through Monevator was that passive investing doesn't require much rebalancing (and that there is even an argument never to do it). So I don't intend to spend a lot of time tweaking, but would sell and buy now and again to reallocate where an asset class was becoming over-represented in my portfolio.

Am I taking the Monevator / passive investing approach too seriously?

To a great extent it doesnt matter what strategy you use as long as you can intellectually live with it and, most importantly, keep to it without getting diverted into buying and selling on gut feeling or the latest tips.

Any strategy is based on a simplified model of the investing world because we cant cope with the complexity of reality so I think it's best that you use the strategy as a tool and dont start believing you have found "The Truth".

HarryFlatters

I've found Monevator useful, also popular is Tim Hales book, Smarter Investor which is another positive look at passive investing.
It's difficult to be sure whether your strategy is right in such a short time frame but diversifying the portfolio by sector and geography has to help iron out the inconsistencies, at least then you'll be consistently average which is just where most are happy.

bowlhead99

jm78 wrote: »

I'm afraid I haven't gone into this kind of detail and my model is basically based on a Monevator model portfolio, with tracker funds chosen based on low ongoing charges and ratings from Morningstar, Trustnet and HL (although I realise HL don't tend to rate funds with low ongoing charges very highly!!).

If the funds you want are all trackers then ongoing charges are one of the key things to look for. One of the few obvious differences between two trackers trying to track the same thing. But Morningstar and Trustnet 'ratings' don't really give you anything to go on in terms of tracker performance or quality such as tracking error, effect of stock lending, potential counterparty risks etc.

So really it is just a Monevator model portfolio picked at random out of the several on their blog, then modified by a bit of guesswork on your own part, versus the professionally marketed all-in-one, off-the-shelf portfolios which have billions of pounds invested through them.

Good luck

Still, having a go at it yourself is a more interesting thing to do than buying a product or service off the shelf. And good experience. It just doesn't necessarily give better or cheaper results in the long term. Same as installing your own toilet, boiler or double glazing.

The message I got from reading through Monevator was that passive investing doesn't require much rebalancing (and that there is even an argument never to do it).

They do present the argument not to do it, but doesn't mean they wouldn't do it themselves.

It's generally accepted that if you have a target portfolio that you like the look of, then the existence of different asset classes in the portfolio and different relative performances will cause your holdings to start to diverge from its target pretty much as soon as you set it up.

- If you don't fix it via a manual rebalance then it will often get further and further away.

- If you don't rebalance and it does come back into balance of its own accord, great, but you will have missed the opportunity to sell high and buy low when fixing the over- and under-exposures so you will have missed the natural performance advantages offered by diversification.

So I don't intend to spend a lot of time tweaking, but would sell and buy now and again to reallocate where an asset class was becoming over-represented in my portfolio.

Yes, you should definitely do that - if you don't just get a multi asset fund or two and have them do the work for you.

Am I taking the Monevator / passive investing approach too seriously?

Maybe. It is a blog, presenting one or two broad philosophies of how things could be approached when building an investment portfolio. It is not the be-all and end-all of investing.

It is well written and there are other websites and books which espouse the virtues of passive investing and plenty of products and product marketing to support them.

However, most people get through their life without ever reading it, and are not necessarily any worse off for that (...unless you ask monevator or other staunch advocates of passive investing, who would say that those people *are* worse off... but in saying that, they are clearly going to be biased to the approach that they chose to take themselves.)

jm78 wrote: »

Actually the ongoing charge would be higher for one of the multi-asset funds than for my portfolio of trackers. This is another reason I'm tending to favour sticking with my own allocations.

The generic comment about your portfolio being more expensive than buying a multi asset fund is because to keep making contributions into a large number of funds of your own portfolio and keep them rebalanced, is costly.

The only reason you don't see it as costly is because you have gone with one of the most expensive providers, HL, who charge a high ongoing fee so they don't need to charge transaction fees on buying and selling funds.

You are perhaps able to build a portfolio for 0.20% for which a professional would charge 0.25% for convenience, saving yourself a fiver on £10k invested. This doesn't really matter a whole hill of beans in the grand scheme of things because your asset allocations may give returns hundreds or thousands higher or lower than the professional allocation in a given year.

If a fiver or 0.005% a year does matter, then it's pretty small compared to the HL platform fee of 0.450% and its cheaper rivals at 0.350% or 0.300% or 0.250% or whatever.

dunstonh

The message I got from reading through Monevator was that passive investing doesn't require much rebalancing (and that there is even an argument never to do it).

We did a bit of research some years back using FE Analytics. We plotted in an allocation and left it unchanged. We then compared it with annual rebalancing using static allocations. and annual rebalancing with fluid allocations. The fluid allocations were best. Then the static with the non-rebalanced last.

Am I taking the Monevator / passive investing approach too seriously?

Its info an opinion but it doesnt make it right.

Actually the ongoing charge would be higher for one of the multi-asset funds than for my portfolio of trackers. This is another reason I'm tending to favour sticking with my own allocations.

You are too focused on charges. The charge difference is less than the equivalent of less than 5 minutes on the market a year. The charges should never be the primary consideration. Always a secondary. Where you invest is top of the pecking order.

I have been an investor and adviser for over 20 years. I am qualified in investments and economics. I don't use my own allocations. You need to know your own limitations.

and ratings from Morningstar, Trustnet and HL

Forget ratings. Funds that dont pay the research companies dont get rated. Ratings also tend to have a bias towards short term discrete performance.