Tim Hale based plan- comments please?

bostonerimus

I agree that someone with a high probability of a 30 year retirement needs more than 40% in equities. However, why bother to think of the portfolio in terms of "buckets". Just set up your overall fixed income, cash and equity allocations and use a total return approach where interest, dividends and capital gains all play their part. It doesn't need to be complicated.

3.5% as a safe withdrawal starting level for 30 years from a 60/40 portfolio is probably ok and if you have some flexibility to apply some Guyton-Klinger limits, that might provide some added security.

bostonerimus

Linton wrote: »

This is an attitude one often seems to see in US investing discussions. The whole world is divided into US and International, now it seems that EM is allowed to have a separate minor existance. However "International" or "Developed World" includes a range of very different markets. Neglecting this may make some sense from a US base where these other markets are comparatively small. From the UK though the allocation between these markets is just as important for diversification as the allocation between your home country and "International".

The situation with EM is even more marked. At one end you have the high tech South Korean and Chinese electronics giants or car manufacturers which are comparable with corresponding companies in the US, Europe, or Japan. At the other you have the real basics and high risk of South America or much of Africa where the only large companies are the banks and possibly a miner or an oil company. It makes no sense to dump it all into EM. With the large companies operating in a global market, sector allocation becomes more important than geographic allocation. An oil company in one country will be much the same as an oil company in another, but both will be very different to say a bank, a major biotech company or a global retailer no matter where their shares happen to be quoted.

How much you "slice and dice" depends on how much money you have to invest. If it's say £10K you may as well go for an all world tracker or an all world active growth fund. In absolute terms the effects of charges or of allocations, as long as they are reasonable, are pretty small. If you have £500K then you can benefit from tighter control over where you money goes by geography, sector, or size. Differences in % allocations in these areas can have a much larger effect than differences in charges.

Given the poor performance of active managers I have little confidence in their ability to make the right calls in the South Korea or Brazil. Keeping indexes broad smooths out return and you will miss the high frequency variation both positive and negative. With a small portfolio you don't want the volatility, with a large portfolio that you are using to generate income it's also good to avoid volatility. If you do want to have a toe in lots of ponds just buy a multi-asset index fund like VLS etc.

jamesd

Audaxer wrote: »

If there is a greater chance of underperformance with active funds that makes me more inclined to stick with passive funds, as I don't really want to be constantly monitoring and chopping and changing active funds, to try and ensure they don't underperform.

There's a lower chance of underperformance with active than the roughly 100% chance with passive. It's the potential size of it and the need to pay attention that can make a difference. If you don't want to pay attention, use passives.

jamesd

bostonerimus wrote: »

I don't see how I've exactly mislead people. It is true that expenses will cause a perfectly tracking index to fall below the return of it's benchmark by a few tenths of a percent, However I do not define success as beating a benchmark. Success is achieving your investment goals and for most people looking to save for retirement or financial security those will be amply met with the highest probability by a passive indexing approach.

Your original assertion was "Passive indexing is actually an active decision to accept the benchmark's return....and one that maximizes your changes of success". In that context success seemed to be referring to success at getting the benchmark return.

Most people won't pay much attention and are likely to be best served with passive multi-asset funds.

Linton

bostonerimus wrote: »

Given the poor performance of active managers I have little confidence in their ability to make the right calls in the South Korea or Brazil. Keeping indexes broad smooths out return and you will miss the high frequency variation both positive and negative. With a small portfolio you don't want the volatility, with a large portfolio that you are using to generate income it's also good to avoid volatility. If you do want to have a toe in lots of ponds just buy a multi-asset index fund like VLS etc.

The smaller the market (up to a point!) the more likely it would seem that local specialist knowledge can improve your returns. The major funds use local specialist knowledge. Relying on a global tracker to do the work will ensure that your money is invested to an excessive extent in the banks and oil companies similar to all the others around the world.

A problem with a global world market cap weighted index is that its components are too correlated, the index being dominated by global companies. Adding some extra, less than 100% correlated, volatility to a portfolio will in general decrease the overall volatility, not increase it. The performance of the portfolio, by contrast, will be the sum of the performances of its components. So some amount of potentially high return high volatility components in a portfolio is totally beneficial.

jamesd

bostonerimus wrote: »

with a large portfolio that you are using to generate income it's also good to avoid volatility. If you do want to have a toe in lots of ponds just buy a multi-asset index fund like VLS etc.

VLS won't do as good a job for drawdown if you believe the research. If you're not familiar with them yet it's well worth reading up on the Guyton and Klinger method and on Guyton's sequence of return risk reduction approach. Even if you like the Vanguard funds in spite of their higher cost, the LifeStrategy funds don't let you directly do the required changing of asset ratios.

Equity volatility isn't very nice but unfortunately you seriously reduce your safe withdrawal rate unless you accept a substantial amount of it.

bostonerimus

jamesd wrote: »

VLS won't do as good a job for drawdown if you believe the research. If you're not familiar with them yet it's well worth reading up on the Guyton and Klinger method and on Guyton's sequence of return risk reduction approach. Even if you like the Vanguard funds in spite of their higher cost, the LifeStrategy funds don't let you directly do the required changing of asset ratios.

Equity volatility isn't very nice but unfortunately you seriously reduce your safe withdrawal rate unless you accept a substantial amount of it.

Thanks I'm familiar with Guyton and Klinger. I'm in an enviable position where I need less than 1% of my portfolio to cover my expenses and I'm using a rising equity glide path in retirement.

bostonerimus

Linton wrote: »

The smaller the market (up to a point!) the more likely it would seem that local specialist knowledge can improve your returns. The major funds use local specialist knowledge. Relying on a global tracker to do the work will ensure that your money is invested to an excessive extent in the banks and oil companies similar to all the others around the world.

Active funds always hope that specialist knowledge and research gives them an advantage, However, the studies seem to show that that's exactly what it is.....hope rather than fact. We definitely need some more up to date studies in the UK, but I'll stick with my market cap weighting, passive approach for now with the hope to continue to get around 8% annually,

jamesd

bostonerimus wrote: »

Thanks I'm familiar with Guyton and Klinger. I'm in an enviable position where I need less than 1% of my portfolio to cover my expenses and I'm using a rising equity glide path in retirement.

I'm going with more of the Guyton approach and G&K but rising glidepath seems quite sensible to me as well, particularly with 1% being sufficient to cover expenses. Not retired yet, though.

jamesd

bostonerimus wrote: »

Active funds always hope that specialist knowledge and research gives them an advantage, However, the studies seem to show that that's exactly what it is.....hope rather than fact. We definitely need some more up to date studies in the UK, but I'll stick with my market cap weighting, passive approach for now with the hope to continue to get around 8% annually,

The really hard part is finding studies that don't ignore what matters for actives. If you just look at fund management houses or funds there are lots of studies but nobody with a free choice will buy consistently underperforming passives or actives , so nobody with that free choice can expect the results of the average for the whole universe of funds of a particular type.

Trying to deal with distinguishing between tied - employer selected pensions, say - buyers and free market buyers or between human fund managers and funds is presumably so much work that few studies even seem to consider doing it, even though that's what it takes to do a decent job.