ISAs should be more aggressive than sipps

bowlhead99

MatthewAinsworth wrote: »

Would currency really matter to average growth over 90 years?

The point is, the return stats are a single asset class with performance calculated in their own currency.

Say you invest £1000 at 7% return for 90 years straight. It turns into £440k.

Or, say you use the £1000 to buy $1300 and invest that at a recorded 7% return for 90 years. It turns into $570k. Then you sell the dollars at perhaps 1.8 to the pound when you need the money in retirement, and get less than £320k ; not even as much as 75% of the pounds you'd projected. So, yes of course it matters.

The fact that you are investing at a range of dollar exchange rates will of course mitigate the ups and downs somewhat as you will be investing and divesting at a range of rates and not just 1.3 in and 1.8 out. But with structural shifts in the market dynamics over time you could easily get all your investments done over three decades in a range of 1.1 to 1.6 and then all your selling over the subsequent three decades in a range of 1.5 to 2.0. with a similar effect - even if the Americans claimed their smallcap market delivered a solid 12% compounded, you wouldn't get it.

There may be liquidity problems faced by fund, but if at the moment tracking error is negligible can I assume it's ok at the moment?

No, because you're only looking at nice easy positive years and what matters is how it performs in the difficult years.

Look back at how the fund performed against its index in 1929-32. How was its tracking error then, did it only lose as much as the index lost during the "great depression", or more?

Or the second world war, 1987, 2000-03, etc: how was the tracking error then? If the answer is you don't have the data because the fund didn't exist, I guess you have your answer - you don't know. So, you can't assume with great certainty, only with a relatively weak expectation.

Fully accept that current p/e isn't a guide to future, but assumption is all I have

Fair point, all you have is educated guesses. For which the logical next step is to take your projections with a monster pinch of salt because it's all a guess and 8-10% or less may be more realistic than 12% once you eliminate the factors that caused your single country single asset class to give its super-performance last century.

I have been revisiting emerging but it doesn't seem reliable enough

Anything that has good return potential is inherently unreliable.

Probably if you looked at the smallcap returns while they were happening last century, you would have said they were unreliable, especially in the years they were beaten by largecaps. But now you are looking back with the benefit of hindsight and literally thinking "ooh, seems like smallcap goes up the most over 90 years, that's what I should be in". Deciding you know what's best only with the benefit of waiting to find out the results is very flawed thinking and promotes false confidence. That's why people on your other threads have told you not to go exclusively into a global smallcap tracker for your pension but to consider all the other sensible investment areas such as EM etc.

, and maybe tracking the s&p 500 is a better way overall of doing that

You can see from the charts that EM and developed US largecap go up and down by different amounts at different times so S&P500 does not function as a substitute for EM. One is a diversifier to the other so both have a place in the portfolio and mixing them and rebalancing periodically can improve returns as well as reducing volatility. It's not an either/or.

System

I agree investing a lump sum and cashing out are the times currency matters most. I think currency risk can create opportunities when £ strong, although I'm not really market timing

8% I could live with, it was the large cap numbers I first saw when I was first attracted to investing anyway. I don't really have a goal, I could "retire" on the tax credits now if I wanted to, so it's a bit pride driven and open ended (although I'm bad at finding ways to actually spend money so when I feel comfortable i might just wind down then

Small are unreliable, but they don't have quite the standard deviation that EM has, my time frame is long enough that that volatility may not really matter but I couldnt exit an em mutual fund with any confidence at all in what I'm getting

EM does tempt me but it has had such a long weak period I don't feel confident expecting a profit let alone building many plans around it. I may give it a small %, but I don't really need returns above small cap and don't want to potentially waste allocation - I'd be happier with large cap than em

Indeed the s&p will have major non EM exposure, but large cap gives you some of the economies of the EM countries, maybe doing it more efficiently - em hasn't captured GDP well so maybe multinationals took it?

bowlhead99

MatthewAinsworth wrote: »

EM does tempt me but it has had such a long weak period I don't feel confident expecting a profit let alone building many plans around it. I may give it a small %, but I don't really need returns above small cap and don't want to potentially waste allocation - I'd be happier with large cap than em

Let us know what specific "long weak period" emerging markets has had that has meant that you don't feel confident expecting a profit from it over the thirty to fifty years period you'll have from your current age to your mid-retirement years (age 60-80)?

Indeed the s&p will have major non EM exposure, but large cap gives you some of the economies of the EM countries, maybe doing it more efficiently - em hasn't captured GDP well so maybe multinationals took it?

In what sense has the growth of value of decent EM equity funds over the last couple of decades failed to capture the GDP growth of EM countries in dollars or sterling?

Granted, on some level, the S&P 500 has exposure to emerging markets because the emerging markets are some of its customers. But emerging markets are not the majority of the customer base (by volume or value) of the S&P500 stocks as a whole.

stoozie1

MatthewAinsworth wrote: »

Don't dismiss me breaching the LTA, it's possible if 12% continues over the next several decades, I can afford to be completely aggressive with tax credits and a dB pension, it's only a wedding and nursery fees and clearing a stooze currently slowing me down, after that I can get serious

If this is a real possbility for you, are you maximising your partner's pension contributions, and personal allowance in retirement?

edinburgher

Thrugelmir wrote: »

For the average investor this is their ultimate dream. When you find the Holy Grail let us know.

I agree - for most of us this entire thought experiment would be filed under 'first world problems'.

System

Bowl - since 2011, granted over my timescale it should be alright but combined with how wild it is and how slow mutual funds are to sell I'd be losing sleep
But I am seriously considering giving 10% to EM just for kicks and diversity. More than that and I'm not comfortable. The s&p 500 is of course not majorly EM but I like that multinationals can swoop down on it quickly and have the resources to do it, without the same illiquidity or volatility, it seems like a good way to do it and compliment to small caps. I'd have more faith come sale time. I might have both s&p and direct EM since they don't correlate much

China had a huge surge in GDP but it's equities didn't do so well, I've read that correlation between GDP and stock markets is very weak, I don't know why but I suspect the s&p pinching it may be somewhat a factor

Stoozie - it's be a possibility if I aimed for it, and cashed in dB pension, but I can just put equities into isa, not cash in dB, prioritise ISA and retire earlier to completely avoid it

coyrls

MatthewAinsworth wrote: »

how slow mutual funds are to sell

What do you mean?

MatthewAinsworth wrote: »

The s&p 500 is of course not majorly EM but I like that multinationals can swoop down on it quickly and have the resources to do it, without the same illiquidity or volatility,

What do you mean?

System

Coryls - I think mutual funds don't trade until a set time so with something wild you don't have much certainty of price

Multinationals can invest in EM quickly if they desire, they can raise funds as large cap and invest

However I note the s&p has low EM exposure and correlation, I won't go down that road. I will buy 10% em to give me diversification that my small caps don't have, not really targeting growth

coyrls

MatthewAinsworth wrote: »

Coryls - I think mutual funds don't trade until a set time so with something wild you don't have much certainty of price

Funds are generally priced daily. If you're investing for the long term, I don't see the problem; after 20 years, you're not going to be hovering over the "sell" button waiting for the right price. However if you really want real time pricing, get an ETF, e.g. iShares MSCI Emerging Markets UCITS ETF.

MatthewAinsworth wrote: »

Multinationals can invest in EM quickly if they desire, they can raise funds as large cap and invest

S&P 500 companies are not Investment Trusts; they don't invest in EM quickly if they desire, they might make a strategic decision to extend their EM presence or they might acquire an EM company but neither of these processes could be described as quick, let alone swooping down.

bowlhead99

MatthewAinsworth wrote: »

Bowl - since 2011, granted over my timescale it should be alright

Yes, you are looking at a tiny period in the grand scheme of things. The whole point of investing with diversity is to have assets that produce good long term returns while not being fully correlated with other assets.

but combined with how wild it is and how slow mutual funds are to sell I'd be losing sleep

a) if you use an investment trust or ETF you can usually sell instantly through an app on your phone, website on your PC, or a call to your broker. If you use a "mutual fund" as you term them (unit trust / OEIC) there will always be a dealing point in the next business day.

b) why would you be losing sleep when you are investing with a thirty year time horizon. The process of investing for the long term inside a pension doesn't require you to be reactive and sell up at a moment's notice if the market dips or rises.

But I am seriously considering giving 10% to EM just for kicks and diversity. More than that and I'm not comfortable.

Rule one of investing is not to invest for "kicks" but for returns. Rule two is invest with diversity.

Most people don't invest more than about 10% in emerging markets. The $3.8 trillion of market capitalisation covered by the FTSE emerging index is about 9% of the $41.35 trillion covered by FTSE All World.

Although as those indices are done on a cap weighted free float basis they exclude some stocks into which it's hard to invest as a foreigner and so EM would really make up a larger proportion of the world markets if you had better access to all share classes and entities in markets such as China as an outsider. 9% of a global equities portfolio in EM would be a little low on a total "true" market basis or on a GDP or population basis, but it's a level that a lot of investors would be happy with. So, it's not a problem putting no more than 10% in EM ; most people wouldn't advise you do that.

Though fretting about not wanting to go over 10% emerging is a bit strange from someone who is going all out for max performance and willing to have 100% of his pension in global smallcap.

The s&p 500 is of course not majorly EM but I like that multinationals can swoop down on it quickly and have the resources to do it, without the same illiquidity or volatility, it seems like a good way to do it

To do what? If you buy Vodafone or Verizon or AT&T or Sprint you aren't selling to China Mobile's customers, for that you would buy a stake in China Mobile.

China had a huge surge in GDP but it's equities didn't do so well

Over five years the Shanghai (SSE composite] index is up 49.6% not including dividends while GDP is up between about 6.7 and 10.6% a year since 2010. So, both have been growing. If you go back to 1990 when the index started you will see a huge increase to today's value which is over 3000. It has fallen back from a "bubble" peak when Chinese domestic markets went crazy. Just like other indexes do from time to time.

Remember China is not the only emerging market, there are plenty others, and there are other lesser developed markets that will move from "frontier" to "emerging" over time. Korea used to be "emerging" now it is developed depending which index set you use. Greece has gone in the other direction.

I've read that correlation between GDP and stock markets is very weak

It can be because stock prices are forward looking and change ahead of the GDP.

Some GDP contribution comes from private or government entities rather than listed stocks; the fortunes of GDP indexes and market indexes are related/linked but there is a difficult to anticipate time lag.

But you'd be kidding yourself to think emerging markets will not be a significant part of global equity markets over the decades to come.

, I don't know why but I suspect the s&p pinching it may be somewhat a factor

It seems like you're just stringing random words together so I won't bother to try to guess what's going on in your head

It's fine to say you don't know what will happen to markets. That's why people invest with diversification.

Stoozie - it's be a possibility if I aimed for it, and cashed in dB pension, but I can just put equities into isa, not cash in dB, prioritise ISA and retire earlier to completely avoid it

Remember the potential DB pension relies on you staying employed by the employer for years to come and them continuing to offer the scheme. At your age surely you haven't accrued your 40/80ths or whatever to hit your early retirement targets just yet.

Rather than just looking at ISA, consider investing some family money in your wife's /partner's pension if she's still not earning ; relatively lower risk of hitting lifetime allowances restrictions if one is taking time out from employment to have kids etc.

As an aside, obviously LISA is more efficient than plain ISA for a youngster such as yourself (or partner) if the money can be left until age 60+