Why doesn't everyone just buy Vanguard LifeStrategy?

bostonerimus

chrisgg wrote: »

It's about picking the right active funds through an assessment of historic performance, both on a risk/return basis and discrete annual performance. Pick consistent 1st/2nd quartile performers that aren't taking too much risk relative to their sectors and you're onto a winner (in my experience - look at Terry Smith/Nick Train/OM Global Equity vs VLS 100 over the last 5 years).

We aren't going to agree about the ability of most people to pick consistent active winners. You might be one of those that does over 10, 20 or 30 years. I think the mathematics and the studies show that the highest probability for most people of meeting a specified investment return with the lowest risk is done with index funds.

brasso

bostonerimus wrote: »

We aren't going to agree about the ability of most people to pick consistent active winners. You might be one of those that does over 10, 20 or 30 years. I think the mathematics and the studies show that the highest probability for most people of meeting a specified investment return with the lowest risk is done with index funds.

Perhaps it's my character / ADHD tendencies, but I'm unable to stick to an investment strategy or long-term investment goal, apart from wanting to grow my savings to a point where I'll feel reasonably comfortable in retirement -- in about 5 years.

So I don't feel that I have to, or have had to, make investment choices that must carry me through the decades. I've dabbled in many trackers, ETFs, Vanguard funds, and still hold several. I sold up nearly all my active funds about 3 years ago, when I decided that charges were everything, but have recently relented, reasoning that I shouldn't care about paying 1% if the fund was earning me 20-30% a year or more (as Fundsmith has done, for instance).

I'll probably change again in a year or two. I quite like the idea of being single-minded about it, but unfortunately can't manage to do it.

aroominyork

bostonerimus wrote: »

Active funds certainly have the potential to beat a passive index fund. If I could know the performance of funds a year ahead I would definitely be 100% active, but as I don't have a working crystal ball I'm 100% index tracker funds and use [strike]guess work[/strike] research and the historical efficient frontier to come up with an asset allocation. In the accumulation phase I did not look to maximize my possible return, I attempt to minimize the probability of investment failure and I chose an allocation that provided my required investment return with the minimum risk.

Would you kindly explain "historical efficient frontier"? Thanks.

bostonerimus

aroominyork wrote: »

Would you kindly explain "historical efficient frontier"? Thanks.

If you plot the return against the risk of a set of portfolios (usually with different allocations to equity and fixed income) then the portfolios will generally fall within a parabola and the positively sloped section of that parabola is the efficient frontier.



A simple way to create an efficient portfolio is to diversify and reduce fixed costs by using index trackers. Here are several historical efficient frontiers that plot the return vs the risk parabola of portfolios made up of different percentages of S&P 500 Index and Barclays Aggregate Bond Index for several decades.

chiang_mai

brasso wrote: »

You’re obsessed with crashes, and seem to live in fear of losing everything. You may not have the temperament for stock market investment. The "downside support" is the profit already made and yet to come, especially if you can continue to buy while stocks are cheap.

I still think you’re misunderstanding the American chart you posted earlier, which shows how much better equities perform than defensive investment. That said, as you’ve made clear, your priority is not growth but protection of capital. With that investment objective, your approach might be right. But most people here have more ambitious targets.

Also, most people here are definitely not young, inexperienced, idealistic punters as you surmised in an earlier post. I’m less than 5 years from retirement myself.

I am not overly concerned at the prospect of a crash, I do however consider risk in most things that I do , this rather than blindly charge into what is perceived to be the most profitable course of action, aka 100% equities.

Slowly but surely some posters are getting there on this point, we're now seeing the word diversification appear more more and more in positive terms, some are even mentioning diversification of asset classes for goodness sake. And let's not forget that VLS, the subject of this very thread, is typically a mixed asset product that comingles bonds (and other instruments) with equities, if that is not a case for asset class diversification, given the massive popularity of the product range, I don't know what is.

Finally on this subject of diversification and it takes us back to IFA's: does anyone really think that more than 0.05% of the UK IFA population would actually recommend 100% equities to any of their clients, in order to do that they would have to have sizeable wealth and a risk profile that is in the top 5% of risk tolerance. Perhaps it's worth thinking about why that is.

**paragraph removed by forum team**

chiang_mai

Here's one mans take on the cash vs shares issue albeit he doesn't show his workings, his findings and conlusions, however, are not what might be expected and challenge traditional conventions: https://www.theguardian.com/money/2016/jun/18/cash-trumps-shares-for-top-returns

BananaRepublic

bostonerimus wrote: »

People should have an asset mix that reduces the probability of them failing to meet their financial goals to an acceptable level. That asset mix is rarely 100% equities.

A home is the obvious key investment for most people. But if we ignore the home, then 100% equities (in the less volatile markets/sectors) is sensible for people more than 10 years from retirement. Assuming they have the stomach for it of course. Some will panic when the markets fall 30%, and sell up thereby crystallising the losses which would otherwise be recovered within a few years. I have no idea what proportion of people fit the panic profile. I have a cold analytical approach to these things (emotionally dead in some people's terms ).

BananaRepublic

bostonerimus wrote: »

A simple way to create an efficient portfolio is to diversify and reduce fixed costs by using index trackers.

Do you have proof of that statement?

BananaRepublic

bostonerimus wrote: »

We aren't going to agree about the ability of most people to pick consistent active winners. You might be one of those that does over 10, 20 or 30 years. I think the mathematics and the studies show that the highest probability for most people of meeting a specified investment return with the lowest risk is done with index funds.

I could believe that, however this forum is not really about 'most people'. It's about people with some investment savvy. I've met many people who fit your description i.e. they do not understand the markets, and passive investments would be by far the best choice.

Malthusian

chiang_mai wrote: »

Here's one mans take on the cash vs shares issue albeit he doesn't show his workings

His workings consisted of taking an extremely poor share investment (HSBC's FTSE 100 tracker, a poor choice of fund to track a poor choice of index) over an extremely poor period and comparing it with the very best possible cash investment (best-buy one year bonds).

For a more detailed rebuttal, see Abraham Okusanya's article.

As an academic exercise in showing that you can prove anything with statistics, it's quite interesting to see how you can contort the data to make cash outperform shares. As information to someone deciding their investment strategy it's completely useless. No-one who had the wherewithal to research the best-buy cash accounts on an ongoing basis would stick all their money in a FTSE 100 tracker (and an expensive HSBC one at that).

Paul Lewis is a bit of a standing joke. Getting energy and mobile companies to sort out incorrect bills is his comfort zone, whenever he delves into areas requiring an understanding of numbers he comes unstuck.

You're casting around the Internet for anyone who supports your theory that equities will lose money over the long term. That the best you can come up with is Paul Lewis should tell you something.