Why doesn't everyone just buy Vanguard LifeStrategy?

BananaRepublic

Malthusian wrote: »

Ironically an infant with a bare trust investment is one of the few clients to whom an IFA might recommend a 100% equity portfolio, because

a) they have a 15+ year investment horizon
b) as they can't spend the money, even if they really want to, their capacity for loss (meaning recoverable, short-term losses) is 100%
c) they aren't going to ring the IFA up in a panic on their Fisher-Price Farm Animal Sounds phone wanting to sell everything during a crash.

I am sure you understood the point I was making. Whether or not your point is true, I can't say not being an IFA. But I would suspect the investment decision would take into account the parent's attitudes to risk, unless the money was locked in.

Malthusian wrote: »

100% equities is pretty exceptional nowadays, even for high risk investors, because a cornerstone of Modern Portfolio Theory is that by introducing a small proportion of bonds and other alternative asset classes, such as commercial property, you get a significant reduction in volatility with a negligible reduction in potential returns.

Are you an IFA. If not, how do you know "100% equities is pretty exceptional nowadays"? What are your sources?

I checked the 5 year figures for Vanguard funds, and the returns significantly reduce as the non equities proportion increases. Sadly 5 years is not a sufficient time period IMO to say much of value.

Malthusian wrote: »

Ten years ago when IFAs were more likely to come from a sales background and not an economics background, fund choices tended to be less scientific and more likely to be 50% In-House UK Equity Fund 50% In-House International Equity Fund or along those lines.

bowlhead99

BananaRepublic wrote: »

Are you an IFA. If not, how do you know "100% equities is pretty exceptional nowadays"? What are your sources?

The sources are the anecdotes from all the IFAs that post here and say that only a pretty small proportion of their clients are 100% equity.

Of course, one might expect that the sort of people who have enough money to afford IFA services are interested in getting returns that meet their long term objectives - "good enough" returns while preserving capital from risk and crashes. While someone just starting out from scratch on a DIY basis with £50pm that they aren't going to touch for two decades, might quite reasonably be happy to start out with all of those contributions going into equities.

So, what the IFAs typically see or recommend will not be the same picture you would get from polling the whole spectrum of retail investors. However, if an investor puts their money in a "default" workplace pension, or buys an ISA or pension fund that mirrors what larger institutions would buy (eg WM pension fund indices etc), they are not going to end up 100% equities as the 'average' investment made by major market participants is not an equity-only holding but a portfolio having diversification across asset classes.

I checked the 5 year figures for Vanguard funds, and the returns significantly reduce as the non equities proportion increases. Sadly 5 years is not a sufficient time period IMO to say much of value.

Lowering the volatility of a portfolio by incorporating asset classes that can deliver a return but are not 100% correlated with equities, has been an established way of investing for a hundred years. However, as equities generally have the highest risk profile, people demand the highest returns from that asset class and is not surprising that in a global bull market when sterling declines you will get significantly better returns from international and multinational equities than from investing in fewer equities and more sterling fixed interest assets.

BananaRepublic

bowlhead99 wrote: »

The sources are the anecdotes from all the IFAs that post here and say that only a pretty small proportion of their clients are 100% equity.

What I was really asking for is either confirmation by an IFA, or links to comments by one or more IFAs.

bowlhead99 wrote: »

Of course, one might expect that the sort of people who have enough money to afford IFA services are interested in getting returns that meet their long term objectives - "good enough" returns while preserving capital from risk and crashes.

That is supposition on your part. I have enough money to afford an IFA, and I do not fit that profile. A colleague has an IFA, and his investments are in equities. Of course two examples proves nothing.

bowlhead99 wrote: »

While someone just starting out from scratch on a DIY basis with £50pm that they aren't going to touch for two decades, might quite reasonably be happy to start out with all of those contributions going into equities.

So, what the IFAs typically see or recommend will not be the same picture you would get from polling the whole spectrum of retail investors. However, if an investor puts their money in a "default" workplace pension, or buys an ISA or pension fund that mirrors what larger institutions would buy (eg WM pension fund indices etc), they are not going to end up 100% equities as the 'average' investment made by major market participants is not an equity-only holding but a portfolio having diversification across asset classes.

Lowering the volatility of a portfolio by incorporating asset classes that can deliver a return but are not 100% correlated with equities, has been an established way of investing for a hundred years. However, as equities generally have the highest risk profile, people demand the highest returns from that asset class and is not surprising that in a global bull market when sterling declines you will get significantly better returns from international and multinational equities than from investing in fewer equities and more sterling fixed interest assets.

That last paragraph is a statement of the obvious. My concern at the 5 year timescale is indeed that it does not include a crash, and it is short so the current investment climate is not represenative.

chiang_mai

bigadaj wrote: »

So you've changed your argument from your assertion that a mixed equity bond fund will outperform a pure equity investment, it would be nice to have some consistency.


You've also acknowledged that for many a pure equity approach is high risk, which is true for much of the population, however on these boards you are dealing with people with a little more knowledge and experience in general.


Many people may not have the stomach for volatility, but that doesn't mean they will be better off with a lower risk strategy. For example someone in their twenties would be encouraged to be 100% equity in their pension, as the returns from 40 years of contributions will almost certainly be higher than from including bonds, it's pretty much that simple.


The official reason for IFAs not proposing 100% equity is that the average person has a medium risk attitude and couldn't stomach the volatility; a real reason might be that the IFA is far less likely to get into trouble and be subject to redress if he invests below someone's risk profile than above it. For example we've had plenty of mis selling scandals, and in many of these cases a product has been confirmed as mis sold, but there has been no redress as that product has significantly outperformed the product that would have been more appropriate, maybe the client should have had to pay the excess back?

If you read at what I've written, carefully and slowly, you'll see that I haven't changed my argument one iota, repeatedly I have said that 100% equities is very dangerous.

"Many people may not have the stomach for volatility, but that doesn't mean they will be better off with a lower risk strategy. For example someone in their twenties would be encouraged to be 100% equity in their pension, as the returns from 40 years of contributions will almost certainly be higher than from including bonds, it's pretty much that simple".

You might like to think the undeline in bold above is true but it is not, especially if the client had a very low risk tolerance and was down to his last 10k and without prospects. Putting all of that into 100% equites under those circumstances would cost the IFA his license, quite rightly so!

Regarding IFA's: the FCA regulates IFA's and determines what they can and can't do and the process they must go through, part of that is a risk assessment and understanding of a clients financial circumstances. The IFA doesn't not recommend 100% equities for fear of a later comeback, they do so because that answer doesn't fit the vast majority of clients, it's as simple as that.

chiang_mai

aroominyork wrote: »

I recently left IFAs and started self investing for two reasons. First, I realised their in-house constructed portfolios did not perform well. Secondly, and to answer your question, because they err on the side of caution so that when the market dips they do not have endless worried clients on the phone. My experience of the way they assess your risk tolerance is disingenuous. They have questionnaires asking questions such as how concerned you would be about the value of your portfolio falling, but with no reference to your age and hence eg the likelihood of it recovering. So for inexperienced investors who do not understand the short term and long term patterns of the stock market, a 30 year old and a 55 year old might give similar answers and be allocated to similar portfolios.

I know IFAs on this forum will say the questionnaires should only be one element of the analysis, but my experience is that IFAs rely on it hugely and then push their clients towards overly ‘safe ‘ investments.

I'm sure there are IFA's out there who do those things, I came across one a few weeks back who wanted me to sell all my holdings and invest in a single fund of funds that he prefered. I declined and afterwards had a a discussion with the FCA about that incident because I was amazed he could be allowed to advise such things, they said they could do nothing unless I filed a complaint - I let it drop because I have better things to do withmy time.

But your reasons for dropping use of your IFA are troubling. On the one hand the IFA evaluated your risk tolerance and recommended funds accordingly. It sounds as though that solution was too slow for you and you didn't see the money rolling quickly enough, perhaps. Maybe it's worthwhile understanding the logic why the IFA recommended what he did, do you really not want an IFA to err on the side of cuation? Personally I think anyone can go out and loose money by investing in the wrong things, it;'s harder and takes more discipline though to take professional advice and to have the discipline to follow it through.

BananaRepublic

chiang_mai wrote: »

"Many people may not have the stomach for volatility, but that doesn't mean they will be better off with a lower risk strategy. For example someone in their twenties would be encouraged to be 100% equity in their pension, as the returns from 40 years of contributions will almost certainly be higher than from including bonds, it's pretty much that simple".

You might like to think the undeline in bold above is true but it is not, especially if the client had a very low risk tolerance and was down to his last 10k and without prospects. Putting all of that into 100% equites under those circumstances would cost the IFA his license, quite rightly so!

What on Earth do you mean? What does 'last 10k and without prospects' have to do with pension contributions?

chiang_mai

My error, I overlooked that the reference was to pensions, my apologies to all.

bigadaj

chiang_mai wrote: »

I'm merely trying to reinforce my earlier point that holding 100% equities over time will loose money in most cases and that the return on capital is not great, if that was seen as a chastisement forgive me because that wasn'nt intended
.

You seem to have changed your position from the above statement.

bigadaj

chiang_mai wrote: »

Regarding IFA's: the FCA regulates IFA's and determines what they can and can't do and the process they must go through, part of that is a risk assessment and understanding of a clients financial circumstances. The IFA doesn't not recommend 100% equities for fear of a later comeback, they do so because that answer doesn't fit the vast majority of clients, it's as simple as that.

You obviously don't have a lot of experience with PI insurance.

bowlhead99

BananaRepublic wrote: »

bowlhead99 wrote: »

The sources are the anecdotes from all the IFAs that post here and say that only a pretty small proportion of their clients are 100% equity.

What I was really asking for is either confirmation by an IFA, or links to comments by one or more IFAs.

Ok, here are a couple of posts pulled haphazardly from among last month's post history for respected IFA "dunstonh" in which he notes that 100% equity is well above the risk level of the average UK consumer:

https://forums.moneysavingexpert.com/discussion/comment/73111751#Comment_73111751

https://forums.moneysavingexpert.com/discussion/comment/73098154#Comment_73098154

You could find more specific comments and from other IFAs too, but I haven't time to go googling at the moment and the search tool for this site is imperfect.

BananaRepublic wrote: »

Of course, one might expect that the sort of people who have enough money to afford IFA services are interested in getting returns that meet their long term objectives - "good enough" returns while preserving capital from risk and crashes. While someone just starting out from scratch on a DIY basis with £50pm that they aren't going to touch for two decades, might quite reasonably be happy to start out with all of those contributions going into equities.

So, what the IFAs typically see or recommend will not be the same picture you would get from polling the whole spectrum of retail investors

That is supposition on your part. I have enough money to afford an IFA, and I do not fit that profile. A colleague has an IFA, and his investments are in equities. Of course two examples proves nothing.

The premise was that 100% equities is above the risk profile of the average UK consumer. You sought confirmation whether the person making that claim was an IFA and if not, how would he know it was the case?

Having given you the comment that we know it is the case because the IFAs that are posting here over the years have told us that it is the case - we do not need to be IFAs ourselves to read those comments and take on board the facts - my observation was simply that the IFA client book, due to its barriers to entry (not affordable for people with small amounts of capital) means they don't actually have the full spectrum of consumers' portfolios within their client book and so generalisations may be statistically a bit off.

I am not challenging you to find examples of people with wealth who DIY nor people who happen to be full on for equities after taking IFA advice. Because, as you say, any couple of specific examples will not be representative of the population at large, and neither have much to do with my point.

You can call that "supposition on my part" but seems common sense and I don't think there is much doubt across the forum here that 100% equities is high risk, nor that it is called "high risk" because it's higher than the "medium risk, normal risk, mixed risk" or indeed "low" risk which vast portions of the population would embrace for their own investing.