Mainly Passive ETF portfolio

Malthusian

Glen_Clark wrote: »

Can you avoid stamp duty and platform charges like you can with ETF's?

Nope, fair point.

ivormonee

I'm not sure that having a few more funds is such a bad thing as it allows you to diversify in greater detail. The key is to balance out asset classes into a mix that has dis-corellation insofar as it is achievable. The asset allocation is a separate matter and will depend on risk management - eg. a portfolio with a high concentration of equities will behave in a more volatile manner to one predominantly invested in bonds.

There are certain asset classes that you can't invest in directly using ETFs, namely property and private equity, which would give you a little more diversification. The property funds and ETFs are indirect property investments as are private equity ETFs. (But if you're going down the fund route there are actually a small handful of actively managed direct property funds).

If you'd rather not take up too much currency risk you have options with some funds and with some ETFs to obtain currency hedged versions of the investment. You don't have to have a home bias if the purpose is for hedging back to your home currency.

There's no right or wrong for the asset mix; it boils down to your portfolio size, how active or passive you want to be, how often you will trade, your time horizon, etc. A balanced and diversified portfolio, for many people, may be around 60% equity, with most of the remainder in fixed interest and a bit of property/ gold/ commodities. The diversification will come from spreading out the individual asset classes, eg. in equities having a geographic spread with some mix of large and smaller caps and a mix of value and growth orientated funds. Similarly, for fixed interest (bonds), shorter dated, longer dated, index linked, government, corporate, etc. If you're putting your own mix together, then that will allow you to choose from a diverse range of asset classes such as this and so provide some cushioning from the volatility of the markets.

bostonerimus

If people are going to create a Fama French style "slice and dice" portfolio from ETFs or Index funds this article might be of interest.

http://www.etf.com/publications/journalofindexes/joi-articles/24234-cloning-dfa.html?nopaging=1

Ray_Singh-Blue

Why overweight any particular region or sector? Do you feel that the universe of investors is wrong about the prospects of, say UK or Japan - and has undervalued the companies of these countries?

bostonerimus

Ray_Singh-Blue wrote: »

Why overweight any particular region or sector? Do you feel that the universe of investors is wrong about the prospects of, say UK or Japan - and has undervalued the companies of these countries?

There's a good argument for small cap and value over weighting coming out of the French Fama 3 factor analysis of stock market returns. Geographical over weighting appears to be trickier to me.

Linton

The main problem with simple geographic market cap weighting in my view is the US. Having more than 50% in one foreign economy seems unnecessarily risky to me. As an example the current high prices for the FANGs is a concern. Reducing US means increasing everything else.

Asia/Pac has a good case for being overweight. It includes major world industries that are rare elsewhere. Also it has more opportunities for significant growth in its home markets than the more mature economies. More speculatively Frontier markets can easily be held at levels greater than its currently very small natural level.

Other possible reasons for geographic weighting particular in UK and Japan is the very significant Small Companies sectors in those countries that seem to behave particularly differently to the main indexes - very unlike the US.

Geographic allocation in a global economy is in my view of itself less important than company size or industriual sector. However because of the nature of available funds it can be a useful proxy for other things.

Glen_Clark

Linton wrote: »

Having more than 50% in one foreign economy

But it isn't, because most are global companies.
They are just listed or whatever in the US.

Linton

Glen_Clark wrote: »

But it isn't, because most are global companies.
They are just listed or whatever in the US.

This is less significant than in the UK as companies can be very large purely from their activity in the US local market whereas this is much more difficult in the UK. Local ownership of shares in the US market is high at around 75% - in the UK it's less than 50%. The % ownership by private citizens is much higher than in the UK. These factors I suggest makes the US exchanges particularly dependent on the local economy and politics. This is to some extent a good thing as it aids diversification. But one can have too much of a good thing.

Another area of concern must be currency. To have more than 50% of your investments denominated in a single foreign currency seems an unnecessary risk. Better to have a more even spread.

The US can sustain a tech bubble on its own and perhaps because of the level of private share ownership it does. It is difficult to avoid such local effects when one holds an overwhelmingly large % in a single foreign exchange.

Audaxer

Linton wrote: »

4) Multi-asset funds are perhaps more concerned with risk management than putting in the effort to squeeze a few extra % performance. People who are interested in maximising performance wouldnt naturally buy a multi-asset fund.

I would like to maximise the performance within my risk level. I'm not averse to putting in the effort, but without having the expert knowledge of you and some others on this forum, I think it would be more risky for me to try and squeeze a few more percentage points by trying to put together the sort of portfolio structure you have. So although I have gone for single sector funds in my income portfolio, I feel a bit more comfortable at present with some multi asset funds for growth.

bostonerimus

Audaxer wrote: »

I would like to maximise the performance within my risk level. I'm not averse to putting in the effort, but without having the expert knowledge of you and some others on this forum, I think it would be more risky for me to try and squeeze a few more percentage points by trying to put together the sort of portfolio structure you have. So although I have gone for single sector funds in my income portfolio, I feel a bit more comfortable at present with some multi asset funds for growth.

There's an infinite number of paths to an investment goal and you can choose a direct one or a more convoluted one. Once you have the basics of saving aggressively,.using tax efficient accounts, keeping costs down and have an appropriate balance between equities and fixed income you have done 99% of the stuff. Using portfolio models to slice and dice further is diminishing returns for the amount of effort. It does take experience and an understanding of statistics and mathematical modelling to develop more complicated portfolios, but actions that the investor takes along the way are more important that the nuances of asset allocation. Therefore, most people are best served by simple portfolios that are easily rebalanced or multi-asset funds that do the job for you. The OPs portfolio might maximize returns for a set volatility using historical data, but will they take the time to managed it correctly and without a buy/sell plan and the commitment and time to follow it things could go pear shaped quickly.