Proposed Portfolio Opinions

ValiantSon

forextc wrote: »

I do love reading these threads and the debate around them.

Too many people think they have a crystal ball which surprises me still, given even recent events such as the Brexit vote and Trumps victory have completely compounded prior market forecasts.

Crucially the research, time and stress of trying to refine these investment strategies to the nth degree negates any marginal gain that there is only the 'possibility' of achieving, particularly when using a market replication product over an active investment.

For the vast majority of people the most diverse global tracking product (global tracker), coupled with low risk gilts in their own currency, weighted to their risk tolerance, is the way to go. Save regularly over the long term and use a platform with the lowest charges and you have got a solid approach.

So why bother going to the trouble of trying to work all this out when you can buy a single fund or ETF to do it for you? It will be re balanced every month/ quarter (no additional re balancing costs) and in holding just one fund you will also save on dealing charges.

If you honestly think that over an 'n' year period you can achieve a better return from over-weighting a particular market by 1-2% then you are clearly saying that you know far better than the markets. And you would need to be repeatedly correct over investment time horizon as market weightings fluctuate quite significantly over time.

In my opinion people spend far to much time worrying about, what is essentially supposed to be a set and forget product.

If you do have insight beyond the markets then set aside a proportion of your capital to pick up some active funds or make some direct stock investment. You can then compare the returns with your global tracker to see if you really do posses the ability to outperform.

While I prefer passive investments, I think there are a couple of points worth noting:

1. In some markets the availability of passives is very limited. Using an active fund may be the better awy forward.
2. Overweighting to the UK market is actually a feature of some passive funds, e.g. Vanguard LifeStrategy. A good reason for this is to reduce the impact of currency exchanges.

There is a continuing debate about passive versus active investing. On the whole, I am on the side of passives, but even there you do still have to make some management decisions in your original allocation.

Generally, I don't subscribe to the principle of trying to second guess the markets, which is why (as I said in an earlier post) I remain overweighted in the UK, which is a deliberate decision as there are cost advantages to holding a greater proportion of equities in my home currency.

Buying gilts may well be fine for trying to control volatility, but even this decision is an attempt to second guess the equities market. The logical conclusion of your strategy on equities is that people should only invest in equities because the market knows best. In buying gilts you are making a decision that the market might not deliver, and you need to build in controls on the volatility of that market. I appreciate that I am being contrarian here, but only to illustrate a point that, ultimately, we all make some level of decision about how to manage an investment.

Furthermore, are you eschewing corporate bonds from your strategy? You only mention gilts.

TheTracker

geeovana wrote: »

Currently investing in the Vanguard FTSE All Cap Index with an OFC of 0.24%. In an effort to save fees and more accurately capture the market I am proposing to purchase the following funds in the following percentage splits:

Vanguard North America UCITS ETF @ 47%
Vanguard Emerging Markets UCITS ETF @ 17%
Vanguard FTSE Developed Europe UCITS ETF @ 16%
Vanguard FTSE Japan UCITS ETF @ 10%
Vanguard FTSE UK All Share Index Unit Trust @ 6%
Vanguard FTSE Developed Asia Pacific ex Japan @ 4%

The above will have an OFC of around 0.14%, so a pretty good saving and I believe it captures the markets more accurately. I am investing through HSD every two months using their regular investment plan which has a commission charge of £2.00 per fund.

Does this seem a sensible proposal?

Seems you have a 17% EM, 83% ROW (with UK market represented c6%) allocation.

I don't do the ETF-only show so maybe you could get this lower. But a quick look shows a 3 fund portfolio in these weights of Vanguard FTSE U.K. All Share Index A, Vanguard FTSE Dev World ex-UK Equity Index, and Vanguard FTSE Emerging Markets ETF is about 0.16%.

A quick look on Monevator indicates you could take iShares UK Equity Index Fund, Fidelity Index World Fund, and db X-trackers MSCI Emerging Markets Index ETF on board for less than 0.14%

A 3 fund portfolio seems a lot more simpler. Especially if you want to add on Property, small cap tilts, value tilts. My 6 fund portfolio with these included has about a 0.18% charge IIRC, but I wouldn't have considered more than 3 funds until having at least 2-300k to invest.

In terms of OCF charges, I like to remember that every 0.01% of every £100k is £10. Its an easy way to consider changes in your head. eg, the difference between 0.24% and 0.18% on a £1M portfolio is 0.06% which is 6 lots of 0.01% x £10 x 10 lots of 100k = £600pa.

But often I will perform a thought experiment by "counting" that £10 in future money terms. If I hadn't given it to vanguard, or whoever, it would have continued to grow for 30 years at c5% above inflation and turned into £45. So I could have counted £2700 above for the £1M portfolio, or £270 for a £100k portfolio. Thinking like this, every .01% of every £100k is £40+ pa (realised upon drawdown).

Fees add up.

Linton

TheTracker wrote: »

"you would need to be repeatedly correct over investment time" - agree with this, but disagree with most of the rest.

Being persistent (holding across swathes of time) is just one measure. Your strategy must also be evidenced by pervasiveness (holds across regions and sectors), robust (holds against various definitions, eg how value is measured), and sensible (risk- or behavioural-based explanations).

Very few strategies stand up to this test, but two that do have been a size premium and a value premium. "Overweighting" these areas, in most regions, across the last 100 years, has been a successful strategy.

Largely agree, but you also need to recognise that maximum return oer the long term may not be the main objective for many investors.

I suggest that one reason why size beats "The Market" is that the illiquidity of small companies limits their availability to the large investors who mainly drive the equity markets. Large investors cant buy sufficent small company shares to make a significant difference to their overall portfolios without distorting the market and without undertaking an uneconomic amount of research. The same could well apply in other areas such as the frontier end of EM. The vast majority of small investors dont have this restriction, they operate in a different market. Another area where The Market for large investors is rather different to that for private investors is income. Income being rather more difficult to handle than capital growth whereas for some private investors it represents the prime objective for investing. Value and Income are strongly linked.

The idea that you *need* to go active to follow these premiums, and pay a fee along the way, is madness.

You dont need to go active to follow premiums. However I believe that doing so can be very profitable and easily outweigh the relatively small extra costs. Because the market in small companies is not perfect possibly for the reason given, but also because less detailed data is readily available, focussed research provides a real advantage in most geographies. In any case the indexes that could be used by a passive fund are nonexistant or unsatisfactory.

Value, at least as it relates to income is another area where passive funds have been particularly unsuccessful. There are very few around. The level of income tends to be low and they have great difficulty distinguishing between unssuccessful companies that temporarily have a high yield because of falls in share price and ones that are generating good yields from a steady cash flow.

In fact, many claim that all active funds do is follow such strategies themselves.

Not all, but I agree it is a major factor. And if by doing so they provide a better overall return to their investors such active funds are surely justified.

forextc

TheTracker wrote: »

"you would need to be repeatedly correct over investment time" - agree with this, but disagree with most of the rest.

Being persistent (holding across swathes of time) is just one measure. Your strategy must also be evidenced by pervasiveness (holds across regions and sectors), robust (holds against various definitions, eg how value is measured), and sensible (risk- or behavioural-based explanations).

Very few strategies stand up to this test, but two that do have been a size premium and a value premium. "Overweighting" these areas, in most regions, across the last 100 years, has been a successful strategy. The idea that you *need* to go active to follow these premiums, and pay a fee along the way, is madness. In fact, many claim that all active funds do is follow such strategies themselves.

Surely hat someone would seek to weight their portfolio in this way is the very definition of taking an 'active' approach to investment. Whether you pay an investment professional or attempt this yourself it will incur costs beyond a truly passive strategy.

Then we come back to the argument of whether their is value in particular markets and how to take advantage of it. Personally I see this as far removed from the role these trackers are trying to fulfill in the first place, which is a generalist investment that covers, growth, value, large, medium, cyclicals etc all under one roof.

The one caveat I do have to using them in this form is that they actually present huge individual stock risk. 10% of the investment is accounted for by the top 10 of the 3,000+ companies covered (in the case of VWL). So perhaps not quite as diverse as it first looks.

This might be a reason to pick your own portfolio or regional trackers to under-weight US large caps, but that's another value call.

So in terms of the OP original question he asked it was sensible to try to replicate the Vanguard FTSE All Cap Index with an OFC by purchasing individual funds to reduce the OCF. To my mind if you want something akin to this investment then taking on the extra task and costs to re-balance are not worth the effort of the reduced OCF. Specifically as some of these markets will make only a limited contribution to performance overall.

On the question of portfolio construction I would recommend a baseline of an equity/ gilt split based on risk tolerance. The 60:40 portfolio has been pretty good over the years. It can be tinkered some more with property, indexed linked gilts, corporate bonds etc but I'm not sure these assets offer as much in the way of upside or the expected diversity in a down turn.

Harry Brownes permanent portfolio is also worth a look. 25% each in global equities, gilts, cash and gold. Similar performance but at lower volatility.

TBC15

forextc wrote: »

I do love reading these threads and the debate around them.

Too many people think they have a crystal ball which surprises me still, given even recent events such as the Brexit vote and Trumps victory have completely compounded prior market forecasts.

Crucially the research, time and stress of trying to refine these investment strategies to the nth degree negates any marginal gain that there is only the 'possibility' of achieving, particularly when using a market replication product over an active investment.

For the vast majority of people the most diverse global tracking product (global tracker), coupled with low risk gilts in their own currency, weighted to their risk tolerance, is the way to go. Save regularly over the long term and use a platform with the lowest charges and you have got a solid approach.

So why bother going to the trouble of trying to work all this out when you can buy a single fund or ETF to do it for you? It will be re balanced every month/ quarter (no additional re balancing costs) and in holding just one fund you will also save on dealing charges.

If you honestly think that over an 'n' year period you can achieve a better return from over-weighting a particular market by 1-2% then you are clearly saying that you know far better than the markets. And you would need to be repeatedly correct over investment time horizon as market weightings fluctuate quite significantly over time.

In my opinion people spend far to much time worrying about, what is essentially supposed to be a set and forget product.

If you do have insight beyond the markets then set aside a proportion of your capital to pick up some active funds or make some direct stock investment. You can then compare the returns with your global tracker to see if you really do posses the ability to outperform.

You have strongly held beliefs, please do join us.
https://forums.moneysavingexpert.com/discussion/5719517