Passive Investing

stphnstevey

AlanP wrote: »

Would these be your only two investments - USA and world? What asset allocation are you working with?

A lot of the world market is US based so won't there be a lot of overlap?

Apologies if these are just part of a wider fund / etf set you are structuring.

It was one or the other as a starting point in equities, I understand there is overlap with the USA. I would potentially add other sectors as I progress.

As choice of low cost tracker in USA or World, I was wondering on the choice?

I was going for accumulation due to lower reinvestment of dividends. But I have been told that outside a tax wrapper, distribution might be better, as accumulation is difficult to unpick the dividends for working out income tax

jm78

Linton wrote: »

At the moment index linked gilts are priced well above what they should be based purely on past inflation. If you buy index linked funds you are certain to be buying and selling almost all the underlying investments "in the meantime".

This is precisely what I've been thinking – the index linked funds must now be priced well above their underlying value. So is there now any reason to buy these funds? It seems to me that they're a guaranteed loss.

Lungboy

Doesn't it make sense to diversify bond holdings in exactly the same way as equity holdings and buy global bonds rather than just UK bonds?

Linton

jm78 wrote: »

This is precisely what I've been thinking – the index linked funds must now be priced well above their underlying value. So is there now any reason to buy these funds? It seems to me that they're a guaranteed loss.

One reason for a private investor buying index linked funds could be that they at least provide some protection against massive inflation. Another could be that they probably are a guaranteed loss in the long term but may not be in the short term.

However I dont hold any index linked bonds (or developed world government fixed rate bonds) preferring to accept the decreased diversification of corporate bonds to achieve better returns. One has to look elsewhere if one wants protection against major crashes.

Linton

Lungboy wrote: »

Doesn't it make sense to diversify bond holdings in exactly the same way as equity holdings and buy global bonds rather than just UK bonds?

To some extent yes though it does depend on why you want bonds in the first place, if safety is your paramount objective then there seems no reason to go beyond cash or UK gilts. Corporate bonds provide a better return and bond diversification at the cost of some loss of diversification against equity. Global corporate bonds add in geographic diversification. Buying other developed world government bonds seems a less attractive option as they are all expensive, highly correlated, and bring in currency risk. EM government bonds provide a reasonable return and diversification though of course they are inherently riskier.

GT85

I am now in a position where using iWeb is cheaper than using Vanguard directly. I currently have a mix of VLS80 and in VLS100 with Vanguard, as I have lowered my exposure to bonds at this moment in time, so not interested in adding HSBC dynamic as that has 15% bonds iirc.

With the financial services compensation scheme in mind to avoid Vanguard products as I'm at the £50k limit, I'm looking for a cheap global equity tracker via iWeb. I see a few options:

1) Don't worry about the £50k FSCS limit. Continue investing in Vanguard products like VLS or Vanguard FTSE Global all-cap.

2) Fidelity index world fund P at 0.13%, but it's very light on tilts like EM & smallcap. Fidelity index EM, and I'd have to find a smallcap fund - any recommendations (other than Vanguard which brings me back to point 1)?

3) L&G UK index and L&G international index. While most trackers weight UK about 6% of a global market, a lot of simple portfolios and Vanguard products stick 25% into home bias. I'm unsure if I would want added domestic bias given the holdings already with Vanguard.

I don't mind rebalancing, but am aware it becomes slightly more faff mixing multi asset funds with trackers to ensure I don't stray well away from my asset allocation.

bostonerimus

To give an example of how using passive trackers and rebalancing works in practice I had a portfolio that was 40% US Equity, 20% International Equity and 40% US bond index (I'm in the US don't just copy this allocation if you live in the UK) from 1987 to 2014 and it returned an annual average of 8.5%. I've now stopped rebalancing and my equity percentage is around 70% and my portfolio is in the mid 7 figures. i did nothing strange or difficult, I just saved aggressively and rebalanced for 30 years.

The construction of portfolios that overweight some sectors and geographies or use actively managed ITs and open ended funds might give better returns than an index portfolio....or it might not. A simple portfolio with a few index funds can give you good diversification and make management easy. You won't make the most money possible, but conversely you won't be the person losing the most either. If you set your financial goals so that average performance is good enough you have a very high probability of success and that's the only definition of winner that matters in my book.

Lungboy

Linton wrote: »

To some extent yes though it does depend on why you want bonds in the first place, if safety is your paramount objective then there seems no reason to go beyond cash or UK gilts. Corporate bonds provide a better return and bond diversification at the cost of some loss of diversification against equity. Global corporate bonds add in geographic diversification. Buying other developed world government bonds seems a less attractive option as they are all expensive, highly correlated, and bring in currency risk. EM government bonds provide a reasonable return and diversification though of course they are inherently riskier.

What about a hybrid choice, something like Liontrust Monthly Income Bond P Gr Acc, that has both UK government bonds and UK + US + EU corporate bonds? Best of both worlds, or worst of both?

Linton

Lungboy wrote: »

What about a hybrid choice, something like Liontrust Monthly Income Bond P Gr Acc, that has both UK government bonds and UK + US + EU corporate bonds? Best of both worlds, or worst of both?

A reasonable choice particularly for income. There are quite a wide range of Strategic Bond funds where you rely on the fund manager to choose the appropriate bonds for the prevailing economic situation. Unlike equity investing, bond investing is largely a mathematical exercise as prices, yields, and the value at maturity are all known in advance. So to my mind it makes sense to pay an expert with software support to choose a sensible range of bonds rather than trying to create a bond portfolio oneself. Some sort of index doesnt as the market in bonds is mainly institutional, and institutions buy bonds for very different reasons than the private investor.

stphnstevey

In terms of Passive Investing in a tracker, I have looked at a world tracker vs S&P 500 tracker

- The S&P 500 appears to have significantly outperformed the world trackers from about 2010
- World trackers consist of at least 50% US based companies
- World tracker top 10 holdings are all US based companies
- Any drop in the US market is likely to be mirrored in other world markets, so the extra 50% diversity doesn't seem worthwhile
- World trackers hold such small amounts of other markets (10% of emerging markets), that any upside is not really going to make a significant difference
- World trackers start from about 0.13% OCF (several are higher) were as S&P 500 trackers are half that at 0.07% OCF