Building a Low Maintenance Long Term Portfolio

Linton

sstteeww wrote: »

Hi larryk,

By choosing actively managed funds, you are effectively saying you know which fund managers are going to beat the market in the future - not only that, but you're willing to pay these fund managers a hefty premium for their FUTURE stellar performance.

I'd argue that you don't know which managers are going to beat the market (I certainly don't!) and you'd be far better off buying VLS80 (or another index fund) and getting the average market return at the lowest possible cost. Over time, the lower cost of index funds will trump superstar mangers that go in and out of vogue. Also VLS80 is a "set it and forget it" fund, you won't have to keep track of hot/cold superstar managers and VLS80 automatically rebalances itself.

If you really have an irresistible itch to try and beat the market, I'd put 90% of your £100k into VLS80 and then use the other 10% to buy individual stocks, gold, bitcoin, lean-hog futures, mortgage-backed securities, funds run by superstar managers, etc etc. (play money). After a year or two you'll realise you can't beat the market, you can then use the small residual of your 10% play money to top up your VLS80 holding slightly.

Outperforming VLS is fairly easy with active funds. Look at the Great British Invest Off thread. All the active igrowth portfolios are doing it. My own growth portfolio has done so every year for the past 5 years since VLS was launched. Most of the GBIO active growth portfolios are outperforming the global index.

Using active funds doesnt mean saying which active managers will beat the market. What it does mean is that not everyone believes that a simple cap weighted portfolio provides the best returns.

Actually it has been easy to beat VLS with passive funds. VLS100 has underperformed global indexes every year since it started, because of its high % allocation to FTSE100 companies. Yes, if you make foolish active decisions you will underperform.

sstteeww

Linton wrote: »

Outperforming VLS is fairly easy with active funds. Look at the Great British Invest Off thread. All the active igrowth portfolios are doing it. My own growth portfolio has done so every year for the past 5 years since VLS was launched. Most of the GBIO active growth portfolios are outperforming the global index.

Using active funds doesnt mean saying which active managers will beat the market. What it does mean is that not everyone believes that a simple cap weighted portfolio provides the best returns.

Actually it has been easy to beat VLS with passive funds. VLS100 has underperformed global indexes every year since it started, because of its high % allocation to FTSE100 companies. Yes, if you make foolish active decisions you will underperform.

I'll have a look at the Great British Invest Off thread, sounds interesting. Yes, the UK FTSE All Share is quite a concentrated index (Shell, HSBC, BAT, BP make up 23% of the entire index). The VLS range does tilt quite heavily to the UK, I'd prefer it didn't do this so much, but it's a very small price to pay for very low cost and automatic rebalancing. There is apparently currency risk and dividend tax reasons for this UK tilt though.

I have to politely disagree with your statement that "using active funds does not mean which active managers will beat the market" as I believe this is exactly what using expensive active managers is doing.

A few years ago, Terry Smith and Neil Woodford were high flying fund managers. Terry Smith has continued to outperform the market whereas Neil Woodford seems to have picked every company that crashed (Provident Financial, Allied Minds, Capita, BT, etc etc) and has subsequently drastically under-performed the market despite still charging high fees for his management. So when you choose an active manager, you may get Terry or you may get Neil, you have no way of knowing; you will be charged much more for these superstar managers though whether they perform well or not.

Linton

sstteeww wrote: »

.....

I have to politely disagree with your statement that "using active funds does not mean which active managers will beat the market" as I believe this is exactly what using expensive active managers is doing.

......

As a currently 100% active fund investor, when I choose funds I do not look at "The Market". Neither do I change funds purely for performance reasons. What is important is the composition of the overall portfolio which is determined by what each individual fund invests in and its allocation as a % of the total.

The key objective of the portfolio is to achieve high diversification in order to minimise the effect of single points of failure, which is rather different to the objective of most investors in "The Market". Beating global indexes and especially VLS100 is not an objective, however it is amusing to see how easily it appears it can be done despite the protestations of those who claim it is impossible. Get a sensible overall allocation and performance will look after itself. In my view "The Market" does not represent a sensible overall allocation.

dunstonh

A few years ago, Terry Smith and Neil Woodford were high flying fund managers. Terry Smith has continued to outperform the market whereas Neil Woodford seems to have picked every company that crashed (Provident Financial, Allied Minds, Capita, BT, etc etc) and has subsequently drastically under-performed the market despite still charging high fees for his management. So when you choose an active manager, you may get Terry or you may get Neil, you have no way of knowing; you will be charged much more for these superstar managers though whether they perform well or not.

If you build a structured asset allocated a portfolio, you are typically looking at around 9-12 funds. I usually go hybrid and pick managed and tracker depending on the sector. Of the managed funds, it is quite normal for 1 or 2 to be quartile 3 or 4. However, it is equally normal for a couple of the trackers to be quartile 3 or 4 as well. Generally, I find that more of the managed selected outperform but this is based on years of experience and knowledge. Not someone who is brand new to investing and doesn't know what to look for. Most of the hybrid investors on this site who are regular posters have a much higher level of knowledge than your typical consumer and can make sufficient analysis to decide when a managed fund offers better potential.

So, the conversation for someone like Linton or other experienced investors is going to be different to someone who is totally inexperienced with investing. I think the OP should have something like VLS (Based on the thread so far). However, we outperform VLS. I also use VLS or alternatives with clients who are new or have smaller amounts. There is no point diving in at the deep end if the person doesnt understand it. Get them used to it then develop it from there.

Interestingly, we put very little into woodfords funds when he left. Mainly because we have seen star managers leave their successful setup and set up boutique firms or alternative funds and fall flat on their face. Whilst a high profile manager may get the media spotlight, it is naive to think that they were responsible for all of the research and analysis going on. Sometimes it is the team behind the manager who are the real stars.

Linton

I agree with Dunstonh that the OP would be best advised to go for a single multi-asset fund, possibly tracker based, for the time being. But not because it is necessarily the best option in all circumstances, but rather because it is safest for a less experienced investor and will avoid them getting frightened off by a bad experience with inappropriate investments. It's a good starting point for learning more, but may not be the ideal end point.

sstteeww

Linton wrote: »

As a currently 100% active fund investor, when I choose funds I do not look at "The Market". Neither do I change funds purely for performance reasons. What is important is the composition of the overall portfolio which is determined by what each individual fund invests in and its allocation as a % of the total.

Clearly, you are very knowledgeable in this area and are willing to do the research and your own rebalancing to eke out as much profit as possible - many people new to investing are not and the litany of different funds available can be extremely confusing. Based on OP's criteria and initial fund selection, on the balance of probability, going for a low cost tracker that auto rebalances would be their best option (ie: very low maintenance so they won't be their own worst enemy).

My ideal definition of low maintenance would be setting up a direct debit to a low cost auto rebalancing fund and then forget about it for decades, concentrate on earning more income and enjoying life without constantly worrying about market gyrations. This "hands-off" strategy may or may not be the most profitable, but it will certainly be the best option for investing newbies and people that don't have time to constantly monitor the market IMO.

Audaxer

dunstonh wrote: »

If you build a structured asset allocated a portfolio, you are typically looking at around 9-12 funds.

dunstonh, if two of your clients had the same risk level/tolerance of say 60% equities, but one was young in the accumulation stage and the other was retired and in the drawdown stage, would you build them fairly similar structured portfolios, or would the retired portfolio exclude funds/sectors that were purely for growth rather than natural income?

Linton

sstteeww wrote: »

Clearly, you are very knowledgeable in this area and are willing to do the research and your own rebalancing to eke out as much profit as possible - many people new to investing are not and the litany of different funds available can be extremely confusing. Based on OP's criteria and initial fund selection, on the balance of probability, going for a low cost tracker that auto rebalances would be their best option (ie: very low maintenance so they won't be their own worst enemy).

My ideal definition of low maintenance would be setting up a direct debit to a low cost auto rebalancing fund and then forget about it for decades, concentrate on earning more income and enjoying life without constantly worrying about market gyrations. This "hands-off" strategy may or may not be the most profitable, but it will certainly be the best option for investing newbies and people that don't have time to constantly monitor the market IMO.

I agree that steadily drip feeding a multi asset fund is very appropriate for investing newbies, and those without a particular interest in investing, if they have standard long term objectives. However I would not restrict the choice to trackers.

Another factor which could well affect ones choice of strategy is the size of portfolio. With at most say £50K in a portfolio and other sources of income different but sensible strategies may not provide a sufficient absolute difference in returns to be worth devoting a great deal of time to worrying about. On the other hand for a retiree with a much larger portfolio a 1% difference in performance could be very significant.

dunstonh

Audaxer wrote: »

dunstonh, if two of your clients had the same risk level/tolerance of say 60% equities, but one was young in the accumulation stage and the other was retired and in the drawdown stage, would you build them fairly similar structured portfolios, or would the retired portfolio exclude funds/sectors that were purely for growth rather than natural income?

I have done drawdown using capital with sale of units (with cash account for float) and yield. It often depends on the draw rate. I am not particularly worried about using growth to fund withdrawals as the end result is what is important along with using a sustainable draw rate. That said, when I do use asset allocation, I will often bias it towards yielding funds in the sectors but not if I feel it is a compromise that is not going to work.

bostonerimus

Linton wrote: »

Using active funds doesnt mean saying which active managers will beat the market. What it does mean is that not everyone believes that a simple cap weighted portfolio provides the best returns.

Nobody believes that a "simple cap weighted portfolio provides the best returns" or if they do they are foolish because it's mathematically it's not going to happen. There are thousands and thousands of active portfolios that will beat a cap weighted index portfolio, but also thousands and thousands that won't. It's managing to beat the averages consistently that is the trick. If you go with a cap weighted index portfolio you are deciding that you are ok with the average market performance over the term of your investments, That's what I did back in the late 1980s and it worked out well for me. If people think they can beat the market they would be foolish not to have an active portfolio.....or maybe they are foolish to believe they can beat the market?