Portfolio Advice

gif1

bostonerimus wrote: »

So you now have 45% allocated to just 30 stocks, and small amounts in small cap and Japan and ?? for bonds.

This is worse than your starting point as far as diversification goes. Stop messing about with small allocations to markets that you don't really understand......leave that up to the fund managers and the people who think they understand the markets.

Hi bostonerimus, I appreciate your comment; I am looking at the best way to balance the portfolio, considering that:
- Fundsmith will be part of it (like it or not)
- I am trying to invest as globally as possible across the world, in proportion to the market cap of the different regions
- From other posters, it seems that 30 companies (in one fund) might be good as far as diversification is concerned; and I can't think that Mr Smith be acting dumb (lucky maybe)
- Trying to keep the cost down (hence the trackers)

Not sure about the fixed income sector, that was my last question.
Thank you

bostonerimus

gif1 wrote: »

Hi bostonerimus, I appreciate your comment; I am looking at the best way to balance the portfolio, considering that:
- Fundsmith will be part of it (like it or not)
- I am trying to invest as globally as possible across the world, in proportion to the market cap of the different regions
- From other posters, it seems that 30 companies (in one fund) might be good as far as diversification is concerned; and I can't think that Mr Smith be acting dumb (lucky maybe)
- Trying to keep the cost down (hence the trackers)

Not sure about the fixed income sector, that was my last question.
Thank you

small cap and Japan are a fraction of the global markets and Fundsmith's 30 stocks are not going to give you a good sampling of other equities. The fact that Fundsmith's returns are so far above the average market should tell you that the fund might be volatile. You have access to many broadly based global equity funds so use them. As far as bond funds go you won't make much from them in the next few years, but you will be glad of the allocation when stocks crash. You might keep duration short to medium.

A_T

gif1 wrote: »

After all your kind comments, I am now considering the following:
- Fundsmith Equity I Acc 45.0%
- Vanguard Emerging Markets Stock Index Acc GBP 10.0%
- Vanguard Japan Stock Index Fund GBP Accumulation 15.0%
- Fixed Income ?? 30.0%

I am now stuck with the Fixed Income asset allocation, as I am not sure how to best build it. The rationale for that would be to act as a buffer when the next equity crash happens. So what is the general consensus in this case? UK or Global? Gilts or Corporate? Short or Long maturity? Active or Passive?
I am struggling to get my head around with the correlation (especially when considering the maturity) between Fixed income and Equity; I guess I would like something to react positively to offset (as much as possible) any negative in the equity sector.
Could you please shed any lights?
Many thanks

45% Fundsmith is way to high for me. Owning Fundsmith is not investing globally it's betting on Terry Smith's ability to choose 30 shares. One needs to ask oneself what is it I like about Fundsmith? Is it just that it's the best performing global fund of the last 7 years?

As far as fixed income goes during the global financial crisis of 2008 UK Gilt funds went up but corporate bonds fell.

Audaxer

gif1 wrote: »

After all your kind comments, I am now considering the following:
- Fundsmith Equity I Acc 45.0%
- Vanguard Emerging Markets Stock Index Acc GBP 10.0%
- Vanguard Japan Stock Index Fund GBP Accumulation 15.0%
- Fixed Income ?? 30.0%

I am now stuck with the Fixed Income asset allocation, as I am not sure how to best build it.

That being the case, it would be better to go with a well diversified multi asset fund that has a professionally built fixed income element.

Linton

gif1 wrote: »

.......

I am now stuck with the Fixed Income asset allocation, as I am not sure how to best build it. The rationale for that would be to act as a buffer when the next equity crash happens. So what is the general consensus in this case? UK or Global? Gilts or Corporate? Short or Long maturity? Active or Passive?
I am struggling to get my head around with the correlation (especially when considering the maturity) between Fixed income and Equity; I guess I would like something to react positively to offset (as much as possible) any negative in the equity sector.
Could you please shed any lights?
Many thanks

Under normal circumstances such as operated for perhaps 150 years prior to 2008/9 one would have a significant % in UK gilts as they would provide a steady very safe income to tide you over the bad times. However the returns on gilts now are close to zero and valuations of medium/long term government bonds could easily fall significantly which means that they are no better than cash.

So what to do?

Government bonds from other developed economy countries such as the US or Europe dont help and they have the added disadvantge of currency risk. There are other areas such as directly held property funds. But that is a limited sector. Then one could go into safer corporate bonds. These can provide a moderate return although they carry the risk of losing everything should the company go bust. And finally there are EM government bonds, higher return than gilts but a much higher chance of defaulting.

I have chosen to invest in strategic bond funds where the manager can choose appropriate bonds from across the full spectrum of very safe government bonds to higher risk corporate bonds and am also trying out very active Wealth Preservation funds whose aim is to minimise downside risk.

The key difference between bonds and equity is that, provided the issuer doesnt go bust, with bonds you know the price now, you know how much income you will get, and you know what the price will be when the bond reaches maturity whereas with equity the future is unknown. So investors can switch money between bonds and equity balancing between the safety of bonds and the higher returns possible with equities.

Prism

gif1 wrote: »

After all your kind comments, I am now considering the following:
- Fundsmith Equity I Acc 45.0%
- Vanguard Emerging Markets Stock Index Acc GBP 10.0%
- Vanguard Japan Stock Index Fund GBP Accumulation 15.0%
- Fixed Income ?? 30.0%

I am going to go against the advice of some of the others and say that I like this allocation better, partly because its very close to my own i suppose. I might go 15% EM and 10% Japan as thats a bit closer to the MCSI or FTSE world index and EM will have more growth than Japan

I don't have any fixed income so can't really provide advice on that. Linton is your best bet i reckon.

Lungboy

Linton wrote: »

I have chosen to invest in strategic bond funds where the manager can choose appropriate bonds from across the full spectrum of very safe government bonds to higher risk corporate bonds and am also trying out very active Wealth Preservation funds whose aim is to minimise downside risk.

This is what I'm leaning towards at the moment, particularly the AXA Framlington Managed income fund, although I'm a little wary of it being a mixed asset unit trust where the other options I'm looking at (Liontrust Monthly Income, Sanlam strategic bond, Twentyfour Dynamic Bond) are purely fixed income OEICs. Should I be wary or am I overthinkng it? Are there other strategic bonds worth looking at?

A_T

re. bonds the OP said the proposed intention for them in the portfolio was "to act as a buffer when the next equity crash happens". In the 2008 GFC funds containing a significant amount of corporate bonds (like strategic bond funds) crashed along with equities. UK Treasuries (not inflation-inked) were just about the only asset class that didn't. The reason for this is quite simple: when capitalism looks in trouble investors flee to government for shelter.

bowlhead99

Prism wrote: »

I might go 15% EM and 10% Japan as thats a bit closer to the MCSI or FTSE world index and EM will have more growth than Japan

FYI, the size of FTSE Emerging as of the February month-end factsheet was 10.322% of FTSE All-World (Emerging would be more like 12% if you included Korea at 1.71%, and MSCI do include Korea in the EM index which OP is buying via the Vanguard tracker). So the OP's 10% to Emerging is not really going to be closer to the world index ratios if he changes it to 15%

But you are right that Japan is a bit smaller than Emerging Markets on the basis of the rules used by FTSE to construct their All-World portfolio (8.7% of All-World) and one can make an argument that Emerging Markets may be under-represented anyway in terms of the financial strength of those regions (due to lack of liquidity and free float market cap available to foreign investors in e.g. Chinese or Russian listed companies). So it wouldn't hurt to have EM greater than Japan.

It also wouldn't hurt to have a few percent to the developed asia-pacific outside Japan, i.e. places such as Hong Kong, Singapore, Australia/ NZ.

While considering these sort of things, if you are the type of person who believes in a managed Fundsmith-type fund for their general global investments, there are various decent managed funds for Japan, Asia and emerging markets generally- Baillie Gifford and First State / Stewart among others have good track records. I tend to think if you believe in active management for a large part of the portfolio (the Fundsmith stuff) then - rather than trusting all your Asian and EM stuff to an index - someone with 'on the ground' experience in Japan or Asia will help your portfolio have a focus on the type of businesses with a bright future rather than the ones that dominate the EM or Japan indexes simply through being large or having been substantially pumped up by QE/ Abenomics.

Still, each to their own I guess, there are many ways to skin a cat.

firestone

one cheap ETF doing ok with a good spread of regions worth looking at maybe HSBC Economic Scale Worldwide Equity ETF