Decision: active v passive multi manager v nutmeg v DIY

bostonerimus

Audaxer wrote: »

I would have hoped that if you pick a good diversified portfolio of funds/ITs for income in retirement these could be buy and hold for the long term no matter what was happening in the markets. Is that not the case?

You should avoid timing the market, but you should time your life circumstances and strategically adjust your asset allocation over the decades. Also take notice of things like interest rates and adjust your fixed income/cash allocations. ie if savings bonds were paying 5% I'd be using them more than I do now.

zagfles

Audaxer wrote: »

Hi dunstonh, I respect your opinion and have seen you mention following the economic cycle before. Can you advise me how we know where we are in the economic cycle? As we have not had a big equity crash for 10 years, does that mean we are near the end of the economic cycle? If we are do you tend to advise clients to have a lower percentage in equities at this time and/or more defensive funds? I would have hoped that if you pick a good diversified portfolio of funds/ITs for income in retirement these could be buy and hold for the long term no matter what was happening in the markets. Is that not the case?

Don't believe the marketing hype. Nobody knows when the next downturn is coming, and if they did, they wouldn't be posting on MSE, they'd be admiring the view of their private island from their new yacht.

Of course (if you believe in active management) some can make better guesses than others. For my active funds I tend to research fund manager performance and choose funds with a wide remit. If someone claims they can perform better than the competition I'll want evidence not vague assertions.

eskbanker

bostonerimus wrote: »

You should avoid timing the market

At the risk of splitting hairs, you should avoid trying to time the market! If the holy grail of timing the market could actually be achieved successfully then it would be very much worth doing....

Audaxer

eskbanker wrote: »

At the risk of splitting hairs, you should avoid trying to time the market! If the holy grail of timing the market could actually be achieved successfully then it would be very much worth doing....

I agree generally you should avoid trying to time the market, but if someone delayed investing a lump sum at the end of last year as they thought the markets were high, and invested in mid-February once they had dropped 10%, they would have successfully timed the market, albeit that it would have been by luck rather than judgement, as the markets could have kept rising.

dunstonh

Edit: just noticed you have included equity income funds in the ones that you say may be affected by the economic cycle. I would have thought funds like Royal London UK Equity Income, Fidelity Global Dividend, MI Chelverton UK Equity Income, which I hold could be classed as fairly general equity funds?

Equity income is an investment style but it is not one that suits the whole of an economic cycle. It is one that will do better for a period in the cycle and one that will do worse for a period.

Whilst equity income funds are popular, they are a focused style.

Audaxer

dunstonh wrote: »

Equity income is an investment style but it is not one that suits the whole of an economic cycle. It is one that will do better for a period in the cycle and one that will do worse for a period.

Whilst equity income funds are popular, they are a focused style.

Thanks, what about equity income ITs that have a history of rising dividends, like City of London and Murray International? They yield about 4% at present, so if you invest £10k you should get around £400 in dividends each year rising with inflation. Maybe at different times in the economic cycle the capital is more volatile, but I think most people that invest in these would continue to hold them throughout the cycle. Would IFAs tend to move out of such funds/ITs at different times in the economic cycle?

grey_gym_sock

it's very plausible that some kinds of funds (such as equity income) tend to do better and worse at different times in the economic cycle. but it doesn't follow that it's a good idea to attempt to jump in and out of those funds to take advantage of that (so you only hold them when they're doing better).

the main problem with this is that the market cycle anticipates the economic cycle. i.e. if a recession appears likely, then the shares worst affected by a recession will be marked down sharply in price before it happens. and similarly, a recovery will be anticipated, with shares prices which will benefit most from it rising before the economy has actually bounced back. however, sometimes what the market is anticipating doesn't happen after all, or does but it's a shallower/slower recovery/recession than anticipated, and then it may reverse its previous move.

to time the cycle successfully, you need to anticipate the economic cycle better than the market does. either to predict what's going to happen before the market predicts it. or to figures out when the market is wrong in predicting economic events, so you can bet the other way (e.g. by buying economically sensitive shares when the market is wrongly expecting a recession).

this is all very difficult to get right. IMHO, not trying at all is perfectly reasonable. and if you just have fixed percentage allocations to various funds, and rebalance back to those allocations, ignoring where the economic cycle might be, then you do automatically end up doing a bit of "buying low, selling high".

bostonerimus

Audaxer wrote: »

I agree generally you should avoid trying to time the market, but if someone delayed investing a lump sum at the end of last year as they thought the markets were high, and invested in mid-February once they had dropped 10%, they would have successfully timed the market, albeit that it would have been by luck rather than judgement, as the markets could have kept rising.

Why is it that 20-20 hindsight is always through rose tinted spectacles? People are always happy to share their successes, however, they don't often shout about their failures. So for every "successful" example of market timing there's a failure too. Also remember that buying is only one half of successful timing......you have to sell too.

There are fantastic examples of market timing and using analysis to beat the market.......the obvious one was "the big short" where people shorted the housing market in the US. Now if you have the time, expertise and guts to unpack CDOs down to the individual mortgage level and you see a pattern that can be exploited and then act on it that's great. But the individual investor and 99% of institutional investors can't do that and the individual investor would be silly to take the risk. Also there were obviously a lot of people who lost a lot of money in that little incident too.

bowlhead99

Audaxer wrote: »

Thanks, what about equity income ITs that have a history of rising dividends,

Equity income is still the investing style/strategy whether it is an OEIC or an IT. ITs just have the ability to hold back a portion of their revenue stream and put it in reserves so that they can pay out dividends at a later date rather than when they receive it.

If you look at the total return (share price or NAV growth and the value of divs paid if reinvested) that they are making for you, that's going to be driven by what they invest in - their investment strategy - to focus primarily on shares delivering a high level of income. A holdback in certain years to allow for a smoothly rising dividend stream in terms of pence per share paid out (adding to reserves in the good times and taking money out of reserves to 'overpay' their investors in the bad times) does not necessarily change the overall amount you get, your total return.

Investors do like the idea of stable dividends and it can be useful when someone is in a drawdown phase of their life rather than trying to build their wealth for the future, if they want hassle-free regular payouts, but it does not necessarily enhance overall returns.

For example in a recession when their investment targets can only afford to pay them lower £ dividends (generally leading to share price drops), they want to keep their own investors sweet so they will dip into their reserves and pay you out some of the money that they had previously withheld and internally reinvested in the better times. But as we know, taking money off the investment table and shovelling it back into your investor's hands when the markets in which you are invested are weak and share prices are poor and your investee companies are paying relatively lower dividends, is not always a great thing to do. Really what you might prefer them to do to maximise the value of your investments would be keeping the money invested/ reinvested at low prices, not taking money off the table and pushing it out to the investors. The investors might like it because they can spend the income on buying shares in things that have fallen even harder; but the investors could always do that anyway simply by taking from capital themselves.

So this idea that certain ITs have a history of always rising the dividends does not make them some miracle tool for wealth generation. If I had an investment that had been going for 100 years, I'd damnwell hope it was paying more dividends now in pence per year than it was paying 100 years ago because a farthing doesn't buy me much these days; but that doesn't mean they are magicians who should have us all bowing down to their amazing reliability. Great if you need a stable dividend and don't care about the capital value, but if they had never paid any income at all that would be just fine- you would still get the overall total return, coming through the share price or NAV instead.

Maybe at different times in the economic cycle the capital is more volatile, but I think most people that invest in these would continue to hold them throughout the cycle.

The fact that different funds (e.g. income vs growth, equity vs bonds or property, etc etc) might perform relatively differently to each other at different parts of the economic cycle does not mean you would necessarily abandon them entirely at one part of the cycle or another. The point of a broad portfolio approach is to be able to use that diversification to your advantage and periodically rebalance to get back to some balance that meets your needs in terms of volatility or return prospects.

If your goal is growing the overall pot then buying a fund that holds boring plodding dividend payers just as the market is going back up after a recession with a brighter future forseen in the world economy will not maximise your gains. Buying a special situations fund might be of use to pick up undervalued stocks with particular issues leading to strong gains during the recovery; much like buying an absolute return fund closer to the top of a cycle may protect to the downside due to the ability to sell short or to have a variety of market neutral strategies. When a bull market is in full swing, growth-focussed funds which don't have stability or robustness in their share price in the lean times will probably do pretty well because being super stable is not as important as the upside gains which can be made. And so on.

So, various fund types will, due to the strategies they each adopt, outperform or underperform relative to each other at different parts of the cycle. With the 'performance' being measured in success at growing or at paying an income or at keeping volatility low or whatever. When targeting the overall portfolio for a particular objective of income production, overall growth, volatility level etc, some wealth managers will logically have a view of where we are in the cycle and what they should have in the portfolio.

For example at the moment we are not 'just emerging out of recession' and perhaps the pickings for a special situations fund or turnaround specialist are somewhat slimmer than they would be in other years, so maybe that's not ideal for the current market. Similarly if you look at the consensus of what people are investing in over the last year in the debt/credit part of their holdings, the typical mix in professional portfolios between long dated govt bonds, short dated govt bonds, index linked bonds, high yield junk bonds etc, may be quite different from what it was five or eight or fifteen or twenty years ago, due to the shape of yield curves and perceived risk/reward.

So there's no doubt that some specialist types of holdings can fall out of favour or into favour based on what is going on in the world, and that some fund types will be going up while others are going up less fast or are falling. That doesn't mean you can time it perfectly and always be riding whatever is performing the best, and that shouldn't be the goal otherwise you're setting yourself up for failure.

Or if you don't believe in strategies that use different asset types and funds with different characteristics and rebalancing between them from time to time (buying low selling high), you can just ride an index up or down, which is a much simpler life. If you have enough money, and keep adding to it, the volatility won't matter and it will still grow over the long term so you shouldn't run out of money.

There are not many people (in the grand scheme of things) who actually just pick one index and ride it; the passive investors will still generally at least have some debt stuff and some equity stuff or maybe multiple types of both of those things, and rebalance back to their target every so often, necessitating selling the highest performing funds after they have grown out of tolerance and adding to the lowest.

Which is a natural 'timing of the market' but does not imply any magic prescience about what is going to be best next, just that one bucket has got relatively bigger or smaller than the other, by more than you wanted it to be. Which can be the same for users of active funds whose growth funds have run away from their value funds in a bull market so they reign in the growth ones and add to the others. The difference can be that the more active investors might be looking at what to rebalance back to, which may not always be a constant, while the more passive investors seek to keep things simple and ideally just have a static spreadsheet that helps them work their 60:40 or 70/30 equity:debt split.


As grey gym sock says, if you were to try to 'beat' the market you would need to know not just where the economy is in the cycle, which might be visible at least compared to some historic data points (e.g. we are no longer one year post-recession), but where the economy will go next, which is pretty much figured out by the rest of market ahead of the economy actually getting there. So having multiple asset classes is not really about 'market timing' and being a wall street psychic and winning a game by having better timing than the supercomputers and hedge fund teams. But it can involve considering whether a particular specialist fund type offers much that's useful to you at a point in time, and perhaps shunning if if it doesn't or embracing it if it does, and if one of your funds has well outgrown another, rebalancing between the two.

bostonerimus

Audaxer wrote: »

Thanks, what about equity income ITs that have a history of rising dividends, like City of London and Murray International? They yield about 4% at present, so if you invest £10k you should get around £400 in dividends each year rising with inflation. Maybe at different times in the economic cycle the capital is more volatile, but I think most people that invest in these would continue to hold them throughout the cycle. Would IFAs tend to move out of such funds/ITs at different times in the economic cycle?

One of the attractions of dividend investing is that it's boring. Dividends should be far less volatile that stock price. So through economic cycles you want a company or fund to maintain it's dividend/share. This is why it's a popular standard retirement strategy, but today total return (that lumps in capital gains) is maybe more popular as it usually offers the chance of higher returns........but there's more risk.

I own a Vanguard Wellesley fund that is an active balanced income fund of 40% equities and 60% bonds. It is popular with US retirees because of the reliable dividends and a bit of capital growth. Now as interest rates are on the way up maybe I should sell this fund, but it is far less volatile than most of my portfolio and as I intend to keep it for at least 20 years I should get back any dip in price from increased dividends.