Easy two fund portfolio

eskbanker

Tom99 wrote: »

My World Ex UK allocation is very low compared with most recommendations on this forum but that is a personal choice.

You obviously don't have to answer that previous question fully or defend your choices but if you feel able to share, what is your split between the two UK funds and the ex-UK one, and why?

It sounds to me like you're still going to end up with a sizable chunk of your pot in HSBC/Shell/BP but that you're less bothered about this than (what sounds like) similar size holdings in the four largest US stocks if you had a more conventionally weighted portfolio? In other words, if you consider that cap-weighting is a 'problem' with index trackers then why aren't you adopting an entirely different strategy?

Tom99

eskbanker wrote: »

You obviously don't have to answer that previous question fully or defend your choices but if you feel able to share, what is your split between the two UK funds and the ex-UK one, and why?

It sounds to me like you're still going to end up with a sizable chunk of your pot in HSBC/Shell/BP but that you're less bothered about this than (what sounds like) similar size holdings in the four largest US stocks if you had a more conventionally weighted portfolio? In other words, if you consider that cap-weighting is a 'problem' with index trackers then why aren't you adopting an entirely different strategy?

[FONT=Verdana, sans-serif]At the moment it is 75% UK equities, 6% rest of world equities and 19% corporate bonds.[/FONT]
[FONT=Verdana, sans-serif]Until the last few years it was all UK. My reluctance to venture outside the UK is mostly:[/FONT]

• [FONT=Verdana, sans-serif]Unknown quantity and lack of understanding about non UK companies and markets.[/FONT]
• [FONT=Verdana, sans-serif]Different economy so an increase in risk[/FONT]
• [FONT=Verdana, sans-serif]Different currency so an increase in risk[/FONT]
• [FONT=Verdana, sans-serif]A large slug of FTSE100 profit and dividend is already declared in US$ so to a certain extent exposure to other world markets is built in to UK stocks.[/FONT]

[FONT=Verdana, sans-serif]I have tried other strategies in the past, mostly buying individual shares in a portfolio of 10 or 20 to spread risk. That met with various rates of success but taken overall usually quite close to a UK Index tracker but with a lot more dealing costs particularly if rebalancing was required after a year or two.[/FONT]

eskbanker

Wow, so 93% of your equities are UK-based?

Your choice obviously but in the context of a thread about a newbie investor considering geographical split (and whose initial stab at 30% UK was challenged as high) I'd humbly suggest that your allocation is unlikely to be particularly close to the norm - in particular you perceive that different economies and currencies would create an increase in risk, whereas many would argue the exact opposite, i.e. that exposure to other economies and currencies actually reduces risk by diversifying and hedging against dips in the UK economy.

I suppose I'm seeing diversification as a spectrum, where a single stock is obviously high risk, your previous 10-20 would clearly reduce that, and going to the UK's top 350 would reduce it further. To me the logical conclusion is to keep going to cover all the sectors, but by only committing 7% of your equity portfolio to cover the 94% non-UK it hardly seems worth doing at all, but each to their own!

bowlhead99

Tom99 wrote: »

Splitting 50/50 puts only 3.56% of the UK part in HSBC.

That still seems a fair chunk, if your complaint with the world index was that it put 7% in 'only' four companies. With your approach you have 7% of your UK allocation (which is itself almost 93% of all your equities), in only two companies, HSBC and Shell...

Part of the problem with any index tracker is that they are based on market cap. ...
...that does not really seem like the best way of diversifying and spreading risk to me.

Well, it does allocate each pound in a ('fair'? non discriminatory?) way among all the places that could take the pound, based on all the shares available in free float into which you could invest.

If people on average around the world are valuing HSBC or Apple highly, such that there's multiple hundred billions worth of those shares in which to invest, then there is some logic in saying that if you fire all your money haphazardly out of a cannon to make sure you don't have to make any investing decisions (or pay anyone else to), then you should expect a lot of the money to land on the big ones.

Maybe a question to ask yourself is if allocating by company size doesn't "really seem like the best way of diversifying and spreading risk"- why do you insist on using indexes for your allocation? If your goal is to diversify and spread risk.

You've addressed part of the flaw with the FTSE all-share (the high allocation to a few major companies like HSBC; banks, big oil, big pharma) by adding some more smaller/mid companies. You could do that elsewhere maybe. Either with active funds or differently weighted indexes (though there are not many of the latter and they are not as cheap as cap weighted ones). But cost isn't everything if your are trying for a particular effect (eg, intentionally avoiding over-concentration in certain areas like you'd get with cap weighting)

Tom99 wrote: »

. My reluctance to venture outside the UK is mostly:
Unknown quantity and lack of understanding about non UK companies and markets.

I generally don't expect to know each corner of the market as well as I know some of them. I accept I can't know what will happen next. You can't really tell what will happen next in the UK economy or UK stock market. Yet you still invest, using the logic that investments outperform cash if left long enough. So, that probably won't be fundamentally different for other markets.

Different economy so an increase in risk ; Different currency so an increase in risk

These combined effects are a major cause of people not looking to invest 'away' when they could invest 'at home'. And there is some merit in not putting a massive proportion of your wealth in an overseas basket and leaving it there to develop when you know you want to spend the proceeds in the UK.

Still, much of what you buy will be imported (whether directly or just having costs tied to overseas economies - like paying UK workers who are themselves buying foreign products as part of their lifestyle and price their services accordingly. If you think about it, if you were comfortable investing your money in Tesco and someone suggested investing in Sainsbury as well to improve the diversification, you wouldn't say "different company, so increase in risk". It's a decrease in risk. Just like investing in France and Germany vs UK.

The difference is the FX movements will move the Germany-focused companies' values, in pounds, more than it will move the UK focused companies. But you don't know which way it will move them. Investing only in UK-priced companies on the basis that then you're more insulated to FX risks is maybe shortsighted. Because you have then focused on making pounds available to you in the future rather than making sure you have a mix of currencies available to help you buy those Korean smartphones and German cars and taiwanese washing machines and US movies and search engine advertising.

To aim for that approach - of mostly making pounds as we move into an every more global economy - is in itself, a major FX risk.

A large slug of FTSE100 profit and dividend is already declared in US$ so to a certain extent exposure to other world markets is built into UK stocks.

Absolutely, but the type of Dollar exposure is oil rather than software operating systems, the Euro and Yen is from certain industries but not video games or car manufacturing, etc. No denying you will get dollars and euro and yen assets and income streams via the FTSE, but limiting by stock market is often also limiting by industry.

Which can increase rather than decrease volatility. Maybe UK retail will do great the next two years and really badly the next two. Whereas French or Australian will be the opposite. A bit of everything from everywhere will smooth the returns rather than just buying one or the other.

I have tried other strategies in the past, mostly buying individual shares in a portfolio of 10 or 20 to spread risk. That met with various rates of success but taken overall usually quite close to a UK Index tracker but with a lot more dealing costs particularly if rebalancing was required after a year or two.

Generally if the portfolio is small, rebalancing costs could be a relatively higher percentage and holding through collective investment schemes is better to replace that cost with OCF and take the effort out of it. If you are buying most of the big companies (the 'usual suspects' on the FTSE that you've heard of, and a few punts you research yourself) you may not get an appreciably different result from the general market, while still being exposed to total loss on 5-10% if a company collapses.

So, whether or not the collective fund outperforms your home-brewed portfolio every year it can make a lot of sense to move over, and is necessary if/when you go international. If rebalancing between funds seems like a headache, then getting a fund where the manager allocates asset classes and individual holdings and countries is a pretty good idea. That doesn't necessarily mean using global indexes, as the indexes don't rebalance, so if you like the idea of rebalancing then might make sense to go with funds that invest in index funds rather than into solely one index (even if marginally more costly).

The purpose of the above isn't to overly criticise or try to convince you to change your mind or your approach, just a counterpoint for others reading who are wondering what to do and whether what you do might make sense for them. Thanks for sharing!

Tom99

eskbanker wrote: »

but by only committing 7% of your equity portfolio to cover the 94% non-UK it hardly seems worth doing at all, but each to their own!

[FONT=Verdana, sans-serif]You are right. It was a token gesture on my part with some money freed up. I am certainly not offering it as a suggested wise investment allocation for others to follow. [/FONT]