Damien Fahy's 80-20 Investor - thoughts?

Malthusian

Prism said:

2) You don't need to diversify across all geographies or industries. Plenty of people avoid oil, gas, finance and certain other sectors with no negative impact on performance.

And the other half of the people who avoid oil / gas / finance / manufacturers of purple dye with an R in their name do see a negative impact on performance.

There is no evidence that anyone can consistently beat the market by picking which sectors to avoid, so the starting point is that excluding any particular sector will have a coin-flip effect on your portfolio's performance in the long run.

Diversification is not about increasing performance but going to bed at night knowing you haven't made a decision that will cause you to lose out compared to everyone else.

If you sleep better at night knowing that you aren't investing in burning dead dinosaurs then all power to you - if it feels good, that's a guaranteed positive, while the effect on performance is a coin flip, so the expected outcome is a net positive. However the main theme of this thread is people who think they can beat the market rather than ethical investing.

4) Both active and passive funds are just fine. You don't know which actives will beat the market but with a bit of research you can select a fund manager which matches with your investment approach.

True, but most people buy active funds because they think they'll beat the market. Lots of investors were happy with Woodford's investment approach of investing in out-of-favour British companies and the non-existent concept of "patient capital" until it started losing them money.

I use mostly active funds (like Fundsmith) and am very happy with my historical increased returns. I fully expect that to continue - or else I would change approach.

If you have scientific evidence to back up that expectation, the asset management industry will make you richer than God. They've been desperately looking for it for 50 years.

Prism

Malthusian said:

There is no evidence that anyone can consistently beat the market by picking which sectors to avoid, so the starting point is that excluding any particular sector will have a coin-flip effect on your portfolio's performance in the long run.

Maybe not the absolute performance but its a pretty reliable assumption that certain industries do particularly badly during an economic downturn, so if one of your goals is to reduce that effects of that, an example being drawdown in retirement, then avoiding those sectors might be desired.

If you have scientific evidence to back up that expectation, the asset management industry will make you richer than God. They've been desperately looking for it for 50 years.

Of course nobody has evidence of such performance going forward. If I didn't have faith in an active fund manager to either beat the market (if thats my goal) or reduce risk or protect during a downturn etc, then I wouldn't use that fund and would likely use a passive equivalent. The strategy which most of my selected funds follow is 'quality' which has now been working pretty much for over 20 years, through 3 crashes of different types. Regardless of active vs passive fund choices I am going to stick with that approach. I don't know if it will be the best performing strategy over the long run but I doubt it will be the worst.

jbrassy

Prism said:

I am going to disagree with some of those points
1) fees are secondary to your desired investment choice. So for two almost identical funds then yes choose the lower of the two, but you should select the investment first and then try and keep the fees down.
2) You don't need to diversify across all geographies or industries. Plenty of people avoid oil, gas, finance and certain other sectors with no negative impact on performance. There are funds that have little to no investment in such as Germany, Japan, Canada to name a few. Again, that isn't especially important in this global world of investing. You likely don't want just a single country to avoid local political and currency issues but you don't need many to diversify.
3) Agreed, though this bit seems hard for people to get right.
4) Both active and passive funds are just fine. You don't know which actives will beat the market but with a bit of research you can select a fund manager which matches with your investment approach. Or you could choose a standard passive or maybe a smart beta fund. Lots of options for all.

My preferences - I don't worry too much about the fee unless it seems out of place with similar funds. I aim for less than 1%. I don't worry at all about regional allocations in my global funds. Its pointless as it doesn't represent where the earnings come from. My funds are mainly focused on just 4 sectors. I use mostly active funds (like Fundsmith) and am very happy with my historical increased returns. I fully expect that to continue - or else I would change approach.

This advice is comical. It has been shown time and time again that active funds do not outperform passive funds over the long term. If you want to know why this is, you should research the Efficient Markets Hypothesis. Economists have known about this for decades and research has consistently shown this to be true. 

For the average person, it is extremely difficult to identify which companies, sectors, or economies are going to do well at the specific stage of the economic cycle we are in. Even professional investors are not very good at it. It's a lot easier to diversify and not worry about it. 

To say you don't worry about fees is also terrible advice. A quick Google of "effect of fees on investment performance" will throw up plenty of results which show that even small differences in the amount you pay in fees can have a substantial impact on returns over the long run.

Diplodicus

“There is no evidence that anyone can consistently beat the market, by picking which sectors to avoid” - Really?
Surely if that were the case then any divergence between the values of any two sectors would be a temporary aberration that would correct itself later. The opposite is more realistic imo.

”Diversification is not about increasing  performance but going to bed knowing you haven’t made a decision that will cause you to lose out compared to everyone else.” - Quite right. That’s what groupthink is all about.

Diplodicus

“It is extremely difficult to identify which companies, sectors or economies are going to do well at the specific stage of the economy we are in.” - Hardly.

”It’s a lot easier to diversify and not worry about it.” - Of course.  It is “easier”.

bowlhead99

jbrassy said:

Prism said:

I am going to disagree with some of those points
1) fees are secondary to your desired investment choice. So for two almost identical funds then yes choose the lower of the two, but you should select the investment first and then try and keep the fees down.
2) You don't need to diversify across all geographies or industries. Plenty of people avoid oil, gas, finance and certain other sectors with no negative impact on performance. There are funds that have little to no investment in such as Germany, Japan, Canada to name a few. Again, that isn't especially important in this global world of investing. You likely don't want just a single country to avoid local political and currency issues but you don't need many to diversify.
3) Agreed, though this bit seems hard for people to get right.
4) Both active and passive funds are just fine. You don't know which actives will beat the market but with a bit of research you can select a fund manager which matches with your investment approach. Or you could choose a standard passive or maybe a smart beta fund. Lots of options for all.

To say you don't worry about fees is also terrible advice. 

"Don't worry about fees" is not what was being suggested. The post you're quoting says that fees are secondary to investment selection, which is surely true.

The difference between one asset class  and another (e.g. US S&P 500 equities vs Global Emerging Market equities vs European smaller companies vs high yield corporate bonds vs investment grade corporate vs UK index-linked gilts, etc) can be 10%+ in a given year, while a fee differential for access to those markets through a variety of funds (or even a portfolio of self-selected equities, in some markets) may be 0.5% or less. Most important is to figure out the desired strategy / asset allocation for the objective, and then decide what specific fund(s) would help you implement that strategy, and then decide where to hold it.

A quick Google of "effect of fees on investment performance" will throw up plenty of results which show that even small differences in the amount you pay in fees can have a substantial impact on returns over the long run.

The 'quick Googles' will show you the drag on the same gross return from two different levels of fees and that if you lose less to fees you will get to keep more for yourself. And most with a spreadsheet or calculator or abacus can tell you that if you reduce the fees for the same gross return, you will get a better result, without needing to resort to Google. However, 'cheaper is better' only really works if the assumption that all funds will produce the same gross return, holds true, which is not always the case.

Whether you agree or not that active management can be useful, the premise that how much it costs is more important than what gross return you get, is false - because total return is a function of both, and the range of returns available from different assets from time to time is wider than the range of fees for accessing those assets. So it's quite sensible to say: "fees are secondary to your desired investment choice. So for two almost identical funds then yes choose the lower of the two, but you should select the investment first and then try and keep the fees down."

Prism

jbrassy said:

Prism said:

I am going to disagree with some of those points
1) fees are secondary to your desired investment choice. So for two almost identical funds then yes choose the lower of the two, but you should select the investment first and then try and keep the fees down.
2) You don't need to diversify across all geographies or industries. Plenty of people avoid oil, gas, finance and certain other sectors with no negative impact on performance. There are funds that have little to no investment in such as Germany, Japan, Canada to name a few. Again, that isn't especially important in this global world of investing. You likely don't want just a single country to avoid local political and currency issues but you don't need many to diversify.
3) Agreed, though this bit seems hard for people to get right.
4) Both active and passive funds are just fine. You don't know which actives will beat the market but with a bit of research you can select a fund manager which matches with your investment approach. Or you could choose a standard passive or maybe a smart beta fund. Lots of options for all.

My preferences - I don't worry too much about the fee unless it seems out of place with similar funds. I aim for less than 1%. I don't worry at all about regional allocations in my global funds. Its pointless as it doesn't represent where the earnings come from. My funds are mainly focused on just 4 sectors. I use mostly active funds (like Fundsmith) and am very happy with my historical increased returns. I fully expect that to continue - or else I would change approach.

This advice is comical. It has been shown time and time again that active funds do not outperform passive funds over the long term. If you want to know why this is, you should research the Efficient Markets Hypothesis. Economists have known about this for decades and research has consistently shown this to be true. 

For the average person, it is extremely difficult to identify which companies, sectors, or economies are going to do well at the specific stage of the economic cycle we are in. Even professional investors are not very good at it. It's a lot easier to diversify and not worry about it. 

To say you don't worry about fees is also terrible advice. A quick Google of "effect of fees on investment performance" will throw up plenty of results which show that even small differences in the amount you pay in fees can have a substantial impact on returns over the long run.

Firstly, to be clear, I never offered any advice about what anyone should do. This thread is about somebody selling a service which attempts to beat market returns. Since market returns are simply an average of all returns then it stands to reason that some people do in fact beat the market and some do not. It does not seem like Damien Fahy is one of those that does but as others pointed out its difficult to tell with his vague results. 

There is no research as far as I know that details how many people do or do not individually beat the so called market. There is evidence that the average fund typically does not, but that does not mean that someone couldn't swap in and out of those funds at the right time and do very well. That is what Damien is attempting to do and its based on a well known momentum strategy (which you can also do passively) which can work. Maybe its just that some people are better at picking funds than others. Sometimes passive will be the best choice, sometimes active. 

As I mentioned in my other post there are reasons not to invest in cyclical sectors and countries which are heavy in those sectors. Again nothing to do with active vs passive. There are thousands of indexes you could track.

And I didn't say I didn't worry about fees. I said it wasn't my primary concern. My primary concern is getting a good result which in my case is higher returns with lower risk but its not the same for everybody. Sometimes you have to pay a bit more than the cost of a tracker to get that.

Trying to get better returns than the market as a target isn't in itself a problem. Some people manage it. I am not convinced that Damien Fahy is one of those people from the evidence we have.

jbrassy

Diplodicus said:

“It is extremely difficult to identify which companies, sectors or economies are going to do well at the specific stage of the economy we are in.” - Hardly.

I think you over-estimate how financially literate the "average" person is. In fact, most people probably don't have a stocks and shares ISA. Over 20 million people can't manage their money in the UK (see the Financial Capability website). You make it sound like it's a doddle to pick the best sectors and companies during a recession. I assure you, for the average person, it is not.

And on the active v passive fees debate: passive funds outperform active funds in the long term when fees are taken into account (i.e. net of fees). That is an undeniable fact. There are literally dozens of academic papers to prove this. Even Warren Buffett knows that passive investing is better than active. Just look up the bet he took up with the hedge fund industry in 2008.

There will be active managers that outperform the market in some years. However, it is also a fact that past performance is not a good predictor of future performance. Therefore, it is extremely (cannot emphasise enough) difficult to predict which managers will outperform next year, or the year after.

Ultimately, people who advise you to buy certain funds are likely to be getting something in return. Whether it's Hargreaves Lansdown and their  "best buy list" or investment consultants who advise pension trustees, they have an incentive to guide investors towards expensive active funds - because they get commissions and other kick-backs. 

Diplodicus

I think I understand what passes for being financially literate on the MSE savings and investment forum: all the gear for the tax benefit/ low fee angle; no idea where to put your money.  As long as you think you’re winning on the first measures, you just want NOT to be making a mistake on the second. 
Is that fair?

Malthusian

Prism said:

Firstly, to be clear, I never offered any advice about what anyone should do. This thread is about somebody selling a service which attempts to beat market returns. Since market returns are simply an average of all returns then it stands to reason that some people do in fact beat the market and some do not. It does not seem like Damien Fahy is one of those that does but as others pointed out its difficult to tell with his vague results.

To be pedantic, we know with certainty that he doesn't beat the market, because if he had

a) his website would publish audited performance figures so that we could all admire his outperformance, not vague figures and broken links using random dates

b) he would have started his own fund by now

c) what data he has published wouldn't indicate miserable underperformance over 5 years

There is no research as far as I know that details how many people do or do not individually beat the so called market. There is evidence that the average fund typically does not, but that does not mean that someone couldn't swap in and out of those funds at the right time and do very well.

There is no evidence that anyone can consistently beat the market by swapping in and out of funds, using a momentum strategy or otherwise. There are any number of discretionary managers and funds-of-funds which could generate such evidence if it existed. If anyone managed to produce that evidence the asset management industry would make them richer than God.

If a trillion-dollar industry has been searching for something for fifty years and not found it, absence of evidence is evidence of absence.

If an individual investor tries to beat the market the expected effect on their returns is nil minus trading costs. This still applies if they are very smart, or very experienced, or do a lot of research, as there is no evidence that people are more likely to consistently beat the market if they are smarter / more experienced / do more research.

In addition, the diminishing marginal utility of money (translation: the richer you are, the less happiness you get from every additional £1,000) means that a zero-sum bet in money terms is a loser in happiness terms. Because losing £1,000 on a failed attempt to beat the market brings more misery than winning £1,000 brings happiness.