Asset allocation and fund selection - thoughts please!

Aminatidi

Snakey wrote: »

Platform+IFA+funds is coming out at 1.8%, which just feels painful (it was 1% before, not that I appear to have had much bang for my buck based on the feedback from you guys). The only option for reducing that (and still going with the IFA) appears to be to invest into cheaper passive funds... but the impression I got from that part of the conversation was another "worst of both worlds" thing - I'd still be paying their full investment management fee, but I wouldn't be getting the full service as they'd be putting me into what they consider to be sub-optimal funds.

One thing I am sorted on is the tax side. I've fully researched the "putting things in" phase anyway, and have a basic understanding of the "taking things out" part which I can consider in more detail when I get there since the rules might have changed by then. I just need (want) someone to do the investments for me - unless I'm either being ripped off or paying for a monkey with a pin in which case why not DIY.

One way to think of things is that if you moved into passives you could arguably be doing things for < 0.5%.

If you went into actives you could arguably be doing things for < 1%.

There's a decent calculator here that highlights the difference fees can make

http://www.candidmoney.com/calculators/investment-charges-impact-calculator

I suspect that it's the size of the pot that makes you hesitant rather than anything about your abilities to know your risk tolerance and choose accordingly.

Linton

bostonerimus wrote: »

It makes me weep when I see people paying well over 1% in total fees to have their money managed and administered. Choose a low cost platform and use low cost ETFs and index funds and you'll be around 1% better off before you even start. There is a perception that index funds are "sub optimal" and that simply isn't the case, but many people feel that they should always try to beat the market and that's not the way to maximize your probability of success,

You will only be certain of being 1% better off if your index funds hold the same assets in the same proportions as the funds they replace. If they dont then over a few years you could easily be, to choose a random number, 20% better off or 20% worse off.


I would like to see evidence that index funds give a better or worse probability of success for a given return. This is a rather different criterion than maximising average return. Relying on index funds limits your options in getting the balance between target return and chance of success appropriate for your needs. There is more to it than deciding the value of n in VLS<n>

bostonerimus

Aminatidi wrote: »

I suspect that it's the size of the pot that makes you hesitant rather than anything about your abilities to know your risk tolerance and choose accordingly.

This could well be the case.

I'm in a similar situation to the OP wrt pension pot size, although I do also have DB pensions and rental income. The OP has the luxury of fairly high net worth and so they could diversify with some sort of income property or even set up a saving bond ladder to produce a very safe 2%, or even consider an annuity strategy for part of the pot, and then invest the rest aggressively.

I have my income covered by the DB pension and rent so I invest my pension pot and other money aggressively mostly in equity index funds and just roll over the 2% to 3% annual dividends. If I need more income I will just spend the dividends.

DrSyn

Linton wrote: »

I would like to see evidence that index funds give a better or worse probability of success for a given return. This is a rather different criterion than maximising average return. Relying on index funds limits your options in getting the balance between target return and chance of success appropriate for your needs. There is more to it than deciding the value of n in VLS<n>

Linton where is your evidence that active funds give better probability of success for a given return than index funds then?

bostonerimus

The probability of success obviously depends on the criterion you set. If it is to get the market average over the long term then indexing comes in with a very high chance of success. If you want more than the market average then indexing will never work....so 100% chance of failure. To get better than average return you will need to take more risk and also the chances of you meeting your goal naturally go down, unless you believe you have the "golden ticket" that will keep you out of the 50% of people who will lag the market.

DrSyn

If you do not have the time or inclination to learn about investing.
If you do not have the time to manage your portfolio.
If you cannot afford the cost of a financial adviser.
If you worry about the daily ups and downs of the stock market.
If you realise costs are important over the long term.
If you are happy for a fair return against risk taken.
If you are someone who does not think they have an edge over others.

Then in my opinion funds like VLS and HSBC's Global Strategy are suitable investments for most people but obviously not for Linton.

These funds stop you constantly tinkering with the assets. Fidelity recently found that their investors that did best where those that did not tinker because they were dead.

Limit your options?
If you wanted to give a tilt in a particular direction you can. Examples smaller companies.

Prism

DrSyn wrote: »

If you do not have the time or inclination to learn about investing.
If you do not have the time to manage your portfolio.
If you cannot afford the cost of a financial adviser.
If you worry about the daily ups and downs of the stock market.
If you realise costs are important over the long term.
If you are happy for a fair return against risk taken.
If you are someone who does not think they have an edge over others.

Then in my opinion funds like VLS and HSBC's Global Strategy are suitable investments for most people.

I agree with all of that and as mainly an active fund investor I can try and explain why I don't follow that advice.

I do have time to manage my portfolio therefore..
I don't pay a financial advisor
I don't worry about the daily ups and downs of the markets and typically neither do the managers of the funds I use
I realise that costs are important but don't mind a higher cost for what I feel is a chance of a better result
I desire a better return for ideally a lower risk - happy with one or the other in general
I feel I have an edge over many people because many people literally don't care and don't even know that their money is invested. I also would only invest in an active fund if I felt that the managers have an edge over others

In essence the stats are so heavily influenced by the vast sums of money in peoples pensions where almost no effort is put in by the platform or by the individuals themselves. As an example, at my wife's work not a single person in her department has even considered changing out of default fund. That fund is an underperforming pension specific managed multi asset. Even if they did change they would find no Vanguard, HSBC or iShares funds available. That probably accounts for a few million pounds of underperforming investments. My sisters company is pretty much the same. I have talked to several people at companies I work at and have never met anybody that has done anything with their investments.

Anyone that puts some thought into it and select either a decent active or passive (or both) strategy is on a good path.

bostonerimus

Prism wrote: »

I feel I have an edge over many people because many people literally don't care and don't even know that their money is invested. I also would only invest in an active fund if I felt that the managers have an edge over others

.

You need to have the edge over the risk/return ratio not the returns other people are getting. One of the worst mistakes people make is to compare themselves to other investors rather than against the plan they should be following, The only thing that matters is that you are getting enough return to meet your own financial goals, forget what other people are doing.

Prism

bostonerimus wrote: »

You need to have the edge over the risk/return ratio not the returns other people are getting. One of the worst mistakes people make is to compare themselves to other investors rather than against the plan they should be following, The only thing that matters is that you are getting enough return to meet your own financial goals, forget what other people are doing.

I totally agree and don't pay much attention to the benchmarks, indexes etc ( I have an awareness if things are going up or down in general). However simply from a theoretical point of view for discussion and in particular over that question of 'do you have an edge' - in other words 'can you beat an index' then vs a whole lot of dumb money in terrible and often expensive funds then I guess my answer is yes.

Linton

DrSyn wrote: »

Linton where is your evidence that active funds give better probability of success for a given return than index funds then?

I have no evidence either way, neither does anyone else as far as I know. Actually thinking about it, I cannot think of any way it could be tested. The probability of success is across all possible future economic scenarios and unfortunately we are only ever presented the one scenario that actually happens. There is no way of determining the outcome of the scenarios that did not happen. Did a portfolio achieve its objective or fail to achieve its objective because it was lucky/unlucky or was it resilient or over risky?



However with passive funds you have to accept the market allocations, so your options to do somethiong different are much more limited than with active funds.