Ideal split of assets across all sectors

Primrose

As a long term but not very experienced investor i,ve read the Woodford thread with interest and noted the various comments about having a good split across all sectors.

For those of us who are amateur investors and who may have allowed our portfolios to become rather skewed over the years, is there an ideal split, and if so, what is it?

Prism

There is no single way of doing this. You can go simple with a single multi asset fund and let someone else decide on the allocation or pick your split between an equity fund, a bond fund and cash. Some use gold, some prefer regional equity funds...

FWIW I split my equities between global large, global mid/small, emerging markets and micro cap. I do that with 6 funds at the moment. I don't worry about regional allocations.

eskbanker

As above, there's no right or wrong answer but one approach for your equity component would be to buy (or mirror the allocation of) global equity trackers such as the FTSE Global All-Cap Index. It's cap-weighted like most, but that doesn't necessarily make it ideal for everyone....

Primrose

So you don,t do it by regions, ie UK, USA, Europe, Asia etc
which is how Hargreaves Lansdown show a split of your invested assets.

I,m wondering how many private investors rely on trackers as a form of safety for fear of making some poor selections.

I haven,t bought Woodford thankfully but am wondering whether, going forward, trackers are the way to avoid falling into traps like this.

If you try to use your ISA allowance every year, is it wiser just to add it to existing trackers or expand your regional areas of investing ? I,ve been guilty of selecting a different fund most years in the past thinking I was spreading my risks but have ended up with too many funds, albeit it across different regions and wondering how I can best simplify.


Probably it makes little sense, for example, to have several UK equity funds when most of them could end up holding, the same large FTSE 100 companies.

What,s the maximum number of funds its sensible to hold in any particular sector, regardless of whether you do it by region, or other investment class?

bostonerimus

There is no ideal asset allocation. Some people follow French Fama and overweight small cap in the belief that it will give better risk adjusted returns than a purely cap weighted approach and then some people also do something similar with geographical splits. I don’t bother with such complications and concentrate on keeping costs down with broad cap weighted global indexes that give a suitable risk to return ratio on the efficient frontier. That was roughly 60/40 equity to bonds when I was working, but now I’m retired I can take more risk, as I have secure retirement income and don’t need to save anymore, so I’m at 75/25

Thrugelmir

Fixed interest, Infrastructure, Private Equity, Commodities, Precious Metals, Renewable Energy, Sustainable Farming, Property. The list goes on with many sub sectors within .

SonOf

So you don,t do it by regions, ie UK, USA, Europe, Asia etc

We use the following
UK equity (core)
UK equity (satellite)
European ex UK (core)
European ex UK (satellite)
US equity (core)
US equity (satellite)
Japan
Asia
Emerging Markets
Property (share)
Gilts
Index Linked Gilts
Inv Grade Bonds.

satellite funds are niche funds (e.g. smaller cos)

The lowest risk portfolio wont have anything allocated to satellite and then as you move up the scale, a bit more gets allocated to them.
Trackers fill the core. Managed to fill the satellite
Not all risk profiles will have an allocation to each area (e.g. emerging markets doesn't get used until later).
The weightings used are based on target volatility and are fluid over the economic cycle. For example, investment-grade bonds are largely out of favour at the lower-risk end now but several years ago, they were not. Each revision recently has reduced the equity content in favour of gilts. If you risk target, that would be expected. if you are static, you accept your portfolio will move around the risk profile even though the weightings will remain the same.

There are many different ways to build a model. The key thing really is that you shouldnt do it yourself using random numbers. e.g. 10% across 10 funds. Or using static models that have no consideration of the underlying assets. This is important as just because a fund is in a sector does not mean it is the same risk as all the other funds in that sector. We filter out funds that do not hold greater than 85% in their sector. Some funds are way off the amount they hold in the area you expect them to. First State Asia Pacific leaders, for example, includes companies that are not based in Asia but trade in Asia. Those same companies could appear in US equity and UK equity funds etc

Sector allocation/asset allocation (often used interchangeably) is also not the only strategy. There are a number of viable methods to invest. Each person will have their own views and investing is very much opinion. There are many ways to get it wrong but there are many ways to get it right.

If you dont feel up to it, then stick with multi-asset funds.

I haven,t bought Woodford thankfully but am wondering whether, going forward, trackers are the way to avoid falling into traps like this.

Its all down to your research. There are synthetic trackers out there which could suffer liquidity issues. Its knowing about what you are investing in irrespective of it being managed or passive. The core/satellite approach is one way to get the best of both (if you want the general market then tracker is often best. If you want niche or focused, managed is often best).

MarkCarnage

Most of my equity exposure is global, and tends to be investment trust, active manager fairly concentrated portfolios. I have some small geographic positions in Japanese ITs but these are the only explicitly geographic allocations.

Geographic by market of listing has become increasingly irrelevant in the last 20-30 years especially, as the revenue and profit stream tend to bear little or no relation to the listing country in many cases.

Markets are also often quite highly correlated (not always, UK is recent example, Japan in 90s too). I tend to allocate more by manager style and fund remit, so a combination of full fat growth (Scottish Mortgage) with international generalist, wealth preservation or smaller cap. The wealth preservation include within them a significant weighting to sovereign debt and IL debt at present, as well as gold. I have some niche private debt fund exposure too, but it's hard to get a 'retail' fund in many of these areas.

I also include an allocation to 'special situation' for interesting opportunities that don't fit into a long term allocation in their own right.

My SIPP drawdown portfolio is quite small at present, but has a more explicit equity income focus, as my intention is to draw the natural yield from it. Rest of the SIPP is largely invested in a combination of global and wealth preservation ITs.

In recent times (last 3-5 years) , most of the portfolio has performed well, or very well. Couple of exceptions and one downright poor one, but at least it was down to a pre identified risk which happened in spades, compounded by management incompetence - the manager has now been changed.

Linton

Being retired with a significant dependence on income from investments my investment horizons are limited to the short and medium term. For equities I hold just sufficient active funds to balance across geographies, company size, and industry sectors with the aim of investing a meaningful % in all subdivisions whilst avoiding any single one having a major impact on the portfolio should there be localised problems.

If I was still making regular contributions from steady income to meet a long term goal I would probably invest in a single global index fund with an additional 20% in a set of small company active funds

LHW99

I tend to run my / my OH portfolios jointly. We expect to enter drawdown in the next couple of years, but have our basic requirement met from other pensions, so have set up a portfolio to provide natural income at around the level we need immediately.
I have chosen to be rather overweight in UK, compared to many on this board - UK is where we live / spend and IMO is under-rated by the markets. The rest is spread globally through a range of large / small company funds / IT's and bond funds. We have a couple of trackers in areas I feel unable / unwilling to research but mainly use active funds selected for minimal overlap.

Sue58

MarkCarnage wrote: »

Most of my equity exposure is global, and tends to be investment trust, active manager fairly concentrated portfolios. I have some small geographic positions in Japanese ITs but these are the only explicitly geographic allocations.

Geographic by market of listing has become increasingly irrelevant in the last 20-30 years especially, as the revenue and profit stream tend to bear little or no relation to the listing country in many cases.

Markets are also often quite highly correlated (not always, UK is recent example, Japan in 90s too). I tend to allocate more by manager style and fund remit, so a combination of full fat growth (Scottish Mortgage) with international generalist, wealth preservation or smaller cap. The wealth preservation include within them a significant weighting to sovereign debt and IL debt at present, as well as gold. I have some niche private debt fund exposure too, but it's hard to get a 'retail' fund in many of these areas.

I also include an allocation to 'special situation' for interesting opportunities that don't fit into a long term allocation in their own right.

My SIPP drawdown portfolio is quite small at present, but has a more explicit equity income focus, as my intention is to draw the natural yield from it. Rest of the SIPP is largely invested in a combination of global and wealth preservation ITs.

In recent times (last 3-5 years) , most of the portfolio has performed well, or very well. Couple of exceptions and one downright poor one, but at least it was down to a pre identified risk which happened in spades, compounded by management incompetence - the manager has now been changed.

If you don't mind me asking which Wealth Preservation IT's do you hold and why?