investment portfolio diversification

itwasntme001

I have been selling down by stock exposure prior to this crash as a form of risk management - valuations were getting too high and it was a good time as any to reduce risk.  It is just my way to re-balance.

Audaxer

Linton said:

port_of_spain said:

Linton said:

port_of_spain said:

Linton said:

port_of_spain said:

What is Lars' key theory? I thought it was that most people don't have an "edge" in investing. Is anybody expecting that to be disproved?

My view is not that the theory is disproved, but rather that it may not be relevent. The "edge" being talked about is in long term returns.  Maximum long term returns may well not be the primary objective of the investor, the main exception being relatively young people with sufficient income to cover day to day needs using contributions from that income to build up a pot that wont be touched until retirement.

Well, the theory is not only relevant to maximizing returns. If an investor's medium- or low-risk portfolio is better than a comparable edgeless medium- or low-risk portfolio — "better", in the sense that: it has higher returns for the same risk level, or the same returns for a lower risk level — then the investor has "edge".

Now, you may say that so-called "risk" levels don't adequately describe the aims of an investor in deccumulation (in plain english: somebody living off their money). It certainly doesn't feel adequate to me. But I'm not convinced there's any better way to guide one's portfolio.

I would certainly say that, which is why I question the approach that implies the only investment decision one needs to make is the value of xx in VLSxx.  The approach that enables me to sleep at night is to identify the basic objectives and focus on achieving them in a way that can easily be controlled by reallocating particular investments.

OK. My next question is: how do you achieve any control, when you are using risk assets (assets that can go down in value)?

 - Income: generating regular dividend and interest income.  This should be a lot more stable, barring global plagues and invasion of the zombies, than equity prices. Aim: steady income

I agree that dividend income should be a lot more stable in more normal circumstances such as previous equity crashes. My concern is that we are in the sort of exceptional circumstances like you have highlighted, so I am concerned that dividends, even in diversified equity income funds, might be more badly affected than in other equity crashes? 

Linton

Audaxer said:

Linton said:

port_of_spain said:

Linton said:

port_of_spain said:

Linton said:

port_of_spain said:

What is Lars' key theory? I thought it was that most people don't have an "edge" in investing. Is anybody expecting that to be disproved?

My view is not that the theory is disproved, but rather that it may not be relevent. The "edge" being talked about is in long term returns.  Maximum long term returns may well not be the primary objective of the investor, the main exception being relatively young people with sufficient income to cover day to day needs using contributions from that income to build up a pot that wont be touched until retirement.

Well, the theory is not only relevant to maximizing returns. If an investor's medium- or low-risk portfolio is better than a comparable edgeless medium- or low-risk portfolio — "better", in the sense that: it has higher returns for the same risk level, or the same returns for a lower risk level — then the investor has "edge".

Now, you may say that so-called "risk" levels don't adequately describe the aims of an investor in deccumulation (in plain english: somebody living off their money). It certainly doesn't feel adequate to me. But I'm not convinced there's any better way to guide one's portfolio.

I would certainly say that, which is why I question the approach that implies the only investment decision one needs to make is the value of xx in VLSxx.  The approach that enables me to sleep at night is to identify the basic objectives and focus on achieving them in a way that can easily be controlled by reallocating particular investments.

OK. My next question is: how do you achieve any control, when you are using risk assets (assets that can go down in value)?

 - Income: generating regular dividend and interest income.  This should be a lot more stable, barring global plagues and invasion of the zombies, than equity prices. Aim: steady income

I agree that dividend income should be a lot more stable in more normal circumstances such as previous equity crashes. My concern is that we are in the sort of exceptional circumstances like you have highlighted, so I am concerned that dividends, even in diversified equity income funds, might be more badly affected than in other equity crashes? 

Yes.  I have about 50/50 dividend funds and higher interest bond funds.  My dividends are globally diversified - Europe and SE Asia are pretty good, and I have hopes for global infrastructure. But in the end you do need a cash and lower risk fund buffer.  Hopefully you wont need to use it more than once or twice a decade.

Prism

itwasntme001 said:

Prism said:

DiggerUK said:

A  diverse portfolio that had no gold exposure will be severely depleted. Most markets show values below levels from 5 years back. I calculate that most who have been in equites from that time are barely treading water. 

The question of how to diversify has been a staple of these threads since I first came on MSE.  Our much ridiculed gold holding has served Digger Mansions well..._

Hmm that's not quite right (at least for me). I am still around 70% up over the last 5 years  ith a pretty diverse equity portfolio and I have never held gold. Not that gold hasn't been a good place to be too, but its not been the only way. 

The 70% return based on just the money you invested 5 years ago or based on the total money invested to date?  If the former then that is hardly surprising but if the latter and investments have been regular and similar sized then I would love to know which investments you used to generate a 70% return even after this recent crash?

Its the later - just growth ignoring my regular payments. I have bought and sold a few funds over the years but its a combination of a multi-asset fund, Fundsmith, L&G Technology, L&G Healthcare, Scottish Mortgage, Legg Mason Japan. Some of them I just grabbed some gains and then sold (Legg Mason Japan) - others are pretty much untouched (Fundsmith). The best performing one over 5 years is L&G Technology (up 139%) which I sold way too early in hindsight but I needed to rebalance tech down somewhat.

Edit: fair to also point out that there have been some non performing funds in the mix too such as FEET and Merian UK mid cap.

ChesterDog

Prism said:

itwasntme001 said:

Prism said:

DiggerUK said:

A  diverse portfolio that had no gold exposure will be severely depleted. Most markets show values below levels from 5 years back. I calculate that most who have been in equites from that time are barely treading water. 

The question of how to diversify has been a staple of these threads since I first came on MSE.  Our much ridiculed gold holding has served Digger Mansions well..._

Hmm that's not quite right (at least for me). I am still around 70% up over the last 5 years  ith a pretty diverse equity portfolio and I have never held gold. Not that gold hasn't been a good place to be too, but its not been the only way. 

The 70% return based on just the money you invested 5 years ago or based on the total money invested to date?  If the former then that is hardly surprising but if the latter and investments have been regular and similar sized then I would love to know which investments you used to generate a 70% return even after this recent crash?

Its the later - just growth ignoring my regular payments. I have bought and sold a few funds over the years but its a combination of a multi-asset fund, Fundsmith, L&G Technology, L&G Healthcare, Scottish Mortgage, Legg Mason Japan. Some of them I just grabbed some gains and then sold (Legg Mason Japan) - others are pretty much untouched (Fundsmith). The best performing one over 5 years is L&G Technology (up 139%) which I sold way too early in hindsight but I needed to rebalance tech down somewhat.

Agreed. Same here.

Actually showing over 80% up over five years, with a portfolio not dissimilar.

Prism

Linton said:

Audaxer said:

Linton said:

port_of_spain said:

Linton said:

port_of_spain said:

Linton said:

port_of_spain said:

What is Lars' key theory? I thought it was that most people don't have an "edge" in investing. Is anybody expecting that to be disproved?

My view is not that the theory is disproved, but rather that it may not be relevent. The "edge" being talked about is in long term returns.  Maximum long term returns may well not be the primary objective of the investor, the main exception being relatively young people with sufficient income to cover day to day needs using contributions from that income to build up a pot that wont be touched until retirement.

Well, the theory is not only relevant to maximizing returns. If an investor's medium- or low-risk portfolio is better than a comparable edgeless medium- or low-risk portfolio — "better", in the sense that: it has higher returns for the same risk level, or the same returns for a lower risk level — then the investor has "edge".

Now, you may say that so-called "risk" levels don't adequately describe the aims of an investor in deccumulation (in plain english: somebody living off their money). It certainly doesn't feel adequate to me. But I'm not convinced there's any better way to guide one's portfolio.

I would certainly say that, which is why I question the approach that implies the only investment decision one needs to make is the value of xx in VLSxx.  The approach that enables me to sleep at night is to identify the basic objectives and focus on achieving them in a way that can easily be controlled by reallocating particular investments.

OK. My next question is: how do you achieve any control, when you are using risk assets (assets that can go down in value)?

 - Income: generating regular dividend and interest income.  This should be a lot more stable, barring global plagues and invasion of the zombies, than equity prices. Aim: steady income

I agree that dividend income should be a lot more stable in more normal circumstances such as previous equity crashes. My concern is that we are in the sort of exceptional circumstances like you have highlighted, so I am concerned that dividends, even in diversified equity income funds, might be more badly affected than in other equity crashes? 

Yes.  I have about 50/50 dividend funds and higher interest bond funds.  My dividends are globally diversified - Europe and SE Asia are pretty good, and I have hopes for global infrastructure. But in the end you do need a cash and lower risk fund buffer.  Hopefully you wont need to use it more than once or twice a decade.

I have been reading your advice on a dedicated income fund for a few years now and have recently started an allocation up myself (with some ideas from Bowlhead and Thrugelmir). Infrastructure seems to be the way in at the moment

DiggerUK

I have been questioned on my figures about drastic drops in the markets from 5 years previous..._

https://www.bbc.co.uk/news/business/market-data

port_of_spain

Linton said:

port_of_spain said:

Linton said:

port_of_spain said:

Linton said:

port_of_spain said:

What is Lars' key theory? I thought it was that most people don't have an "edge" in investing. Is anybody expecting that to be disproved?

My view is not that the theory is disproved, but rather that it may not be relevent. The "edge" being talked about is in long term returns.  Maximum long term returns may well not be the primary objective of the investor, the main exception being relatively young people with sufficient income to cover day to day needs using contributions from that income to build up a pot that wont be touched until retirement.

Well, the theory is not only relevant to maximizing returns. If an investor's medium- or low-risk portfolio is better than a comparable edgeless medium- or low-risk portfolio — "better", in the sense that: it has higher returns for the same risk level, or the same returns for a lower risk level — then the investor has "edge".

Now, you may say that so-called "risk" levels don't adequately describe the aims of an investor in deccumulation (in plain english: somebody living off their money). It certainly doesn't feel adequate to me. But I'm not convinced there's any better way to guide one's portfolio.

I would certainly say that, which is why I question the approach that implies the only investment decision one needs to make is the value of xx in VLSxx.  The approach that enables me to sleep at night is to identify the basic objectives and focus on achieving them in a way that can easily be controlled by reallocating particular investments.

OK. My next question is: how do you achieve any control, when you are using risk assets (assets that can go down in value)?

1) Some guaranteed Income

2) Separate highly focussed portfolios:

 - Wealth Preservation: Cash to cover both basic and significant discretional expenditure for perhaps 3 years+wealth preservation funds & ITs for another 7 years at least. Aim inflation matching return.

 - Income: generating regular dividend and interest income.  This should be a lot more stable, barring global plagues and invasion of the zombies, than equity prices. Aim: steady income

 - Growth: - focussed on significantly exceeding long term inflation over 5-10 years.

The control comes from rebalancing between the  portfolios.

Guaranteed income, and cash to cover the next 3 or so years' spending, clearly does give you some control. It's beyond that, that I'm not so sure.

For instance, I certainly agree that having both some equities which pay a decent income, and some with stronger prospects for capital growth, helps. But then you get both of them in broad tracker funds. Does putting them in separate buckets give you a useful additional lever? I'm not sure. (And even if it is useful, does is it giving "control" in any meaningful sense? We are still at the mercy of the markets — both the real economy, and how stock markets react to it.)

Does having an "income" portfolio, in the sense that one aims to draw a hopefully relatively steady income from it, while worrying less about how volatile the capital value may be, give more control? I think it may only be the illusion of control. Yes, if set up in a reasonably cautious way, it will only fail in extreme circumstances; but that is also true of using VLSxx with a modest initial draw rate, so is there any fundamental difference? (And both methods become more robust if one is prepared to use a variable draw rate, i.e. to cut spending if it appears the current rate may be unsustainable.)

Using wealth preservation funds delegates part of the decision process, but doesn't fundamentally change the range of building blocks for the portfolio.

You have an interesting approach, but I'm not convinced its complexity is necessary.

ChesterDog

DiggerUK said:

I have been questioned on my figures about drastic drops in the markets from 5 years previous..._

https://www.bbc.co.uk/news/business/market-data

Those charts are price return, not total return.

Trustnet shows total return of the rubbishy FTSE 100 over five years is currently up 0.9%.

Price return is -18%.

ChesterDog

FTSE World index is 45% and 28% total vs price.