Portfolio Reassessment - Critique

itwasntme001

None that I know of which is exactly the point I am making.  They are priced to be much more sensitive to near term cash flows and therefore will be beaten down more and recover less when you have a complete shutdown of the economy.

MichelleN

MarkCarnage said:

Most people have posted that the OP’s portfolio is high risk. Please can I ask you why you feel it is not that high risk?

I think the reason is related to my view on what constitutes risk as outlined in my comment. I take a somewhat different view from the conventional volatility based one, which while mathematically convenient is flawed in a number of ways. You can of course have a portfolio that is high risk under the conventional definition and mine! 

I would also caution that my definition is very conditional on there being no foreseen requirement to liquidate specific assets on a specific date.....however, the good thing about the 'bar bell' structure here is that there is a significant weighting (over 40%) to funds which are best characterised as wealth preservation and would be defined as relatively low risk under either definition, so would be likely to be be realisable both quickly and without material loss in most scenarios. The rest of the portfolio is higher risk in the conventional sense, but has rewarded well over the longer term. That doesn't mean you shouldn't at times review these holdings - I very recently took some profits in SMT after its extremely strong performance this year meant that it was now more than 10% of my portfolio. It has since kept rising and stands at almost the same value again! Worth mentioning also that one of the directors of PNL Trust has stated publicly on more than one occasion that his second largest holding after PNL is SMT - the bar bell approach in action again. 

My scepticism (and some might say cynicism) over conventional risk definition is that it is too narrow, overlooks some seriously material long terms risks, like erosion of real value of capital - a very significant risk for many assets right now, notably cash - and that it can give misleading views. I once encountered a so called 'managed' fund whose main, indeed almost sole 'strategy' was to buy and hold out of the money put options on the S&P US stockmarket index, based on a bearish view of that market. This was in the early 1990s.....it was certainly low volatility, as these options didn't fluctuate much on a daily basis, but their time value just inexorably expired leading to a slow but sure erosion of investor value. It was classified as low risk by some mindless person who ticked boxes, although it was very clear that it was actually a very high risk long term strategy. 

Thanks for your replies on this. As another aside, the OP stated they have 5 years in cash. Would a proportion of this be better off moved into their Wealth Preservation funds?

bowlhead99

MichelleN said:
Thanks for your replies on this. As another aside, the OP stated they have 5 years in cash. Would a proportion of this be better off moved into their Wealth Preservation funds?

That seems a personal question for the OP, as the question of whether to have more investments and less cash is highly personal. Their 5 years expenses is set aside for 'emergencies' and 'in case of a market crash'. If they invest the 'year 2' money into investments and they get to year 2 and need to spend the money and it has dropped by 20%, that will be annoying. Also, spending is not always straight line smooth, so having the next 5 years expenses in cash doesn't mean you will be using 1/60th of it per month - you may be buying a new boiler in year 2 or a new roof in year 4, and perhaps the year 2 boiler expense will coincide with an unexpected problem in the 'self employed' business.

Having the certainty of a decent chunk of your short to medium term spending needs on hand in cash rather than subject to investment risk is something that can affect the amount of risk or volatility you would tolerate on your investment portfolio. So if you have got comfortable with x cash, y WP funds, z equity funds, you would not necessarily be comfortable still having as much as z in equity funds if you had [x-a] in cash and [y+a] in WP funds.

It's a personal question so I don't see that someone else would be more qualified to say that some of that cash would be 'better' moved into the Wealth  Preservation -type holdings, unless you were going to reassess your objectives and potentially rejig the whole portfolio. 

If they'd said they had 20 years expenses in cash rather than 5 years in cash, we might be more likely to all concur that some movement of cash to investments might be 'better'.

MichelleN

bowlhead99 said:

MichelleN said:
Thanks for your replies on this. As another aside, the OP stated they have 5 years in cash. Would a proportion of this be better off moved into their Wealth Preservation funds?

That seems a personal question for the OP, as the question of whether to have more investments and less cash is highly personal. Their 5 years expenses is set aside for 'emergencies' and 'in case of a market crash'. If they invest the 'year 2' money into investments and they get to year 2 and need to spend the money and it has dropped by 20%, that will be annoying. Also, spending is not always straight line smooth, so having the next 5 years expenses in cash doesn't mean you will be using 1/60th of it per month - you may be buying a new boiler in year 2 or a new roof in year 4, and perhaps the year 2 boiler expense will coincide with an unexpected problem in the 'self employed' business.

Having the certainty of a decent chunk of your short to medium term spending needs on hand in cash rather than subject to investment risk is something that can affect the amount of risk or volatility you would tolerate on your investment portfolio. So if you have got comfortable with x cash, y WP funds, z equity funds, you would not necessarily be comfortable still having as much as z in equity funds if you had [x-a] in cash and [y+a] in WP funds.

It's a personal question so I don't see that someone else would be more qualified to say that some of that cash would be 'better' moved into the Wealth  Preservation -type holdings, unless you were going to reassess your objectives and potentially rejig the whole portfolio. 

If they'd said they had 20 years expenses in cash rather than 5 years in cash, we might be more likely to all concur that some movement of cash to investments might be 'better'.

I agree it is personal to the OP but I was asking the question more in general terms. For instance, if I had in excess of £100K in cash, would I not be better off reducing that to say £50K and transferring the other £50k into something like Trojan O? Surely it would have to be a significant crash for this fund to drop 20 per cent. Although I would still have my cash balance of £50K to fall back on until the WP fund recovered?

bowlhead99

MichelleN said:

bowlhead99 said:

MichelleN said:
Thanks for your replies on this. As another aside, the OP stated they have 5 years in cash. Would a proportion of this be better off moved into their Wealth Preservation funds?

That seems a personal question for the OP, as the question of whether to have more investments and less cash is highly personal. Their 5 years expenses is set aside for 'emergencies' and 'in case of a market crash'. If they invest the 'year 2' money into investments and they get to year 2 and need to spend the money and it has dropped by 20%, that will be annoying. Also, spending is not always straight line smooth, so having the next 5 years expenses in cash doesn't mean you will be using 1/60th of it per month - you may be buying a new boiler in year 2 or a new roof in year 4, and perhaps the year 2 boiler expense will coincide with an unexpected problem in the 'self employed' business.

Having the certainty of a decent chunk of your short to medium term spending needs on hand in cash rather than subject to investment risk is something that can affect the amount of risk or volatility you would tolerate on your investment portfolio. So if you have got comfortable with x cash, y WP funds, z equity funds, you would not necessarily be comfortable still having as much as z in equity funds if you had [x-a] in cash and [y+a] in WP funds.

It's a personal question so I don't see that someone else would be more qualified to say that some of that cash would be 'better' moved into the Wealth  Preservation -type holdings, unless you were going to reassess your objectives and potentially rejig the whole portfolio. 

If they'd said they had 20 years expenses in cash rather than 5 years in cash, we might be more likely to all concur that some movement of cash to investments might be 'better'.

I agree it is personal to the OP but I was asking the question more in general terms. For instance, if I had in excess of £100K in cash, would I not be better off reducing that to say £50K and transferring the other £50k into something like Trojan O? Surely it would have to be a significant crash for this fund to drop 20 per cent. Although I would still have my cash balance of £50K to fall back on until the WP fund recovered?

In general terms then if you are happy to take investment risk and put the money away in an investment which includes a mix of asset classes each having potential to deliver a return over the medium to long term, you will get a better outcome from doing that than from keeping the cash on deposit 'just in case' when you don't really need the cash. 

Whereas if you need the money in the short term, then an investment doesn't seem appropriate because the return from the investment during your timeframe might be negative instead of positive, and you only get the 'expected' positive gains from investment by leaving the investment for the long term. The longer you leave it the better chance you have of it delivering the 'expected' outcome despite shorter-term choppier market conditions.

In the short term the returns from a market-linked investment will be a gamble even if the fund's strategy is 'capital preservation' - the term capital preservation doesn't mean that the capital will always be successfully  'preserved' and kept safe from losses over a particular known short-term period.

So, that is the 'general terms' position. 

Then you are asking a specific, 'for instance' question  - which is not in general terms but is a specific example about you having £50k more cash than you think you need, and whether you would be better off investing that cash in Trojan O, not minding that the value of that £50k would go up and down from time to time because you have another £50k of cash balance and don't expect that you would use that up before the WP fund recovered.  

We don't know enough about how much £50k really means to you and how long it might take you to burn through it, and what your attitude would be if the money invested dropped by £10k for a couple of years (laugh it off,? sell in a panic?), to be able to say that you would be 'better off' investing all the money in excess of £50k into investment funds instead of holding it as cash.

All one could do is generalise that e.g. if you may need e.g. £40k a year for care home fees, and £15k for roof repairs at some point over the next couple of years, it would  probably be inappropriate to only have £50k of cash while greedily seeking a higher return with the next £50k; while if your worst case scenario is that £50k in the bank could only be exhausted by ten years of planned and unplanned expenditure and you are not the type of person to be worried if your investment fund dropped 20% and stayed dropped for some of those ten years, you are probably in a much better position to invest the 'spare' money that's in excess of several years' spending.

Surely it would have to be a significant crash for this fund to drop 20 per cent.

The crashes that cause the most significant distress or inconvenience or damage to one's wealth are not always the ones with the greatest peak-to-trough falls in value, but the ones that happen when we are unprepared.