IFA or DIY - any thoughts appreciated

83705628

1. You seem to be quoting a ot of figures and putting your spin on the reasons why things have happened, you're not an analyst by any chance?
2. You are refuting underperformance by the uk stockmarket over decades and quoting data back to 2016, then saying it's all post brexit?
3. You also are saying I'm only young so cut me some slack, at the end of the day what you do with your money is your business. However one approach to investment would be after determining attitude to risk and so equity exposure preference to then allocate that according to world equity weightings, which would give you say 5% in the uk, maybe a little more given home bias. Not many people would suuprt a 60-70% uk weighting but it's your choice.

1. Not an analyst just a failed actuary.

2. I am quoting figures but none of what I have said is spin, it's just fact. The long-term return in a stock market  = average dividend yield over a period + inflation + real earnings growth + change in PE ratio, by definition. If you think my figures or my interpretation of them is wrong I'd love to hear your thoughts. Do you have different data, do you have data that suggests the UK has under-performed global equity over the very long-term i.e. since 1962 (FTSE All Share start year), 1945, 1926 (S&P 500 start year), 1900? What do you think is behind it?

3. I am not refuting "underperformance" by the UK over decades, I am denying its existence. I have attached pdf's with data from trustnet.com comparing the FTSE All Share and FTSE World indices on a nominal total return basis in £, unfortunately the data only go back to 1994, but you could also compare with the IA Global Equity sector, for which data goes back to 1990. What this clearly shows is almost identical performance and correlation between UK and global markets over the past 26-30 years until 2016, and UK under-performance since 2016, which makes the UK relatively cheap as can be seen by comparing the valuation measures.
There is simply no evidence that the UK has been under-performing for a long time. In previous comments I compared the FTSE 100 and the S&P 500 from 2000-2010, and the FTSE All Share and S&P 500 from 1990-2020. 
1945-2019, UK's total return was 11.2% (Barclays Equity Gilts Study + recent data), US total return was 10.9% (https://dqydj.com/sp-500-return-calculator/). A £ investor holding US equity also got an extra 1.5% currency appreciation.
Or look at 1900-2010, UK returned 5.3% in real terms, global equity 5.5%, US equity 6.3%. The US saw very slight positive speculation, much greater population growth, slightly lower average inflation and wasn't affected by the world wars in the way other markets were (https://papers.ssrn.com/sol3/papers.cfm?abstract_id=891620).
If you have alternative facts, please present them.

I also fundamentally disagree with your assumption that 100% global equity should be seen as the normal baseline for a UK investor. We aren't America, and Bogle's advice has always been American investors simply don't need to buy non-US equity, and he's right, and the $ has a habit of appreciating especially in a crisis (but we'll see how long that lasts). However the evidence from a starcapital.de study is that for most reasonably large and diverse developed markets in capitalistic economies, i.e. the US, JPN and most European countries, country-specific issues such as politics or sector weightings do not materially affect long-term equity returns. I agree some global equity weighting is sensible for a £ investor as the UK is a geographically small globally-integrated "middleman" country, a trading island vulnerable to global economic shocks given imports and exports both count for about 30% of GDP, unlike insulated America with both those numbers around 10%. The sector weighting is still relevant, the UK has 18% less tech weight and 1% less healthcare and industrials, for 6% extra financials 5% more consumer goods and oil & gas, and 4% more miners.  Also as I have said in 1972-4 and post-Brexit the UK did perform materially worse than the US/global market - in the short-term, almost entirely down to speculation and not an significant reduction in earnings or dividends. Some global weighting can help insulate these shocks. But to suggest 100% global equity, with all the currency and political risk, and the current high valuations, and the £ being at record lows, is a good idea right now for a £ based investor - I think that makes no economic sense. Bogle suggests US investors cap their equity exposure at 20%, I think under normal circumstances 50:50 for a UK investor is fine, but I also want to "up-weight" domestically oriented UK stocks as much as possible and again - valuations and currency. So I ended up settling for 1/3 FTSE 100, 1/3 FTSE 250 and 1/3 global, except I actually split the 2/3 UK equity in a 3:2 ratio between Vanguard's FTSE All Share and FTSE 250 funds because the FTSE All Share fund has lower costs than their FTSE 100 funds and that ratio works out as almost exactly 1/3 FTSE 100, 1/3 FTSE 250.

Also I don't care if other people "support" my suggestions and ideas. To paraphrase Warren Buffett, I'm not right because other people agree with or because other people disagree with me. I know I'm right because I've worked it out and done the maths and it makes sense.

What returns do you expect from the UK vs global/US equity over the foreseeable future and how do you explain those expectations?

Albermarle

Deleted_User said:

k6chris said:

I think there sensible balance around a 50/50, UK(home) / rest of world equity split, based on currency risk, yield history vs rest of world growth, given the global unknowns re growth and currency risks?  Happy to be shot down (constructively!)

Thats too tilted to the home market. https://personal.vanguard.com/pdf/icrrhb.pdf

It is an interesting article but does not name an ideal % as such . Although their Life Strategy funds ( as sold in UK ) have around 25% in UK , and on the ( easy ) assumption that Vanguard know more than I do , this seems like a good compromise figure for the average investor. 

83705628

Albermarle said:

Deleted_User said:

k6chris said:

I think there sensible balance around a 50/50, UK(home) / rest of world equity split, based on currency risk, yield history vs rest of world growth, given the global unknowns re growth and currency risks?  Happy to be shot down (constructively!)

Thats too tilted to the home market. https://personal.vanguard.com/pdf/icrrhb.pdf

It is an interesting article but does not name an ideal % as such . Although their Life Strategy funds ( as sold in UK ) have around 25% in UK , and on the ( easy ) assumption that Vanguard know more than I do , this seems like a good compromise figure for the average investor. 

I'm 2/3 UK, reasons given in posts above. I just don't buy the idea that UK investors need to buy global equity in the proportions mainstream financial advice suggests (50%, Vanguard Lifestrategy 25%, or 100% global equity implying 4-5% home). I don't see my view as "home bias" I see the globalist view as having global bias.

[Deleted User]

tcallaghan93 said:

Albermarle said:

Deleted_User said:

k6chris said:

I think there sensible balance around a 50/50, UK(home) / rest of world equity split, based on currency risk, yield history vs rest of world growth, given the global unknowns re growth and currency risks?  Happy to be shot down (constructively!)

Thats too tilted to the home market. https://personal.vanguard.com/pdf/icrrhb.pdf

It is an interesting article but does not name an ideal % as such . Although their Life Strategy funds ( as sold in UK ) have around 25% in UK , and on the ( easy ) assumption that Vanguard know more than I do , this seems like a good compromise figure for the average investor. 

I'm 2/3 UK, reasons given in posts above. I just don't buy the idea that UK investors need to buy global equity in the proportions mainstream financial advice suggests (50%, Vanguard Lifestrategy 25%, or 100% global equity implying 4-5% home). I don't see my view as "home bias" I see the globalist view as having global bias.

Call it what you want, you reduced diversification, concentrated in a limited number of sectors, excessively exposed yourself to one-country politics and ended up with higher risk

[Deleted User]

Albermarle said:

Deleted_User said:

k6chris said:

I think there sensible balance around a 50/50, UK(home) / rest of world equity split, based on currency risk, yield history vs rest of world growth, given the global unknowns re growth and currency risks?  Happy to be shot down (constructively!)

Thats too tilted to the home market. https://personal.vanguard.com/pdf/icrrhb.pdf

It is an interesting article but does not name an ideal % as such . Although their Life Strategy funds ( as sold in UK ) have around 25% in UK , and on the ( easy ) assumption that Vanguard know more than I do , this seems like a good compromise figure for the average investor. 

Vanguard does not know what is the optimal home bias. Nobody does. What they can do is to show historic impacts on risks and several other factors so one can make an informed guess.

Other factors to keep in mind:
- experience of countries like Japan, where lack of returns has been observed for decades. Even US in 1970s
- correlation between markets has increased. Might reduce again for all we know
- U.k is going through changes which are unique to UK.

To me, putting 50% into a market impacted by a single government is too much. 

83705628

Deleted_User said:

tcallaghan93 said:

Albermarle said:

Deleted_User said:

k6chris said:

I think there sensible balance around a 50/50, UK(home) / rest of world equity split, based on currency risk, yield history vs rest of world growth, given the global unknowns re growth and currency risks?  Happy to be shot down (constructively!)

Thats too tilted to the home market. https://personal.vanguard.com/pdf/icrrhb.pdf

It is an interesting article but does not name an ideal % as such . Although their Life Strategy funds ( as sold in UK ) have around 25% in UK , and on the ( easy ) assumption that Vanguard know more than I do , this seems like a good compromise figure for the average investor. 

I'm 2/3 UK, reasons given in posts above. I just don't buy the idea that UK investors need to buy global equity in the proportions mainstream financial advice suggests (50%, Vanguard Lifestrategy 25%, or 100% global equity implying 4-5% home). I don't see my view as "home bias" I see the globalist view as having global bias.

Call it what you want, you reduced diversification, concentrated in a limited number of sectors, excessively exposed yourself to one-country politics and ended up with higher risk

What allocation do you think is right and why?
I've explained my reasons and provided counter-arguments to all of your points in previous posts on this thread.
Diversification/concentration doesn't make a big difference in sufficiently large and diverse markets ie us Jpn and most larger European markets.
I don't see "excess" UK exposure as a bad thing.
Global equity has political risk and currency risk, UK has neither for a UK investors in anything more than negligible amounts.
I expect higher returns from UK than global equity this decade/for the foreseeable future. Reasons explained in previous posts. How do you arrive at a different conclusion?

[Deleted User]

tcallaghan93 said:

Deleted_User said:

tcallaghan93 said:

Albermarle said:

Deleted_User said:

k6chris said:

I think there sensible balance around a 50/50, UK(home) / rest of world equity split, based on currency risk, yield history vs rest of world growth, given the global unknowns re growth and currency risks?  Happy to be shot down (constructively!)

Thats too tilted to the home market. https://personal.vanguard.com/pdf/icrrhb.pdf

It is an interesting article but does not name an ideal % as such . Although their Life Strategy funds ( as sold in UK ) have around 25% in UK , and on the ( easy ) assumption that Vanguard know more than I do , this seems like a good compromise figure for the average investor. 

I'm 2/3 UK, reasons given in posts above. I just don't buy the idea that UK investors need to buy global equity in the proportions mainstream financial advice suggests (50%, Vanguard Lifestrategy 25%, or 100% global equity implying 4-5% home). I don't see my view as "home bias" I see the globalist view as having global bias.

Call it what you want, you reduced diversification, concentrated in a limited number of sectors, excessively exposed yourself to one-country politics and ended up with higher risk

What allocation do you think is right and why?
I've explained my reasons and provided counter-arguments to all of your points in previous posts on this thread.
Diversification/concentration doesn't make a big difference in sufficiently large and diverse markets ie us Jpn and most larger European markets.
I don't see "excess" UK exposure as a bad thing.
Global equity has political risk and currency risk, UK has neither for a UK investors in anything more than negligible amounts.
I expect higher returns from UK than global equity this decade/for the foreseeable future. Reasons explained in previous posts. How do you arrive at a different conclusion?

Claiming uk has no currency risk is misinformed. British companies derive profits from jurisdictions trading in other currencies. Claiming you are not exposed to political risks in the UK... I am not going to say it, will sound rude. 

UK is heavily concentrated in certain sectors, eg mining and financials. Mining might suffer. All the growth might be in tech. You’ll be screwed. Just one scenario. 

Also, imagine its 1989 and you put 2/3 of what your own in Japanese stocks. https://qz.com/1103091/nikkei-225-the-japanese-stock-markets-20-year-high-is-still-around-50-below-its-1989-peak/

[Deleted User]

“expect higher returns from UK than global equity this decade/for the foreseeable future.“

I don’t know what to say to a person with a crystal ball other than “good luck. You’ll need it”

83705628

1. Claiming uk has no currency risk is misinformed. British companies derive profits from jurisdictions trading in other currencies. Claiming you are not exposed to political risks in the UK... I am not going to say it, will sound rude. 

UK is heavily concentrated in certain sectors, eg mining and financials. Mining might suffer. All the growth might be in tech. You’ll be screwed. Just one scenario. 

Also, imagine its 1989 and you put 2/3 of what your own in Japanese stocks. https://qz.com/1103091/nikkei-225-the-japanese-stock-markets-20-year-high-is-still-around-50-below-its-1989-peak/

1. 3/4 of FTSE 100 and 1/2 of FTSE 250 earnings come from overseas, via £ denominated companies (mostly) in UK jurisdiction with no forex fees or foreign dividend withholding tax. However the UK is also a slight net importer, unfortunately this data isn't available but I would hazard a guess and say 3/4 of FTSE 100 costs and 1/2 of FTSE 250 costs are also in non £ currencies, so the currency risk is negligible.
2. 95% of global equity is outside the UK denominated in other currencies, and I would hazard a guess that 5% of global equity earnings come from the UK (i.e. UK domestic earnings + exports from foreign companies into the UK).
3. There is no evidence (PensionCraft has done a video about this but I can't seem to find it) of the myth that the FTSE 100 is inversely correlated with the £ exchange rates.
So that's how I explain that the UK has essentially no currency risk.
4. By political risk I mean a country shutting down its stock market, freezing assets owned by UK beneficiaries, withholding dividends to UK beneficiaries. What will happen to European stocks owned by UK funds/shareholders if Brexit ever concludes? What protectionist trade deal will Trump impose? Might China refuse to recognise UK ownership of Chinese shares in retaliation over Hong Kong?
5. The UK is not "heavily" concentrated in certain sectors, and you're just speculating about sectors. Vs the global index the UK has 18% less weight in tech, 1% less indys and healthcare, 6% extra weight in financials, 5% extra weight in consumer goods and oil & has, and 4% extra weight in miners. Every market is more concentrated in something than the global market but there is no evidence that in sufficiently large and diverse markets (US, UK, JPN, larger European countries), as opposed much smaller and much concentrated examples like Greece, Ireland, Denmark, Finland, sector weighting materially affects long-term returns vs a wider global benchmark. For example 1900-2010 the UK's real total return was 5.5%, the US 6.3% and the UK started that period with a 1/2 weighting to rail, the US 2/3! I don't think speculating about unpopular sectors is healthy.
6. It's not 1989 and we're in the UK not Japan, what's your point? At the peak of the bubble Japan I think had a 42% weight in global equity and at that time people were saying the exact same thing about how you had to get into Japan and how they were overtaking the rest of the world. The dividend yield was close to 1%. Valuations were at dot-com levels. Right now the UK's valuation is on the cheaper end of average.

I just prefer to keep emotion and politics of out investing.

83705628

Deleted_User said:

“expect higher returns from UK than global equity this decade/for the foreseeable future.“

I don’t know what to say to a person with a crystal ball other than “good luck. You’ll need it”

Well if you think differently I'd love to hear your thoughts. This is just how Jack Bogle used to come up with his expected returns. I honestly don't mind all this globalist, anti-UK emotional/political mantra. Keep UK equity cheaper for longer while I'm buying it!
Think of it decade at a time.

UK div yield = 4.7%
Reasonable earnings growth expectation of 2% inflation + 2% real growth, perhaps 1.5% accommodates your pessimism 
so 3.5% total earnings growth
Valuation is on the cheaper end of average (CAPE 14, PE 15, PB 1.5) so no reason to expect speculation up or down.
Comes to 8.2%, knock the 0.2% off for dividend cuts yet to come this year and I arrive at a return expectation of 8%

Global equity yield = 2.5%
Same reasonable earnings growth expectation, but let's say 2-3% inflation + 2-3% real growth turns out a 5% total earnings growth figure.
Valuations are high (CAPE 22, PE 20, PB 2) and a reversion to the mean might imply coming down by 1/8, maybe a 1/4 over say the next decade, knocks off 1.5%-3% a year.
As for currency ap/depreciation, no-one knows, but the £ is at record lows currently so I certainly wouldn't count on appreciation.
So I end up with a global equity return expectation of 4.5%-6%. At least with UK equity you don't have to take the unknown currency risk.