Does my plan need altering already?

83705628

masonic said:

tcallaghan93 said:

masonic said:

tcallaghan93 said:

If you live, work, pay taxes, vote, save and intend to retire in; are subject to the laws of; have savings and investments subject to the regulations and protections of; and  cost of living linked to inflation in the UK, then it makes complete sense to invest the majority of your money in the UK unless there is a very good, legitimate economic reason not to.

...such as an economic system that is global by nature.

/
FTSE 100 earnings are 3/4 global, FTSE 250 1/2 global anyway. You already have a global portfolio. Bingo.

The FTSE100 is a terribly unbalanced index, which was the point AnotherJoe was making. You'd get a better spread of sectors and industries by buying companies listed on various different stockmarkets rather than limiting yourself to the global companies who have decided to list themselves on the London Stock Exchange. As to the FTSE250, if you no ihave "the majority of your money" in a FTSE250 tracker, then you're adding quite a lot of risk and you'll still have a pretty unbalanced portfolio. Perhaps it's slightly preferable to holding a FTSE100 tracker in its place, but it's still bad investing.

/
I agree that's why I use 3 parts FTSE all share to 2 parts FTSE 250.
It's not "terribly" unbalanced. It lacks tech and is slightly more concentrated.
Investment return has matched US and global returns over the long term.
I agree you'd get more diversification but that's just diversification for diversifications sake.
The FTSE 250 is a good diversifier from both the FTSE 100 and global equity, r = 0.8 Vs well over 0.9 between FTSE 100 and global.
Why is this bad investing? How do you define bad? Where's the evidence that it's bad? The FTSE all share yield is ~4.5% currently and it's remarkably resilient, you can more or less rely on those keeping up with inflation regardless of what happens with the price indices. With global equity you're counting on an extra 2% growth ontop of the 2.5% dividend yield, after a decade long well above average earnings run, bubble valuations and the £ at record lows. It hardly adds more risk, and it does balance the imbalance you're talking about in the FTSE 100.

bowlhead99

tcallaghan93 said:

masonic said:

tcallaghan93 said:

If you live, work, pay taxes, vote, save and intend to retire in; are subject to the laws of; have savings and investments subject to the regulations and protections of; and  cost of living linked to inflation in the UK, then it makes complete sense to invest the majority of your money in the UK unless there is a very good, legitimate economic reason not to.

...such as an economic system that is global by nature.

/
FTSE 100 earnings are 3/4 global, FTSE 250 1/2 global anyway. You already have a global portfolio. Bingo.

They do earn from all over the world. Lots of tobacco and oil revenues in there, for example. That may or may not be the future. 

The business with those global revenues will also use a lot of goods and services that they buy in from companies listed on other countries' stock exchange - for example an ERP system from Europe, office productivity suites or virtual meeting software or cloud storage from the US, a fleet of trucks from Asia, a mining machine from Australia, computer hardware from China, while their executives talk on Korean smartphones and laugh about the Instagram post they saw while downloading a Netflix show and waiting for the Amazon package to arrive before traveling in a non-UK manufactured train carriage on the way to travel on a non-UK built plane to a destination where they'll take a non-UK built taxi to meet their prospective customer.

The problem with investing only in the assets and revenue streams of companies headquartered or stockmarket-listed in the UK is that their assets and revenue streams are simply not as diverse as the assets and revenue streams that actually exist in the world, and their cost base (like your personal cost base) inevitably has a heavily foreign component.

To think, "well I suppose investing globally would be a bit more diverse but I don't really need it" comes across quite blinkered, even if you believe UK is cheap on (e.g.) a CAPE measure. You would be missing out on a broad swathe of company types that don't choose to list here (or at least are not currently listed here). To participate in those parts of the global economy is not "diversification for diversifications sake".


Perhaps there are deserved reasons why a Microsoft or Alphabet (which dominate a global index) has a higher price/earnings ratio than a Shell or Lloyds Bank - they are not the same sort of businesses so you wouldn't expect them to have the same P/E, and there may not be a driver for UK P/E or CAPE to grow over the next decade nor for the world's at large to fall.

I am not one of those that says UK is 5% of world GDP or equity market cap so I only need 5% of my investments to be UK businesses. However, the idea that there is some foreign revenue available to UK based companies so it's not important to look elsewhere seems like an oversight. To say overseas businesses are good does not mean UK businesses are bad, or that they will definitely do better - they may just be good in a different kind of way. They do not have to 'do better' to be a valid investment choice, they just have to not do too much worse, and provide broader exposure to global industries to provide resilience against downturns or increasing costs in other industries.

83705628

bowlhead99 said:

tcallaghan93 said:

masonic said:

tcallaghan93 said:

If you live, work, pay taxes, vote, save and intend to retire in; are subject to the laws of; have savings and investments subject to the regulations and protections of; and  cost of living linked to inflation in the UK, then it makes complete sense to invest the majority of your money in the UK unless there is a very good, legitimate economic reason not to.

...such as an economic system that is global by nature.

/
FTSE 100 earnings are 3/4 global, FTSE 250 1/2 global anyway. You already have a global portfolio. Bingo.

They do earn from all over the world. Lots of tobacco and oil revenues in there, for example. That may or may not be the future. 

The business with those global revenues will also use a lot of goods and services that they buy in from companies listed on other countries' stock exchange - for example an ERP system from Europe, office productivity suites or virtual meeting software or cloud storage from the US, a fleet of trucks from Asia, a mining machine from Australia, computer hardware from China, while their executives talk on Korean smartphones and laugh about the Instagram post they saw while downloading a Netflix show and waiting for the Amazon package to arrive before traveling in a non-UK manufactured train carriage on the way to travel on a non-UK built plane to a destination where they'll take a non-UK built taxi to meet their prospective customer.

The problem with investing only in the assets and revenue streams of companies headquartered or stockmarket-listed in the UK is that their assets and revenue streams are simply not as diverse as the assets and revenue streams that actually exist in the world, and their cost base (like your personal cost base) inevitably has a heavily foreign component.

To think, "well I suppose investing globally would be a bit more diverse but I don't really need it" comes across quite blinkered, even if you believe UK is cheap on (e.g.) a CAPE measure. You would be missing out on a broad swathe of company types that don't choose to list here (or at least are not currently listed here). To participate in those parts of the global economy is not "diversification for diversifications sake".


Perhaps there are deserved reasons why a Microsoft or Alphabet (which dominate a global index) has a higher price/earnings ratio than a Shell or Lloyds Bank - they are not the same sort of businesses so you wouldn't expect them to have the same P/E, and there may not be a driver for UK P/E or CAPE to grow over the next decade nor for the world's at large to fall.

I am not one of those that says UK is 5% of world GDP or equity market cap so I only need 5% of my investments to be UK businesses. However, the idea that there is some foreign revenue available to UK based companies so it's not important to look elsewhere seems like an oversight. To say overseas businesses are good does not mean UK businesses are bad, or that they will definitely do better - they may just be good in a different kind of way. They do not have to 'do better' to be a valid investment choice, they just have to not do too much worse, and provide broader exposure to global industries to provide resilience against downturns or increasing costs in other industries.

/
Well that's poetic, now THAT (and the lower volatility especially in the post Brexit, Corona, 1972-4) is why I do hold 1/3 of my equity allocation in global, at least with the current relative valuation difference.

dunstonh

The UK is at a high risk of Japanification.   In that scenario you want to avoid banks.  That is a major part of the FTSE100.  Oil is in decline.  Another major part of the FTSE100.     The FTSE100 is far too biased to too few industries/companies.
However, the UK is very good with small and mid cap which, inevitably,  get bought by overseas companies to exploit.  Good for investors even if not good for the UK.   Effectively, the FTSE100 is a bit like the UK in general.  It has the industries of a past era.  There is not a lot to like about UK large cap.

masonic

tcallaghan93 said:

Why is this bad investing? How do you define bad? Where's the evidence that it's bad? The FTSE all share yield is ~4.5% currently and it's remarkably resilient, you can more or less rely on those keeping up with inflation regardless of what happens with the price indices. With global equity you're counting on an extra 2% growth ontop of the 2.5% dividend yield, after a decade long well above average earnings run, bubble valuations and the £ at record lows. It hardly adds more risk, and it does balance the imbalance you're talking about in the FTSE 100.

One could define bad in terms of performance or suitability. Some arguments have already been made about how it is bad due to unsuitability. In terms of performance, a FTSE100 tracker has delivered annual total returns of 5.5% over the last 10 years, compared with 8.2% for the FTSE250, 15.5% for the S&P500 and 12.2% for the FTSE World index. So it is quite clear that concentrating your portfolio in companies that happen to be listed on the UK stock exchange can be costly in terms of returns, although such asset allocation is a gamble and can deliver superior results if you happen to pick the right country at the right time. Good investing, however, should as far as possible not be a gamble.

You could argue that you aren't just picking a country, you're intrinsically tied to the fate of the UK economy and so what goes on in the USA, Europe or Asia is irrelevant. This belies the fact that many of the goods and services purchased by the UK consumer are either produced overseas, sold overseas, in competition with those produced by overseas companies or are otherwise priced based on overseas influences, and as bowlhead pointed out, even some of those that were patriotically produced in the UK by a UK brand are made by companies that will have at least some of their costs derived from overseas. I don't believe the UK is going to cut itself off from the rest of the world any time soon (despite some of the rhetoric), so a good investment strategy should seek to capture the major players in the globalised economy.

Sailtheworld

tcallaghan93 said:

AnotherJoe said:

tcallaghan93 said:

AnotherJoe said:

AdmanPea said:

Hi all

I recently started investing for the first time after reading lots of stuff, listening to lots of stuff, and eliminating debt and creating a block of savings. 

I decided to open a Vanguard LifeStrategy 60% and 80% with the idea being that I put £100 a month into each for the next 20 years (possibly increase contributions over time). However, given the current state of the finances in the country and the outlook ahead, is this something I should already alter? I know I'm playing the long game here but I'm also conscious that once reality hits the economy the slump could be devastating for a long, long time. 

What do you think? Keep going as is and it'll ride out okay or tinker with what I'm doing just a few months in to the plan? 

If it's "devastating" for a long time, say 15 years, and you are investing for 20, that means you are buying really cheap for 15 years and will benefit Much more when it recovers than if a vaccine was discovered tomorrow and we all went back to normal next week. So the only change to your plan would be to stop buying 60 and 80 and buy 100. 
An analogy often used here, suppose you often buy dishwasher tablets (or any other long lived item). They are half price at the moment. Do you buy more now, or do you say "I'll wait till they come back to their usual price" ?
Subsidiary point - for a span of 20 years, IMO VLS 70, (which is what you've got) is too cautious and you'd be better off with 80 or 100 though given your worry now  when you should be buying more, maybe that fits your psychology better. 

Second subsidiary point, there are better options than VLS. The "U.K." component, focussed as it is on oil and finance, will drag down performance. 

/
If the OP is new to investing they really shouldn't be thinking about market timing.
Also the bit about VLS has absolutely no evidence behind it.
There are other similar types of funds offered by BlackRock, iShares, Fidelity, HSBC etc. VLS slightly upweights the UK whereas a globalist investor would say a "pure" VLS should be 100% global and so ~5% UK, and a pure domestic investor would say 100% UK is normal.

But they *are* thinking about market timing, (eg changing their strategy) so my response was in regards to that ! 

We can debate til the cows come home what upweight VLS gives to the U.K. (eg, what's the weight of the UK in, say Shell or AstraZeneca) but more concerning to me is that VLS gives a boost to a randomly chosen selection of companies that Just happen to be domiciled here and could change at a whim (especially with Brexit) 

If you live, work, pay taxes, vote, save and intend to retire in; are subject to the laws of; have savings and investments subject to the regulations and protections of; and  cost of living linked to inflation in the UK, then it makes complete sense to invest the majority of your money in the UK unless there is a very good, legitimate economic reason not to.

I live, work, vote etc in the UK but came up with the opposite view of what made complete sense. Most of the money I have invested in equities are outside the UK. It's not just an argument about whether the FTSE250's income stream is diversified - there are other risks to consider - political risk is one and correlation risk is another.

That said I wouldn't spend 5 minutes worrying about whether VLS was over-exposed to the UK. Taken in the round it's neither here nor there.

AnotherJoe

Sailtheworld said:

tcallaghan93 said:

AnotherJoe said:

tcallaghan93 said:

AnotherJoe said:

AdmanPea said:

Hi all

I recently started investing for the first time after reading lots of stuff, listening to lots of stuff, and eliminating debt and creating a block of savings. 

I decided to open a Vanguard LifeStrategy 60% and 80% with the idea being that I put £100 a month into each for the next 20 years (possibly increase contributions over time). However, given the current state of the finances in the country and the outlook ahead, is this something I should already alter? I know I'm playing the long game here but I'm also conscious that once reality hits the economy the slump could be devastating for a long, long time. 

What do you think? Keep going as is and it'll ride out okay or tinker with what I'm doing just a few months in to the plan? 

If it's "devastating" for a long time, say 15 years, and you are investing for 20, that means you are buying really cheap for 15 years and will benefit Much more when it recovers than if a vaccine was discovered tomorrow and we all went back to normal next week. So the only change to your plan would be to stop buying 60 and 80 and buy 100. 
An analogy often used here, suppose you often buy dishwasher tablets (or any other long lived item). They are half price at the moment. Do you buy more now, or do you say "I'll wait till they come back to their usual price" ?
Subsidiary point - for a span of 20 years, IMO VLS 70, (which is what you've got) is too cautious and you'd be better off with 80 or 100 though given your worry now  when you should be buying more, maybe that fits your psychology better. 

Second subsidiary point, there are better options than VLS. The "U.K." component, focussed as it is on oil and finance, will drag down performance. 

/
If the OP is new to investing they really shouldn't be thinking about market timing.
Also the bit about VLS has absolutely no evidence behind it.
There are other similar types of funds offered by BlackRock, iShares, Fidelity, HSBC etc. VLS slightly upweights the UK whereas a globalist investor would say a "pure" VLS should be 100% global and so ~5% UK, and a pure domestic investor would say 100% UK is normal.

But they *are* thinking about market timing, (eg changing their strategy) so my response was in regards to that ! 

We can debate til the cows come home what upweight VLS gives to the U.K. (eg, what's the weight of the UK in, say Shell or AstraZeneca) but more concerning to me is that VLS gives a boost to a randomly chosen selection of companies that Just happen to be domiciled here and could change at a whim (especially with Brexit) 

If you live, work, pay taxes, vote, save and intend to retire in; are subject to the laws of; have savings and investments subject to the regulations and protections of; and  cost of living linked to inflation in the UK, then it makes complete sense to invest the majority of your money in the UK unless there is a very good, legitimate economic reason not to.

I live, work, vote etc in the UK but came up with the opposite view of what made complete sense. Most of the money I have invested in equities are outside the UK. It's not just an argument about whether the FTSE250's income stream is diversified - there are other risks to consider - political risk is one and correlation risk is another.

That said I wouldn't spend 5 minutes worrying about whether VLS was over-exposed to the UK. Taken in the round it's neither here nor there.

The thing is, it's not over exposed to the UK (because of the global nature of these companies), its over exposed to an almost literally random selection of global companies with no rhyme or reason to it other than historical accident.

bowlhead99

AnotherJoe said:
The thing is, it's not over exposed to the UK (because of the global nature of these companies), its over exposed to an almost literally random selection of global companies with no rhyme or reason to it other than historical accident.

So what you mean is that it doesn't feel like an 'almost literally random' set of 100 or 350 companies at all (i.e. plucked at random from the global economy - as a random selection has a chance of being statistically fine, for diversification), but a set of companies that have things in common - while other types of companies are missing. You would have to shake the dice a lot for a well diversified and non-correlated set of companies to pop out, if you are only plucking 350 from 10,000 and have already filtered down the 10,000 to the ones that chose to list in the UK and which have grown big without being bought out by someone else internationally.

I tend to agree with Sailtheworld that 'taken in the round' it doesn't really matter enough to jump up and down about if the UK equity is 15-20% of VLS60-80 instead of 5% or 10%, as some bias to UK is fine and there is plenty of 'other diversified global stuff' within the 45%-60% equities that are not in the UK. Having at least 75% of the equities part of the portfolio be international is also fine, especially when the UK-listed allocation also comes with a good dose of international revenues.

Personally I think one can do better than to use a UK index for their UK equity market exposure, and I don't use the VLS product. FWIW, if you've read my old posts, I held the VLS100 for a while several years ago as some 'general equities' filler within a portfolio, but haven't done so for a long time. But the original query on the thread was whether the OP was on the right track towards early retirement by investing rather than not investing, given the state of the economy - rather than 'how can I get my hands dirty and construct the most perfect multi-asset portfolio'.  He is looking to buy a simple product(s) off the shelf, which he has done, and it's probably fine in the grand scheme of things, even if some rival products are more fine.

83705628

masonic said:

tcallaghan93 said:

Why is this bad investing? How do you define bad? Where's the evidence that it's bad? The FTSE all share yield is ~4.5% currently and it's remarkably resilient, you can more or less rely on those keeping up with inflation regardless of what happens with the price indices. With global equity you're counting on an extra 2% growth ontop of the 2.5% dividend yield, after a decade long well above average earnings run, bubble valuations and the £ at record lows. It hardly adds more risk, and it does balance the imbalance you're talking about in the FTSE 100.

One could define bad in terms of performance or suitability. Some arguments have already been made about how it is bad due to unsuitability. In terms of performance, a FTSE100 tracker has delivered annual total returns of 5.5% over the last 10 years, compared with 8.2% for the FTSE250, 15.5% for the S&P500 and 12.2% for the FTSE World index. So it is quite clear that concentrating your portfolio in companies that happen to be listed on the UK stock exchange can be costly in terms of returns, although such asset allocation is a gamble and can deliver superior results if you happen to pick the right country at the right time. Good investing, however, should as far as possible not be a gamble.

You could argue that you aren't just picking a country, you're intrinsically tied to the fate of the UK economy and so what goes on in the USA, Europe or Asia is irrelevant. This belies the fact that many of the goods and services purchased by the UK consumer are either produced overseas, sold overseas, in competition with those produced by overseas companies or are otherwise priced based on overseas influences, and as bowlhead pointed out, even some of those that were patriotically produced in the UK by a UK brand are made by companies that will have at least some of their costs derived from overseas. I don't believe the UK is going to cut itself off from the rest of the world any time soon (despite some of the rhetoric), so a good investment strategy should seek to capture the major players in the globalised economy.

/
The first bit of your comment is wrong. FTSE 100 performance matched the FTSE 250 until 2000, and only fell behind global because of Brexit speculation. 10 years is too short term to compare countries.
The UK is already a globally integrated highly trading island global financial centre, the Asian financial crisis cut the UK's dividends by 14% and the GFC that started in the US cut it by 11%. So it's wrong to suggest that global economic/corporate performance does not affect UK equity returns. The only major stock market that is materially insulated from global events is the US so this is true of all countries.
I agree that some glob exposure is probably sensible for a UK investor. Bogle always said US investors don't need any non-US exposure and given the correlation and same performance until the dot-com and then Brexit eras (and the US's much greater capital supply and wider stock market involvement that the UK) I start with that as the default and worked upto about 1/3 of your equity as global being a sensible number, but this idea of being majority global is, I think, unfounded.

masonic

tcallaghan93 said:

masonic said:

tcallaghan93 said:

Why is this bad investing? How do you define bad? Where's the evidence that it's bad? The FTSE all share yield is ~4.5% currently and it's remarkably resilient, you can more or less rely on those keeping up with inflation regardless of what happens with the price indices. With global equity you're counting on an extra 2% growth ontop of the 2.5% dividend yield, after a decade long well above average earnings run, bubble valuations and the £ at record lows. It hardly adds more risk, and it does balance the imbalance you're talking about in the FTSE 100.

One could define bad in terms of performance or suitability. Some arguments have already been made about how it is bad due to unsuitability. In terms of performance, a FTSE100 tracker has delivered annual total returns of 5.5% over the last 10 years, compared with 8.2% for the FTSE250, 15.5% for the S&P500 and 12.2% for the FTSE World index. So it is quite clear that concentrating your portfolio in companies that happen to be listed on the UK stock exchange can be costly in terms of returns, although such asset allocation is a gamble and can deliver superior results if you happen to pick the right country at the right time. Good investing, however, should as far as possible not be a gamble.

You could argue that you aren't just picking a country, you're intrinsically tied to the fate of the UK economy and so what goes on in the USA, Europe or Asia is irrelevant. This belies the fact that many of the goods and services purchased by the UK consumer are either produced overseas, sold overseas, in competition with those produced by overseas companies or are otherwise priced based on overseas influences, and as bowlhead pointed out, even some of those that were patriotically produced in the UK by a UK brand are made by companies that will have at least some of their costs derived from overseas. I don't believe the UK is going to cut itself off from the rest of the world any time soon (despite some of the rhetoric), so a good investment strategy should seek to capture the major players in the globalised economy.

/
The first bit of your comment is wrong. FTSE 100 performance matched the FTSE 250 until 2000, and only fell behind global because of Brexit speculation. 10 years is too short term to compare countries.

The first bit of my comment is not wrong. Those figures I've stated for the last 10 years are accurate. In fact, it's been in the last 6 years that the FTSE100 performance has fallen away from the world index (as you say, it's underperformed the FTSE250 for closer to 20 years, but the FTSE250 has the benefit of a smaller company risk premium). The below chart shows this quite clearly:

As you suggest, this could be primarily Brexit-related, but the impact is that total returns from the FTSE100 are half those of the FTSE World over 26 years (which is as far as the data goes back in Trustnet). This is the risk of failure to diversify.

tcallaghan93 said:

The UK is already a globally integrated highly trading island global financial centre, the Asian financial crisis cut the UK's dividends by 14% and the GFC that started in the US cut it by 11%. So it's wrong to suggest that global economic/corporate performance does not affect UK equity returns. The only major stock market that is materially insulated from global events is the US so this is true of all countries.
I agree that some glob exposure is probably sensible for a UK investor. Bogle always said US investors don't need any non-US exposure and given the correlation and same performance until the dot-com and then Brexit eras (and the US's much greater capital supply and wider stock market involvement that the UK) I start with that as the default and worked upto about 1/3 of your equity as global being a sensible number, but this idea of being majority global is, I think, unfounded.

On the basis of using diversification to reduce volatility, the sweet spot for UK investors to allocate to non-UK listed stocks seems to be around 50-60% (see https://www.vanguard.com/pdf/ISGGEB.pdf).