DIY pension definition and related questions

dunstonh

1. Here is what you did say: “ Everyone that pays just a little bit more and gets higher returns will feel different to you.” And “ when buying an active fund, you filter out the funds you dont want to be left with a much smaller set of funds to select from. Sometimes only a couple.   Or the fact that some areas are best with trackers and some are best with active. ”

Pulling a sentence out of a paragraph or discussion thread means it may not be in context.   However, i don't see any issue with what is said there.       It doesnt imply anything.  

The assumption with the passive only brigade is that all managed is bad.   Yet in reality, it is not and you do filter out the dross.  DIY investors do it.  You appear to have done it.   Yet you only appear to have an issue if any IFA does it.

There is a very clear implication that you know an easy way to beat the market and your services will assure higher returns.  Very dodgy.  

Yet you have not provided any evidence I have said that.  You have just made it up.

2. I was making a point that I am open to active and the added complexity but only for largish portfolios. That’s what I do myself for a very limited fraction of my portfolio. I am not certain that the extra complexity is worth it - or that the approach will deliver higher returns - but at least I am not jeopardizing my overall objectives. 

It's not really adding complexity though unless you bring in loads of funds and go a bit over the top.  And remember that IFAs generally deal with larger portfolios.    For smaller portfolios, we use multi-asset funds.   So, we are aligned there.   Looking at our medium risk portfolio, 77.5% of it is made up of passive.  Just 22.5% is active.   For the lowest risk profile, it is 84.3% passive.  13% is in an area that has no passives available.   So, again, the majority is passive.  So, we are fairly aligned there as well.

There is no “lying”. You do imply you can easily  beat the market for your clients if they just pay you. Its blatant.

Provide some evidence I have said that.     I have said is that you can beat it and plenty of people who use adviser or DIY have done so.  You referred to that as being rare.   

Prism

Deleted_User said:

Linton said:

Deleted_User said:

Prism said:

Deleted_User said:

dunstonh said:

Its probably an unnecessary complexity but I am well into a 7 digit portfolio and trying to squeeze a little alpha by taking on more risk on a portion of investment makes sense. Smaller portfolios should focus on simplicity. 

You are absolutely entitled to your opinion but it is nothing more than that.   Everyone that pays just a little bit more and gets higher returns will feel different to you.   you can be happy you are paying lower charges and they can be happy they have made more money.

On costs, it’s not my opinion. I was briefly summarizing Vanguard’s analysis which you referenced. The higher the costs the better your chances of underperforming passive all the while taking more risk. 

The bit about “making more money than me” is a weird thing to say for a professional who knows zilch about my money. 

If funds were selected randomly then that would be true. However those of that do use active funds are not simply throwing a dart at a list of options. A certain amount of work does go into it to select a fund or stock which might be able to out perform its benchmark without increasing risk by much. In fact most of my funds have performed better with lower risk - assuming we are talking volatility and deviation which is only on that is reliably measured. 

I have nothing against passive funds and would recommend and do sometimes use passive funds. However is it far from impossible to use active funds to get a better result. That could be DIY or IFA led.

Again, I am summarizing the Vanguard White Paper he referenced, or at least my recollection of it. 

Having said it... If you want to increase your chances of offsetting higher costs and beating passive, you have to take bets and more risk. You HAVE to be less diversified. If you buy factors, you are cutting out certain types of companies and might be facing long periods of underperformance. 

Or you are as well diversified as a passive fund and then you are just buying a closet index fund but at a higher cost.  And on top of it all you have risk of bad management which you don’t have with the index. 

Recent record of active vs passive speaks for itself. Very few active funds beat passive given the same level of risk. The longer your sampling period the smaller your chance.  In the US they now have really cheap active funds as a result - these might become competitive. 

Then you have some funds buying a limited selection of US tech funds. These have done great the last decade but at a massively higher level of risk and are kinda useless. If thats your game, just buy stock. 

ISTM...
1) You do not HAVE to be less diversified than a passive fund if you buy factors.  The market itself is strongly influenced by factors as areas of investment go in and out of fashion.   An obvious example is the high rating of tech growth companies that are priced solely on investor's belief in future growth, a belief that is often not borne out in practice.  20+ years ago, before the .com boom/bust companies were more judged on current fundamentals, "blue chip" shares being the prime example.

2) The problem with saying more, the same, or less diversification and more, the same,  or less risk is that it becomes mere hand waving unless you have agreed metrics that correspond to investor's understanding of what those terms  mean to them.  You may define maximum diversification as the market cap allocation.  Then of course any allocation that differs from the market is by definition less diversified.  I would see maximum diversification as that which minimises the potential effect of problems in any single company, geography, industry sector etc on the total portfolio.  Clearly one can't optimise diversification of all these measures simultaneously so compromise is required.

Similarly risk.  To the newbie investor, "risk" means the chance of losing all your money.  To someone with more experience it may mean the size of fall during a crash.  To Trustnet I believe it means volatility over a medium time period.  My measure would be the chance of failing to meet objectives in quantity and time.  Taking this view primarily implies mitigation at the strategic level, not in the choice of individual equity investments.

Yes, this is how I see risk as well. If you cut out a sector or a region... Let’s say tech because of your active view on fundamentals, then you run the risk of long term underperformance. Ignoring US tech over the last 20 years would have been damaging to anyones objectives.  Same effect if you focused on the value or small over that time period. Its a risk one takes when trying to beat the market. 

The trouble is that risks like that are not comparable because we all have different opinions. For example I believe that Linton thinks that using a standard global equity index tracker is higher risk because it simply allocates on market cap. Therefore actively underweighting the US right now is lower risk not higher risk. I have an opinion that investing in cyclicals is higher risk and therefore have actively chosen funds which underweight energy, finance and consumer cyclical. I also see this as lower risk than a passive global allocation. I am perfectly happy that others disagree as they might see risk differently. Linton I believe emphasises the risk of not meeting objectives over pure performance. I think I can have both.

[Deleted User]

Prism said:

Deleted_User said:

Linton said:

Deleted_User said:

Prism said:

Deleted_User said:

dunstonh said:

Its probably an unnecessary complexity but I am well into a 7 digit portfolio and trying to squeeze a little alpha by taking on more risk on a portion of investment makes sense. Smaller portfolios should focus on simplicity. 

You are absolutely entitled to your opinion but it is nothing more than that.   Everyone that pays just a little bit more and gets higher returns will feel different to you.   you can be happy you are paying lower charges and they can be happy they have made more money.

On costs, it’s not my opinion. I was briefly summarizing Vanguard’s analysis which you referenced. The higher the costs the better your chances of underperforming passive all the while taking more risk. 

The bit about “making more money than me” is a weird thing to say for a professional who knows zilch about my money. 

If funds were selected randomly then that would be true. However those of that do use active funds are not simply throwing a dart at a list of options. A certain amount of work does go into it to select a fund or stock which might be able to out perform its benchmark without increasing risk by much. In fact most of my funds have performed better with lower risk - assuming we are talking volatility and deviation which is only on that is reliably measured. 

I have nothing against passive funds and would recommend and do sometimes use passive funds. However is it far from impossible to use active funds to get a better result. That could be DIY or IFA led.

Again, I am summarizing the Vanguard White Paper he referenced, or at least my recollection of it. 

Having said it... If you want to increase your chances of offsetting higher costs and beating passive, you have to take bets and more risk. You HAVE to be less diversified. If you buy factors, you are cutting out certain types of companies and might be facing long periods of underperformance. 

Or you are as well diversified as a passive fund and then you are just buying a closet index fund but at a higher cost.  And on top of it all you have risk of bad management which you don’t have with the index. 

Recent record of active vs passive speaks for itself. Very few active funds beat passive given the same level of risk. The longer your sampling period the smaller your chance.  In the US they now have really cheap active funds as a result - these might become competitive. 

Then you have some funds buying a limited selection of US tech funds. These have done great the last decade but at a massively higher level of risk and are kinda useless. If thats your game, just buy stock. 

ISTM...
1) You do not HAVE to be less diversified than a passive fund if you buy factors.  The market itself is strongly influenced by factors as areas of investment go in and out of fashion.   An obvious example is the high rating of tech growth companies that are priced solely on investor's belief in future growth, a belief that is often not borne out in practice.  20+ years ago, before the .com boom/bust companies were more judged on current fundamentals, "blue chip" shares being the prime example.

2) The problem with saying more, the same, or less diversification and more, the same,  or less risk is that it becomes mere hand waving unless you have agreed metrics that correspond to investor's understanding of what those terms  mean to them.  You may define maximum diversification as the market cap allocation.  Then of course any allocation that differs from the market is by definition less diversified.  I would see maximum diversification as that which minimises the potential effect of problems in any single company, geography, industry sector etc on the total portfolio.  Clearly one can't optimise diversification of all these measures simultaneously so compromise is required.

Similarly risk.  To the newbie investor, "risk" means the chance of losing all your money.  To someone with more experience it may mean the size of fall during a crash.  To Trustnet I believe it means volatility over a medium time period.  My measure would be the chance of failing to meet objectives in quantity and time.  Taking this view primarily implies mitigation at the strategic level, not in the choice of individual equity investments.

Yes, this is how I see risk as well. If you cut out a sector or a region... Let’s say tech because of your active view on fundamentals, then you run the risk of long term underperformance. Ignoring US tech over the last 20 years would have been damaging to anyones objectives.  Same effect if you focused on the value or small over that time period. Its a risk one takes when trying to beat the market. 

The trouble is that risks like that are not comparable because we all have different opinions. For example I believe that Linton thinks that using a standard global equity index tracker is higher risk because it simply allocates on market cap. Therefore actively underweighting the US right now is lower risk not higher risk. I have an opinion that investing in cyclicals is higher risk and therefore have actively chosen funds which underweight energy, finance and consumer cyclical. I also see this as lower risk than a passive global allocation. I am perfectly happy that others disagree as they might see risk differently. Linton I believe emphasises the risk of not meeting objectives over pure performance. I think I can have both.

Exactly. I have views on US, cyclical etc as well but I also know I could be wrong. Thats were passive shines. It assures that your active views do not screw up with your objectives even if you are wrong. 

Thrugelmir

Deleted_User said:

Linton said:

Deleted_User said:

Prism said:

Deleted_User said:

dunstonh said:

Its probably an unnecessary complexity but I am well into a 7 digit portfolio and trying to squeeze a little alpha by taking on more risk on a portion of investment makes sense. Smaller portfolios should focus on simplicity. 

You are absolutely entitled to your opinion but it is nothing more than that.   Everyone that pays just a little bit more and gets higher returns will feel different to you.   you can be happy you are paying lower charges and they can be happy they have made more money.

On costs, it’s not my opinion. I was briefly summarizing Vanguard’s analysis which you referenced. The higher the costs the better your chances of underperforming passive all the while taking more risk. 

The bit about “making more money than me” is a weird thing to say for a professional who knows zilch about my money. 

If funds were selected randomly then that would be true. However those of that do use active funds are not simply throwing a dart at a list of options. A certain amount of work does go into it to select a fund or stock which might be able to out perform its benchmark without increasing risk by much. In fact most of my funds have performed better with lower risk - assuming we are talking volatility and deviation which is only on that is reliably measured. 

I have nothing against passive funds and would recommend and do sometimes use passive funds. However is it far from impossible to use active funds to get a better result. That could be DIY or IFA led.

Again, I am summarizing the Vanguard White Paper he referenced, or at least my recollection of it. 

Having said it... If you want to increase your chances of offsetting higher costs and beating passive, you have to take bets and more risk. You HAVE to be less diversified. If you buy factors, you are cutting out certain types of companies and might be facing long periods of underperformance. 

Or you are as well diversified as a passive fund and then you are just buying a closet index fund but at a higher cost.  And on top of it all you have risk of bad management which you don’t have with the index. 

Recent record of active vs passive speaks for itself. Very few active funds beat passive given the same level of risk. The longer your sampling period the smaller your chance.  In the US they now have really cheap active funds as a result - these might become competitive. 

Then you have some funds buying a limited selection of US tech funds. These have done great the last decade but at a massively higher level of risk and are kinda useless. If thats your game, just buy stock. 

ISTM...
1) You do not HAVE to be less diversified than a passive fund if you buy factors.  The market itself is strongly influenced by factors as areas of investment go in and out of fashion.   An obvious example is the high rating of tech growth companies that are priced solely on investor's belief in future growth, a belief that is often not borne out in practice.  20+ years ago, before the .com boom/bust companies were more judged on current fundamentals, "blue chip" shares being the prime example.

2) The problem with saying more, the same, or less diversification and more, the same,  or less risk is that it becomes mere hand waving unless you have agreed metrics that correspond to investor's understanding of what those terms  mean to them.  You may define maximum diversification as the market cap allocation.  Then of course any allocation that differs from the market is by definition less diversified.  I would see maximum diversification as that which minimises the potential effect of problems in any single company, geography, industry sector etc on the total portfolio.  Clearly one can't optimise diversification of all these measures simultaneously so compromise is required.

Similarly risk.  To the newbie investor, "risk" means the chance of losing all your money.  To someone with more experience it may mean the size of fall during a crash.  To Trustnet I believe it means volatility over a medium time period.  My measure would be the chance of failing to meet objectives in quantity and time.  Taking this view primarily implies mitigation at the strategic level, not in the choice of individual equity investments.

 Ignoring US tech over the last 20 years would have been damaging to anyones objectives. 

Invested in US tech in 2000 you would have lost a lot of money. 75% of the Dot Com boom companies didn't survive.  

BRICs were flavour of the month until 2015. Tech has only more recently taken centre stage.

Hindsight is a usefull tool. 

Linton

Prism said:

Deleted_User said:

Linton said:

Deleted_User said:

Prism said:

Deleted_User said:

dunstonh said:

Its probably an unnecessary complexity but I am well into a 7 digit portfolio and trying to squeeze a little alpha by taking on more risk on a portion of investment makes sense. Smaller portfolios should focus on simplicity. 

You are absolutely entitled to your opinion but it is nothing more than that.   Everyone that pays just a little bit more and gets higher returns will feel different to you.   you can be happy you are paying lower charges and they can be happy they have made more money.

On costs, it’s not my opinion. I was briefly summarizing Vanguard’s analysis which you referenced. The higher the costs the better your chances of underperforming passive all the while taking more risk. 

The bit about “making more money than me” is a weird thing to say for a professional who knows zilch about my money. 

If funds were selected randomly then that would be true. However those of that do use active funds are not simply throwing a dart at a list of options. A certain amount of work does go into it to select a fund or stock which might be able to out perform its benchmark without increasing risk by much. In fact most of my funds have performed better with lower risk - assuming we are talking volatility and deviation which is only on that is reliably measured. 

I have nothing against passive funds and would recommend and do sometimes use passive funds. However is it far from impossible to use active funds to get a better result. That could be DIY or IFA led.

Again, I am summarizing the Vanguard White Paper he referenced, or at least my recollection of it. 

Having said it... If you want to increase your chances of offsetting higher costs and beating passive, you have to take bets and more risk. You HAVE to be less diversified. If you buy factors, you are cutting out certain types of companies and might be facing long periods of underperformance. 

Or you are as well diversified as a passive fund and then you are just buying a closet index fund but at a higher cost.  And on top of it all you have risk of bad management which you don’t have with the index. 

Recent record of active vs passive speaks for itself. Very few active funds beat passive given the same level of risk. The longer your sampling period the smaller your chance.  In the US they now have really cheap active funds as a result - these might become competitive. 

Then you have some funds buying a limited selection of US tech funds. These have done great the last decade but at a massively higher level of risk and are kinda useless. If thats your game, just buy stock. 

ISTM...
1) You do not HAVE to be less diversified than a passive fund if you buy factors.  The market itself is strongly influenced by factors as areas of investment go in and out of fashion.   An obvious example is the high rating of tech growth companies that are priced solely on investor's belief in future growth, a belief that is often not borne out in practice.  20+ years ago, before the .com boom/bust companies were more judged on current fundamentals, "blue chip" shares being the prime example.

2) The problem with saying more, the same, or less diversification and more, the same,  or less risk is that it becomes mere hand waving unless you have agreed metrics that correspond to investor's understanding of what those terms  mean to them.  You may define maximum diversification as the market cap allocation.  Then of course any allocation that differs from the market is by definition less diversified.  I would see maximum diversification as that which minimises the potential effect of problems in any single company, geography, industry sector etc on the total portfolio.  Clearly one can't optimise diversification of all these measures simultaneously so compromise is required.

Similarly risk.  To the newbie investor, "risk" means the chance of losing all your money.  To someone with more experience it may mean the size of fall during a crash.  To Trustnet I believe it means volatility over a medium time period.  My measure would be the chance of failing to meet objectives in quantity and time.  Taking this view primarily implies mitigation at the strategic level, not in the choice of individual equity investments.

Yes, this is how I see risk as well. If you cut out a sector or a region... Let’s say tech because of your active view on fundamentals, then you run the risk of long term underperformance. Ignoring US tech over the last 20 years would have been damaging to anyones objectives.  Same effect if you focused on the value or small over that time period. Its a risk one takes when trying to beat the market. 

The trouble is that risks like that are not comparable because we all have different opinions. For example I believe that Linton thinks that using a standard global equity index tracker is higher risk because it simply allocates on market cap. Therefore actively underweighting the US right now is lower risk not higher risk. I have an opinion that investing in cyclicals is higher risk and therefore have actively chosen funds which underweight energy, finance and consumer cyclical. I also see this as lower risk than a passive global allocation. I am perfectly happy that others disagree as they might see risk differently. Linton I believe emphasises the risk of not meeting objectives over pure performance. I think I can have both.

Yes.  But it isnt just a matter of economic theories, different circumstances are a major factor.

At my age really long term growth is irrelevent. Perhaps worse, it is a distraction from the real focus of surviving safely and very comfortably in the medium term.  Passives may or may not significantly outperform actives over the next 50 years, who knows? I will never find out - they mostly dont in my timeframes  So quite different from many people still in work saving for retirement who are recommended to focus on the long term and ignore what happens in the meantime.

To go back to the topic of the matter of IFAs, this is where many people would find their help highly beneficial.  People's circumstances need to be understood and an appropriate overall financial management approach may need to be implemented.  Whether one "beats the market" is totally immaterial, appropriateness is what is key.

garmeg

Thrugelmir said:

Deleted_User said:

Linton said:

Deleted_User said:

Prism said:

Deleted_User said:

dunstonh said:

Its probably an unnecessary complexity but I am well into a 7 digit portfolio and trying to squeeze a little alpha by taking on more risk on a portion of investment makes sense. Smaller portfolios should focus on simplicity. 

You are absolutely entitled to your opinion but it is nothing more than that.   Everyone that pays just a little bit more and gets higher returns will feel different to you.   you can be happy you are paying lower charges and they can be happy they have made more money.

On costs, it’s not my opinion. I was briefly summarizing Vanguard’s analysis which you referenced. The higher the costs the better your chances of underperforming passive all the while taking more risk. 

The bit about “making more money than me” is a weird thing to say for a professional who knows zilch about my money. 

If funds were selected randomly then that would be true. However those of that do use active funds are not simply throwing a dart at a list of options. A certain amount of work does go into it to select a fund or stock which might be able to out perform its benchmark without increasing risk by much. In fact most of my funds have performed better with lower risk - assuming we are talking volatility and deviation which is only on that is reliably measured. 

I have nothing against passive funds and would recommend and do sometimes use passive funds. However is it far from impossible to use active funds to get a better result. That could be DIY or IFA led.

Again, I am summarizing the Vanguard White Paper he referenced, or at least my recollection of it. 

Having said it... If you want to increase your chances of offsetting higher costs and beating passive, you have to take bets and more risk. You HAVE to be less diversified. If you buy factors, you are cutting out certain types of companies and might be facing long periods of underperformance. 

Or you are as well diversified as a passive fund and then you are just buying a closet index fund but at a higher cost.  And on top of it all you have risk of bad management which you don’t have with the index. 

Recent record of active vs passive speaks for itself. Very few active funds beat passive given the same level of risk. The longer your sampling period the smaller your chance.  In the US they now have really cheap active funds as a result - these might become competitive. 

Then you have some funds buying a limited selection of US tech funds. These have done great the last decade but at a massively higher level of risk and are kinda useless. If thats your game, just buy stock. 

ISTM...
1) You do not HAVE to be less diversified than a passive fund if you buy factors.  The market itself is strongly influenced by factors as areas of investment go in and out of fashion.   An obvious example is the high rating of tech growth companies that are priced solely on investor's belief in future growth, a belief that is often not borne out in practice.  20+ years ago, before the .com boom/bust companies were more judged on current fundamentals, "blue chip" shares being the prime example.

2) The problem with saying more, the same, or less diversification and more, the same,  or less risk is that it becomes mere hand waving unless you have agreed metrics that correspond to investor's understanding of what those terms  mean to them.  You may define maximum diversification as the market cap allocation.  Then of course any allocation that differs from the market is by definition less diversified.  I would see maximum diversification as that which minimises the potential effect of problems in any single company, geography, industry sector etc on the total portfolio.  Clearly one can't optimise diversification of all these measures simultaneously so compromise is required.

Similarly risk.  To the newbie investor, "risk" means the chance of losing all your money.  To someone with more experience it may mean the size of fall during a crash.  To Trustnet I believe it means volatility over a medium time period.  My measure would be the chance of failing to meet objectives in quantity and time.  Taking this view primarily implies mitigation at the strategic level, not in the choice of individual equity investments.

 Ignoring US tech over the last 20 years would have been damaging to anyones objectives. 

Invested in US tech in 2000 you would have lost a lot of money. 75% of the Dot Com boom companies didn't survive.  

BRICs were flavour of the month until 2015. Tech has only more recently taken centre stage.

Hindsight is a usefull tool. 

Foresight is even more valuable!

Sadly nobody can predict the future.

Linton

Thrugelmir said:

Deleted_User said:

Linton said:

Deleted_User said:

Prism said:

Deleted_User said:

dunstonh said:

Its probably an unnecessary complexity but I am well into a 7 digit portfolio and trying to squeeze a little alpha by taking on more risk on a portion of investment makes sense. Smaller portfolios should focus on simplicity. 

You are absolutely entitled to your opinion but it is nothing more than that.   Everyone that pays just a little bit more and gets higher returns will feel different to you.   you can be happy you are paying lower charges and they can be happy they have made more money.

On costs, it’s not my opinion. I was briefly summarizing Vanguard’s analysis which you referenced. The higher the costs the better your chances of underperforming passive all the while taking more risk. 

The bit about “making more money than me” is a weird thing to say for a professional who knows zilch about my money. 

If funds were selected randomly then that would be true. However those of that do use active funds are not simply throwing a dart at a list of options. A certain amount of work does go into it to select a fund or stock which might be able to out perform its benchmark without increasing risk by much. In fact most of my funds have performed better with lower risk - assuming we are talking volatility and deviation which is only on that is reliably measured. 

I have nothing against passive funds and would recommend and do sometimes use passive funds. However is it far from impossible to use active funds to get a better result. That could be DIY or IFA led.

Again, I am summarizing the Vanguard White Paper he referenced, or at least my recollection of it. 

Having said it... If you want to increase your chances of offsetting higher costs and beating passive, you have to take bets and more risk. You HAVE to be less diversified. If you buy factors, you are cutting out certain types of companies and might be facing long periods of underperformance. 

Or you are as well diversified as a passive fund and then you are just buying a closet index fund but at a higher cost.  And on top of it all you have risk of bad management which you don’t have with the index. 

Recent record of active vs passive speaks for itself. Very few active funds beat passive given the same level of risk. The longer your sampling period the smaller your chance.  In the US they now have really cheap active funds as a result - these might become competitive. 

Then you have some funds buying a limited selection of US tech funds. These have done great the last decade but at a massively higher level of risk and are kinda useless. If thats your game, just buy stock. 

ISTM...
1) You do not HAVE to be less diversified than a passive fund if you buy factors.  The market itself is strongly influenced by factors as areas of investment go in and out of fashion.   An obvious example is the high rating of tech growth companies that are priced solely on investor's belief in future growth, a belief that is often not borne out in practice.  20+ years ago, before the .com boom/bust companies were more judged on current fundamentals, "blue chip" shares being the prime example.

2) The problem with saying more, the same, or less diversification and more, the same,  or less risk is that it becomes mere hand waving unless you have agreed metrics that correspond to investor's understanding of what those terms  mean to them.  You may define maximum diversification as the market cap allocation.  Then of course any allocation that differs from the market is by definition less diversified.  I would see maximum diversification as that which minimises the potential effect of problems in any single company, geography, industry sector etc on the total portfolio.  Clearly one can't optimise diversification of all these measures simultaneously so compromise is required.

Similarly risk.  To the newbie investor, "risk" means the chance of losing all your money.  To someone with more experience it may mean the size of fall during a crash.  To Trustnet I believe it means volatility over a medium time period.  My measure would be the chance of failing to meet objectives in quantity and time.  Taking this view primarily implies mitigation at the strategic level, not in the choice of individual equity investments.

 Ignoring US tech over the last 20 years would have been damaging to anyones objectives. 

Invested in US tech in 2000 you would have lost a lot of money. 75% of the Dot Com boom companies didn't survive.  

BRICs were flavour of the month until 2015. Tech has only more recently taken centre stage.

Hindsight is a usefull tool. 

Not only would investing in tech in 2000 have lost a lot of money, it did lose a lot of money for anyone investing in the major indexes. One small company that had never made a profit IIRC got close to the FTSE 100.  The people who won out were those who kept to their very different strategy, like Woodford.  One may have difficulty defining diversification, but however one does it the indexes in 2000 were not well diversified.

Thrugelmir

garmeg said:

Thrugelmir said:

Deleted_User said:

Linton said:

Deleted_User said:

Prism said:

Deleted_User said:

dunstonh said:

Its probably an unnecessary complexity but I am well into a 7 digit portfolio and trying to squeeze a little alpha by taking on more risk on a portion of investment makes sense. Smaller portfolios should focus on simplicity. 

You are absolutely entitled to your opinion but it is nothing more than that.   Everyone that pays just a little bit more and gets higher returns will feel different to you.   you can be happy you are paying lower charges and they can be happy they have made more money.

On costs, it’s not my opinion. I was briefly summarizing Vanguard’s analysis which you referenced. The higher the costs the better your chances of underperforming passive all the while taking more risk. 

The bit about “making more money than me” is a weird thing to say for a professional who knows zilch about my money. 

If funds were selected randomly then that would be true. However those of that do use active funds are not simply throwing a dart at a list of options. A certain amount of work does go into it to select a fund or stock which might be able to out perform its benchmark without increasing risk by much. In fact most of my funds have performed better with lower risk - assuming we are talking volatility and deviation which is only on that is reliably measured. 

I have nothing against passive funds and would recommend and do sometimes use passive funds. However is it far from impossible to use active funds to get a better result. That could be DIY or IFA led.

Again, I am summarizing the Vanguard White Paper he referenced, or at least my recollection of it. 

Having said it... If you want to increase your chances of offsetting higher costs and beating passive, you have to take bets and more risk. You HAVE to be less diversified. If you buy factors, you are cutting out certain types of companies and might be facing long periods of underperformance. 

Or you are as well diversified as a passive fund and then you are just buying a closet index fund but at a higher cost.  And on top of it all you have risk of bad management which you don’t have with the index. 

Recent record of active vs passive speaks for itself. Very few active funds beat passive given the same level of risk. The longer your sampling period the smaller your chance.  In the US they now have really cheap active funds as a result - these might become competitive. 

Then you have some funds buying a limited selection of US tech funds. These have done great the last decade but at a massively higher level of risk and are kinda useless. If thats your game, just buy stock. 

ISTM...
1) You do not HAVE to be less diversified than a passive fund if you buy factors.  The market itself is strongly influenced by factors as areas of investment go in and out of fashion.   An obvious example is the high rating of tech growth companies that are priced solely on investor's belief in future growth, a belief that is often not borne out in practice.  20+ years ago, before the .com boom/bust companies were more judged on current fundamentals, "blue chip" shares being the prime example.

2) The problem with saying more, the same, or less diversification and more, the same,  or less risk is that it becomes mere hand waving unless you have agreed metrics that correspond to investor's understanding of what those terms  mean to them.  You may define maximum diversification as the market cap allocation.  Then of course any allocation that differs from the market is by definition less diversified.  I would see maximum diversification as that which minimises the potential effect of problems in any single company, geography, industry sector etc on the total portfolio.  Clearly one can't optimise diversification of all these measures simultaneously so compromise is required.

Similarly risk.  To the newbie investor, "risk" means the chance of losing all your money.  To someone with more experience it may mean the size of fall during a crash.  To Trustnet I believe it means volatility over a medium time period.  My measure would be the chance of failing to meet objectives in quantity and time.  Taking this view primarily implies mitigation at the strategic level, not in the choice of individual equity investments.

 Ignoring US tech over the last 20 years would have been damaging to anyones objectives. 

Invested in US tech in 2000 you would have lost a lot of money. 75% of the Dot Com boom companies didn't survive.  

BRICs were flavour of the month until 2015. Tech has only more recently taken centre stage.

Hindsight is a usefull tool. 

Foresight is even more valuable!

Sadly nobody can predict the future.

One can learn from the past though and use the knowledge to make better informed decisions. Unfortunately experience can only be gained over time. New investors will continue to make the same fundamental errors of judgement. Irrespective of what gets said. 

aekostas

Thrugelmir said:

 New investors will continue to make the same fundamental errors of judgement. Irrespective of what gets said. 

Sorry, I could not make out from your previous posts on this thread: what are these fundamental errors of judgement?

Thanks.

zagfles

aekostas said:

Thrugelmir said:

 New investors will continue to make the same fundamental errors of judgement. Irrespective of what gets said. 

Sorry, I could not make out from your previous posts on this thread: what are these fundamental errors of judgement?

Thanks.

It's usually stuff like going into panic mode and selling when investments go down, not diversifying enough etc. Which is where good value multi-asset funds like VLS help, as there's no need to manually rebalance, there's no temptation to say "ooh this  single asset fund did well, that one did badly, I'll pile more money into the one that did well", ie chasing yesterday's winner rather than remaining diversified and balanced.