DIY pension definition and related questions

Prism

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.

Another example I see quite a bit is advice from some investors that all you need is a US S&P 500 tracker 'because it performs the best and is fully diversified across global companies'. In reality it is quite expensive, heavy on tech and influenced by US politics and the Dollar - its quite risky, as all single country funds are. It also has a chance of significant underperformance, again like any other country. So you wouldn't avoid it but its highly risky to put all your eggs in one basket. 

If someone brings up examples of significant US underperformance like the 1970s, when Japan was starting to take over the world or the 2000 crash with the failure of the tech dream (15 years too early), then they tend to get ignored by new investors. Its hard to imagine what you haven't been through. 

Linton

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.

Another common one is "fashion investing". eg buying shares and other investments that appear in the news or because they are promoted on social media.

zagfles

Or another one is

Prism said:

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.

Another example I see quite a bit is advice from some investors that all you need is a US S&P 500 tracker 'because it performs the best and is fully diversified across global companies'. In reality it is quite expensive, heavy on tech and influenced by US politics and the Dollar - its quite risky, as all single country funds are. It also has a chance of significant underperformance, again like any other country. So you wouldn't avoid it but its highly risky to put all your eggs in one basket. 

If someone brings up examples of significant US underperformance like the 1970s, when Japan was starting to take over the world or the 2000 crash with the failure of the tech dream (15 years too early), then they tend to get ignored by new investors. Its hard to imagine what you haven't been through. 

Indeed, like being told by financial advisers or the financial services industry how great endowments are, or how you should leave that workplace DB scheme and invest in a private pension...

Thrugelmir

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.

Invest for long enough and you'll understand.  Over time you'll see the same cycles and patterns of investor behaviour, such as herd bias. 

Linton

zagfles said:

Or another one is

Prism said:

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.

Another example I see quite a bit is advice from some investors that all you need is a US S&P 500 tracker 'because it performs the best and is fully diversified across global companies'. In reality it is quite expensive, heavy on tech and influenced by US politics and the Dollar - its quite risky, as all single country funds are. It also has a chance of significant underperformance, again like any other country. So you wouldn't avoid it but its highly risky to put all your eggs in one basket. 

If someone brings up examples of significant US underperformance like the 1970s, when Japan was starting to take over the world or the 2000 crash with the failure of the tech dream (15 years too early), then they tend to get ignored by new investors. Its hard to imagine what you haven't been through. 

Indeed, like being told by financial advisers or the financial services industry how great endowments are, or how you should leave that workplace DB scheme and invest in a private pension...

At the time those statements could well have been correct.  I believe most endowments worked out well.  Pre 1997 DB pensions were less valuable and pre 2007 annuity rates were much higher. It was possible to beat an employer scheme with a personal pension and an annuity. But circumstances change.

[Deleted User]

Linton said:

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.

1. All active investors taken together will achieve the index minus their costs. 

2. What makes you say “passives don’t outperform actives in your timeframe”?
3. The best person to fully know and understand his/her circumstances is that person. Thats not a good reason to use an IFA.  

4. There is a problem when misleading claims are made along the lines “pay a bit more and I’ll help you to beat the market. 

zagfles

Linton said:

zagfles said:

Or another one is

Prism said:

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.

Another example I see quite a bit is advice from some investors that all you need is a US S&P 500 tracker 'because it performs the best and is fully diversified across global companies'. In reality it is quite expensive, heavy on tech and influenced by US politics and the Dollar - its quite risky, as all single country funds are. It also has a chance of significant underperformance, again like any other country. So you wouldn't avoid it but its highly risky to put all your eggs in one basket. 

If someone brings up examples of significant US underperformance like the 1970s, when Japan was starting to take over the world or the 2000 crash with the failure of the tech dream (15 years too early), then they tend to get ignored by new investors. Its hard to imagine what you haven't been through. 

Indeed, like being told by financial advisers or the financial services industry how great endowments are, or how you should leave that workplace DB scheme and invest in a private pension...

At the time those statements could well have been correct.  I believe most endowments worked out well.  Pre 1997 DB pensions were less valuable and pre 2007 annuity rates were much higher. It was possible to beat an employer scheme with a personal pension and an annuity. But circumstances change.

Strange how endowments aren't still sold then, isn't it? Most people I know who had one regretted it. Also while true that DB pre 97 wasn't as good as now, equally private pensions weren't either with high hidden charges, commission etc. It's recognised that it was generally a bad idea to leave employer DB schemes as evidenced by the amount of successful mis-selling claims. But when you had commission hungry advisers, banks, brokers etc who wanted the first two years or so of your endowment or pension premium as commission, what was actually best for the client took a back seat.

There will always be middlemen who want a slice of your investments, things are a bit better now in that at least you know how much they're getting. Mostly. Question is whether they're worth it, when it's so easy to use the likes of VLS etc...

zagfles

Linton said:

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.

Another common one is "fashion investing". eg buying shares and other investments that appear in the news or because they are promoted on social media.

A bank tried that on me when I wanted a mortgage. "You want a repayment mortgage, really?? Everyone's getting endowments these days". But I was never a sad fashion victim

Thrugelmir

zagfles said:

Linton said:

zagfles said:

Or another one is

Prism said:

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.

Another example I see quite a bit is advice from some investors that all you need is a US S&P 500 tracker 'because it performs the best and is fully diversified across global companies'. In reality it is quite expensive, heavy on tech and influenced by US politics and the Dollar - its quite risky, as all single country funds are. It also has a chance of significant underperformance, again like any other country. So you wouldn't avoid it but its highly risky to put all your eggs in one basket. 

If someone brings up examples of significant US underperformance like the 1970s, when Japan was starting to take over the world or the 2000 crash with the failure of the tech dream (15 years too early), then they tend to get ignored by new investors. Its hard to imagine what you haven't been through. 

Indeed, like being told by financial advisers or the financial services industry how great endowments are, or how you should leave that workplace DB scheme and invest in a private pension...

At the time those statements could well have been correct.  I believe most endowments worked out well.  Pre 1997 DB pensions were less valuable and pre 2007 annuity rates were much higher. It was possible to beat an employer scheme with a personal pension and an annuity. But circumstances change.

Strange how endowments aren't still sold then, isn't it? Most people I know who had one regretted it. 

Until you realise how much was invested in the Nikkei by the insurance companies at the time. Which of course never recovered. 50% of capital permanently wiped.  Insurance companies only first started investing in Japan in the late 70's / early 80's.  When shares could be held by institutions on a nominee basis. 

Linton

Deleted_User said:

Linton said:

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.

1. All active investors taken together will achieve the index minus their costs. 

2. What makes you say “passives don’t outperform actives in your timeframe”?
3. The best person to fully know and understand his/her circumstances is that person. Thats not a good reason to use an IFA.  

4. There is a problem when misleading claims are made along the lines “pay a bit more and I’ll help you to beat the market. 

1) All investors taken together will achieve the index minus their costs.  Some will do better and some worse.  If you put in the effort to understand what you are investing in and avoid the mistakes that often result in poor performance you can increase your chances of being in the first category.  An index investor by definition cant. 

2) I said "significantly".  Looking at the data for most sectors passives remain middling performers, at least over the limited timeframe for which data is readily available.  I have yet to see an example where they have risen to the top of the listings.

3) Many people may know their circumstances and what they want to get from their money.  What they may well have no idea about is how to manage their finances to achieve their wants in the light of their circumstances.  Other people may not understand their circumstances or may not have clearly identified their wants. In all these cases an outside person with a good understanding of personal finance can add value.

4)  I havent seen anyone anywhere say “pay a bit more and I’ll help you to beat the market".  Some people may have noted that their portfolio(s) have outperformed relevent indexes.  Generally however the primary objective of a portfolio is not to beat the market,  if it does it is just a side effect of trying to meet other objectives.