DIY pension definition and related questions

dunstonh

Strange how endowments aren't still sold then, isn't it? 

Not really.   The life assurance wrapper effectively became so niche following tax changes that made it obsolete for most people.  The lack of flexibility, which just cannot exist on an endowment, made it something that most dont want.   The market just went away.       When you can put £20k a year into an ISA and have a portfolio of over £100k in a GIA without paying tax, there isn't going to be much of a need for a further tax wrapper for the majority.

aekostas

zagfles 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.

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.

Ah great stuff. I am familiar with the pattern through Fantasy Football. Well, 22 years on the same product, I cannot be accused of being rash in this respect.  

Thanks for all the other answers. Out of curiosity, what would have been a reasonable (not optimal) return over this period?

Thrugelmir

dunstonh said:

Strange how endowments aren't still sold then, isn't it? 

Not really.   The life assurance wrapper effectively became so niche following tax changes that made it obsolete for most people.  The lack of flexibility, which just cannot exist on an endowment, made it something that most dont want.   The market just went away.       When you can put £20k a year into an ISA and have a portfolio of over £100k in a GIA without paying tax, there isn't going to be much of a need for a further tax wrapper for the majority.

Life assurance may of come in handy for some unfortunate individuals recently.  Advancement in medical science has reduced the likelihood of an early demise in the past 40 years or so. 

zagfles

Linton said:

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.

Well, when you continually state stuff like "our portfolios have consistently outperformed multi-asset funds after charges" while advertising that you're an IFA in your signature, it certainly looks like it. Maybe I'm too cynical...

zagfles

dunstonh said:

Strange how endowments aren't still sold then, isn't it? 

Not really.   The life assurance wrapper effectively became so niche following tax changes that made it obsolete for most people.  The lack of flexibility, which just cannot exist on an endowment, made it something that most dont want.   The market just went away.       When you can put £20k a year into an ISA and have a portfolio of over £100k in a GIA without paying tax, there isn't going to be much of a need for a further tax wrapper for the majority.

The tax changes were in the mid 80's, as I'm sure you well know. Endowments were still being pushed by the financial services industry in the 90's, despite the lack of tax advantages, and at a time tax wrappers like PEPs (forerunner of ISAs) were available. I got the hard sell on endowments both times I went for a mortgage, in the early and late 90's.

I can see they might have had some benefit in the 70's and early 80's as they were basically a savings product disguised as an insurance, since the Labour govt of the 70's thought savings were an evil capitalist thing and had a savings supertax, whereas insurance is a nice fluffy socialist concept and should get tax relief. Endowments had the tax treatment of an insurance as of course they included an insurance element, but they were primarily a savings product.

But the Thatcher govt changed all this by abolishing the savings supertax and abolishing the tax relief on endowments, exposing the inflexible high charging rubbish underneath the wrapper. So they should have gone obsolete then, in the mid 80's not late 90's.

But there were too many vested interests in the financial services industry to allow that to happen.

dunstonh

The tax changes were in the mid 80's, as I'm sure you well know. 

Which year in the 80s did ISAs start?

Which year in the 80s did the divendend allowance and taxation on dividends change that made unwrapped more tax efficient than insured?

Endowments were still being pushed by the financial services industry in the 90's, despite the lack of tax advantages, and at a time tax wrappers like PEPs (forerunner of ISAs) were available

Regular contribution PEPs typically had a minimum contribution level of £100pm.  That put them out of reach for most people at that time.

I got the hard sell on endowments both times I went for a mortgage, in the early and late 90's.

Early 90s I can understand.  late 90s, less so.

I can see they might have had some benefit in the 70's and early 80's as they were basically a savings product disguised as an insurance, since the Labour govt of the 70's thought savings were an evil capitalist thing and had a savings supertax, whereas insurance is a nice fluffy socialist concept and should get tax relief. Endowments had the tax treatment of an insurance as of course they included an insurance element, but they were primarily a savings product.

They had also never failed to hit target and the surpluses paid were massive.  However, that had nothing to do with the tax wrapper.  It was inflation.

But the Thatcher govt changed all this by abolishing the savings supertax and abolishing the tax relief on endowments, exposing the inflexible high charging rubbish underneath the wrapper. So they should have gone obsolete then, in the mid 80's not late 90's.

The charges were high because inflation was so high and returns were so high.  They margin of gains on investments over cash allowed such a high margin to exist back then.

Well, when you continually state stuff like "our portfolios have consistently outperformed multi-asset funds after charges" while advertising that you're an IFA in your signature, it certainly looks like it. Maybe I'm too cynical...

I was waiting for that to appear.   You get goading into proving information and when you do you then get accused of advertising.  If you have a problem then report my posts.   Advertising is a breach of board rules and let them deal with it.

[Deleted User]

Linton said:

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.

1. Once you subtract the higher costs for active investment in Europe, most will do worse.  Individual investors are getting a lot smarter. And they put money into a pension scheme and it stays there regardless of the market noise. And the market is dominated by institutional investors, endowment funds, etc which are  run by well educated professionals. Hoping to win dumb money from naive punters making ”mistakes” is optimistic.

2. Passives never top the rankings in any given year. But our  chances of picking a few funds that both survive long term AND beat passive low cost investments are poor. If you really want to be active, pick stocks. At least they are not handicapped by the ongoing charges. 

3. Finding a good solution is easy with the tools we have today. I am very sceptical that an interview or forms would allow a third party to understand your needs. Peoples’ answers to questions on risk tolerance change depending on the weather and news from the stockmarket. Is everyone going to be honest with an IFA about potential trouble with the spouse?   An advisor could be helpful when there is a specific technical issue that can be resolved once and for all and when errors have major implications. Or if the client is too lazy to read a 100 page book and/or cannot count. 

4. Really?

barnstar2077

I came online before bed to catch up on the forum, and only managed to read this thread! : )

zagfles

dunstonh said:

The tax changes were in the mid 80's, as I'm sure you well know. 

Which year in the 80s did ISAs start?

Which year in the 80s did the divendend allowance and taxation on dividends change that made unwrapped more tax efficient than insured?

Endowments were still being pushed by the financial services industry in the 90's, despite the lack of tax advantages, and at a time tax wrappers like PEPs (forerunner of ISAs) were available

Regular contribution PEPs typically had a minimum contribution level of £100pm.  That put them out of reach for most people at that time.

I got the hard sell on endowments both times I went for a mortgage, in the early and late 90's.

Early 90s I can understand.  late 90s, less so.

I can see they might have had some benefit in the 70's and early 80's as they were basically a savings product disguised as an insurance, since the Labour govt of the 70's thought savings were an evil capitalist thing and had a savings supertax, whereas insurance is a nice fluffy socialist concept and should get tax relief. Endowments had the tax treatment of an insurance as of course they included an insurance element, but they were primarily a savings product.

They had also never failed to hit target and the surpluses paid were massive.  However, that had nothing to do with the tax wrapper.  It was inflation.

But the Thatcher govt changed all this by abolishing the savings supertax and abolishing the tax relief on endowments, exposing the inflexible high charging rubbish underneath the wrapper. So they should have gone obsolete then, in the mid 80's not late 90's.

The charges were high because inflation was so high and returns were so high.  They margin of gains on investments over cash allowed such a high margin to exist back then.

Well, when you continually state stuff like "our portfolios have consistently outperformed multi-asset funds after charges" while advertising that you're an IFA in your signature, it certainly looks like it. Maybe I'm too cynical...

I was waiting for that to appear.   You get goading into proving information and when you do you then get accused of advertising.  If you have a problem then report my posts.   Advertising is a breach of board rules and let them deal with it.

The tax changes I was talking about were in the 80's - the tax relief on endowments and the savings supertax being abolished, those which made endowments a "tax wrapper". Not ISAs. But you knew that. They didn't all hit their targets, and they certainly underperformed compared with similar risk investments even if inflation didn't make them look at bad as they actually were. The underperformance was mainly due to the high charges.

Reporting - thanks, good idea, let the forum team decide. Maybe it's my cynicism but even apart from stuff like the above your posting style in general does give the appearance of someone with a vested interest, an agenda to pursue, rather than someone prepared to debate and discuss objectively and fairly. I'm sure you'll throw that back at me, but the difference is, I don't sell financial services nor work in the financial sector so I have no conflict of interest between discussing financial matters here and my livelihood.

BTW I apologise, and I really mean that, if you never let your personal professional interests influence what you post here. It just doesn't come across that way, to me anyway. 

zagfles

aekostas said:

zagfles 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.

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.

Ah great stuff. I am familiar with the pattern through Fantasy Football. Well, 22 years on the same product, I cannot be accused of being rash in this respect.  

Thanks for all the other answers. Out of curiosity, what would have been a reasonable (not optimal) return over this period?

It depends on the level of risk - I had a small amount in a bog standard stakeholder pension over a bit shorter period and that went up about 160% (ie to 2.6 x the original value) from about 2002-2020. But I also had an ISA that went up about 300% (4 x original value) between 1997 and now but that was mainly in stuff at the high end of the risk scale (emerging markets etc).