Passive + active investment? Or just passive?

BananaRepublic

TheLittleSaver said:

Thanks grumiofoundation for the link, I'm actually reding it now, and so far I guess the choice is between Vanguard and Fidelity.
Anyway I'll look more into it before choosing, thanks again.

@BananaRepubblic May I ask you why you even consider passive funds a big mistake? I am actually reading that active funds doesn't usually outperform passive ones in the long run, like 5-10+ years (and for me, I am investing so that I would HOPEFULLY get some decent money for my retirement, so I don't really care about "winning" 3k now, to then loose 2.9k next year ahahah).

Anyway I now agree that investing in shares is not a good move, especially for someone like me who doesn't have much experience, but I will keep researching as you suggest.

I didn’t say that passive funds are a mistake. In some markets and sectors passive funds are in the view of many people the best choice. North America is a good example. My mistake was to put some money into passive funds in a market with modest returns. 

The argument between active and passive funds is complex, and each side has adherents. Passive fans point out that on average active funds underperform and overcharge. There are some active funds that are abysmal and no doubt the managers enjoy a very comfortable lifestyle. Often an active fund has a winning streak through luck, followed by years of underperformance. The LF Woodfood Equity Income fund is a good example. There are also some active funds that have outperformed the markets over many years. The Jupiter European fund is a good example. One advantage of active funds is that they provide exposure to markets and sectors which have no index funds. 

Do your own research and form your own opinions. As an aside take a look at pension funds. I’ve had many from various jobs, and all have been mediocre performers. The cynic would  say that providers of company pension funds care only about their remuneration, and are skilled at marketing sub standard products to company managers. 

Lastly, investing in shares can be a good idea, but it’s much more risky than for example buying shares in tracker funds, Not for the beginner, and not for me either. 

Alexland

If you are a sole trader rather than a ltd company director have you considered if a S&S Lifetime ISA might be more beneficial than making personal pension contributions? Same 25% uplift as basic rate contributions but no possibly of tax on withdrawal. Pensions are better if you are a higher rate taxpayer or likely to otherwise leave an estate subject to inheritance tax.

TheLittleSaver

Alexland said:

If you are a sole trader rather than a ltd company director have you considered if a S&S Lifetime ISA might be more beneficial than making personal pension contributions? Same 25% uplift as basic rate contributions but no possibly of tax on withdrawal. Pensions are better if you are a higher rate taxpayer or likely to otherwise leave an estate subject to inheritance tax.

Yes, I am a sole trader, but now I am getting confused... I thought that the Vanguard Life Strategy package was a S&S LISA? If not, are you saying that a S&S LISA is better than the Vanguard 60/40 Life strategy package (as in, in the long run, 20/30 years, it would potentially perform much better)?

I'm sorry if they sound like silly quesitons, but as I said I just want to be sure I get some decent money out of my savings once I reach retirement age, something that is much better than just letting my saving sit in a saving account that gives you almost nothing.

So I would really appreciated if you could shed some light on the above. Thanks.

Alexland

VLS is an investment fund series which like other funds, ETFs or individual company shares can be held in a variety of tax efficient wrappers such as a S&S ISA, S&S Lifetime ISA or Pension.
If you go direct with the Vanguard Investor platform they offer S&S ISAs and Pensions but not S&S Lifetime ISAs. If you want a S&S Lifetime ISA then you would need to use a provider who offers them such as EQi who give access to thousands of funds including the VLS series.
It's a bit complicated but there are different platforms offering different tax wrappers and access to different investment funds. As a DIY investor you need to work out which combination(s) is/are suitable for your circumstances.

TheLittleSaver

Alexland said:

VLS is an investment fund series which like other funds, ETFs or individual company shares can be held in a variety of tax efficient wrappers such as a S&S ISA, S&S Lifetime ISA or Pension.
If you go direct with the Vanguard Investor platform they offer S&S ISAs and Pensions but not S&S Lifetime ISAs. If you want a S&S Lifetime ISA then you would need to use a provider who offers them such as EQi who give access to thousands of funds including the VLS series.
It's a bit complicated but there are different platforms offering different tax wrappers and access to different investment funds. As a DIY investor you need to work out which combination(s) is/are suitable for your circumstances.

Thanks Alexland, looks like I need to do much more research than I thought!

JohnWinder

BananaRepublic said:

Passive fans point out that on average active funds underperform and overcharge. ... There are also some active funds that have outperformed the markets over many years. The Jupiter European fund is a good example. One advantage of active funds is that they provide exposure to markets and sectors which have no index funds.

There's theory, to two decimal places, and there's approximations. This is a bit more like the latter: passive investors can only get market returns, less frictional losses like trading costs as well as manager fees. All other investors are 'active' ones, and they also, as a whole (or 'on average') can only get market returns because the passive ones have taken market returns from the market which only leaves market returns for the active folk. So at that level there should be no underperformance.

But then the costs come in, and if the active trade more they have more costs. Worse, while the passive investors all get the same returns of the market they're in, the active ones who outperform the market must be taking some of the market returns from other active ones who will now be underperforming. If you buy into an active fund, and wish to outperform a comparable passive one, you have to pick the active one which will outperform in the future; no one's ever demonstrated how to do that reliably, or at least told readers of this forum.

Costs for active fund managers ought to be higher if they trade more than passive managers. As well, customers will pay a fee premium if they can be convinced that the active fund will outperform the index; so investors in active funds possibly pay a bit for their faith in the fund manager which in the majority of cases will be ill-founded according to the SPIVA research each year/half year.

Can I ask what market and what sector we might want to invest in that is not covered by a decent index fund?

Prism

JohnWinder said:

BananaRepublic said:

Passive fans point out that on average active funds underperform and overcharge. ... There are also some active funds that have outperformed the markets over many years. The Jupiter European fund is a good example. One advantage of active funds is that they provide exposure to markets and sectors which have no index funds.

There's theory, to two decimal places, and there's approximations. This is a bit more like the latter: passive investors can only get market returns, less frictional losses like trading costs as well as manager fees. All other investors are 'active' ones, and they also, as a whole (or 'on average') can only get market returns because the passive ones have taken market returns from the market which only leaves market returns for the active folk. So at that level there should be no underperformance.

But then the costs come in, and if the active trade more they have more costs. Worse, while the passive investors all get the same returns of the market they're in, the active ones who outperform the market must be taking some of the market returns from other active ones who will now be underperforming. If you buy into an active fund, and wish to outperform a comparable passive one, you have to pick the active one which will outperform in the future; no one's ever demonstrated how to do that reliably, or at least told readers of this forum.

Costs for active fund managers ought to be higher if they trade more than passive managers. As well, customers will pay a fee premium if they can be convinced that the active fund will outperform the index; so investors in active funds possibly pay a bit for their faith in the fund manager which in the majority of cases will be ill-founded according to the SPIVA research each year/half year.

Can I ask what market and what sector we might want to invest in that is not covered by a decent index fund?

I am not debating that most active funds underperform - they do. However the whole market is certainly not made of just passive and active funds. How about all of the individual stocks investors of the world? Pension funds, hedge funds, international traders.. Somebody has to perform for another to do better but there an awful lot of underperformers about.

So we are back to the original question - can someone pick an active fund ahead of time to outperform that sector? I have never found it that hard. Or alternatively, is pure performance not the goal - maybe its wealth preservation or strategic bonds or private equity. Lots of reasons for a bit of both in a portfolio.

JohnWinder

Prism said:

I am not debating that most active funds underperform - they do. However the whole market is certainly not made of just passive and active funds. How about all of the individual stocks investors of the world? Pension funds, hedge funds, international traders........there an awful lot of underperformers about.

Thanks for weighing in in this thread. Lots to learn for many of us. For me, how to get ahead with active investing.

I had that very thought in mind, which is why I referred to 'investors' rather than 'funds'. I hadn't intended to suggest the whole market is only fund managers, either passive or otherwise.

Indeed there are a lot of underperformers out there investing, funds and individuals by the tens of thousands. Thus, you'd imagine that the active fund managers with all the resources and contacts at their disposal would be able to get above market returns at the expense of the stock picking mugs like me. But they don't, so it just can't be that easy.

I wouldn't expect you to give us the secret sauce for how to identify managers or funds that will outperform into the future, but can you point to anywhere that someone has described a reproducible method to identify such funds, which we can judge by subsequent results, and can't reasonably be attributed to luck?

fred246

It's interesting thinking what is allowed in a portfolio. Someone on here recently said "I am glad I used an IFA he put 6% of my money in Baillie Gifford American and it has made 100%". I thought well if he is so clever why didn't he put 100% in to that fund? That would have been seen to be unacceptable. Putting 100% into a Global passive fund such as Vanguard FTSE Global All cap with 6884 stocks would be OK. Very volatile but OK. So active funds are less trustworthy because they have lower number of stocks. So active funds are only acceptable if you have plenty of them. Hedging your bets. So you could have a portfolio of a large number of active funds. A lot of portolios are composed of a large passive component and then a reasonably large number of active funds. This is what advisers do to make make the portfolio look complicated. 100% passive and there isn't much to talk about except the global economy. 30 active funds and you can chat all day long.

fred246

I had a work colleague who used to bet on horses. He reckoned that he had made an absolute fortune. Instead of concentrating on his work he had his laptop watching the horses and putting bets on with all sorts of  bookmakers. I found all this confusing. Surely people always lost on betting. Had he found a certain way? Should I give him my money and tell him to double up his bets for me? Should everyone give him their money. I decided he was doing well for now but eventually his luck would turn. I think it's the same for active fund managers. On average they should make the same as a tracker minus their costs. A few will do really well and a few really badly. So why not just have the tracker 100% and avoid their costs? That's what I do. Just for the equities I mean.