The "Balanced" (60/40?) Investor: Topic for Discussion & Analysis | New Thread

Thrugelmir

ZingPowZing said:

It is worth saying that no-one  on the board is truly neutral.

Be wary of posters who adopt an authoritative tone, there's usually a pre-existing position to bolster.

This isn't Reddit or Facebook. No plants on here. 

Prism

ZingPowZing said:

It is worth saying that no-one  on the board is truly neutral.

Be wary of posters who adopt an authoritative tone, there's usually a pre-existing position to bolster.

Nothing anyone on here could say would have any real effect on a share price or position, maybe with the exception of the 'punt' thread.

Alexland

Prism said:

Nothing anyone on here could say would have any real effect on a share price or position

Well we tried on that Unilever thread and the share price is broadly unchanged.

https://forums.moneysavingexpert.com/discussion/6239220/unilever-shares/p1

If we can't even hype a good company what hope do we have with a retail games shop!

[Deleted User]

No, I don't mean ramping a price. I mean backing your prejudice as if it were impartial.

So if you have a pre-existing investment position, for example "Don't hold FAANG stocks because they are overvalued and overdue a correction," or "invest according to reversion to the mean," then subsequent posts are likely - however obliquely - to support your agenda.

[Deleted User]

The above sounds a bit harsh, but it is only nature; we all want to be right in the end, especially after digging heels in.

Thrugelmir

ZingPowZing said:

The above sounds a bit harsh, but it is only nature; we all want to be right in the end, especially after digging heels in.

Having humility makes all of us better investors.  Only fools will invest and expect to make good picks every time. Nothing sedates rationality like large doses of effortless money on the back of a rising market. 

JohnWinder

ivormonee said:

And how to you measure performance? What benchmark(s), if any, do you use?

35 posts on, without anyone satisfying you, you may be pointing at the elephant in the room. I'll have a shot.

For benchmarking performance, funds need to be matched for risk and perhaps asset type for it to be meaningful.

A couple of approaches are either: against an absolute standard eg inflation +2%, or a market index;  or against another fund in the same category. The former is an absolute benchmark, the latter a relative one.

For a passive fund you could use the former because the fund sets out to track the index, so the performance measure is how far its return differs from the index. A relative benchmark, such as how well it tracks the index compared to a comparable index fund would add a bit more information. A relative benchmark of comparative costs would be useful if the returns did not include the effects of costs.

For an active fund, it's not so easy. if you were to compare it with an index it would need to be investing in a way representative of that index - eg same asset class, sector, region, whatever. For other active funds however, with more complex asset allocations it’s beyond the ordinary investor to find an index or mix of indices with the same risks for a valid comparison to be made, and the managers seem not to do it. I quote:

'risk-adjusted studies involve complicated computer analyses that are only available to research houses and academics. They do not reflect the information available to retail investors via advertisements, league tables or formal offer documents.'

So one is left with using the ‘inflation +2%’ type absolute benchmark, or a relative benchmark.

Once you start using a relative benchmark, ‘is this fund’s returns better than its comparators’?’, you are into the area of 'does past performance predict future performance?’. Because there is no point comparing the past performance of a fund with its comparators if that will tell you nothing about its future performance.

So what do we know about that predictability? I quote:

'Good past performance seems to be, at best, a weak and unreliable predictor of future good performance over the medium to long term.

Where persistence was found, this was more frequently in the shorter-term, (one to two years) than in the longer term. 

Short-term past performance is only correlated with short term future performance. Longer term future performance is only correlated (if at all) with longer term past performance.'

The source material is an academic review, 18 years old, commissioned by a national investments regulator titled:

'A Review of the Research on the Past Performance of Managed Funds' 

https://downloads.asic.gov.au/media/1337666/FMRC_Report.pdf

If the relevant conclusions were true then, and remain true, it suggests that many active funds have no benchmarks you and I could reliably use to evaluate them. That's could be handy for someone, just not you or me.

Prism

One of the problems with risk rated returns is that for every person that is interested in them there is someone else who claims that volatility isn't a risk at all. And yet the whole of the financial system is based on volatility as a measure of risk. So for example I could compare Vanguards LifeStrategy 80 with its 5 year standard deviation of 10.1 and Sharpe ratio of 1.02 against the active multi asset that we hold, Baillie Gifford Managed, which has a standard deviation of 11.2 and Sharpe ratio of 1.47. What does that really tell us except that the BG fund holds slightly more volatile stocks to produce its higher returns and does anyone really care at that level. The only people that are affected by the higher volatility are those in drawdown (but by how much is an individual issue) or those who might have panicked and sold out at some point due to that volatility. 

One risk is permanent loss of capital but that isn't measured as we can't tell within funds if a manager sold out of an equity at a lower value than we bought in - and is that even a problem? Cutting losses is a perfectly valid decision. All of that risk gets rolled up into absolute performance again.

Comparing multi-asset funds from a large range of allocations and volatilities seems difficult, not helped by the fact that people can't agree on what a risk actually is. Meeting your own personal goals with a low as risk as required is a perfectly fine benchmark but that one can't be used as a comparison against a benchmark. 

JohnWinder

Prism said:

 So for example I could compare Vanguards LifeStrategy 80 with its 5 year standard deviation of 10.1 and Sharpe ratio of 1.02 against the active multi asset that we hold, Baillie Gifford Managed, which has a standard deviation of 11.2 and Sharpe ratio of 1.47. What does that really tell us except that the BG fund holds slightly more volatile stocks to produce its higher returns and does anyone really care at that level.
One risk is permanent loss of capital but that isn't measured as we can't tell within funds if a manager sold out of an equity at a lower value than we bought in - and is that even a problem? Cutting losses is a perfectly valid decision. All of that risk gets rolled up into absolute performance again.
Comparing multi-asset funds from a large range of allocations and volatilities seems difficult, not helped by the fact that people can't agree on what a risk actually is. Meeting your own personal goals with a low as risk as required is a perfectly fine benchmark but that one can't be used as a comparison against a benchmark. 

Yes it tells us that about the BG fund except I'd use the past tense, but I think it also tells us that the BG fund was a better fund to hold than the VLS80 over the past 5 years because it gave higher risk adjusted returns. Even if you thought VLS80 and the BG fund were too risky for you, you could dampen the risk by holding some risk free assets as well, like cash or short term government bonds. BG was clearly the winner recently; how confident can anyone be that it will continue to be? Not at all from what I quoted previously, but we might be confident enough for the less risk averse amongst us.

Eco_Miser

ZingPowZing said:

It is worth saying that no-one  on the board is truly neutral.

Be wary of posters who adopt an authoritative tone, there's usually a pre-existing position to bolster.

he said, authoritatively.

Yes, everyone has an opinion, and their posts are likely to reflect that opinion. Readers need to decide whether those opinions are fair reflections of reality.