Pension Reset - what your asset/geographic allocation be?

JustAnotherSaver

dunstonh said:

Pulling random numbers out of a hat as long as they add up to 100% is not how you build a portfolio.  Sure you can do it but the lack of structure means you are attempting to be a fund manager and chances are you do not have the skills and knowledge to be a fund manager or access to the data required to build structured portfolios.    So, why would you do it?

Would you be in agreement with Lars Kroijer's outlook for 99% of DIY investors out of interest?

Not for a minute do I believe you'll break the habit of a lifetime by answering a question with anything other than a question but your above post made me curious enough to ask.

[b]EDIT[/b]: Also, you wouldn't need to use my 99% to give a politicians response For 99% read vast majority rather than a scientific poll resulting in an accurate figure of 99%.

kinger101

I'd personally be considering diversification across sectors and asset classes rather than just geography.  Most large-caps trade globally.

Thrugelmir

JustAnotherSaver said:

dunstonh said:

Pulling random numbers out of a hat as long as they add up to 100% is not how you build a portfolio.  Sure you can do it but the lack of structure means you are attempting to be a fund manager and chances are you do not have the skills and knowledge to be a fund manager or access to the data required to build structured portfolios.    So, why would you do it?

Would you be in agreement with Lars Kroijer's outlook for 99% of DIY investors out of interest?

US investors are effectively holding the S&P 500 within a global tracker fund. The additional companies within the index now simply add international diversification. With the $ as their home currency then there's no currency risk exposure for them. Unlike international investors who will have increasing levels of exposure depending on their home domestic weighting within the index. 

A few years ago the weighting of US companies within a global index was around twice the US's share of global GDP. With the increased valuations in some stocks then can only be even higher now. 

chiang_mai

Food for thought: "diversification is protection against ignorance. It makes little sense if you know what you are doing." 
Warren Buffet

eskbanker

ZingPowZing said:

eskbanker said:

3. I'm not convinced that it's particularly helpful or accurate to characterise diversification as a zero-sum game, but even if the opinion has merit, that doesn't make it a fact!

It's a fact that if a hundred (or ten thousand) people, allocated one investment each, decided to pool their investments, it would make zero difference to the collective value of their investments.

Trouble is, that describes neither diversification nor a zero-sum game in any sense relevant to the scenario giving rise to this thread, which, let's not forget, is an investor looking to achieve a broad spread of holdings across multiple geographies.  Or are you suggesting that those who believe your glib mantra should somehow be discouraged from diversifying, on the simplistic basis that for every win someone else must be losing (and vice versa of course)?

chiang_mai said:

Food for thought: "diversification is protection against ignorance. It makes little sense if you know what you are doing." 
Warren Buffet

I largely agree with this and posted a similar point recently (without awareness of that quote), i.e. that there are many who can (and do) make a success out of buying individual stocks, but that they're unlikely to be the ones asking what to do on public web forums!  In other words, is diversification a one-size-fits-all 'right' answer for everyone, no, absolutely not, but is it a generally sound principle for inexperienced investors seeking guidance on portfolio construction, probably yes....

https://forums.moneysavingexpert.com/discussion/comment/78175896#Comment_78175896

JohnWinder

You’re in a good position, on the right track. As noted, remember you’re perhaps investing for 45 years (until death, not start of retirement), and at sometime (decades) you might be wanting to hold some less volatile assets. Back to now….

DoctorStrange said:

...but I guess I thought trying to make a global portfolio of different allocations (e.g. 30% UK, 45% US, 15% Asia Pac, 10% EM) would offer more flexibility.

Those certainly don’t look random to me, and seem quite sensible, but you’re making work for yourself in having to re-balance them as they drift - that’s simple when you’re adding money to the pile continuously - but it also involves making decisions about what percentages they should be, and the more funds you have the more expenses there are likely to be. You also compound the problem of currency hedging if you wish to hedge any. Not a hanging crime, but there’s worse to come:

dunstonh said:

... add up to 100% is not how you build a portfolio.  Sure you can do it but the lack of structure means you are attempting to be a fund manager and chances are you do not have the skills and knowledge to be a fund manager or access to the data required to build structured portfolios. 

You’re taking on, in a modest way, the role of an active fund manager. They’ve demonstrated that over your type of periods most cannot beat an index fund; so even if you were as good as them why would you risk it? The obvious answer is that you’re happy with the risk so as to get above market returns, but just be aware of the reality if you dreams include successful financial stewardship. On the plus side you’d be well diversified, but you’d likely lose out with costs and under-perform compared to a cap weighted fund(s). But if you decide to go your own way, have the strategy well described and stick to it through thick and thin because that’s the best way of it achieving its potential.

Everyone, even the dullest amongst us, can get equity market returns (less costs) with a well diversified cap weighted passive fund, our share of the economic bounty. That’s the beauty of diversification. If you choose to hold just a selection of the market, you can get better than market returns or you can get worse returns, depending on your choices. People ask ‘why hold any of the many stocks which will turn out to be duds?’. Sadly it’s proven hard to identify them reliably, and at worse they can only fall 100% in value. The smaller number of good performers which are responsible for market returns being as good as they are can rise 100’s, 1000’s or 10,000’s of percents, so they’re the ones you have to hold. The surest way is to hold them all.

I'm not fussed about short term drops/corrections and believe the 20 year horizon will iron those out;

To reiterate, if you’re investing for 20 years, in 15 years you have a 5 year horizon.

I'm unsure which sectors / geographies will outperform the next 10/20 years (obviously none of us are sure, but folk here have opinions and those are what I'm after so I can see which I agree/disagree with and adjust accordingly)

Yes, it’s good to get other views, but it remains that you’re trying to beat the market. For all the above market returns there must be below market returns. I don’t think one can choose to be in the winning group rather than the losing group, it’s down to luck or skill (and in an efficient market, it would have to be mostly luck). How much ‘home bias’ and how much currency hedging seem to me worth focusing on. The rest of it can be: plenty of diversification; low costs; index tracking because we don’t know which active managers will do better/worse; sticking to your plan.

[Deleted User]

eskbanker said:

ZingPowZing said:

eskbanker said:

3. I'm not convinced that it's particularly helpful or accurate to characterise diversification as a zero-sum game, but even if the opinion has merit, that doesn't make it a fact!

"It's a fact that if a hundred (or ten thousand) people, allocated one investment each, decided to pool their investments, it would make zero difference to the collective value of their investments."

 Trouble is, that describes neither diversification nor a zero-sum game in any sense relevant to the scenario..

Really? I thought the first half of the statement was an accurate description of diversification stripped of window-dressing, and the second the outcome in every case, which is net zero overall. So I'm really keen to learn what diversification really is, particularly the model of diversification that acts like a brick dropped in a tank and raises the overall level of the collective investment. 
  
..which, let's not forget, is an investor looking to achieve a broad spread of holdings across multiple geographies.
Amongst other things, if you read the whole of the OPs input. But I suspect that Dr Strange, like me, would swap all that good advice for the version of diversification that performs alchemy and increases the aggregate value of its component parts. I'm all ears anyway.

Warren Buffet

Obviously we're discussing the +/- of diversification strategy, not the placebo effect. 

[Deleted User]

DoctorStrange, with a quarter of a million already in your SIPP and twenty years to retirement, you may be on course to reach LTA without changing very much at all. Imo it's not a good idea to let tax be the tail that wags the dog but may be another thing to consider in your case.

Linton

ZingPowZing said:
.....
So I'm really keen to learn what diversification really is, particularly the model of diversification that acts like a brick dropped in a tank and raises the overall level of the collective investment. 

.....

A bit late in the discussion for you to be asking what diversification is.  Let me help....

Diversification is the holding of as wide a variety of underlying assets as is reasonably possible whilst achieving one's objectives.  To go into more detail:
There are a number of ways of categorising equities into different groups based on a single factor:
1) Geography
2) Developed vs less developed markets
3) Business sector
4) Company size
5) Company maturity - growth vs value
and no doubt others

With good diversification in a portfolio no single group should take a dominant %  and all should be represented to some extent.  The purpose is to ensure that in the short/medium term no problem localised to an individual company, geography or sector etc  can seriously impact your portfolio and conversely in the long term you take advantage of otherwise neglected areas that could provide major growth.

These considerations tie into rebalancing. Clearly if one group does begin to crowd out the others it would be irrational not to limit the % allocation and give other groups more opportunity to contribute.

In order to compare one portfolio's diversification with another one can make specific measurements, for example:
1) % allocation to each group
2) % allocation to largest holding
3) % allocation to top 10 holdings

eskbanker

ZingPowZing said:
I'm really keen to learn what diversification really is, particularly the model of diversification that acts like a brick dropped in a tank and raises the overall level of the collective investment. [...] But I suspect that Dr Strange, like me, would swap all that good advice for the version of diversification that performs alchemy and increases the aggregate value of its component parts. I'm all ears anyway.

You're not all ears though, that's the issue - you accepted earlier in the thread that the primary rationale for diversification isn't value growth ("diversification isn't necessarily about maximising performance but managing risk...."; "Agreed again. [So long as managing risk is the main concern of the OP.]") but continue to cling to the trite soundbite about a zero-sum game as if it's meaningful or relevant.  It could just as easily be asserted that investing itself is a zero-sum game and choose to interpret that as meaning that nobody should invest....