Pension Reset - what your asset/geographic allocation be?

[Deleted User]

Thrugelmir said:

ZingPowZing said:

About ten individual stocks. 
I have been invested in most for a dozen years or more. I had a reset after 2007. 
Biggest investment currently is in Apple, about 30% of total. Judges have been telling me it is overvalued since my first purchase. 

How correlated are the ten stocks?  High weighting to the US? 

Sorry for not replying sooner, Thrugelmir: just seen this.

I have a high weighting to the UK but consider it unavoidable - my property, state pension, salary and savings are valued in £.
So, with that overview, I am heavily invested in US stocks - the type of company that the UK does not have. No investments elsewhere. I get why people think we all should have a stake in Alibaba etc, but wasn't BRICS the future ten years ago? Consumer wise, there are are no "have nots" there are only "have laters", so - while recognising that the USA and Europe will comprise an ever shrinking proportion of GDP, it will become ever more important in the 21stC as the "shop window" of the world.

Deliberately high correlation between my investments but not in the obvious way and I think the usual definitions are a bit comical: I can see that Tesco and Sainsbury are highly correlated but two "tech companies."?

But I acknowledge that this is all "in my opinion", which is somewhat at odds with ideas - diversification good, correlation bad - in which most readers (or posters at least) are long-time "invested".

DairyQueen

DoctorStrange said:

My pension is lop sided through years of neglect and I'd like to 'reset' it. 

I've got £250k with maybe 20 years to retirement, and I'm quite happy to be on the moderate-to-high side of risk, so I'm thinking 100% equity is ok?

So, if you had a SIPP with £250k in cash in it today, how would position it for the next few years?

OP: As you can tell from the numerous-page debate, your question isn't as straightforward as you would imagine. 

Basic rules of investing:

- Know your attitude to risk. 100% equities isn't 'moderate-to-high' it's high risk (i.e. high volatility).
One way to gauge your tolerance to risk is to 'what if' your proposed equity %age value and half it. When you reach a figure that allows you to sleep nights without selling then double it and that's the equity %age of your portfolio you should hold. A high risk tolerance (80%+ equities) on a £250k portfolio could experience a drop of £100k+ in a market crash.

- Know your aims. 
Are you trying to beat the market? My experience suggests that only those who are... a) very experienced.... b) greedy.....c) suffering from hubris.....d) very naive attempt this. Most MSE-ers are enthusiastic amateurs and, over years, have learned our limitations. I don't attempt to beat the market and I am satisfied with gains that out-pace inflation. This is best achieved through diversification. 

- Know your investment horizon.
This is a retirement portfolio and, unless you plan to buy an annuity when you retire, your investment timescale is 30+ years post retirement so, in your case, 50+ years.

I will stick my neck-out and reveal the strategy behind our portfolio. Note that I am 20 years ahead of you in age and DIY-experience. Caveat emptor applies.

- First cut = asset type.
In our case we can afford to go high risk (sufficient guaranteed income and other assets/cash to suspend drawdown)
So, we are 78/9/13 equity/bonds/cash.  The cash is high as we intend to frontload drawdown. The equity %age will increase as cash is drawdown.

- Second cut = geography
Globally diversified but deliberately overweight UK and China. The former because I believe the UK is undervalued and the latter because, despite the 'anti-capitalist' regime, China is now the world's 2nd largest economy and rapidly gaining on the US. Its economic success has been nothing short of amazing over the last 30 years. The UK overweight is achieved via Vanguard's VLS funds. China via specialist active fund managers. I am also concerned about the dominance of the US indexes of a handful of tech mega-caps.

- 3rd cut = passive v active
68% of our portfolio is passively invested in global trackers and 19% with active managers.  Global trackers do not include small caps (a relative term) and this area of the market is highly specialised. With that in mind I choose to invest in actively managed small-cap funds that specialise in specific regions. I also opt for active managers for our smidge of wealth preservation and some of our bond allocation. For the record, the actively managed part of our portfolio has significantly outperformed the trackers over the last year. 

Diversification is the over-riding strategy. There is no way I expect to outperform professionals or even DIY experts. Nor hope to outperform an efficient market unless hanging-on the coat-tails of a smart fund manager. Fund managers rarely shine over long periods but each has a specialism whose time may come over a long investment period. Choose wisely (not those who are flavour of the month/year).

I am now considering 'value' funds as a possibility for future tweaks of the actively-managed part fo our portfolio. I am also considering commodities/gold as a bond-proxy. I have been leery of bonds for the last few years as their historic (inverse) link to equities has been broken courtesy of QE. 

One thing I would definitely not support - single-share investing. Been there, done that, ironed the t-shirt. Like many on here I have experienced everything from 100% gains to 100% losses over short periods. This is not the way to build wealth over the long-term.

DairyQueen

P.S.

OP: With the benefit of hindsight I would have followed the following strategies at your age:

1) Not that interested.
100% equities. Park in low-cost global tracker

2) Interested.
100% equities. 80% in low-cost global tracker and 20% in actively-managed specialist funds.

DoctorStrange

Thanks DairyQueen.

Couple of points:

Risk. 
I said "moderate to high" as I believe that the 20yr timeframe negates a lot of the risk. I'm happy to sit on a 50% loss in the SIPP and allow it time to recover (no choice anyway given I can't access it!). I mentioned 20 years as the positioning would be adjusted as I get closer to accessing the money (i.e. in 15 years or so I'd start to reduce equity and increase cash/bonds, depending on conditions at the time) but for now the focus should be on growth in my opinion and cash/bonds will act as a drag on that. 

Geography 
I'm also overweight UK and I'm wary of the US being overvalued. I do need to include some China though so will look into that in more detail. 

Active/Passive 
Most of mine is passive just now, but I'll be adding some active small caps shortly, primarily to diversify but also hoping that it's sector that might outperform in the next 5-10 years. 

I do have some single shares which I'm looking to exit as I agree its not sustainable without high conviction.

[Deleted User]

Invest 100% in equities but don't pick single stocks?

[Deleted User]

DoctorStrange said:

I do have some single shares which I'm looking to exit as I agree its not sustainable without high conviction.

I think single shares are sustainable so would be happy to run a +/- on the premise that you sell them to me.

Which shares are these, Dr Strange?

JohnWinder

DairyQueen said:

Basic rules of investing:

- Know your aims. 
I don't attempt to beat the market ....

- Second cut = geography
Globally diversified but deliberately overweight UK and China. The former because I believe the UK is undervalued and the latter because, despite the 'anti-capitalist' regime, China is now the world's 2nd largest economy and rapidly gaining on the US. ....... I am also concerned about the dominance of the US indexes of a handful of tech mega-caps.

..... and 19% with active managers.  Global trackers do not include small caps (a relative term) and this area of the market is highly specialised. With that in mind I choose to invest in actively managed small-cap funds that specialise in specific regions. I also opt for active managers for our smidge of wealth preservation and some of our bond allocation. For the record, the actively managed part of our portfolio has significantly outperformed the trackers over the last year. 

Diversification is the over-riding strategy. There is no way I expect to outperform professionals or even DIY experts. Nor hope to outperform an efficient market unless hanging-on the coat-tails of a smart fund manager. Fund managers rarely shine over long periods but each has a specialism whose time may come over a long investment period. Choose wisely (not those who are flavour of the month/year).

Thanks for sharing that. Obviously thought out and soundly based on some accepted truths, so I wouldn’t suggest any changes; but lest someone thinks ’that sounds good, I’ll go for that’ I’ll raise just a couple of concerns and questions.

I don't attempt to beat the market....

....and 19% with active managers

They’re inconsistent on the face of it, but you explained that there were no diversified funds which include small cap although they are appearing now.

Secondly, I think there’s a general recognition that a growing economy doesn’t equate to rising equity returns. 'To many investors, it seem obvious that, as a nation’s population and GDP grows, so should its stock prices; there ought to be a direct positive relationship. Unfortunately, there is not.’   Here’s some discussion to get it started: https://www.bogleheads.org/forum/viewtopic.php?t=194296

 I am also concerned about the dominance of the US indexes of a handful of tech mega-caps.

That’s reasonable to be concerned, but should you deviate from a market cap, broad based index fund as a result? Active fund managers deviate for all sorts of concerns and reasons, but the majority can’t out-perform a comparable index funds over periods exceeding about 3-5 years. Is it really wise to, effectively, bet against the wisdom of the whole market in the pricing of tech stocks? You can win out, or lose out. The amount of money that wins out can only equal the amount that loses out since both groups of investors represent the whole market. It suits some folk to take that gamble, but it needs to be recognised for what it is.

For the record, the actively managed part of our portfolio has significantly outperformed the trackers over the last year. 

Sadly, one year doesn’t count when we’re investing for 40 years.

Fund managers rarely shine over long periods but each has a specialism whose time may come over a long investment period. Choose wisely (not those who are flavour of the month/year).

How does do that? Is there any performance evidence to validate the way one chooses wisely? And ideally, was the way to choose described at the beginning of the period covering the performance, not at the end?

DairyQueen

JohnWinder said:

DairyQueen said:

Basic rules of investing:

- Know your aims. 
I don't attempt to beat the market ....

- Second cut = geography
Globally diversified but deliberately overweight UK and China. The former because I believe the UK is undervalued and the latter because, despite the 'anti-capitalist' regime, China is now the world's 2nd largest economy and rapidly gaining on the US. ....... I am also concerned about the dominance of the US indexes of a handful of tech mega-caps.

..... and 19% with active managers.  Global trackers do not include small caps (a relative term) and this area of the market is highly specialised. With that in mind I choose to invest in actively managed small-cap funds that specialise in specific regions. I also opt for active managers for our smidge of wealth preservation and some of our bond allocation. For the record, the actively managed part of our portfolio has significantly outperformed the trackers over the last year. 

Diversification is the over-riding strategy. There is no way I expect to outperform professionals or even DIY experts. Nor hope to outperform an efficient market unless hanging-on the coat-tails of a smart fund manager. Fund managers rarely shine over long periods but each has a specialism whose time may come over a long investment period. Choose wisely (not those who are flavour of the month/year).

Thanks for sharing that. Obviously thought out and soundly based on some accepted truths, so I wouldn’t suggest any changes; but lest someone thinks ’that sounds good, I’ll go for that’ I’ll raise just a couple of concerns and questions.

I don't attempt to beat the market....

....and 19% with active managers

They’re inconsistent on the face of it, but you explained that there were no diversified funds which include small cap although they are appearing now.

Secondly, I think there’s a general recognition that a growing economy doesn’t equate to rising equity returns. 'To many investors, it seem obvious that, as a nation’s population and GDP grows, so should its stock prices; there ought to be a direct positive relationship. Unfortunately, there is not.’   Here’s some discussion to get it started: https://www.bogleheads.org/forum/viewtopic.php?t=194296

 I am also concerned about the dominance of the US indexes of a handful of tech mega-caps.

That’s reasonable to be concerned, but should you deviate from a market cap, broad based index fund as a result? Active fund managers deviate for all sorts of concerns and reasons, but the majority can’t out-perform a comparable index funds over periods exceeding about 3-5 years. Is it really wise to, effectively, bet against the wisdom of the whole market in the pricing of tech stocks? You can win out, or lose out. The amount of money that wins out can only equal the amount that loses out since both groups of investors represent the whole market. It suits some folk to take that gamble, but it needs to be recognised for what it is.

For the record, the actively managed part of our portfolio has significantly outperformed the trackers over the last year. 

Sadly, one year doesn’t count when we’re investing for 40 years.

Fund managers rarely shine over long periods but each has a specialism whose time may come over a long investment period. Choose wisely (not those who are flavour of the month/year).

How does do that? Is there any performance evidence to validate the way one chooses wisely? And ideally, was the way to choose described at the beginning of the period covering the performance, not at the end?

All good points.

The crux of my post is that diversification is my primary strategy. There are many ways of implementing a strategy and I have adopted an approach that suits me, my aims, my risk tolerance, and my concerns about individual markets and/or asset types. Others will have entirely different thoughts.

A global passive is one approach (and IMO the best for the disinterested and/or novice investor) but OP requested nuanced opinions rather than the more mainstream one-size-fits-all.

I am not sure I could argue positively with respect to all of the nuances in my portfolio but am nonetheless content with the strategy and its implementation. Sometimes investing is more of an art than a science.

If OP has reached a point of comfort (i.e. he understands what he is doing, and why, and how) then he has the confidence to continue with his plan regardless of what the markets do.

'Time in the market' plus diversification should serve most people well howsoever that strategy is implemented.