Fundsmith

Aged

bostonerimus said:

In all this I see no discussion of how much risk you need to take on to meet your financial goals. Fundsmith and equities in general are inherently risky and if you could save a lot and were frugal maybe the small but guaranteed return of a savings account ladder would be enough. Now that’s probably an extreme example, but how many people have an idea of the returns they need to meet their financial goals given their level of capital investing/saving and are they taking more risk than is necessary? Or even taking enough risk. Investing is too often an “open loop” process.

In my case, the funds are within a pension. What are the options for 'taking less risk' (by which I presume you mean avoiding equities) in a pension fund?

bostonerimus

Aged said:

bostonerimus said:

In all this I see no discussion of how much risk you need to take on to meet your financial goals. Fundsmith and equities in general are inherently risky and if you could save a lot and were frugal maybe the small but guaranteed return of a savings account ladder would be enough. Now that’s probably an extreme example, but how many people have an idea of the returns they need to meet their financial goals given their level of capital investing/saving and are they taking more risk than is necessary? Or even taking enough risk. Investing is too often an “open loop” process.

In my case, the funds are within a pension. What are the options for 'taking less risk' (by which I presume you mean avoiding equities) in a pension fund?

Well if it's a DC what are your fund choices? But you need to first get an idea of what you might need to retire in the future and then develop a sensible approach. 

aroominyork

bostonerimus said:

Aged said:

bostonerimus said:

In all this I see no discussion of how much risk you need to take on to meet your financial goals. Fundsmith and equities in general are inherently risky and if you could save a lot and were frugal maybe the small but guaranteed return of a savings account ladder would be enough. Now that’s probably an extreme example, but how many people have an idea of the returns they need to meet their financial goals given their level of capital investing/saving and are they taking more risk than is necessary? Or even taking enough risk. Investing is too often an “open loop” process.

In my case, the funds are within a pension. What are the options for 'taking less risk' (by which I presume you mean avoiding equities) in a pension fund?

Well if it's a DC what are your fund choices? But you need to first get an idea of what you might need to retire in the future and then develop a sensible approach. 

I'll set you a challenge, boston! Planning one's needs and strategy is easy to say but many people would have no idea to start. However... an algorithm which goes through every aspect of someone's situation and needs and results in a set of options would be very useful. Do you think such a thing could be developed? 

bostonerimus

aroominyork said:

bostonerimus said:

Aged said:

bostonerimus said:

In all this I see no discussion of how much risk you need to take on to meet your financial goals. Fundsmith and equities in general are inherently risky and if you could save a lot and were frugal maybe the small but guaranteed return of a savings account ladder would be enough. Now that’s probably an extreme example, but how many people have an idea of the returns they need to meet their financial goals given their level of capital investing/saving and are they taking more risk than is necessary? Or even taking enough risk. Investing is too often an “open loop” process.

In my case, the funds are within a pension. What are the options for 'taking less risk' (by which I presume you mean avoiding equities) in a pension fund?

Well if it's a DC what are your fund choices? But you need to first get an idea of what you might need to retire in the future and then develop a sensible approach. 

I'll set you a challenge, boston! Planning one's needs and strategy is easy to say but many people would have no idea to start. However... an algorithm which goes through every aspect of someone's situation and needs and results in a set of options would be very useful. Do you think such a thing could be developed? 

There are the online retirement income calculators, but any projection is only going to be an estimate and it's probably a good idea to do a projection with a range of values for things like inflation. The starting point should be a budget, then with your annual income number you can project into the future using different inflation values (2%, 5% etc) and subtract some fixed costs that you might not have...like a mortgage. This will allow you to estimate a pot size that might be needed to support that income after any DB and SP have been taken off. Again a good grasp of compounding and future value is required to estimate those. So now you have a DC pot value...it might be one million...and you then need to take your current pension pot value and contributions and see what rate of return you need to use in the compounding to get to your pot. You can vary contribution amount and rate of return and maybe the amount you need by being a bit more frugal to get an idea of the sort of portfolio that will get you to where you want to be.

When I went through this exercise I realized that the DC pot I needed was small, but I continued to make contributions for the tax advantages and kept a risky equity heavy portfolio because i was ok with a volatile DC pot amount. So Fundsmith would be fine for my situation because I can discount the downside potential and the rather small number of stocks it holds. I would probably not hold it if I was still saving for retirement and wanted steadier growth over a lot of years.

GazzaBloom

aroominyork said:

bostonerimus said:

Aged said:

bostonerimus said:

In all this I see no discussion of how much risk you need to take on to meet your financial goals. Fundsmith and equities in general are inherently risky and if you could save a lot and were frugal maybe the small but guaranteed return of a savings account ladder would be enough. Now that’s probably an extreme example, but how many people have an idea of the returns they need to meet their financial goals given their level of capital investing/saving and are they taking more risk than is necessary? Or even taking enough risk. Investing is too often an “open loop” process.

In my case, the funds are within a pension. What are the options for 'taking less risk' (by which I presume you mean avoiding equities) in a pension fund?

Well if it's a DC what are your fund choices? But you need to first get an idea of what you might need to retire in the future and then develop a sensible approach. 

I'll set you a challenge, boston! Planning one's needs and strategy is easy to say but many people would have no idea to start. However... an algorithm which goes through every aspect of someone's situation and needs and results in a set of options would be very useful. Do you think such a thing could be developed? 

Timeline is the best I've come across, designed for advisors ben can be used free to run up to 3 client profiles for yourself if you have a handle on your income, where your money is invested, future expected expenses, state pension and any other future income such as final salary pensions (if you have any)

https://www.timelineapp.co/

Rollinghome

bostonerimus said:

There are the online retirement income calculators, but any projection is only going to be an estimate and it's probably a good idea to do a projection with a range of values for things like inflation.

Predicting retirement income needs is difficult and the further I get into retirement, now a long way, the more I realise just how difficult.

There are just so many unknowns, including how long we will live, our likely state of health, and future government policies. 

How many would have based their assumptions on always receiving reasonable healthcare under the NHS?  Sadly the current position, due to covid and past policy decisions, is that without health insurance or sufficient funds, some who have been healthy all their lives may endure months or years of pain before receiving proper treatment.  Something I was unaware of until  only recently.

How do we plan for when we're unable to fully look after ourselves? Will we need just someone to do a bit of dusting, or far more.  Will we become just a little unsteady on our feet or suffer the extremes of dementia.  Will spouses always be around to help each other. Will children and their spouses be able and willing?  What government support will there be?

Calculate the cost of running a car and maintaining your house, but for how long will you be able, and allowed ,to drive?  How long will you be able to paint a ceiling or clean your own windows? Should you allow for good holidays and for how long will you be able to travel?  The true cost of many of our needs may only be known once required.

Then there are the unknowns that can always surprise.  Who predicted the recent rise in energy prices before it was upon us?

So we need to plan but also accept that our calculations may need constant adjustment

But Mouse, you are not alone,
In proving foresight may be vain:
The best-laid schemes of mice and men
Go oft awry,
And leave us nothing but grief and pain,
For promised joy!

RB

bostonerimus

Rollinghome said:

bostonerimus said:

There are the online retirement income calculators, but any projection is only going to be an estimate and it's probably a good idea to do a projection with a range of values for things like inflation.

Predicting retirement income needs is difficult and the further I get into retirement, now a long way, the more I realise just how difficult.

There are just so many unknowns, including how long we will live, our likely state of health, and future government policies. 

How many would have based their assumptions on always receiving reasonable healthcare under the NHS?  Sadly the current position, due to covid and past policy decisions, is that without health insurance or sufficient funds, some who have been healthy all their lives may endure months or years of pain before receiving proper treatment.  Something I was unaware of until  only recently.

How do we plan for when we're unable to fully look after ourselves? Will we need just someone to do a bit of dusting, or far more.  Will we become just a little unsteady on our feet or suffer the extremes of dementia.  Will spouses always be around to help each other. Will children and their spouses be able and willing?  What government support will there be?

Calculate the cost of running a car and maintaining your house, but for how long will you be able, and allowed ,to drive?  How long will you be able to paint a ceiling or clean your own windows? Should you allow for good holidays and for how long will you be able to travel?  The true cost of many of our needs may only be known once required.

Then there are the unknowns that can always surprise.  Who predicted the recent rise in energy prices before it was upon us?

So we need to plan but also accept that our calculations may need constant adjustment

But Mouse, you are not alone,
In proving foresight may be vain:
The best-laid schemes of mice and men
Go oft awry,
And leave us nothing but grief and pain,
For promised joy!

RB

Couldn't agree more with this. A plan is only ever going to be a poor estimation of reality, but it helps you to react to reality in sensible and measured ways to keep you on track. There should be feed back between your plan and your reality and part of that will be looking at your strategic portfolio allocation and deciding if funds like Fundsmith have a place.

Prism

Every fund in a portfolio should require a justification beyond 'I think it will provide higher returns'. In the case of Fundsmith, I use it as an alternative to a developed world fund like Fidelity Index World. I do this for a few reasons but mainly to avoid the riskier, more cyclical parts of the market like banks, miners, car makers and the like. The end effect of this is generally a lower volatility compared to other large cap equity funds and typically a lower drawdown when there is a crash. The last time this was tested was 2020 and it worked very well then. In general I try to reduce risk and volatility across most aspects of my portfolio, not just large cap global equities.

One aspect of quality only investing, whether that is via an active fund like Fundsmith or a passive quality fund, is that they have over the last 30 years or so outperformed. That is under a specific set of conditions of falling interest rates and I would not assume that this outperformance would continue if interest rates continue to rise - I would expect the opposite. Anyone getting into Fundsmith expecting significant outperformance in the coming is likely to be disappointed unless we have another crash and then hopefully Fundsmith once again will provide some resilience. 

aroominyork

Prism said:

One aspect of quality only investing, whether that is via an active fund like Fundsmith or a passive quality fund, is that they have over the last 30 years or so outperformed. That is under a specific set of conditions of falling interest rates and I would not assume that this outperformance would continue if interest rates continue to rise - I would expect the opposite. Anyone getting into Fundsmith expecting significant outperformance in the coming is likely to be disappointed unless we have another crash and then hopefully Fundsmith once again will provide some resilience. 

But... Fundsmith invests in companies with low levels of debt so surely they are not significantly affected by raising interest rates? Compare their model of 'established winners' to other types of growth companies - either small caps with future potential reliant on short/medium term debt, or large companies with high turnover, investing in being world leaders but not currently generating high profits - Baillie Gifford comes to mind.

Prism

aroominyork said:

Prism said:

One aspect of quality only investing, whether that is via an active fund like Fundsmith or a passive quality fund, is that they have over the last 30 years or so outperformed. That is under a specific set of conditions of falling interest rates and I would not assume that this outperformance would continue if interest rates continue to rise - I would expect the opposite. Anyone getting into Fundsmith expecting significant outperformance in the coming is likely to be disappointed unless we have another crash and then hopefully Fundsmith once again will provide some resilience. 

But... Fundsmith invests in companies with low levels of debt so surely they are not significantly affected by raising interest rates? Compare their model of 'established winners' to other types of growth companies - either small caps with future potential reliant on short/medium term debt, or large companies with high turnover, investing in being world leaders but not currently generating high profits - Baillie Gifford comes to mind.

The companies themselves are likely not affected and can also probably increase their prices to match inflation. However the share prices of those companies will be affected. People are less willing to pay higher share prices for future growth when they believe they can get much quicker returns from cheaper stocks. If people only want to buy Microsoft on a PE of 20 not 30 then that's a 33% drop baked in. Money floods out of growth equities into value stocks, commodities and eventually new higher yield bonds regardless of the actual performance of the underlying companies. 

Myself, I am happy to wait it out.