Annual Review - Rebalancing and Changes to Investments Concerns

GSP

I have just received this information and will look at much more closely, but would appreciate any thoughts for now.

For the last year my drawdown portfolio has consisted of 16 investments.
My “Chartered Financial Planner” has just sent his recommendations for the coming year and he is suggesting bringing in 13 new investments replacing 13 or so existing ones.

My appetite for risk is 5 out of 10. On the 13 new fund factsheets he sent through, most appear to have a rating 6 out of 7.

There does not appear to be much cash at all rebalanced from his recommendations.

In the past, he has recommended losing around 3 or 4 investments, and replaced these with new ones. Normally, the ones being removed were the worst performers over the year.

Overall my fund is down 25% on last year and within there individual investments are down anywhere between 10% to 50%. Last year, he recommended much less cash and I instructed him to change so I had a year’s cash buffer. I’m glad I did!
This money has all but run out now, so I will have to sell investments at least to raise more cash.

I’ll have a number of questions for him already when I respond.
For now, my thoughts are.
1) Why so many changes and why now to ‘give up’ on many existing investments?
2) What am I going to do for cash?
3) If my risk appetite is 5 out of 10, why so many new investments with a 6 out of 7 rating? (I’m assuming a 6 out of 7 is like having a risk appetite between 8 and 9).

After all investments being down some way from a year ago, I was expecting very little in the way of change recommended from him, more of a sit tight as he has been communicating while dips have/are playing out.

My untrained eye thinks that in time these falls will be reversed or at least improve, and feel it’s ‘dangerous’ to go for such big changes at this time.
As for raising cash, I maybe wrong but thinking if I have to sell any investments it should come from the investments that have lost less money?

Thanks.

bostonerimus

It’s hard to assess your advisors recommendations as you don’t tell us anything about the actual investments. Let me say up front that I am generally biased against advisors so take everything I say with that in mind. You advisor seems to be doing a good business in creating complexity and turn over where it might not be necessary. Like you and many others I have seen big losses this year, but unlike you I only have 3 main funds and I don’t intend to sell any of them. In going for some riskier investments you advisor might be looking to make back some losses, but I think they need to listen you you and focus more on income and capital preservation and maybe you should trim your spending to get your drawdown plan back on track rather than taking more risk.

Audaxer

It sounds like he is restructuring your whole portfolio, and possibly increasing your risk level by the sound of it. It does sound a bit drastic, and I'd want to be satisfied as to his reasoning behind such a big change. You shouldn't have to sell investments for cash after he has made all these changes - any cash you need to replenish your cash buffer and this year's income should, in my view, be generated by him as part of his restructuring and rebalancing of your portfolio. 

If it was me, I'd want a meeting with him to ask those type of questions and specifying how much cash you need from the rebalance.

[Deleted User]

So you are in a withdrawal mode, right? The fund is down 25% accounting for withdrawals? That does not tell us much about your portfolios return but does not sound good. 

Someone in a withdrawal mode shouldn’t be too aggressive regardless of the risk “number”. A typical balanced portfolio returned -5.3% over last 12 months (based on VLS60). 

Chasing returns and selling “underperforming funds” would bother me too. And having 13 funds in a portfolio. Completely unnecessary. And wholesale changes by the same advisor given that nothing changed in your life that we know of. Some advisors try to guess the future and “rotate” in and out of US stocks, in and out of growth vs value and even between asset classes. Well, your advisor didn’t guess very well last year, who is to tell he’ll do a better job this time? 

If it was me I would do nothing (except making sure I have a cash buffer) until I learn a bit more. You can learn by reading books on the subject from the very best financial advisors in the world. Once I know what to do I would cut the middle man out. 

dunstonh

My appetite for risk is 5 out of 10. On the 13 new fund factsheets he sent through, most appear to have a rating 6 out of 7.

Ignore the 1-7 scale on factsheets/KIIDs.   There are flaws in those.

There does not appear to be much cash at all rebalanced from his recommendations.

Without context it is hard to comment.  However, from my perspective, I wouldnt look to increase cash from the sale of equities at this time unless you have to.

Overall my fund is down 25% on last year and within there individual investments are down anywhere between 10% to 50%. Last year, he recommended much less cash and I instructed him to change so I had a year’s cash buffer. I’m glad I did!

What is the drawdown strategy?  I prefer 36 months of cash with income units feeding into the cash.  Others may prefer 24 months.  Some dont run any cash and sell on demand.

1) Why so many changes and why now to ‘give up’ on many existing investments?

Your adviser is in the best position to answer that.   However, changing cycle and a differing view on risks can lead to a change.  Particularly on satellite funds (rather than core funds)

Also, many advisers not only use a risk scale but incorporate timescale weightings.  It could be that you have moved from one timescale to another.  Some funds will be present on some timescales/risk profiles and not others.

2) What am I going to do for cash?

What does your adviser say?

3) If my risk appetite is 5 out of 10, why so many new investments with a 6 out of 7 rating? (I’m assuming a 6 out of 7 is like having a risk appetite between 8 and 9).

Because the 1-7 scale is flawed and no-one uses it.   Plus, each fund scores as if 100% was going into that fund and no diversification was taking place.   A portfolio is the sum of its parts.  Not the bits in isolation.

JohnWinder

Shares are the engine of most pension investments. If you own a broad diversity of shares you can get the returns of the sharemarket (less fees, costs etc), guaranteed. If you choose just one share you can do a lot better (if it were Apple 20 years ago), or do a lot worse (if it were General Electric 10 years ago). The more different shares you own the further away you move from those extremes of benefit. Which approach does your nature guide you towards? And before you say ‘I’d like a bit better than market returns which should be possible by having smart people identify the better and worse shares for me’, you need to know that even a large majority of well paid professionals can’t do that over the longer periods that are relevant to you and me, and we know this from the SPIVA reports and the Morningstar reports on how persistent the ‘winners’ are. The odds say ‘forget it’ and accept market returns. The industry thrives on people choosing otherwise, but their fees mostly just detract from investors’ returns. If you go along with that thinking, you only need one or two funds holding shares, not 8 out of 16; the broadest based, lowest cost funds in general. Because it’s that easy many interested amateurs managed their own investments, cheaper than anyone else can, and without any possible conflicts of interest.

Shares gyrate in value too much too often over too short a time to be comfortable or useful for some of us/?you. So some of our investments are in bonds (and/or cash), which steadies the wobbly growth engine of our stocks. Banks don’t fail like stocks do, so you don’t need much diversification with cash, or with government bonds. 1 or 2 bond and cash funds is probably enough, not 8 out of 16, and you’ll get bond market returns.

A professional changing 13 funds is either a genius getting you better than market returns, a dope out of his depth flailing around, or trying to convince you it’s so complicated you need him. Which has it been, and more importantly which will it be when your investments are no longer needed? If i’ve missed a couple of ‘eithers’ let me know. And if he thinks you’re better off with 16 funds than 3 which you never have to change, get him on here to explain why, or find out from him and report back to us.

Linton

JohnWinder said:

.....

A professional changing 13 funds is either a genius getting you better than market returns, a dope out of his depth flailing around, or trying to convince you it’s so complicated you need him. Which has it been, and more importantly which will it be when your investments are no longer needed? If i’ve missed a couple of ‘eithers’ let me know. And if he thinks you’re better off with 16 funds than 3 which you never have to change, get him on here to explain why, or find out from him and report back to us.

Or perhaps using a computer generated portfolio to achieve a particular risk profile?

JohnWinder

The OP’s risk level is 5/10 we were told. So stocks are too risky and bonds aren’t risky enough. The computer could spit out a stock/bond(cash) mix with 2 or 3 funds, unless of course one tells it ‘make this as complex as plausibility allows’ and it spits out 18 funds. It’s good to be charitable, but let it not stray into gullible. 

Linton

JohnWinder said:

The OP’s risk level is 5/10 we were told. So stocks are too risky and bonds aren’t risky enough. The computer could spit out a stock/bond(cash) mix with 2 or 3 funds, unless of course one tells it ‘make this as complex as plausibility allows’ and it spits out 18 funds. It’s good to be charitable, but let it not stray into gullible. 

It is over simplistic to regard risk as simply a number in the range 1-10. which can be met by a corresponding % assigned to a single broad  bond fund.  We have seen the drawbacks of that approach in the past few months. At least one poster on these boards has found their retirement plans significantly compromised.

Apart from holding the wrong sort of bonds investors have also been hit by major differences between growth equity and value equity. Go back to the 19090s/early 2000s when growth tech had one of the largest boom/busts for many years whereas value equity carried on calmly.  Someone concerned about risk may reasonably not want to follow the fashions with a global index tracker.

A third example is the %US.  To a US investor such as yourself that clearly would not be seen as a potential problem but rather as a source of safety.  However for  many people outside the US >60% allocation to a single foreign country could be seen as an unnecessary risk.  Sadly there are no Global Excluding US funds so to meet a chosen US allocation one would need to buy sufficient single geography funds to provide global coverage.

One can take the view that in the sufficiently long term the results will be no better than global tracker.  I would agree and in fact go further and suggest that all sufficiently broad portfolios will, given sufficient time. provide much the same returns.  However if that is your position and your timescales are decades why bother about risk?  Simply go for a 100% equity tracker.

On the other hand if one's timescales are shorter, life is more complex.  

[Deleted User]

One can certainly take lots of views but when looking at a 13 fund “conservative” portfolio which sinks like a stone and requires wholesale changing, a reasonable view would be “I am dealing with BS artist”.  Its not OK.  Someone’s retirement is at stake; and its not the advisors.   International and asset diversification can be easily achieved with a single cost-efficient fund from one of 3-4 highly reputable providers. The type of allocation which avoided nose bleeding losses in 2000, 2008, 2020 and 2022. And recovers quickly.   And one can stick with it rather than change annually. The future is uncertain but financial salesman’s BS is clear. 

JohnWinder

‘At least one poster on these boards has found their retirement plans significantly compromised.’

Perhaps take us to one of those, for the benefit of the OP, and we can see why it might have been a poor choice. But without doing that, we can say that there are many bond funds, some quite different from others and some very unsuited to a particular person. However, just because we could choose one bond fund that was a very poor choice, it doesn’t mean that choosing only one is a poor choice if that one is suitable for that person.

Go back to the 19090s/early 2000s when growth tech had one of the largest boom/busts for many years whereas value equity carried on calmly.  Someone concerned about risk may reasonably not want to follow the fashions with a global index tracker.’

Surely you’re overlooking the very risk reducing benefit of a widely diversified fund. Sometimes ‘growth’ type stocks like Facebook do well (and sometimes poorly) while at other times ‘value’ stocks representing established profit turning businesses do better (or poorly). By owning both in a broad fund you reduce the adverse consequences of one doing poorly. Tempting as it is to think we can predict when one or the other will have its day in the sun, seems to be not that easy.

If there’s any ‘fashion’ in investing, it’s going along with the herd thinking now is the time for ‘growth’ stocks; the popularity of a global tracker doesn’t make it a fashion when it’s consistent with the theory that the greater the diversification the better the risk adjusted returns.

‘However for  many people outside the US >60% allocation to a single foreign country could be seen as an unnecessary risk. ’

There’s certainly room for a variety of valid opinions on US allocation for UK investors, but we need to remember that the reason that a fund which is broadly diversified lowers the risk compared with choosing particular stocks individually is because you put your money exactly where all investors as a whole but their money, so you’re not making a bet against the market that this stock or that stock will outperform the market. And, if it’s not too big a leap, that’s how it is with which countries you invest in; if the whole world thinks it’s worth putting 60% of its money into US stock markets, then if you don’t do that you are pretty much saying ‘I know better than all other investors and I think I should have more than them in Europe/UK/Far East take your pick. When you move away from a global fund you increase your risk because everyone else as a whole is investing to minimise their risk. You might do better, or worse, but you you’re moving away from ‘market returns’. The beauty of ‘market returns’ are that they are there for the taking, no brain work needed, just take a global tracker. Forget high fees, forget advisor charges, forget buy/sell spreads as you swap 13 funds every year. 

I agree that ‘for the long term’ can be very misleading. Someone famous said, in the long term we’re all dead. As many of us don’t have a long term left we need sensibly chosen assets.