Active vs Passive

Beddie

bostonerimus said:

JohnWinder said:

Good point about corporate bonds and cap weighting. There must be a place for corporate bonds in personal investing, but we can do it all without their complexity which is why I simply ignore them in my thinking. You want bonds to be safe from default, so forget corporates. If you want higher returns than government bonds give, raise your equity holding. Surely, for simpletons like me that’s the way.

90% of my equities are in global cap weighted index funds and the rest are in a multi asset active fund that is 60% bonds and 40% equities, the bonds being a mix of high quality corporate and government debt with an average duration of 7 years and the equities large cap dividend stocks. I don't manage the portfolio in any way, I just let it sit there. I can do this without worry because I don't rely on it for retirement income. I like passive index funds for their low fees. I would never buy a "celebrity" active fund like Woodford or Fundsmith or any fund focussed on a particular sector or small geographical area, other than maybe a domestic fund; so no "Indonesian pork belly" funds for me.

Hi, I'd be interested in the funds you are using please. I'm looking to move towards passives and therefore curious as to what others use.

bostonerimus

Beddie said:

bostonerimus said:

JohnWinder said:

Good point about corporate bonds and cap weighting. There must be a place for corporate bonds in personal investing, but we can do it all without their complexity which is why I simply ignore them in my thinking. You want bonds to be safe from default, so forget corporates. If you want higher returns than government bonds give, raise your equity holding. Surely, for simpletons like me that’s the way.

90% of my equities are in global cap weighted index funds and the rest are in a multi asset active fund that is 60% bonds and 40% equities, the bonds being a mix of high quality corporate and government debt with an average duration of 7 years and the equities large cap dividend stocks. I don't manage the portfolio in any way, I just let it sit there. I can do this without worry because I don't rely on it for retirement income. I like passive index funds for their low fees. I would never buy a "celebrity" active fund like Woodford or Fundsmith or any fund focussed on a particular sector or small geographical area, other than maybe a domestic fund; so no "Indonesian pork belly" funds for me.

Hi, I'd be interested in the funds you are using please. I'm looking to move towards passives and therefore curious as to what others use.

I'm in the US so this won't be directly applicable to you, but I use a 3/4 fund Boglehead type of portfolio for its low cost and simplicity. I do not have a bond index fund anymore because I think of my DB pension as part of my fixed income allocation and I have the active multi-asset fund that has some bonds. Anyway most of my portfolio is as follows, FYI I'm 17% down YTD.

VTSAX (US Total Stock market ) 60%
VTIAX (Global stock market ex US) 25%
VWIAX (Wellesley income fund 60% high grade bonds, 40% dividend stocks) 15%

If I was in the UK I would have more in a Global Stock Index fund and would use a UK multi-asset fund or might just put everything in one of the many LifeStrategy funds available like the VLSxx family from Vanguard.
Just google  "Bogleheads 3 fund portfolio" and you'll find plenty of reading

Cus

bostonerimus said:

Cus said:

Go passive if you want market returns, go active if you want a chance of beating average. 

...or making less than the average, maybe a lot less than the average. If your financial plans require you to get above average returns then IMO you need to adjust your plan as you will be taking on unacceptable levels of risk.

You are correct, of course we know that on average, over a significant time period, the average investor will be highly likely to make less with active than you would with passive. Not sure about unacceptable risk though with actives.
imo, the vast majority of people should stick with passive as how are they going to choose the correct actives again and again. What I don't agree with is that the debate has people thinking it's like a casino and that it's a random numbers game where you will lose in the end. You can't have a system at a casino that beats the odds, but I think you can with the markets if you study enough and are talented enough. 
The difficulty is how do you find those rare people? They certainly are not IFA's.

JohnWinder

You can't have a system at a casino that beats the odds, but I think you can with the markets if you study enough and are talented enough. 

Someone should be able to, but how to find those rare managers, as you say. But back it up for a moment; how many funds or famous investors have there been which would have been useful to an investor of 35 years (from age 40 when you might have enough disposable money to start investing, to age 75)? And who are/were they? I’ll guess the number is in single figures, among which I include zero.

jcontest

eskbanker said:

adindas said:
Why only look this year. Did you look at how they performed in 2020, 2021 ?? If they made a gain of 190% and down 90% this year they are still in the winning side, are not they ??

If something gains 190% previously and then loses 90% this year, the overall result is -71%, which wouldn't meet many people's definition of winning!

Ugh...

Maths.

Truthfully when looking over things quickly this can be a easy mistake to make.

I see a lot of people with a Lifetime ISA who cant understand how invest(+25%)&withdraw(-25%) = -6.25%

adindas

jcontest said:

eskbanker said:

If something gains 190% previously and then loses 90% this year, the overall result is -71%, which wouldn't meet many people's definition of winning!

Ugh...

Maths.

Truthfully when looking over things quickly this can be a easy mistake to make.

I see a lot of people with a Lifetime ISA who cant understand how invest(+25%)&withdraw(-25%) = -6.25%

The maths is like this.

Say you have an investment of £1,000 (to make it simple)

Up 190%: Initial Value = £1,000; Final Value = £2,900

From Initial Value = £2,900, down -90%, Final Value = £290

Considering Initial outlay is £1,000 and it is now down to £290, this will equate to down -71% from original investment.

I have changed the original posting to  -65% instead of -90%. If it is down -65% you are still in the winning side.

Beddie

bostonerimus said:

Beddie said:

bostonerimus said:

JohnWinder said:

Good point about corporate bonds and cap weighting. There must be a place for corporate bonds in personal investing, but we can do it all without their complexity which is why I simply ignore them in my thinking. You want bonds to be safe from default, so forget corporates. If you want higher returns than government bonds give, raise your equity holding. Surely, for simpletons like me that’s the way.

90% of my equities are in global cap weighted index funds and the rest are in a multi asset active fund that is 60% bonds and 40% equities, the bonds being a mix of high quality corporate and government debt with an average duration of 7 years and the equities large cap dividend stocks. I don't manage the portfolio in any way, I just let it sit there. I can do this without worry because I don't rely on it for retirement income. I like passive index funds for their low fees. I would never buy a "celebrity" active fund like Woodford or Fundsmith or any fund focussed on a particular sector or small geographical area, other than maybe a domestic fund; so no "Indonesian pork belly" funds for me.

Hi, I'd be interested in the funds you are using please. I'm looking to move towards passives and therefore curious as to what others use.

I'm in the US so this won't be directly applicable to you, but I use a 3/4 fund Boglehead type of portfolio for its low cost and simplicity. I do not have a bond index fund anymore because I think of my DB pension as part of my fixed income allocation and I have the active multi-asset fund that has some bonds. Anyway most of my portfolio is as follows, FYI I'm 17% down YTD.

VTSAX (US Total Stock market ) 60%
VTIAX (Global stock market ex US) 25%
VWIAX (Wellesley income fund 60% high grade bonds, 40% dividend stocks) 15%

If I was in the UK I would have more in a Global Stock Index fund and would use a UK multi-asset fund or might just put everything in one of the many LifeStrategy funds available like the VLSxx family from Vanguard.
Just google  "Bogleheads 3 fund portfolio" and you'll find plenty of reading

Thanks, very interesting. I have just had a read about Bogleheads and that also led me to Paul Merriman, who suggests a similar strategy, but with different areas covered. What are your thoughts on that, if you've looked into it?

adindas

An index fund (also index tracker) used in passive investing, whether is a mutual fund or exchange-traded fund (ETF) is often credited to Jack (John) Bogles, the Vanguard founders. But the first theoretical model for an index fund was suggested by Edward Renshaw and Paul Feldstein.

https://en.wikipedia.org/wiki/Index_fund

Theoretically noone could beat passive investing in S&P 500 index (which is frequently assumed as beating the market return) under the hypothesis that the market is Efficient (e.g Efficient Market Hypothesis - EMH). In reality the market is far from efficient. The people try to beat the market is exploiting this inefficiency.

Prism

adindas said:

An index fund (also index tracker) used in passive investing, whether is a mutual fund or exchange-traded fund (ETF) is often credited to Jack (John) Bogles, the Vanguard founders. But the first theoretical model for an index fund was suggested by Edward Renshaw and Paul Feldstein.

https://en.wikipedia.org/wiki/Index_fund

Theoretically noone could beat passive investing in S&P 500 index (which is frequently assumed as beating the market return) under the hypothesis that the market is Efficient (e.g Efficient Market Hypothesis - EMH). In reality the market is far from efficient. The people try to beat the market is exploiting this inefficiency.

I'm not sure anyone said that nobody could beat it and the main focus at the time was that idea that because of high fund fees, those that could beat it tended to reap the benefits and their clients still underperformed. Very few could beat it reliably and even less after they had deducted fees. Individual stocks investors (ie not using funds) tend to do especially poorly.

Of all of the markets, the US is the most well researched and efficient - very difficult to beat an index over time. Other areas of the world offer better chances of success mainly due to being less well known. That said, beating a low return index isn't especially cause for celebration

There are plenty of examples of really good fund investors who have achieved such results, however the question as always is can we pick them ahead of time? Individual investors trying to select their own stocks might get lucky for a while but would really have a hard time up against the mass data of the institutional investors.

eskbanker

adindas said:

Theoretically noone could beat passive investing in S&P 500 index

Presumably what you're trying to say here is that theoretically noone wanting to track the S&P 500 index could beat a passive tracker, rather than claiming that a passive S&P 500 fund beats all investments?!

adindas said:

Theoretically noone could beat passive investing in S&P 500 index (which is frequently assumed as beating the market return)

Again, a bit more clarity may help - who is assuming that a passive S&P500 index tracker beats 'the market return' and what exactly do you mean by 'the market return' anyway, i.e. which market?