Critique our updated 2023 retirement investment portfolio

GazzaBloom

Eco_Miser said:

GazzaBloom said:

 I believe the US will continue to dominate for decades or maybe another century. It's a huge swathe of land, unlikely to be invaded in a land war by any of it's land locked neighbours,

Geographical nit-pick: that's a dead cert, since it has no land locked neighbours.

Putin might want to repudiate the sale of Alaska though.

I think I used the wrong words, I mean unlikely to invaded by any of it's bordering countries.

baj25

Following with interest, particularly the comments re bonds. I didn't think it was possible to buy goverment bonds as an individual. One of my pension providers uses a mix of Vanguard bond funds as the bonds element, and I pretty much replicated this with my own investments.

Richard1212

baj25 said:

Following with interest, particularly the comments re bonds. I didn't think it was possible to buy goverment bonds as an individual. One of my pension providers uses a mix of Vanguard bond funds as the bonds element, and I pretty much replicated this with my own investments.

Yes, baj, it's easy to buy government bonds. They are, I think an important part of a largish portfolio in that their safety and fixed rate can offset the volatility of other parts of a portfolio, from shares to property investment. I have always kept bonds as about 10% of my overall portfolio. And I think 2023 looks like a good year for bonds, especially if  ( as I believe ) interest rates will gradually come down at some point this year , so bond prices will rise and provide an even better return than in other stages of a financial cycle.

NedS

Richard1212 said:

baj25 said:

Following with interest, particularly the comments re bonds. I didn't think it was possible to buy goverment bonds as an individual. One of my pension providers uses a mix of Vanguard bond funds as the bonds element, and I pretty much replicated this with my own investments.

Yes, baj, it's easy to buy government bonds. They are, I think an important part of a largish portfolio in that their safety and fixed rate can offset the volatility of other parts of a portfolio, from shares to property investment. I have always kept bonds as about 10% of my overall portfolio. And I think 2023 looks like a good year for bonds, especially if  ( as I believe ) interest rates will gradually come down at some point this year , so bond prices will rise and provide an even better return than in other stages of a financial cycle.

Yes, some platforms (e.g, HL) will allow you to purchase individual government bonds whereas others may not, so it is likely to depend on the platform.

Linton

JohnWinder said:

….much more growth and development of the US to come.

I don't believe a Japanification stagnation will occur to the US, as the Japan situation is as much cultural as it is fiscal policy. I am happy to bet on America and believe that it's a solid bet.’

I think the ‘betting on America’ wording might confuse some people.

Assuming your US stocks reflect global market capitalisation at ~70%, which I think we’ve established close enough,  I see it as you are ‘investing’ in US stocks (and thus taking all the usual stock investing risks) but not betting. 

Were there only 2 stocks on the planet, one nine times as big as the other, you would invest your money in them 90/10 as the most ‘balanced’ investment. To put 50/50 in each stock would be a bet on the smaller one doing better than the bigger; similarly to put 99/1 in the two stocks would be to bet the bigger would do better. To go 90/10 is not betting, it’s investing.

I don’t think you have to justify market cap weighted investing by imagining sunny uplands for a country which looks a lot worse to plenty of observers. You’re just investing in it, not betting on it. That might be splitting hairs, but if one believes one needs to invest there is no need to bet, and there is a difference.

I dont understand your analysis of investing in a 2 stock split 90/10% world.  The existance of a 90/10 split could simply be a reflection of the size of the companies. Both could have the same Return On Investment.  I am unaware of any evidence that the  ROI is proportional to the company's size.  Though at the extremes I assume a very large company is less likely to go bust than a very small one.

So to minimise the risk I suggest a better investment approach could be say 2/3 large company amd 1/3 small company.  Perhaps a bit of maths could come up with a justifiable split.. That is not claiming the smaller company is a better investment, without further knowledge it would be sensible to assume the % return is the same. It is not gambling but diversification to reduce the risk of relying almost entirely on only one company.

Linton

baj25 said:

Following with interest, particularly the comments re bonds. I didn't think it was possible to buy goverment bonds as an individual. One of my pension providers uses a mix of Vanguard bond funds as the bonds element, and I pretty much replicated this with my own investments.

Note that a bond fund is very different to a set of individual bonds.  If you buy a bond with 10 years to maturity then in 10 years the you are guaranteed to get the same interest on your initial investments every 6m months for the next 10 years and then you will receive the £100 capital.

With a 10 year average bond fund in 10 years time you will still have a 10 year average bond fund. Neither the ongoing interest nor the final capital value are guaranteed.

coastline

I've no idea how the US will perform but I wouldn't like to bet against it . Here's a few thoughts which have been posted in recent days. 
Global fund managers suggest recession fears have peaked ?

Fm1NcunXwAEK_02 (700×450) (twimg.com)

Although earnings will fall 2022 the forecasts are for higher in next two years. Can only be good news for US markets ?

FmXybnJaEAE-O8y (564×704) (twimg.com)

The idea that the SP500 is overvalued isn't as clear cut as many say . Remove the top 6 stocks and the others are on a forward P/E of 12. Hardly expensive. ? The top 6 have all fallen in the last year.

FmUYkWxX0AAqrFp (652×900) (twimg.com)

If you want to compare forward world P/E valuations then here's a list all in one place updated ever week. There isn't a great amount in it when you look . Most are reasonably priced between 10-15.
Some of the charts especially figures 1 to 11 clearly show the US maintains it's premium rating or valuation. Data goes back as for as 1995 so not something new.
Look at figure 9 France and Germany also have a premium rating in Europe so the idea you can look for value elsewhere isn't always true.
Look at the UK rarely has a premium in 30 years. These trends tend to stick . Maybe a crash or slump might bring up an opportunity but that's once in a decade or so.
Basically the US valuations could well be justified considering the growth stocks. It's in the data over the years.?

MSCI Forward P/Es (yardeni.com)

GazzaBloom

Linton said:

baj25 said:

Following with interest, particularly the comments re bonds. I didn't think it was possible to buy goverment bonds as an individual. One of my pension providers uses a mix of Vanguard bond funds as the bonds element, and I pretty much replicated this with my own investments.

Note that a bond fund is very different to a set of individual bonds.  If you buy a bond with 10 years to maturity then in 10 years the you are guaranteed to get the same interest on your initial investments every 6m months for the next 10 years and then you will receive the £100 capital.

With a 10 year average bond fund in 10 years time you will still have a 10 year average bond fund. Neither the ongoing interest nor the final capital value are guaranteed.

Yet it seems that it's bond funds that are more easily accessible inside pensions

JohnWinder

‘I dont understand your analysis of investing in a 2 stock split 90/10% world.  The existance of a 90/10 split could simply be a reflection of the size of the companies. Both could have the same Return On Investment.  I am unaware of any evidence that the  ROI is proportional to the company's size.  Though at the extremes I assume a very large company is less likely to go bust than a very small one.

So to minimise the risk I suggest a better investment approach could be say 2/3 large company amd 1/3 small company.  Perhaps a bit of maths could come up with a justifiable split.. That is not claiming the smaller company is a better investment, without further knowledge it would be sensible to assume the % return is the same. It is not gambling but diversification to reduce the risk of relying almost entirely on only one company.’

You might be right there, I can’t easily dispute that. But some comments….

I don’t understand ROI, but I thought it was backward looking; you calculate how much you gained, then annualise the result to give ‘it returned x%/year’. Stock prices are based on forward looking guesstimates of future earnings, so a tech company might make no money now (zero ROI), but be considered to have great prospects and thus be priced high. So if the 90/10 pair had the same ROI, their prospects and thus price might be different, I’m guessing wildly.

Going 2/3 and 1/3 with the 90/10 pair would reduce the risk should the 90 blow up, but wouldn’t it reduce your likely returns since the market as a whole has put 90% of its money into the 90 stock because it thinks its prospects are better? That’s less of a wild guess.

‘. It is not gambling but diversification to reduce the risk of relying almost entirely on only one company.’

It might be better if we avoid the words ‘gambling’ and ‘diversification’ since we don’t all share the same meaning or understanding of what they’re about. I say that because I see it as a gamble to deviate from market cap weighting, since the returns for the ‘deviator’ might be better or worse - that’s gambling to me. Whereas ‘it’s not gambling but diversification…’ views, correctly, the deviation from 90/10 as a safeguard against the 90 blowing up, and hence the antithesis of gambling.

As to ‘diversification’, it’s worst if you hold only one stock, and best if you hold them all, but in what proportions? It might not matter much; it certainly doesn’t matter much if you omit the smallest 10 or 20%, or if you hold them all in equal amounts rather than cap weighted. But I keep coming back to the notion that an efficient market captures all the information there is to best estimate the value of any stock; if you deviate from that, it is because you think you know something about the future of those companies than others don’t. Calling market cap weighting ‘optimally diversified’ doesn’t sit well with some people because it’s contrary to the common sense different ways you can be diversified, I suppose.

If going 2/3 1/3 with the 90/10 stocks reduces the possible range of return outcomes, then I suppose it reduces the risk; that means there has to be no condition in which 2/3 1/3 does worse than being 90/10. That puts the onus on me to find it I suppose.

baj25

Linton said:

baj25 said:

Following with interest, particularly the comments re bonds. I didn't think it was possible to buy goverment bonds as an individual. One of my pension providers uses a mix of Vanguard bond funds as the bonds element, and I pretty much replicated this with my own investments.

Note that a bond fund is very different to a set of individual bonds.  If you buy a bond with 10 years to maturity then in 10 years the you are guaranteed to get the same interest on your initial investments every 6m months for the next 10 years and then you will receive the £100 capital.

With a 10 year average bond fund in 10 years time you will still have a 10 year average bond fund. Neither the ongoing interest nor the final capital value are guaranteed.

Yes, I get that key difference. 
Gilts don't seem to be attractive just now, looking on HL a gilt with 5y to maturity at coupon of 0.125% is selling for about 86p, returning about 3.25% p.a. minus any platform fees. That's if I understand correctly. I've usually kept a portion in fixed rate cash ISAs of varying terms, that seems to do a similar job to gilts and is very simple with no charges.
Linkers on the other hand could be of interest. Assuming held to maturity, would I be correct in thinking that if inflation is rampant they look good, otherwise you basically get your money back having lost the opportunity of a better return? Which I'm sure is a valid reason to have them if you value that security.
Bond funds are still suggested by many as a good holding for low volatility, and they hold huge sums, but I am less sure of their usefulness than I was, I'd be interested to hear others' thoughts.