Transfer from management of investments in active Wealth Manager to Vanguard passive funds

Linton

GeoffTF said:

Linton said:

GeoffTF said:

Linton said:

GeoffTF said:

bundoran said:

GeoffTF said:

dunstonh said:

GeoffTF said:

dunstonh said:

Aminatidi said:

One reason.

Also a bit of personal psychology there where I'm trying to move towards passives and rightly or wrongly Vanguard not having 3000 active funds minimises the occasional urge to tinker

But Vanguard doesn't have the best or cheapest trackers in every area.  So, limiting yourself to just them could compromise the outcome.

Vanguard's trackers are as good as any. The cost of the platform will usually be more important than a small difference in the OCF. Transaction costs cannot be compared between providers because there is no standard method of calculation. You do not need trackers "in every area". Adding more of them will not increase your chances of a good outcome.

I never said you needed trackers in every area.   

However, Vanguard do have one of the largest range of trackers in non-core areas.   They are just not as low cost in core areas compared to other fund houses.

If charges are a driver behind the decision, as they are in this thread, then restricting yourself to Vanguard trackers only increases your charges.

The vast majority of Vanguard funds are aimed at speculators who believe that a particular market or sector will outperform. 

The vast majority of Vanguard funds are aimed at long term passive investors who want to invest in either the whole world, the developed world, or regions of the world in a proportion which they have chosen and are comfortable with for their own reasons; or people who wish to invest in a mixed asset fund like Lifestrategy.

To say that these passive funds and mixed asset funds - which make up the vast bulk of Vanguard's offering - are "aimed at speculators" is asinine.

Choosing "regions of the world in a proportion which they have chosen and are comfortable with for their own reasons" is speculation. That is not what Jack Bogle advocated. I have not said that Vanguard is wrong to offer those funds.

As for your last sentence, kindly quote me accurately and be polite.

Nonsense in my humble opinion.  Choosing not to invest more than 60% of one's life savings in one single country whose returns are dominated by one or two sectors which are in turn  dominated by a handfull of massive companies seems to me to be taking a prudent approach rather than speculation.

What matters most here is diversification between companies, not countries. For the most part, the political boundaries are irrelevant. Companies can incorporate wherever they choose. They can derive most of their earnings overseas. Moving their headquarters does not change much. There can be relevant differences. Local taxation can be different, for example, but that should be reflected in the share price. There are special considerations for Emerging Market companies, but they should also be reflected in the share price.

If a company decided to incorporate in New York, rather than Canada, I would not reduce its weighting because of that.

The home market is an exception, because UK company dividends are not subject to withholding tax, for example. There are rational reasons for a home bias.

Countries can be a proxy for quite different sector asset allocations and differences in style. Hence they are also a single point of failure. Look at the US markets in the tech boom/crash era.

 

Professional investors try to exploit that. There is abundant evidence that they do not have more than chance success. Bogle would have asked why you believe that you are more capable of pricing market sectors than them. He would not have advocated under-weighting the tech stocks.

The objective is to achieve sufficient real long term return at minimum risk, not to maximise return. My belief is that all well diversified sensibly managed portfolios will achieve much the same long term returns. I agree that attempts to achieve higher long term returns than this are on average likely to fail. However different allocations will have different short/medium term behaviours.

I see nothing magic about a market capitalisation based portfolio. Its only advantage is the low cost of implementation, the downside is restricted diversification being over dependent on a small number of closely related companies and susceptibility to over-enthusiastic speculation in high risk areas.

Why do you feel it necessary to rely on support from gurus? Surely your arguments should be defensible on their own.

InvesterJones

Linton said:

GeoffTF said:

Linton said:

GeoffTF said:

Linton said:

GeoffTF said:

bundoran said:

GeoffTF said:

dunstonh said:

GeoffTF said:

dunstonh said:

Aminatidi said:

One reason.

Also a bit of personal psychology there where I'm trying to move towards passives and rightly or wrongly Vanguard not having 3000 active funds minimises the occasional urge to tinker

But Vanguard doesn't have the best or cheapest trackers in every area.  So, limiting yourself to just them could compromise the outcome.

Vanguard's trackers are as good as any. The cost of the platform will usually be more important than a small difference in the OCF. Transaction costs cannot be compared between providers because there is no standard method of calculation. You do not need trackers "in every area". Adding more of them will not increase your chances of a good outcome.

I never said you needed trackers in every area.   

However, Vanguard do have one of the largest range of trackers in non-core areas.   They are just not as low cost in core areas compared to other fund houses.

If charges are a driver behind the decision, as they are in this thread, then restricting yourself to Vanguard trackers only increases your charges.

The vast majority of Vanguard funds are aimed at speculators who believe that a particular market or sector will outperform. 

The vast majority of Vanguard funds are aimed at long term passive investors who want to invest in either the whole world, the developed world, or regions of the world in a proportion which they have chosen and are comfortable with for their own reasons; or people who wish to invest in a mixed asset fund like Lifestrategy.

To say that these passive funds and mixed asset funds - which make up the vast bulk of Vanguard's offering - are "aimed at speculators" is asinine.

Choosing "regions of the world in a proportion which they have chosen and are comfortable with for their own reasons" is speculation. That is not what Jack Bogle advocated. I have not said that Vanguard is wrong to offer those funds.

As for your last sentence, kindly quote me accurately and be polite.

Nonsense in my humble opinion.  Choosing not to invest more than 60% of one's life savings in one single country whose returns are dominated by one or two sectors which are in turn  dominated by a handfull of massive companies seems to me to be taking a prudent approach rather than speculation.

What matters most here is diversification between companies, not countries. For the most part, the political boundaries are irrelevant. Companies can incorporate wherever they choose. They can derive most of their earnings overseas. Moving their headquarters does not change much. There can be relevant differences. Local taxation can be different, for example, but that should be reflected in the share price. There are special considerations for Emerging Market companies, but they should also be reflected in the share price.

If a company decided to incorporate in New York, rather than Canada, I would not reduce its weighting because of that.

The home market is an exception, because UK company dividends are not subject to withholding tax, for example. There are rational reasons for a home bias.

Countries can be a proxy for quite different sector asset allocations and differences in style. Hence they are also a single point of failure. Look at the US markets in the tech boom/crash era.

 

Professional investors try to exploit that. There is abundant evidence that they do not have more than chance success. Bogle would have asked why you believe that you are more capable of pricing market sectors than them. He would not have advocated under-weighting the tech stocks.

The objective is to achieve sufficient real long term return at minimum risk, not to maximise return. My belief is that all well diversified sensibly managed portfolios will achieve much the same long term returns. I agree that attempts to achieve higher long term returns than this are on average likely to fail. However different allocations will have different short/medium term behaviours.

I see nothing magic about a market capitalisation based portfolio. Its only advantage is the low cost of implementation, the downside is restricted diversification being over dependent on a small number of closely related companies and susceptibility to over-enthusiastic speculation in high risk areas.

I agree with your first paragraph, but not your second. Market cap weighting is effectively the worldwide investor consensus view. Taking a view that it's over dependant or too weighted to small number of companies is saying that you think you know better than that consensus, i.e. that you're doing the job of an active fund manager trying to beat the market. Self-belief is important, but is it really wise to think we armchair investors can do a better job? I don't think so - but that doesn't stop me trying with at least a minority portion of my portfolio where I'm also concerned that valuations are a touch high (I don't know what Bogle would have thought of the report from Vanguard about the US stock market, especially large caps, likely having lower performance over the next decade than other markets - presumably he'd shrug and say 'that's OK, it'll perform enough').

JohnWinder

‘I see nothing magic about a market capitalisation based portfolio. ‘

'The efficient-market hypothesis (EMH) is a hypothesis in financial economics that states that asset prices reflect all available information. A direct implication is that it is impossible to "beat the market" consistently on a risk-adjusted basis since market prices should only react to new information.'  https://en.wikipedia.org/wiki/Efficient-market_hypothesis
The magical thing about it is that it promises and delivers market returns, less costs. If that will deliver the long term return you need, there’s no surer way to get it. If you need more return, you need to leverage the investment with borrowings, or deviate from the market cap portfolio and take your chances (which is hardly ‘at minimal risk’).

The objective is to achieve sufficient real long term return at minimum risk

How is a market cap portfolio not the optimal way to do that if one needs equities at all?

dunstonh

The magical thing about it is that it promises and delivers market returns, less costs. If that will deliver the long term return you need, there’s no surer way to get it. If you need more return, you need to leverage the investment with borrowings, or deviate from the market cap portfolio and take your chances (which is hardly ‘at minimal risk’).

But which markets? 
For US investors, using US equities is very different to UK investors due to currency fluctuation.       

US investors would typically be 100% US equities.  European investors are typically more global as their own markets are too small.

How is a market cap portfolio not the optimal way to do that if one needs equities at all?

A market cap weighted portfolio for a US investor will perform differently to a UK investor and differently again to a Japanese investor.   So you are not just getting market performance.

Linton

JohnWinder said:

‘I see nothing magic about a market capitalisation based portfolio. ‘

'The efficient-market hypothesis (EMH) is a hypothesis in financial economics that states that asset prices reflect all available information. A direct implication is that it is impossible to "beat the market" consistently on a risk-adjusted basis since market prices should only react to new information.'  https://en.wikipedia.org/wiki/Efficient-market_hypothesis
The magical thing about it is that it promises and delivers market returns, less costs. If that will deliver the long term return you need, there’s no surer way to get it. If you need more return, you need to leverage the investment with borrowings, or deviate from the market cap portfolio and take your chances (which is hardly ‘at minimal risk’).

The objective is to achieve sufficient real long term return at minimum risk

How is a market cap portfolio not the optimal way to do that if one needs equities at all?

 I am suggesting that:
1) the EMH maximum is not highly dependent on the precise allocations.  Quite wide deviations from the market cap based index will deliver much the same long term returns.
2) Deviations from the market cap index allocation may deliver other benefits than long term return.
3) In any case aiming to achieve maximum long term market return may not be the best primary objective for a retiree or someone close to retirement. Having the EMH maximum as a requirement could well be highly risky for shorter timescales.

As a secondary point I would question the validity of the current market cap indexes as a complete representation of the global market from the point of view of the EMH, particularly as applied to small UK investors
1) The importance of the US allocation may be overstated by US investors prefering to invest in their home country rather than in "international" and there are more investors in the US than anywhere else.
2) Prices are set by investors who trade.  Such investors are more likely to be interested in speculative opportunities. UK investors aiming for, or in retirement would be less enthusiastic.
3) The allocations such as % China may have a little to do with global politics rather than economic reality
4) Any cut-off for small companies or restriction to developed vs em will distort the index.  I find it somewhat hard to see why any believer in market cap would not be using the Vanguard FTSE Global All Cap fund, that being the most complete one I know of.

Prism

JohnWinder said:

The magical thing about it is that it promises and delivers market returns, less costs. If that will deliver the long term return you need, there’s no surer way to get it. If you need more return, you need to leverage the investment with borrowings, or deviate from the market cap portfolio and take your chances (which is hardly ‘at minimal risk’).

The objective is to achieve sufficient real long term return at minimum risk

How is a market cap portfolio not the optimal way to do that if one needs equities at all?

You seem to be assuming that the goal is 'more return'. How about someone, who like Linton says, is after sufficient return. The classic answer is a chunk allocated to bonds or cash but there is no market cap baseline for that split. In addition, it could be argued that by avoiding the riskiest parts of the equity market you can reduce the effect of an equity crash when it happens, which for a retiree is likely more important than worrying about the best return or even the global index return. Why aim for 5% if you only want 2%?

JohnWinder

‘But which markets?

All investable markets I suppose.

A market cap weighted portfolio for a US investor will perform differently to a UK investor and differently again to a Japanese investor.   So you are not just getting market performance.

Yes, a practical point. Not all investors would get the same returns, given the influence of currency exchange rate movements. So I suppose one might use currency hedging to reduce that effect, or take it on the chin like a man. The latter is still getting the returns the markets have to offer at lowest risk, compared with trying to anticipate whether it’s Japan this year or European stocks next year.

Linton

InvesterJones said:

Linton said:

GeoffTF said:

Linton said:

GeoffTF said:

Linton said:

GeoffTF said:

bundoran said:

GeoffTF said:

dunstonh said:

GeoffTF said:

dunstonh said:

Aminatidi said:

One reason.

Also a bit of personal psychology there where I'm trying to move towards passives and rightly or wrongly Vanguard not having 3000 active funds minimises the occasional urge to tinker

But Vanguard doesn't have the best or cheapest trackers in every area.  So, limiting yourself to just them could compromise the outcome.

Vanguard's trackers are as good as any. The cost of the platform will usually be more important than a small difference in the OCF. Transaction costs cannot be compared between providers because there is no standard method of calculation. You do not need trackers "in every area". Adding more of them will not increase your chances of a good outcome.

I never said you needed trackers in every area.   

However, Vanguard do have one of the largest range of trackers in non-core areas.   They are just not as low cost in core areas compared to other fund houses.

If charges are a driver behind the decision, as they are in this thread, then restricting yourself to Vanguard trackers only increases your charges.

The vast majority of Vanguard funds are aimed at speculators who believe that a particular market or sector will outperform. 

The vast majority of Vanguard funds are aimed at long term passive investors who want to invest in either the whole world, the developed world, or regions of the world in a proportion which they have chosen and are comfortable with for their own reasons; or people who wish to invest in a mixed asset fund like Lifestrategy.

To say that these passive funds and mixed asset funds - which make up the vast bulk of Vanguard's offering - are "aimed at speculators" is asinine.

Choosing "regions of the world in a proportion which they have chosen and are comfortable with for their own reasons" is speculation. That is not what Jack Bogle advocated. I have not said that Vanguard is wrong to offer those funds.

As for your last sentence, kindly quote me accurately and be polite.

Nonsense in my humble opinion.  Choosing not to invest more than 60% of one's life savings in one single country whose returns are dominated by one or two sectors which are in turn  dominated by a handfull of massive companies seems to me to be taking a prudent approach rather than speculation.

What matters most here is diversification between companies, not countries. For the most part, the political boundaries are irrelevant. Companies can incorporate wherever they choose. They can derive most of their earnings overseas. Moving their headquarters does not change much. There can be relevant differences. Local taxation can be different, for example, but that should be reflected in the share price. There are special considerations for Emerging Market companies, but they should also be reflected in the share price.

If a company decided to incorporate in New York, rather than Canada, I would not reduce its weighting because of that.

The home market is an exception, because UK company dividends are not subject to withholding tax, for example. There are rational reasons for a home bias.

Countries can be a proxy for quite different sector asset allocations and differences in style. Hence they are also a single point of failure. Look at the US markets in the tech boom/crash era.

 

Professional investors try to exploit that. There is abundant evidence that they do not have more than chance success. Bogle would have asked why you believe that you are more capable of pricing market sectors than them. He would not have advocated under-weighting the tech stocks.

The objective is to achieve sufficient real long term return at minimum risk, not to maximise return. My belief is that all well diversified sensibly managed portfolios will achieve much the same long term returns. I agree that attempts to achieve higher long term returns than this are on average likely to fail. However different allocations will have different short/medium term behaviours.

I see nothing magic about a market capitalisation based portfolio. Its only advantage is the low cost of implementation, the downside is restricted diversification being over dependent on a small number of closely related companies and susceptibility to over-enthusiastic speculation in high risk areas.

I agree with your first paragraph, but not your second. Market cap weighting is effectively the worldwide investor consensus view. Taking a view that it's over dependant or too weighted to small number of companies is saying that you think you know better than that consensus, i.e. that you're doing the job of an active fund manager trying to beat the market. Self-belief is important, but is it really wise to think we armchair investors can do a better job? I don't think so - but that doesn't stop me trying with at least a minority portion of my portfolio where I'm also concerned that valuations are a touch high (I don't know what Bogle would have thought of the report from Vanguard about the US stock market, especially large caps, likely having lower performance over the next decade than other markets - presumably he'd shrug and say 'that's OK, it'll perform enough').

There is no belief that I know better than the consensus but rather that my objectives are different to many of those who determine what the consensus is, in particular as regards risk.

If as you say you agree with my first paragraph surely it makes sense to use one's flexibility on allocations without sacrificing long term return to set up one's portfolio to match one's needs or wishes.

I do not care what Vanguard say what will happen to US large caps in the next decade or whether valuations are too high or too low..  They dont know. I dont know.  Bogle would not know.  The market consensus doesnt know.  Nothing will change that.  Dont try to predict anything to do with the markets.  The important thing is to ensure is that if it is a reasonable possibility  that US large stocks do perform badly the portfolio as a whole  is not too badly hit. So constraiun the % of your portfolio you put into them and leave room for allocations elsewhere.  That is what I mean by over-dependence - it is nothing to do with whether current valuations are deemed too low or too high.

JohnWinder

Dont try to predict anything to do with the markets.  The important thing is to ensure is that if it is a reasonable possibility  that US large stocks do perform badly the portfolio as a whole  is not too badly hit. So constraiun the % of your portfolio you put into them and leave room for allocations elsewhere.

If you hold the market, cap weighted, you’ll take a bigger hit if the whole market falls than I will if I hold less of those mega cap US stocks which contribute a lot to the total capitalisation of the market. Yes, indeed. Or, if those big US stocks alone have a bad run, you’ll do especially badly.

Dont try to predict anything to do with the markets.’

To be wary of those big cap US stocks I would be predicting that one segment of the market will behave in a particular way, mais non?

JohnWinder

You seem to be assuming that the goal is 'more return'. How about someone, who like Linton says, is after sufficient return. The classic answer is a chunk allocated to bonds or cash but there is no market cap baseline for that split. In addition, it could be argued that by avoiding the riskiest parts of the equity market you can reduce the effect of an equity crash when it happens, which for a retiree is likely more important than worrying about the best return or even the global index return. Why aim for 5% if you only want 2%?

They are really good points, and worth chewing over. Firstly, I think ‘more return’ has to be compared with something specific. I think the goal of equity investing, instead of in bonds, is ‘more return’. So anyone holding any equities is after more return than not holding equities; I think that’s fair. If Linton holds stocks which he’s said he does, we can’t say he’s not after ‘more return’.
He’s not after more return than I who hold all stocks, or you who borrows to hold even more than 100% stocks, but we can’t say he’s not chasing stock returns. His choice now is to take market returns (with all the caveats about hedging currency risk etc), guaranteed, or as you put it to choose from the market to get smaller returns with even disproportionately smaller risk (there would be no advantage taking proportionate risk). If such a segment of the market existed it would be recognised, people would pile into it because it gives better risk adjusted returns than the whole market, and as a result the advantage would be gobbled up. The only way to choose a segment(s) of the market with better risk adjusted returns than the market is by skill or luck. I don’t have the former, or trust the latter. We’re all different, and ‘vivre’ that difference.