First Time DIY Portfolio

RichardS

I suppose why I started this thread was that through reading some books and watching YouTube videos etc I was getting the message (maybe I misunderstood?) that 9 times out of 10 the index beats the managed fund over the long term. That seems simple.  9 times out of 10 the cheap option beats the expensive option. It’s obviously not that simple.  If I was 20 years old and just starting out I don’t think I would hesitate and go for a straight index fund. But at 57 and with a £200k pension and a £25k ISA to play with it feels very different. 

JohnWinder

If the index/active thing is as you say, and I think it’s a fair summation, then there is more risk with active (you can do better than the market or worse) compared to indexing which carries only market risk. A popular line of thinking is that when you’re young, with plenty of earning power and potential ahead of you, you can safely take more risk with your investments because you have time to make good on unexpected losses (with personal exertion) as well as having less in your investments to take ‘beyond market risk’ with. This flies in the face of the logic you proposed, unless you have so much that you can put some of it at extra risk. Go, you, if that’s the case.

RichardS

@JohnWinder thanks I’m not sure what you are saying here - the bit about flying in the face of logic - as I think you were backing up my point?  If I was young and starting out I would go for an index fund and ride out any major falls. But at my age (with a large sum accrued already) leaping into index funds seems a difficult (and perhaps foolish) thing to do?

Pat38493

RichardS said:

I suppose why I started this thread was that through reading some books and watching YouTube videos etc I was getting the message (maybe I misunderstood?) that 9 times out of 10 the index beats the managed fund over the long term. That seems simple.  9 times out of 10 the cheap option beats the expensive option. It’s obviously not that simple.  If I was 20 years old and just starting out I don’t think I would hesitate and go for a straight index fund. But at 57 and with a £200k pension and a £25k ISA to play with it feels very different. 

You are basically correct according to the widsom of Tim Hale and so on, and this is what I am following.  You will get plenty of people claiming that they can make a little bit more by their investment skills, either DIY or active managers, but unless you want to spend a lot of your time staring at stock prices on computer screens to make, at best, a tiny extra gain, your approach of using low cost trackers has been proven to work pretty well.

JohnWinder

Assuming the only significance that you attribute to your age is that you’re making choices for a lot of money, losing too much of which can hurt, why is moving into indexing from active possibly foolish, and feels difficult (if for a reason other than possibly being foolish)?

RichardS

@JohnWinder I don’t know!

dunstonh

To access these - I think this would be case of finding the transactional IFA (pension transfer farm or willing local firm) that uses a desired provider. 

I suspect an IFA wouldn't do it on transactional basis.   Where the IFA/DFM relationship is "agent as the client", IFAs are responsible for the changes made in the portfolio and any removals/additions and the resulting issues that could arise.       So, whilst the DFM carries out the transactions, the adviser carries the liability.     Every time a DFM adjusts the portfolio, the adviser is meant to check that it remains suitable.       

A transactional client is not paying for any ongoing servicing.  So, why would an IFA want to put someone on that if they are not paying for it?

Total costs look mildly alarming just on the example I clicked through to.  Invesco MPS on Fidelity. 
Ivesco risk tiered MPS "Fund of funds" 0.64%
Fidelity (assumed 0.3% as retail for funds - could be wrong about indirect pricing being the same.  Unlikely to be zero.

Invesco is fund house that offers managed funds.   So, you are looking at fully active pricing.  So, 0.64% is not alarming for a fully active portfolio.  Invesco do two methods.  A DFM portfolio within a fund - so a fund of funds effectively.  The charges are 0.40% for the Summit Growth range or 0.25% for the Summit responsible range.    And an MPS Portfolio service where the IFA firm pays the DFM charge and the OCF ranges from 0.52% to 0.70%.  All of those are fully active.

Fidelity usually charge less than that for IFAs.   0.20% to 0.25% is typical (often bespoke terms)

An alternative DFM MPS strategy (again, noting MPS versions rather than full DFM) has a DFM at 0.10% and funds at 0.09%.   (add on platform and adviser).   So, the investment side at 0.19% is much more reasonable and in line with VLS, HSBC GS etc but will also include monthly/quarterly reports on market events and the portfolio changes and reasons for the changes.   So, you get a commentary on how and why.   

So, DFM use can be expensive or it can be low cost.

But at my age (with a large sum accrued already) leaping into index funds seems a difficult (and perhaps foolish) thing to do?

A portfolio of index funds is no more or no less risky than a portfolio of active funds.   Its the assets used within them and the spread between the regions/country that matter.

However, in the last 18 months, I have noticed that the hybrid portfolios have not gone down as much as the index portfolios.  Mainly due to the use of alternative assets on the defensive side of the hybrid portfolios compared to the gilts and bonds used on the index portfolios.      That said, during the coronavirus falls, there was no noticeable difference.    The flip side is that in the growth periods, the hybrid (and fully active) portfolios tend to lag passive portfolios bar occasional spikes.       

It is far too crude to say that hybrid has a better downside but worse upside with active and vice versa but there is some truth in that with some negative events.

I suppose why I started this thread was that through reading some books and watching YouTube videos etc I was getting the message (maybe I misunderstood?) that 9 times out of 10 the index beats the managed fund over the long term.

Long term yes.  Short term no.    If you are on a lazy portfolio which is chosen at the outside and left with no changes then passive really is a no brainer (if 100% equity, if not then a multi-asset strategy with underlying passives).    However, if you are on a portfolio where ongoing changes occur than targeted use of managed funds can be beneficial and add value.    Even Vanguard agree with that.

Most of the time, the return differences are down to asset allocation weightings.  You can achieve different outcomes with different passive funds.   Do you go heavy in UK or light in UK?   (replace UK with US, Japan, Asia etc).  Do you use gilts or index linked gilts, corporate bonds, strategic bonds etc and how much in each?     

You could have millions of people investing in passive portfolios who either outperform or underperform a managed or hybrid portfolio because their asset & sector allocations (UK use of Sector allocation, not US) are different or outside of the typical and either get lucky or unlucky.

coastline

RichardS said:

I suppose why I started this thread was that through reading some books and watching YouTube videos etc I was getting the message (maybe I misunderstood?) that 9 times out of 10 the index beats the managed fund over the long term. That seems simple.  9 times out of 10 the cheap option beats the expensive option. It’s obviously not that simple.  If I was 20 years old and just starting out I don’t think I would hesitate and go for a straight index fund. But at 57 and with a £200k pension and a £25k ISA to play with it feels very different. 

Then maybe keep it very simple and have two funds you have some control over. A global tracker fund and a cash fund. I'm no sure how well this will go down on here but why not if you're cautious . So you've established many active funds don't beat an index fund and the global tracker is an option. The equity fund can be volatile and as much as 50% . That has played out around every 20 years. Drawdowns are common and 10%-15% in any year isn't unusual.

 How the S&P 500 Performed During Major Market Crashes (visualcapitalist.com)

Hopefully you have a twitter log in.

FAnlCscXMAAofaK (900×529) (twimg.com)

FE_eyeLXEAY6jG8 (900×428) (twimg.com)

Usually investors have bonds/gilts in their portfolio as it adds a bit of stability. This hasn't been the case in recent years as bonds have crashed big time. History shows they're volatile in normal times but not as much as equities.

FsZwd6qXwAImInR (900×561) (twimg.com)

recent slump

Vanguard UK Gilt UCITS ETF, UK:VGOV Advanced Chart - (LON) UK:VGOV, Vanguard UK Gilt UCITS ETF Stock Price - BigCharts.com (marketwatch.com)

If you don't want bonds/gilts then why not have a cash fund . This depends on the platform you use of course but its possible to build a two fund portfolio. Many posters here are using a short term money market fund and current rates are near 5% PA. 

Gilts and a global tracker..

Chart Tool | Trustnet

Short term money market fund and a global tracker because of recent events looks more stable.

Chart Tool | Trustnet

You then decide on your allocation to global tracker , bond/gilts , or the cash fund. If you go 30% global tracker and 70% cash then a disastrous crash in equities of 50% would leave you just 15% down ( half of the 30% ). All depends on your risk ? Adding more to equities increases the risk. In a normal year equites might only fall 10% so very little change to your set up. Only offering an idea ..

Bostonerimus1

JohnWinder said:

If the index/active thing is as you say, and I think it’s a fair summation, then there is more risk with active (you can do better than the market or worse) compared to indexing which carries only market risk. A popular line of thinking is that when you’re young, with plenty of earning power and potential ahead of you, you can safely take more risk with your investments because you have time to make good on unexpected losses (with personal exertion) as well as having less in your investments to take ‘beyond market risk’ with. This flies in the face of the logic you proposed, unless you have so much that you can put some of it at extra risk. Go, you, if that’s the case.

In developed markets index funds usually beat active ones and a lot is made of that. However, a bigger influence on your investment success is your own actions. Failing to invest enough or panic selling in down turns or buying very volatile stuff like crypto could be far worse for your finances than the performance difference between well run active and index funds. In some circumstances active management has a long history of success, eg investment trusts like Capital Gearing Trust, but you might use a multi-asset fund instead. There are many possible solutions so I think its important to keep things simple and don't worry about what you don't have or read the headlines about the latest big successes or market leaders; just make initial sensible choices and keep an eye on what you have.

The OP has made some good choices and thought about a simple portfolio that is a great start. 

MK62

RichardS said:

I suppose why I started this thread was that through reading some books and watching YouTube videos etc I was getting the message (maybe I misunderstood?) that 9 times out of 10 the index beats the managed fund over the long term. That seems simple.  9 times out of 10 the cheap option beats the expensive option. It’s obviously not that simple.  If I was 20 years old and just starting out I don’t think I would hesitate and go for a straight index fund. But at 57 and with a £200k pension and a £25k ISA to play with it feels very different. 

Far too sweeping a statement tbh, and a big over-generalisation. None of this really matters though as long as your retirement portfolio meets it's goals. 
However, one of the big appeals of index investing, especially to new investors, is that it pretty much guarantees you won't be in the worst performing fund in any particular sector....by it's very nature, an index fund will be an average performer....perhaps a little above average due to the generally lower charges v active funds (though that gap has narrowed significantly over the years, no doubt due in a large part to index funds forcing the change).......most of the other funds in the same sector will be buying and selling the same things as the index fund for the most part (there are always a few exceptions of course) just at different times and in different quantities, or not at all in some cases.......some funds will outperform the index, more probably won't, and some will underperform by a fair margin.......buying the index fund guarantees you won't be in one of those, which is perhaps a new investor's biggest fear.