First Time DIY Portfolio

JohnWinder

@JohnWinder I don’t know!

‘I would have everyman write what he knows and no more.’ I don’t know who wrote that but she should have written more.

JohnWinder

‘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.’

If you compare an index fund, tracking a good index well, with an active fund, both of which have the same asset class, spread between the regions and other relevant characteristics, then the active fund should be more risky because it is taking market risk (as the index fund is) and then because it is stock picking from the market just a selection of all available stocks, it should at times get a better return than the index funds and a worse return at other times. That’s more volatility and thus more risk by that measure of risk. Worse yet, likely more expensive.

‘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. ’

Investing is usually about the long term, so keep that in focus. Short term it’s about six times out of ten according to the SPIVA reports.

‘However, if you are on a portfolio where ongoing changes occur than targeted use of managed funds can be beneficial and add value.’

And detract from value surely, if it’s only ‘can’ be beneficial. How do we choose that strategy if it could be better or could be worse than indexed funds?

Bostonerimus1

MK62 said:

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.

Being average has been the foundation of my 35 years of investing and if I was doing drawdown from my DC funds it would be the foundation of that too. Experienced investors can benefit from index investing just as much as the beginner. I've been retired for ten years and being average for so long has helped to give me a far from average mid seven figure net worth. My own success is the reason that I am an evangelist for simple DIY index investing.

JohnWinder

‘Being average has been the foundation of my 35 years of investing ’

Not at all. Index funds have outperformed 80-90% of active funds over 20 years. Unless active funds were better managed for the 15 years before that, you’ve been well above average.

‘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’

Since the fees of decent index funds tracking decent indexes closely are lower on average than the average active fund it’s definitely not true that an index fund will be an average performer; definitely above average due to fees. There’s nothing ‘perhaps’ about it surely?

Bostonerimus1

JohnWinder said:

‘Being average has been the foundation of my 35 years of investing ’

Not at all. Index funds have outperformed 80-90% of active funds over 20 years. Unless active funds were better managed for the 15 years before that, you’ve been well above average.

I was referring more to the perception of index investing than to the actual results and to the fact that I've just followed the performance of equity and US bond indexes. Index investing with some rebalancing has given me a simple way to manage my funds and allowed me to concentrate on regular contributions over decades that have compounded to give me financial independence. But that was combined with a well paying job that gave me enough income to invest and save, a frugal lifestyle and also mostly friendly stock and bond markets.

MK62

Bostonerimus1 said:

MK62 said:

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.

Being average has been the foundation of my 35 years of investing and if I was doing drawdown from my DC funds it would be the foundation of that too. Experienced investors can benefit from index investing just as much as the beginner. I've been retired for ten years and being average for so long has helped to give me a far from average mid seven figure net worth. My own success is the reason that I am an evangelist for simple DIY index investing.

I didn't say an experienced investor can't benefit......I simply said that a big attraction, "especially" to new investors, is the guarantee that investing in an index fund will mean avoiding one of the worst performing funds in the sector.

As for your own success making you an index investing evangelist, I could counter that with it perhaps being a bit of confirmation bias... ....but however it's obtained, success is the important factor. Can you honestly say you'd definitely have been less successful choosing active funds though?......or is it more of a "generally speaking" thing?........but even if you had made a little less money, that doesn't necessarily equate to failure.
As an aside, you'd get little argument from me that 35 years ago, a low cost index fund would have had a much easier time outperforming most of the typical active funds of the day, certainly in the UK, where entry charges of 5% were not uncommon, as were annual fees of 1.5-2%........fast forward to today though and the lines are perhaps a little more blurred.

Bostonerimus1

MK62 said:

Bostonerimus1 said:

MK62 said:

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.

Being average has been the foundation of my 35 years of investing and if I was doing drawdown from my DC funds it would be the foundation of that too. Experienced investors can benefit from index investing just as much as the beginner. I've been retired for ten years and being average for so long has helped to give me a far from average mid seven figure net worth. My own success is the reason that I am an evangelist for simple DIY index investing.

I didn't say an experienced investor can't benefit......I simply said that a big attraction, "especially" to new investors, is the guarantee that investing in an index fund will mean avoiding one of the worst performing funds in the sector.

As for your own success making you an index investing evangelist, I could counter that with it perhaps being a bit of confirmation bias... ....but however it's obtained, success is the important factor. Can you honestly say you'd definitely have been less successful choosing active funds though?......or is it more of a "generally speaking" thing?........but even if you had made a little less money, that doesn't necessarily equate to failure.
As an aside, you'd get little argument from me that 35 years ago, a low cost index fund would have had a much easier time outperforming most of the typical active funds of the day, certainly in the UK, where entry charges of 5% were not uncommon, as were annual fees of 1.5-2%........fast forward to today though and the lines are perhaps a little more blurred.

Yes, you didn't mention that experienced investors can benefit from indexing, which is why I said it.

Confirmation bias is always a trap, but I would counter that it is one that proponents for active investing fall into more often than index investors because they seldom talk about the active funds that fail to beat their benchmarks or indeed just get wound up.

I might have done better by active investing, I can certainly look back and see many clear paths to ridiculous wealth, but the path to future wealth is what we need to see and that's obviously a lot fuzzier. Index investing does not maximize your potential returns, but it can be argued that it maximizes your chance of success within some pre determined criteria because you avoid the stinkers. I believe that indexing's greatest advantage is that it allows you to sleep better at night than having constant the push for "alpha" that is inherent in active investing. I set my asset allocation using a Lazy Bogleheads portfolio and just rebalanced through several market crashes and that discipline helped me stay on course. I don't know if that approach will work over the next 35 years, but my bet would be that it would probably see you ok and as a scientist balancing probability, return and risk against my goals is how I've always approached investing.

RichardS

Thanks for all these comments, it’s been really interesting to read them.  I appreciate the advice.

So just getting back to my original question. Let’s say I was really brave and moved my £200K actively managed pension into a two fund passive index portfolio on InvestEngine (with the 60/40 split).  In any one year if there were losses that would only be because either or both the indexes returned a loss.  It would be likely that the actively managed fund may also have made a loss in that year as well (I would think?) but it would have to be doing almost £3k better than the index tracker’s losses for me to be worse off in that particular year (due to the £3k a year charges on the actively managed pension)

Is that just way too simplistic a way of looking at it?

Also, if we had a sudden outbreak of a new dangerous virus somewhere in the world tomorrow, what would my current active fund managers be doing?  Would they suddenly move everything into cash and then buy stock again after a likely fall in the markets?. Is that situation the sort of situation where managed funds clearly have an advantage over passive index tracking?   What do people with passive index tracking portfolios do in that type of scenario, do they sit tight and ignore it or do they adjust their portfolios fund allocations?   With passive index tracking is it really just a case of creating a portfolio and then just sticking with it?

coastline

Anything can happen equities up and bonds down and visa versa. All years are different . Saving in management fees will add to your portfolio performance only if the active manager fails to deliver. In a crisis maybe the active fund manger will tweek the fund but it won't be much unless it was out and out active. There'll not be many of those. Ballpark returns below and clearly shows average performance during the pandemic.

 Chart Tool | Trustnet

60/40 portfolio only negative annually around 20 times in 100 years.

FlUNZblXoAEcILa (900×446) (twimg.com)

Bostonerimus1

RichardS said:

Thanks for all these comments, it’s been really interesting to read them.  I appreciate the advice.

So just getting back to my original question. Let’s say I was really brave and moved my £200K actively managed pension into a two fund passive index portfolio on InvestEngine (with the 60/40 split).  In any one year if there were losses that would only be because either or both the indexes returned a loss.  It would be likely that the actively managed fund may also have made a loss in that year as well (I would think?) but it would have to be doing almost £3k better than the index tracker’s losses for me to be worse off in that particular year (due to the £3k a year charges on the actively managed pension)

Is that just way too simplistic a way of looking at it?

Also, if we had a sudden outbreak of a new dangerous virus somewhere in the world tomorrow, what would my current active fund managers be doing?  Would they suddenly move everything into cash and then buy stock again after a likely fall in the markets?. Is that situation the sort of situation where managed funds clearly have an advantage over passive index tracking?   What do people with passive index tracking portfolios do in that type of scenario, do they sit tight and ignore it or do they adjust their portfolios fund allocations?   With passive index tracking is it really just a case of creating a portfolio and then just sticking with it?

Keep your thinking simple. You are on the right lines with paragraph 1. In paragraph 2 you are thinking too hard.

We cannot know the future and short term tactical changes in a portfolio can be a disaster. I'll tell you want I did in 2007/8 crash and through Covid and the recent terrible military actions in Ukraine and Israel and Gaza.

2007/8

I was basically 60/40 between Global equities and US bonds in three index funds. As equities fell and my allocation went to 55/45 I rebalanced selling bonds to buy equities. This discipline stopped me from panicking, although I came close. I made sure I had no debt other than the mortgage and a plan to pay that off asap. As I approached retirement and my income sources came into focus I gradually went to 80/20 asset allocation and stopped rebalancing. This is backwards from conventional wisdom, but I can afford to take the risk.

Covid, Ukraine and Gaza.

I have done very little and nothing with my investments. I am retired and have 90% equities, mostly in index funds, and a little in an income oriented multi-asset fund and keep 3 years cash on hand for emergencies and cash flow. My mortgage is paid off and income comes from a DB pension and a rental property on the first floor of my house. My portfolio's worth fell by about 25% at the worst, but has gained that, and more, all back. As I don't rely on my DC pension money or other invested accounts for any income I can be pretty sanguine about the ups and downs of the markets.