DIVERSIFICATION...?

jay_ftw

Hi All,

Still very new to the forum and the world of investing...outside of a basic cash isa that!

So I've gone a little investment crazy the last fortnight and I've opened:

SIPP - I own my own business so this seemed logical given I'm not paying much at all into my own workplace pension
LISA - gutted I only just found out about these (I'm 37)!
S&S ISA - I have a high risk appetite, can afford the potential ups and down, and I don't see myself need the money in the short term
JISA - for my 2yr old, will open 2nd JISA for baby due in March.

So my question is...is investing in the same single global index fund, being diversified? Like I said I'm very new to investing so please forgive my naivety but surely a Global fund in its self covers everything, so it's as diverse as can be?

Thanks in advance and I look forward to hearing your opinions

dunstonh

SIPP - I own my own business so this seemed logical given I'm not paying much at all into my own workplace pension

Company owners don't have to auto-enrol in the workplace pension.

LISA - gutted I only just found out about these (I'm 37)!

Pension would still beat LISA for a company owner who is in the higher rate band.   However, LISA is good if you are maximising pension allowances.

S&S ISA - I have a high risk appetite, can afford the potential ups and down, and I don't see myself need the money in the short term

Whilst high in the pecking order for employees or self employed, it is not that high up the pecking order for shareholding directors/owners unless the money is needed before age 58.

So my question is...is investing in the same single global index fund, being diversified?

yes.

gm0

Diversification isn't a switch - on or off.  Done it or not. It is a dial.   

For equities.  Increasing in the list below

1 Holding a single stock - say all in on tesla
2 Picking 20 tickers out of the paper
3 Holding a concentrated actively managed fund with 50 stocks
4 Holding a single country fund - FTSE100 (100 stocks)
5 Holding a Global Equities Developed markets fund with a few thousand (1500-6000)

And there are more investible things beyond that

6) Emerging markets equities - more countries
7) Smaller capitalisation stocks (smaller companies) not found in the main indices and funds

So a level (within) equities beyond global developed - is possible. 
More stocks held = more diversification (more or less).

And there are other asset classes

8) Bonds (of numerous sorts - Government, Corporate, Index Linked, Emerging markets, Junk (high credit risk)
9) Property investment trusts (REITS) themed around commercial property assets
10) Commodities - gold, metals etc.

Turning the dial in equities is what you have done so far by going to item 5.

So for a stockmarket equities holdings this quite well diversfied - and would be viewed as such by most people

But there are more equities and other asset classes out there whiich you can choose to add or ignore.

Using more wrappers, fund managers and platforms

Using the same one every time - does mean that "all your eggs" are in the same basket. Fund manager, tax wrapper etc.  This is not a diversification issue but something else.  Resilience and impact of scandal or failure.  If you used HSBC and Vanguard "global equities" for ISA and SIPP then the investments are super similar but not all your investments are via the same company.  There are usually options from big players.  BlackRock iShares, Vanguard, HSBC, L&G (LGIM) etc. for any given thing.  You can choose to care about this topic or not.

Linton

In my opinion...

The major factor in determining a suitable portfolio is the time frame - ie when do you plan to withdraw the money?
 - upto around 5-7 years is easy, use cash savings or equivalent
 - long term, say >15-20  years is easy, use a global equity index fund, as diversified as possible

Assuming you are investing for the long term the next factor is your attitude to risk.  You need to be thinking of your reaction to a 50% fall in the value of your equity investments say once or twice a decade.  Would you panic and sell everything or sleep soundly confident that the global markets would recover by the time you needed the money?

Assuming you had ample income, cash savings/lower risk investments to cover one-off expenditures plus any emergency for several years and were happy with the volatility then 100% in the most diversified equity fund available could be appropriate.

The only single fund that I know of that meets that criterion is Vanguard's FTSE Global All Cap Index Fund. It includes big and small companies and emerging markets.  Adding other funds would not improve the diversification. 

If you aren't happy with just holding a single global index tracker then more thought is required starting from an understanding of why you were not happy.  

Malthusian

jay_ftw said:

So my question is...is investing in the same single global index fund, being diversified? 

No. If it's a global equity index fund.

Not often I disagree with dunstonh, but if there's no allocation to bonds or other asset classes, it's not diversified. (It's not 100% clear from your post, but "global index fund" would often be used as shorthand for "global equity index fund".)

gm0 said:

Turning the dial in equities is what you have done so far by going to item 5.

Actually, if the OP holds a global equity index tracker, they already hold 6, 7, 9 and 10. Just in very small amounts, reflecting their place in the grand global scheme as measured by their market capitalisation.

8 (bonds) is the one they are (apparently) missing.

(Miners, agribusinesses, etc are held in global equity index funds, so you do hold gold, iron, wheat etc in a global equity index. Just a really really small amount of it. Especially as these companies are in the business of offloading their commodities ASAP so someone can use it productively, not sitting on them waiting for number go up, or buying rolling futures contracts waiting for number go up. But it's still there.)

Linton

Malthusian said:

jay_ftw said:

So my question is...is investing in the same single global index fund, being diversified? 

No. If it's a global equity index fund.

Not often I disagree with dunstonh, but if there's no allocation to bonds or other asset classes, it's not diversified. (It's not 100% clear from your post, but "global index fund" would often be used as shorthand for "global equity index fund".)

gm0 said:

Turning the dial in equities is what you have done so far by going to item 5.

Actually, if the OP holds a global equity index tracker, they already hold 6, 7, 9 and 10. Just in very small amounts, reflecting their place in the grand global scheme as measured by their market capitalisation.

8 (bonds) is the one they are (apparently) missing.

(Miners, agribusinesses, etc are held in global equity index funds, so you do hold gold, iron, wheat etc in a global equity index. Just a really really small amount of it. Especially as these companies are in the business of offloading their commodities ASAP so someone can use it productively, not sitting on them waiting for number go up, or buying rolling futures contracts waiting for number go up. But it's still there.)

I dont disagree with what you are saying but it does read on to an important consideration.  Within most assed classes diversification is essential.  Hoever I am far less certain that diversification across asset classes is, of itself, benficial.

Choice of asset classes in which to invest depends on one's time scale and risk acceptance.  In my view classes other than cash or equity are irrelevent in the short term, generally  important in the medium term but useful only to dampen volatility in the long term at the cost of some return.

dunstonh

No. If it's a global equity index fund.
Not often I disagree with dunstonh, but if there's no allocation to bonds or other asset classes, it's not diversified. (It's not 100% clear from your post, but "global index fund" would often be used as shorthand for "global equity index fund".)

I was answering on the basis that the OP has the risk profile and capacity for loss to be 100% equities on these investments.     Whilst in our world, we wouldn't use 100% equities with the majority of people we deal with, we do see a lot of DIYers on this site go 100% equity.   So, in that respect, a global equity tracker (all markets) would meet that criteria.

MK62

My view is that it all depends on exactly what is meant by diversification here........a typical global equity index fund will have more money invested in Apple shares than the entire UK stock market, more money invested in 4 companies (Apple, Microsoft, Amazon, and Google) than all the European ex-UK stock markets combined, and over two thirds will be invested in just the USA (and hence USD).

So, it's diversified in the sense that it'll be invested in a lot of different companies, but perhaps less so regionally, and less so in terms of currency exposure. This has worked in investor's favour in recent times.......hence the popularity at the moment......but it could potentially backfire quite badly if the US economy, and especially the tech sector, hits harder times than the rest of the world.

.......and then there's other asset classes, as mentioned by other members.

GeoffTF

MK62 said:

My view is that it all depends on exactly what is meant by diversification here........a typical global equity index fund will have more money invested in Apple shares than the entire UK stock market, more money invested in 4 companies (Apple, Microsoft, Amazon, and Google) than all the European ex-UK stock markets combined, and over two thirds will be invested in just the USA (and hence USD).

So, it's diversified in the sense that it'll be invested in a lot of different companies, but perhaps less so regionally, and less so in terms of currency exposure. This has worked in investor's favour in recent times.......hence the popularity at the moment......but it could potentially backfire quite badly if the US economy, and especially the tech sector, hits harder times than the rest of the world.

.......and then there's other asset classes, as mentioned by other members.

Nonetheless, financial theory says that market cap weighting gives the highest expected risk adjusted return for an equity portfolio.

Linton

GeoffTF said:

MK62 said:

My view is that it all depends on exactly what is meant by diversification here........a typical global equity index fund will have more money invested in Apple shares than the entire UK stock market, more money invested in 4 companies (Apple, Microsoft, Amazon, and Google) than all the European ex-UK stock markets combined, and over two thirds will be invested in just the USA (and hence USD).

So, it's diversified in the sense that it'll be invested in a lot of different companies, but perhaps less so regionally, and less so in terms of currency exposure. This has worked in investor's favour in recent times.......hence the popularity at the moment......but it could potentially backfire quite badly if the US economy, and especially the tech sector, hits harder times than the rest of the world.

.......and then there's other asset classes, as mentioned by other members.

Nonetheless, financial theory says that market cap weighting gives the highest expected risk adjusted return for an equity portfolio.

What does "risk" mean in that context?

My assessment and acceptance of risk (however you define it) may be very different to your's,with both being very different to the market's.  Whose is right?  Well, as far as I am concerned mine is.  Anybody else's is irrelevent.

Surely if you believe in the Efficient Market Hypothesis that all market prices are "correct" in as far as anyone can know all aufficiently diversified (in the sense of minimally correlated underlying holdings) allocations of equity investments will give the same return in the long term.  Any advantage of say Apple is already priced in.

One can see this by comparing performance of US tindex rackers with equal weighted US fiunds or small company funds.  They are all remarkably close over the longer term.

Given that is the case the next risk to consider is that of correlated failure across individual sectors, geographies etc.  The best protection is surely to minimise high concentrations of investment in any particular companies or  identifiable sub-class.


I would suggest that a significant reason why the US is so dominant in world markets is that there are more investors  in the US for whom "international" investments are seen (possibly correctly for them) as higher risk than elsewhere rather than any group-mind effect.  Were market prices to be determined by say Chinese investors the global ndexes could look very different.

GeoffTF

Linton said:

Given that is the case the next risk to consider is that of correlated failure across individual sectors, geographies etc.  The best protection is surely to minimise high concentrations of investment in any particular companies or  identifiable sub-class.

I would suggest that a significant reason why the US is so dominant in world markets is that there are more investors  in the US for whom "international" investments are seen (possibly correctly for them) as higher risk than elsewhere rather than any group-mind effect.  Were market prices to be determined by say Chinese investors the global ndexes could look very different.

"Developed world" companies can incorporate wherever they like nowadays. If most of them choose to incorporate in the US, that does not increase the risk of a global portfolio. A market weighted portfolio has the greatest diversification.

The US has a very large number of very large and very profitable companies. It does not matter where the investors are nowadays. Wherever they are, they are going to invest heavily in the US. China has a big economy too, but most of that economy is not quoted on a stock exchange.