Challenge to Financial Advisers

daimes

Linton said:

daimes said:

Linton said:

Perhaps you should have analysed your results over a longer timeframe:

In 2000 Fidelity Global Tech dropped by 70%.  It did not return to its previous high until 2014.  That is what high risk can mean and is why sensible investors pay careful attention to diversification.  An IFA would not recommend a portfolio that is likely to show this type of behaviour.  Inexperienced investors would be likely to have sold out immediately after the crash at a loss rather than wait for the recovery, most experienced investors would not want to get in that position in the first place.

Stop prevaricating, I'm getting tiered of responding to arguments that have little real substance.... 

It's time to put up or shut up ... where is your alternative suggestion?

If you want me to respond to your points then start with an alternative portfolio. One that you would comfortably say to a client (assuming you are an adviser) don't buy that one... buy this one.

10 years investment horizon.

One cannot propose a sensible portfolio unless one knows, for example:
1) Timescale, 1 year or 30 years? If you really are thinking about 10 years you may be best advised to take significant  advantage of the currently high interest rates rather than risk a crash devastating your savings with insufficient time to recover.
2) How much return is needed? There is no point in chasing more than you need by adding unnecessary risk to your portfolio.
3) Are you planning to take a steady income or wanting a specific lump sum after a significant time period ?
4) Investor psychology - will you panic and sell out completely at the bottom of the next 50% (or in your case 70%) equity crash.  One will come along every decade or so.  You dont want a portfolio whose gyrations keep you awake at night.

If you are are investing life-changing amounts of money portfolio construction is about appropriateness given the answers to the type of questions suggested above.  Chasing maximum returns to get top of the returns list is both pretty irrelevent and often counter-productive

Your definition of risk in terms of annual volatility is pretty irrelevent in the real world.  What happens in the event of a real equity crash or a major change in global economic circumstances has nothing to do with Gaussian distributions, kurtosis, skew etc. What is the Gaussian probability of having 2 40%+ falls in 8 years as happened in 2000-2008? Investment returns are only Gaussian for small variations and if you care about small variations over a year you should not be investing anyway.

I think you will find that many of the longer term investors on this forum are investing a major part of their total assets.  Would you have the confidence to invest nX£100K in your proposed portfolio?  This is the sort of money many people in the future  will have in their pension pots.  They will need to manage it themselves or get an IFA to manage it for them if they are non-numerate and/or have minimal knowledge of investing and have little interest in learning.  You can't manage >> £100K  seeing investing as some sort of game.  The real world is very different

Finally, the detailed construction of a portfolio is a secondary matter for both an IFA and their customers.  Many buy in that sort of expertise rather than  creating a unique one for each customer. More important are issues like tax and inheritance, and questions like how much should one contribute to a pension to retire early.

This is an interesting response....

First, I never suggested that there as an underlying "investment need" I just issued a simple challenge to see if "professionals" could come up with a 10 year portfolio to match mine"... they couldn't or they wouldn't.

I agree to some extent with your points on portfolio construction, but again, not entirely relevant here.

"What is the Gaussian probability of having 2 40%+ falls in 8 years as happened in 2000-2008?" 
This is again a bit misleading. it's actually 2 x 40% falls over 100 years. Still a very unlikely event and has more to do with correlation convergence and any simple normal curve could predict.... which is why I would never advocate using pure mathematics to model stock market behaviour. But your point is well made.

"They will need to manage it themselves or get an IFA to manage it " 
My principle point is the on the whole IFAs are not doing this with enough professionalism. For many it's a case of 1 or lest say 5 sizes fits all and people get put into portfolio boxes that they think best suits the customer without any real attention to the details needed to construct an efficient appropriate portfolio.

"You can't manage >> £100K  seeing investing as some sort of game"
I never said you could. Indeed my very point is almost exactly that.

"Finally, the detailed construction of a portfolio is a secondary matter for both an IFA and their customers. "
Then why are they charging fees from 0.25 to over 1% per annum for exactly that? 
You cannot claim that anything is "secondary" to customers when you are the one, in may occasions, persuading them of their priorities. 


"More important are issues like tax and inheritance, and questions like how much should one contribute to a pension to retire early."
It may be more important but 2 years ago I sought advice on inheritance tax from an IFA only to be told that such advice was not provided unless allowed them to manage all my assets. 

"Funds under management" appears to be the mantra of most IFSs almost always to the detriment of their customers best interests.

Thank you for your comments.

Hoenir

daimes said:

Where is your alternative portfolio suggestion? The absence of which is the clear sign that so far you haven't demonstrated you know what you are talking about.

So I'll make it easier for you.... come up any portfolio you want an I'll show you a better alternative based on risk and return over the past 10 years... Lets both exclude tech funds.

Anybody can pull up a historic chart and say look at this. There's no shortage of people who do. When questioned they've no comprehension as to the far wider macro picture. Historic narrative etc.  Markets don't exist in a parallel universe to the real world. Though at times of euphoria there appears sufficient investors who hold that view.

I've invested through the past 10 years and decades prior to that. I've no need to be told what I could have or in fact shouldn't have invested in  . That day has past. Only tomorrow matters. 

daimes

Linton said:

Bostonerimus1 is in the US!

I would also agree that you need global equities.  However to minimise single point failures you also need a broad balance of sectors.  With the importance of multi national giants sector diversification is more important than geographic diversification.

Now this is an interest point...let me politely rephrase..

"to minimise single point failures you also need to fire bullets in every direction in the hope that some will hit their target. Or in the hope that those that miss don't rock the return boat too much."

In my search for well managed funds I came across a very small number of really good fund managers. These were always global equity managers who somehow seem to be able to use a rifle with great accuracy while their counterparts used a shotgun with, well let's say, less accuracy.

If I'm going to pay anyone 1% per annum I think those guys might be worth it. Find enough of them (probably all of them) and you have the makings of a very efficient portfolio (i.e. one that converts minimal risk to maximum reward).

I believe that what you are suggesting is to use a broad range of sector specific index funds... this, as it turns out is highly inefficient and remember...  in a market crash everything correlates to one. There is no way to minimise single points of failure. See how your portfolio would have performed in 2008 / 2011.

My strategy of expertly picking funds and coupling them with well chosen short dated corporate bond funds  is much more likely to succeed an far more efficient.  It performs better on the upside and is usually less risky on the downside. Indeed the extra return achievable (if done efficiently) are the perfect cushion for downside risk.

Thank you again for your comments, certainly much to consider and ponder here.

daimes

Linton said:

One thing I agree with you is that long dated bond funds are far too risky to be worth buying as we have seen with the rapid rise in interest rates.   Individual gilts may be justified to meet specific objectives if you can  hold until maturity and ideally buy at under par.

Let's be more clear here.

Long data fixed interest funds (almost all of which are government bonds), which by individuals will never be held to maturity, are risky simply because their value is primarily dependent on changes in the shape of the yield curve.

Nobody can predict how the yield curve will change. At any point in the curve it's a 50/50 bet on up or down. So your asset price progresses at the bond yield rate plus or minus the effect of movements in the curve.

Such assets have no equity risk premium (as found in stocks). So it's a zero sum game. You might as well put most of your money on deposit and with the rest go into a casino. It takes a lot less time.

Also I believe there is no fixed interest fund manager capable of reliably and consistently making accurate yield curve predictions.

JohnWinder

'My strategy of expertly picking funds and coupling them with well chosen short dated corporate bond funds  is much more likely to succeed an far more efficient.  It performs better on the upside and is usually less risky on the downside.'

I think you mean 'it performED better...' Past tense. If it is more likely to succeed (compared to some comparable stock/bond mix), tell us why you think that. You might be right, but we need your reasons to help us decide that. That's Q1.

'The best way to shut me up is come up with a portfolio that you can demonstrate is better then my suggestion '

You mean '... demonstrate WAS better...' Past tense again.

Kudos to you for considering 50k funds; some lazy ones here consider Vanguard and be done with it.

And nice work with the analytics, graphics etc. My concern would be that the efficient frontier changes as volatility and return get bigger then smaller then bigger at unpredictable times. Choosing the best asset mix based on the efficient frontier as it is today (based on past data) may not be the best based on future data. And to illustrate, you could re-do your analysis for the decade preceding yours to see how a different asset mix might have been a better choice then; or even do your analysis twice for the two five year periods in your decade.

In essence, I think so much of what we see with returns and risk is very date dependent - starting date and ending date. Change those by a week or two, and equity returns for a 12 month period can vary by several percentage points.

So you've analysed the past nicely and thrown some barbs at an industry that doesn't always cover itself with glory, but for your analysis to be useful to us it must inform us about the future. How do you suggest it can do that? And that informing can't be based on 'the future is tech, quite obviously' type assertions. We need something theoretic or empiric. That's Q2

So, help us out, and while you're at it consider whether you should answer an earlier question: 'But what actually is the point of this, because all that shows us is what the best portfolio was for the last 10 years.'  And that's Q3.

Bostonerimus1

daimes said:

Linton said:

One thing I agree with you is that long dated bond funds are far too risky to be worth buying as we have seen with the rapid rise in interest rates.   Individual gilts may be justified to meet specific objectives if you can  hold until maturity and ideally buy at under par.

Let's be more clear here.

Long data fixed interest funds (almost all of which are government bonds), which by individuals will never be held to maturity, are risky simply because their value is primarily dependent on changes in the shape of the yield curve.

Nobody can predict how the yield curve will change. At any point in the curve it's a 50/50 bet on up or down. So your asset price progresses at the bond yield rate plus or minus the effect of movements in the curve.

Such assets have no equity risk premium (as found in stocks). So it's a zero sum game. You might as well put most of your money on deposit and with the rest go into a casino. It takes a lot less time.

Also I believe there is no fixed interest fund manager capable of reliably and consistently making accurate yield curve predictions.

These sentiments are why I kept my bond investments to average maturities of 7 years and sold most of them in 2014.

artyboy

I think the OP should be setting up as a hedge fund manager - with their ability to outperform professional advisers, not to mention a fairly bullish personality akin to 'Dollar Bill' from Billions, I suspect they would fit right in...

Foxhouse

Hindsight eh! A wonderful skill to have.

NoviceInvestor1

Daimes, using your unique powers of foresight can you please share with us all the funds that you know are going to perform well for the next 20 years?

we can then follow them with interest and offer our apologies when you’re proven right. 

LHW99

One could say that the South Sea Company, Tulips and steam railways were the best investments of their time - until they weren't. I suspect that even the big 7 won't persist to eternity, and no-one's crystal ball is good enough to predict when the tide wil turn.

The problem is that what used to take 100 years now takes decades at most, and the rise of new companies that sweep out the old because they exploit unknown (for now) niches is less and less predictable. Back in the 70's analogue computers (basically a lot of wires knitted into a whole lot of sockets) were still availible, but unused. They "won the war" but barely 25 years later were obsolete. Changes happen faster than that now.

Electronic technology may be the future (in some form), or perhaps memory size and computer power will be sufficient to make Google (at least in its present form) unnecessary, because people will be able to access and search information without the need for an intermediary service.

If you are old enough to remember Tomorrow's World on TV, you would remember that almost all the futuristic items shown never lasted.

Using the sh0tgun analogy - on the whole people don't go after clays successfully with a r1fle.