Dumping IFA portfolio to go DIY

Hoenir

"Trackers" aren't dumb though.  Taking MSCI indexes for example. There's layers of constructed methodology that screens the "Global Investable Market" to determine the weighting given to an individual stock. These indices are not like the Nasdaq or FTSE 100 where it's pure market capitalisation that determines weightings. Or in the case of the S&P 500 where entry is by invitation only with clear criteria that has to met. Since 2015 a third of this index has actually been turned over. 

"Trackers" are not one stopshop portfolio's either. MSCI run and maintain some 200,000 indexes for global organisations. Morgan Stanley will create whatever people ask and pay them to. As they hold a gold mine of accumulated data. 

One "tracker" will not provide you with a diversified portfolio. If global equity markets collectively are poor. Then you'll receive a poor return. And vica versa.  You won't find coin tossing listed in any risk management commentary. Even the FCA on their pages lists diversification as one of the 4 key elements that every investor needs to bear in mind. Whether they be a novice or a seasoned professional. 

Bostonerimus1

thunderroad88 said:

Aminatidi said:

I'm assuming there's a reason for the allocation in the opening post?

Just interesting that whatever the reasoning behind it a cheap dumb global tracker looks to have done better.

I suppose in a different environment that may not have been the case?

Which I why I’m thinking of moving to a cheap dumb tracker and trying to find a reason not to.. what kind of different environment would it take for my ifa crafted pf to either perform significantly better or worse than a global tracker? Do the allocations provide significant defensive protection against certain potential market conditions and give reason to retain the pf structure albeit on a diy platform? I personally can’t see how they would but maybe someone else can

The vast majority of people don't need complicated portfolios and they can be actively bad if they make it difficult to rebalance and other wise manage your holdings and they are a good way for some financial advisors to charge fees. If you stick to large global equity indexes you are choosing the whole market on a cap weighted basis so while you'll effectively own thousands of stocks most of your money will be in developed markets with big companies. That's why some people choose to throw in some EM or small cap into the mix. That's Dimensional funds schtick...they basically started out selling index funds, but they overweighted some areas where they thought they saw inefficiencies that would give them a better return. But basically people are scared of simple portfolios as they equate complication with sophistication. I don't need much of an income or defensive aspect to my portfolio as I get my retirement income from rental and a DB pension, many people will want to have more income producing things in their portfolio like dividend stocks and bonds. I want my portfolio to grow so I can leave money to heirs and charities. My three fund portfolio is up 9.5% annual average over the last 10 years...that would have been 12% a year if my portfolio contained just the US Total Stock market fund, it's easy to choose a winner with hindsight, but I'll continue with what I have because next year the international stock market index might be the star.

JohnWinder

From your first post:

'but I do wonder if it’s a bit overweight in small companies and EM. I am thinking of simplifying things by putting most of it into VWRP (up 20% the last year),'

EM are currently 10% of global, and small cap about 15% so your current portfolio is not overweight in either it seems to me.

Secondly, to suggest that VWRP might be a suitable alternative partly because its return last year was better is flawed thinking. Time for a home truth:

“Investors are always searching for good ideas, when what they need are good habits.”

https://www.morningstar.com/financial-advice/behaviorally-dangerous-year  

thunderroad88

JohnWinder said:

From your first post:

'but I do wonder if it’s a bit overweight in small companies and EM. I am thinking of simplifying things by putting most of it into VWRP (up 20% the last year),'

EM are currently 10% of global, and small cap about 15% so your current portfolio is not overweight in either it seems to me.

Secondly, to suggest that VWRP might be a suitable alternative partly because its return last year was better is flawed thinking. Time for a home truth:

“Investors are always searching for good ideas, when what they need are good habits.”

https://www.morningstar.com/financial-advice/behaviorally-dangerous-year  

I did say most of it so I have room for some tilts towards EM and small cap, although if I understand your previous posts correctly, you did say KISS and doubted the need for tilts…. which I took to mean just have one global index tracker which VWRP is. I also didn’t say I was considering VWRP purely because of its latest return, although it’s consistently strong long term performance is certainly a factor as it should be for whichever option I choose. VWRP is 9.3% EM which seems fair to me but no small cap, so I could simply add a small cap tilt if I wanted. I used portfolioanalyzer as you suggested and experimented with tweaking EM and small cap weightings with various core trackers and found that actually adding extra weighting for EM and small cap didn’t make that much difference in many years historically..

dunstonh

thunderroad88 said:

JohnWinder said:

From your first post:

'but I do wonder if it’s a bit overweight in small companies and EM. I am thinking of simplifying things by putting most of it into VWRP (up 20% the last year),'

EM are currently 10% of global, and small cap about 15% so your current portfolio is not overweight in either it seems to me.

Secondly, to suggest that VWRP might be a suitable alternative partly because its return last year was better is flawed thinking. Time for a home truth:

“Investors are always searching for good ideas, when what they need are good habits.”

https://www.morningstar.com/financial-advice/behaviorally-dangerous-year  

I did say most of it so I have room for some tilts towards EM and small cap, although if I understand your previous posts correctly, you did say KISS and doubted the need for tilts…. which I took to mean just have one global index tracker which VWRP is. I also didn’t say I was considering VWRP purely because of its latest return, although it’s consistently strong long term performance is certainly a factor as it should be for whichever option I choose. VWRP is 9.3% EM which seems fair to me but no small cap, so I could simply add a small cap tilt if I wanted. I used portfolioanalyzer as you suggested and experimented with tweaking EM and small cap weightings with various core trackers and found that actually adding extra weighting for EM and small cap didn’t make that much difference in many years historically..

Remember that EM has been off the boil for a while, and the US has been much better than others in this last cycle (it was the other way around in the previous).   So, be wary of making asset allocation changes on the basis of short or medium-term performance.    Often, what has been the best area is the worst in the next or vice versa.      You should be picking your weightings based on sensible diversification and not looking at performance.  For example, if we were back in 2010, past performance had the US as the worst performer over that decade. Would that influence your decision on how much you should have in the US?

aroominyork

I keep an eye on my non-large cap allocation, typically hovering around 25% (about 60% of my UK (mostly micro cap), and 20% in other regions), but I measure it small and medium caps using Morningstar's Portflio>Stock Style>Weight. That shows VWRP as 18% midcaps, so you should not think that VWRP is all large cap.

JohnWinder

, although if I understand your previous posts correctly,

I think we're on the same page, and it's easy with brief posts to mis-convey or misinterpret.

I do like KISS, but I wasn't trying to sell it to you. I'm trying have all sensible sides of any argument put to you so you make the decision that best suits you; you shouldn't follow what I think is right for me. If you say 'A' is good, I'll put it to you why 'B' is good and vice versa.

Just to note: 'tilt' commonly is used to say the holding will overweight that sector compared with a cap weighting. You're using it in a different sense I sense.

'although it’s consistently strong long term performance is certainly a factor as it should be for whichever option I choose.'

Here I go with A and B again. I think a better approach is: #1 is the index the one I should have; #2 does the fund tracking this index have a small tracking error; #3 are the costs reasonable; #4 a few others like fund size, buy/sell spread, liquidity. If you choose sensibly based on those considerations why would the history of returns for that fund be relevant? We could find a 20 year period when a diverse bond fund outperformed a diverse equity fund; would that mean we should choose the bond fund, ignoring all those other considerations? Lastly, I don't know what you mean by 'performance', but if it's 'returns', one really ought to consider risk when considering returns.

JG1A

There is a Vanguard fund called  FTSE Global All Cap Index Fund and it includes global small caps.  Its charges are 0.23 ocf and Trans. costs about 0.04. Performance since Nov 2016 (inception date) is up over 100% similar performance to your IFA portfolio.

thunderroad88

JG1A said:

There is a Vanguard fund called  FTSE Global All Cap Index Fund and it includes global small caps.  Its charges are 0.23 ocf and Trans. costs about 0.04. Performance since Nov 2016 (inception date) is up over 100% similar performance to your IFA portfolio.

Yes, I’ve been looking at that as it happens.

Thanks everyone, I think I’m starting to go round in circles here….and the more I read here and on various forums and sites like monevator the more fund suggestions I end up looking at and my notes get longer. Back to basics…my original objective was to replace my high cost ifa managed pf with a low cost simplified diy pf which could offer similar returns at a similar, but not higher, level of risk. I’m not knowledgable enough about global markets and economics, nor do I have the inclination, to take on responsibility for managing allocations across a number of funds. Therefore I’m concluding that 100% in an all world tracker fund, either HSBC All World or Vanguard Global All Cap, or possibly 90% in one of those plus 10% in L&G Global100 might work best for me.

aroominyork

That sounds like a very sound conclusion. I wish I had as much sense!