Fund Selection

chiang_mai

masonic said:

chiang_mai said:

Thank you for the tip. I personally am not looking for more indepth engagement on this subject but it struck me several times that many others do want to see the basics set out and have said as much on a couple of occiaisons. It was that thought that made me want to post up a straw man thinking that others who professed to be more seasoned investors, might chip in and help out. What more can be said, apart from oh well.

A few "seasoned" investors have contributed. I'd predict the few that have not are the ones who caution against engaging in such pursuits, so it is perhaps unsurprising they cannot give you any insight into what they'd likely consider a pointless exercise.

If it is helpful, here are my views on the individual items you bulleted earlier

• Overall asset allocation, e.g. equities vs MA vs Bonds etc. Most important
• Is the risk level appropriate for me and the gap I’m trying to fill, e.g. Morningstar, Kiid, Trustnet etc ratings. Consider this type of risk rating deeply flawed and wouldn't normally use
• Geographic allocations, e.g. Regions/countries. As a means to an end, some markets have different characteristics than others. Country of listing isn't necessarily meaningful beyond that.
• Capitalisation percentages of large, medium and small caps. Fairly important for overall composition, but would achieve using different funds
• Fund size and managed vs passive.. Don't care as long as it isn't so small it might not survive
• Sector allocations. Important
• Is the investing style appropriate for my needs, e.g. Value, Growth or Blend. Important
• Are the metrics in line with my needs, e.g. P/E, Beta, Alpha etc. Tend to avoid high valuation and high beta
• The number of companies in the fund, e.g. not a closet tracker. Tend to avoid concentration, prefer larger numbers with largest holdings as a small %
• Upside/Downside Capture Ratio’s, Aim for a fund that can achieve 1 with a high degree of confidence
• Investment flows. Don't care unless extreme
• Fund Manager experience and other funds managed. Generally consider active fund managers a risk to be avoided
• Previous performance against the Index, using trailing returns to understand anomalies. Avoid deviation from index
• Drawdown. Does this mean beta?
• Overlap with other holdings. Try to avoid multiple funds covering same sector/region

And ones you didn't

• Cost (both OCF and impact of fund type on platform fees)
• Liability matching
• Liquidity
• Domicile

Thank you for your thoughts on those points.

No, drawdown is not exactly the same as Beta, drawdown is the maximum peak to trough fall whereas beta is a measure of volatility, relative to market voltaility.....a beta of 1.0 indicates fund volatility at the same level as the market, a rewading greater or less than 1.0 indicates the +/- difference of the fund to the market. 

A note on risk ratings: none of them are perfect but in the absence of anything better......!

Regarding geographies: I think the region in which I invest is very important and forms a distinct part of my asset allocation, just as does capitalisation ratio's sectors and asset classes. The difference between investing in US large caps and emerging market mid caps can be huge, their volatility risk and performance characteristics are totally different and should be well understoof and allocated in advance.....I think   

masonic

chiang_mai said:

Regarding geographies: I think the region in which I invest is very important and forms a distinct part of my asset allocation, just as does capitalisation ratio's sectors and asset classes. The difference between investing in US large caps and emerging market mid caps can be huge, their volatility risk and performance characteristics are totally different and should be well understoof and allocated in advance.....I think   

Yes I take your point on EM vs a developed market and small vs large. There are more risks associated with a market that is less transparent and/or suffers political interference, and company size also matters, hence the small-cap risk premium. But a company could make a choice between various stock markets and its choice of listing wouldn't really matter to me. It was asked of me a while back if the magnificent 7 were distributed around the world markets instead of all in the US (therefore more "geographically diversified") would I want to hold more of them than I currently do, and my answer was a definitive no.

chiang_mai

masonic said:

No I do not mean that at all. I'm astonished you would jump to such a conclusion! That is quite a dim view to take of those whose input you were previously courting.

What I meant was that a large part of the process you outlined would be considered a pointless exercise, and therefore they'd view it as counter-productive for junior members to learn about. Clearly these people do want to help others learn, as the evidence is all over the forum where they have contributed their simple approach that does not involve many of the considerations you have in your process. I added to my post above the extent I use or don't use the original factors you outlined.

I do not sit at the end of the spectrum where I just buy the market using a simple passive multi-asset fund, though that is a great place to start for beginners, and I'd not consider it a bad thing not to make things any more complex. But my accumulated knowledge and experience has led me progressively further from trying to pick an active manager or use past performance to predict future returns. I've seen time and time again the active fund do worse in a falling market because it was just surreptitiously harvesting beta, or enjoying a period where its investment style was in fashion. Top down asset allocation, diversification and control of costs are the factors I advocate when helping others learn.

I don't know why you'd be so astonished, it's an obvious conclusion to draw! Forums such as these are often prone to members trying to maintain their "expert" status without ever putting forth anything really useful. And to be clear, I'm not courting views, it's more that I'm curious to see who actually understands what! It's easy enough to buy a global tracker or three and using the right lingo, say you understand it all. On the other hand, the likes of Morningstar gives us all these metrics and analytical data, it seems counter productive not to at least understand what it all means and wherever possible, use it. Of course you don't have to do that and chances are you may even obtain the same result, more easily, if you take the simple approach. But there again you may not. My experience is that it's better to understand the mechanics of what's under the hood, at a detail level, in whatever I do in life and investing is no different, it helps when you break down in the middle of nowhere.   

masonic

chiang_mai said:

masonic said:

No I do not mean that at all. I'm astonished you would jump to such a conclusion! That is quite a dim view to take of those whose input you were previously courting.

What I meant was that a large part of the process you outlined would be considered a pointless exercise, and therefore they'd view it as counter-productive for junior members to learn about. Clearly these people do want to help others learn, as the evidence is all over the forum where they have contributed their simple approach that does not involve many of the considerations you have in your process. I added to my post above the extent I use or don't use the original factors you outlined.

I do not sit at the end of the spectrum where I just buy the market using a simple passive multi-asset fund, though that is a great place to start for beginners, and I'd not consider it a bad thing not to make things any more complex. But my accumulated knowledge and experience has led me progressively further from trying to pick an active manager or use past performance to predict future returns. I've seen time and time again the active fund do worse in a falling market because it was just surreptitiously harvesting beta, or enjoying a period where its investment style was in fashion. Top down asset allocation, diversification and control of costs are the factors I advocate when helping others learn.

I don't know why you'd be so astonished, it's an obvious conclusion to draw! Forums such as these are often prone to members trying to maintain their "expert" status without ever putting forth anything really useful. And to be clear, I'm not courting views, it's more that I'm curious to see who actually understands what! It's easy enough to buy a global tracker or three and using the right lingo, say you understand it all. On the other hand, the likes of Morningstar gives us all these metrics and analytical data, it seems counter productive not to at least understand what it all means and wherever possible, use it. Of course you don't have to do that and chances are you may even obtain the same result, more easily, if you take the simple approach. But there again you may not. My experience is that it's better to understand the mechanics of what's under the hood, at a detail level, in whatever I do in life and investing is no different, it helps when you break down in the middle of nowhere.   

Then I am very confused. I originally took this thread to be an attempt to synthesise some sort of framework based on your own preferred style, and you were actively inviting contributions from others and seeking suggestions for improvement from others of a somewhat like mind. Now it is starting to look like some sort of test or trap targeted at specific individuals who you think are unworthy.

I don't know who these individuals are, and it would probably be unwise to name them now, but perhaps they saw through this more easily than me and didn't take the bait.

chiang_mai

Bostonerimus1 said:

Right from the start you should define your investing goals and time horizons as that's going to inform your asset allocation. I started to invest in my mid 20s when I got my first paying job and the goals were to buy a home and be financially independent by my 50s and retire early. So I set about ensuring I would have a guaranteed base income from state pensions and a small deferred annuity (I'm in the USA). I later augmented this by taking a job with a good DB pension plan starting at age 55, and now I have more than enough to cover my retirement expenses. I also made sure that I entered retirement, which I did at age 52, with zero debt...including the mortgage.

Now to investments. I just couldn't put in the work that seems to be involved in the OP's recommendations, much of which I also believe is unnecessary to be successful. Anyway most people will have to choose from a restricted set of funds offered in their DC pensions and only after that in say SIPPS and ISAs will the whole cosmos of funds be available. I followed a basic 4 fund "Lazy Portfolio" as advocated by Bogleheads. I set some guard rails for rebalancing between bonds and equities and US and Global equities and that was it. I've managed 9% average annual return over the last 35 years with very little mental effort, although rebalancing through several crashes took some gut level effort. I have been frugal and always put retirement savings high up on my budget...oh I've always kept a budget so I know roughly where my money is being spent. But my ethos has always been to minimize debt, prioritize savings and investing and to live within my means. Before you think about the alpha and beta of funds make sure you are following Mr. Micawber's advice:

"Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds nought and six, result misery."

Investing doesn't need to be complicated, but it isn't necessarily easy either.

That's all good and sound life advice.

There's absolutely nothing wrong with the Boggleheads approach, if that's the way you chose to go. I do think however that increasingly, investers are being funneled towards packed all in one solutions, without understanding all their options. For somebody just starting out in investing, everything is way too complicated and there's no easy starting point, other than the almost off the shelf packaged solutions such as a global tracker. The alternative is to pay an IFA, which can be expensive and not always an ideal solution. Otherwise, it's a case of sit down and read investopedia from cover to cover which is mind numbing. 

Bostonerimus1

chiang_mai said:

masonic said:

No I do not mean that at all. I'm astonished you would jump to such a conclusion! That is quite a dim view to take of those whose input you were previously courting.

What I meant was that a large part of the process you outlined would be considered a pointless exercise, and therefore they'd view it as counter-productive for junior members to learn about. Clearly these people do want to help others learn, as the evidence is all over the forum where they have contributed their simple approach that does not involve many of the considerations you have in your process. I added to my post above the extent I use or don't use the original factors you outlined.

I do not sit at the end of the spectrum where I just buy the market using a simple passive multi-asset fund, though that is a great place to start for beginners, and I'd not consider it a bad thing not to make things any more complex. But my accumulated knowledge and experience has led me progressively further from trying to pick an active manager or use past performance to predict future returns. I've seen time and time again the active fund do worse in a falling market because it was just surreptitiously harvesting beta, or enjoying a period where its investment style was in fashion. Top down asset allocation, diversification and control of costs are the factors I advocate when helping others learn.

I don't know why you'd be so astonished, it's an obvious conclusion to draw! Forums such as these are often prone to members trying to maintain their "expert" status without ever putting forth anything really useful. And to be clear, I'm not courting views, it's more that I'm curious to see who actually understands what! It's easy enough to buy a global tracker or three and using the right lingo, say you understand it all. On the other hand, the likes of Morningstar gives us all these metrics and analytical data, it seems counter productive not to at least understand what it all means and wherever possible, use it. Of course you don't have to do that and chances are you may even obtain the same result, more easily, if you take the simple approach. But there again you may not. My experience is that it's better to understand the mechanics of what's under the hood, at a detail level, in whatever I do in life and investing is no different, it helps when you break down in the middle of nowhere.   

Yes it's good to understand what's in the black box, but for most people they simply don't need to and most importantly don't want to understand the workings of their funds. For those reasons we have multi-asset funds and "Lazy Portfolios". There will be some nerds, and I use the term with admiration and affection, that do want to understand all the "nuts and bolts", but that's simply not appropriate for most people. It's like some one buying a drone to take some overhead pictures and needing or wanting to know the PID/PDF servo control on the propeller motors. Or someone with diabetes wanting to understand the PI3K/AKT pathway.

chiang_mai

masonic said:

chiang_mai said:

masonic said:

No I do not mean that at all. I'm astonished you would jump to such a conclusion! That is quite a dim view to take of those whose input you were previously courting.

What I meant was that a large part of the process you outlined would be considered a pointless exercise, and therefore they'd view it as counter-productive for junior members to learn about. Clearly these people do want to help others learn, as the evidence is all over the forum where they have contributed their simple approach that does not involve many of the considerations you have in your process. I added to my post above the extent I use or don't use the original factors you outlined.

I do not sit at the end of the spectrum where I just buy the market using a simple passive multi-asset fund, though that is a great place to start for beginners, and I'd not consider it a bad thing not to make things any more complex. But my accumulated knowledge and experience has led me progressively further from trying to pick an active manager or use past performance to predict future returns. I've seen time and time again the active fund do worse in a falling market because it was just surreptitiously harvesting beta, or enjoying a period where its investment style was in fashion. Top down asset allocation, diversification and control of costs are the factors I advocate when helping others learn.

Oh dear me! It's no trap, it's a simple question, how do you select an investment fund....here's my straw man, feel free to critique it and contribute to its construction, just as you have done....that's all.

masonic

chiang_mai said:

masonic said:

chiang_mai said:

masonic said:

No I do not mean that at all. I'm astonished you would jump to such a conclusion! That is quite a dim view to take of those whose input you were previously courting.

What I meant was that a large part of the process you outlined would be considered a pointless exercise, and therefore they'd view it as counter-productive for junior members to learn about. Clearly these people do want to help others learn, as the evidence is all over the forum where they have contributed their simple approach that does not involve many of the considerations you have in your process. I added to my post above the extent I use or don't use the original factors you outlined.

I do not sit at the end of the spectrum where I just buy the market using a simple passive multi-asset fund, though that is a great place to start for beginners, and I'd not consider it a bad thing not to make things any more complex. But my accumulated knowledge and experience has led me progressively further from trying to pick an active manager or use past performance to predict future returns. I've seen time and time again the active fund do worse in a falling market because it was just surreptitiously harvesting beta, or enjoying a period where its investment style was in fashion. Top down asset allocation, diversification and control of costs are the factors I advocate when helping others learn.

Oh dear me! It's no trap, it's a simple question, how do you select an investment fund....here's my straw man, feel free to critique it and contribute to its construction, just as you have done....that's all.

Ok, fair enough. Then let's forget about the people who haven't contributed for whatever reason.

chiang_mai

Bostonerimus1 said:

chiang_mai said:

I don't know why you'd be so astonished, it's an obvious conclusion to draw! Forums such as these are often prone to members trying to maintain their "expert" status without ever putting forth anything really useful. And to be clear, I'm not courting views, it's more that I'm curious to see who actually understands what! It's easy enough to buy a global tracker or three and using the right lingo, say you understand it all. On the other hand, the likes of Morningstar gives us all these metrics and analytical data, it seems counter productive not to at least understand what it all means and wherever possible, use it. Of course you don't have to do that and chances are you may even obtain the same result, more easily, if you take the simple approach. But there again you may not. My experience is that it's better to understand the mechanics of what's under the hood, at a detail level, in whatever I do in life and investing is no different, it helps when you break down in the middle of nowhere.   

Yes it's good to understand what's in the black box, but for most people they simply don't need to and most importantly don't want to understand the workings of their funds. For those reasons we have multi-asset funds and "Lazy Portfolios". There will be some nerds, and I use the term with admiration and affection, that do want to understand all the "nuts and bolts", but that's simply not appropriate for most people. It's like some one buying a drone and needing or wanting to know the PID/PDF servo control on the propeller motors. Or someone with diabetes wanting to understand the PI3K/AKT pathway.

Your analogies are a bit extreme but I get your point. Whether or not it's approppriate to tilt more towards being a  nerd, depends on how comforrtable they are putting all their trust and faith in one or two trackers and handing all control and responsibility for your financial future, to the likes of Vanguard et al. But I suppose that approach has always worked well in the past so it must continue to work well in the future, right!  

Bostonerimus1

chiang_mai said:

Bostonerimus1 said:

chiang_mai said:

I don't know why you'd be so astonished, it's an obvious conclusion to draw! Forums such as these are often prone to members trying to maintain their "expert" status without ever putting forth anything really useful. And to be clear, I'm not courting views, it's more that I'm curious to see who actually understands what! It's easy enough to buy a global tracker or three and using the right lingo, say you understand it all. On the other hand, the likes of Morningstar gives us all these metrics and analytical data, it seems counter productive not to at least understand what it all means and wherever possible, use it. Of course you don't have to do that and chances are you may even obtain the same result, more easily, if you take the simple approach. But there again you may not. My experience is that it's better to understand the mechanics of what's under the hood, at a detail level, in whatever I do in life and investing is no different, it helps when you break down in the middle of nowhere.   

Yes it's good to understand what's in the black box, but for most people they simply don't need to and most importantly don't want to understand the workings of their funds. For those reasons we have multi-asset funds and "Lazy Portfolios". There will be some nerds, and I use the term with admiration and affection, that do want to understand all the "nuts and bolts", but that's simply not appropriate for most people. It's like some one buying a drone and needing or wanting to know the PID/PDF servo control on the propeller motors. Or someone with diabetes wanting to understand the PI3K/AKT pathway.

Your analogies are a bit extreme but I get your point. Whether or not it's approppriate to tilt more towards being a  nerd, depends on how comforrtable they are putting all their trust and faith in one or two trackers and handing all control and responsibility for your financial future, to the likes of Vanguard et al. But I suppose that approach has always worked well in the past so it must continue to work well in the future, right!  

Many people struggle with percentages, compound interest and the difference between tax-free and tax deferred. It's good that you are sharing your approach, but it will be too much for most people and my contention is that you simply don't need to get into such a level of detail because the stochastic processes of large markets make it pointless and the risks of small markets make it inadvisable.