FTSE 100 and other trackers
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Comments
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You dismiss the UK because it has underperformed. You dismiss the US even though it outperformed. You have focused on the negatives only. Why is there not a 50/50 chance of there being positive news?
Sensible investing considers the downside at least as much as the upside. Suppose you need a house deposit of £50K. Would you rather have £50K or a 50/50 chance of nothing or £100K, or even a 60% chance of £100K and a 40% chance of nothing?
With fund investments the ups and downs are asymmetric. If you are invested in a focussed sector fund over sufficient time at best you can make many times your original investment but you can never do worse than lose all of it, and even that is virtually impossible. But you dont know which small number of sectors are going to do very well. Therefore it makes sense to invest in all of them as you are certain to get a very good upside if one is available. The smaller the range of sectors you hold the more you are leaving it to chance whether you strike gold. By investing in the FTSE100 you are making a positive decision not to invest in particular sectors. For example you would have missed out on the massive rise of Google, Apple, Facebook, Amazon etc as the FTSE100 has very little exposure to that sector.
Another differentiator between indexes is company size. The FTSE100 only invests in large companies . Over the past 20 years UK small companies have in general performed more than twice as well as large ones, who knows whether this will be true in the next 20 years. Again by investing broadly you minimise the risk.0 -
Bowlhead, you could say everyone needs to do more research because they don't have the perfect strategy.
You seem to be coming from a glass half empty point of view while you could also think of it as glass half full. I don't understand dunstonh's comment "you will likely underperform in the long run". One reason for a FTSE or US tracker would be lower fees that might tip the odds 51/49 in my favour.
I am happy to hear your opinions. I'm just not convinced that having fewer sectors covered necessarily leads to a worse performance. It is likely to be more volatile but not necessarily worse.0 -
Sensible investing considers the downside at least as much as the upside. Suppose you need a house deposit of £50K. Would you rather have £50K or a 50/50 chance of nothing or £100K, or even a 60% chance of £100K and a 40% chance of nothing?
I don't need the money for a specific purpose so I can take some risk. I would take the 60/40 chance because the odds are in my favour.With fund investments the ups and downs are asymmetric. If you are invested in a focused sector fund over sufficient time at best you can make many times your original investment but you can never do worse than lose all of it, and even that is virtually impossible. But you dont know which small number of sectors are going to do very well. Therefore it makes sense to invest in all of them as you are certain to get a very good upside if one is available. The smaller the range of sectors you hold the more you are leaving it to chance whether you strike gold. By investing in the FTSE100 you are making a positive decision not to invest in particular sectors. For example you would have missed out on the massive rise of Google, Apple, Facebook, Amazon etc as the FTSE100 has very little exposure to that sector.
I feel that the range of sectors is large enough. I don't feel like having all of them would make much difference.Another differentiator between indexes is company size. The FTSE100 only invests in large companies . Over the past 20 years UK small companies have in general performed more than twice as well as large ones, who knows whether this will be true in the next 20 years. Again by investing broadly you minimise the risk.
Whichever tracker I go for it will be large companies.0 -
You seem to believe that it really is 50/50 above and below the average at each time step - ie that things will balance out in the long term. Unfortunately that is not the case. There can be long term trends that will ensure that particular subsets of the world market diverge. Sadly you dont know what these trends will be in the future, but experience has shown that they exist. So investing in small (as a % of global) indexes like the FTSE100 doesnt merely add to volatility, it increases the chances that you will have seriously suboptimal performance by the time you need the money.
For example (numbers read off graph so not exact):
Index/%total return 1996-2016
Nikkei225/0%
FTSE100/240%
FTSE Europe/330%
FTSEWorld/350%
Hangseng/390%0 -
But ultimately you will need the money for some purpose. The pleasure of having too much doesnt match the tragedy of having too little. If you wont need the money what you are doing is gambling for pleasure. Fine, nothing wrong with that, but it's not investing.I don't need the money for a specific purpose so I can take some risk. I would take the 60/40 chance because the odds are in my favour.Whichever tracker I go for it will be large companies.
I thought you were chasing the possibility of high returns whilst accepting extra volatility. Small Companies give you that.0 -
You seem to believe that it really is 50/50 above and below the average at each time step - ie that things will balance out in the long term. Unfortunately that is not the case. There can be long term trends that will ensure that particular subsets of the world market diverge. Sadly you dont know what these trends will be in the future, but experience has shown that they exist. So investing in small (as a % of global) indexes like the FTSE100 doesnt merely add to volatility, it increases the chances that you will have seriously suboptimal performance by the time you need the money.
For example (numbers read off graph so not exact):
Index/%total return 1996-2016
Nikkei225/0%
FTSE100/240%
FTSE Europe/330%
FTSEWorld/350%
Hangseng/390%
That list is far from complete. You say you don't know what the trends will be. Why are you suggesting that most of the subsets will diverge to the downside when they could equally diverge to the upside?0 -
I am investing rather than gambling because what I buy will not be all or nothing like your example.
I meant the options discussed so far are all large cap.0 -
Well clearly, but the point is to demonstrate that the returns diverge significantly , with the disparity between good and bad being in excess of 100% of your invested capital over the period reviewed. That could be done with 2 indexes, but 5 indexes helps to show the variety of returns.That list is far from complete.
Once you can see that there is a very wide variety of returns in just a handful of indexes there is little point in Linton going and finding the comparable figures to list another ten indexes for you. I already gave you 10 US industry sector indices on a pretty PDF link to demonstrate the exact same point.
All of the subsets are much more likely to diverge to the downside than settling for some mid point. You are right of course that they are also more likely to diverge to the upside than they are to hit the mid point. They are unlikely to hit the mid point because the mid point is a one in ten shot which you are much more likely to hit if you buy the whole market and much less likely to hit if you buy a subset.You say you don't know what the trends will be. Why are you suggesting that most of the subsets will diverge to the downside when they could equally diverge to the upside?
You wonder why the focus is on the risk of underperforming to the downside. Well, most people prefer that their returns don't fall short of their expectation or needs.
Your contention is that you don't mind if your returns fall short of your expectations or needs, because you don't really have any expectations or needs anyway, so it is just play money and you are indifferent to whether you get a lot less than the market return if it gives you the chance to get a better than market return. So if your selection of a single specialist fund delivered 0% gain or 240% gain rather than 350 for the middle one or 500 for the top ones, you would just shrug and not really care because you didn't really need the returns and this 10% of your wealth was only invested for a bit of a laugh.
Most people don't have that approach to investing.
To think about it another simplified way:
Say a particular class of assets which each have similar risks has a disparity of returns which might average out so that the midpoint of returns is 7% in real terms a year (double your money in a decade, quadruple in 20 years)...but the top performer in the class over the particular period under review is 6% higher (13% a year on average) and the low performer is 6% lower (1% a year on average).
If your personal goal and critical objective is that you definitely need to beat cash by 1%, over the 20 years, but don't actually have any needs or goals beyond that simple aim, and cash delivers inflation+0% each year. You would say this class of investments seems fine for you, pick any fund at random from this class and worst case scenario the history books say you'll get 1% real terms if left long enough, which is fine.
However, to get there, you are investing in assets which are way way more risky than you need to.
You are investing in a class carrying the risks and rewards of investing in assets that deliver 7% a year on average (risk free rate plus 7%) which might go up to 13% which you really don't need, or down to the 1% that you really do need. That puts you in a pretty risky set of investments to achieve a modest goal, and the reason it puts you in this high risk asset class is that you are haphazardly picking only one specialist fund from the class and you have to prepared for it to be the bottom performer and still be as much as the 1% you really do need, if left long enough. So you have to use a class that takes the risks to get 7% average or 1-13% extreme.
Alternatively if you would take the approach of investing more broadly across an asset class, to get the average return rather than potentially getting the return of an outlier, you don't need to invest in something so risky where the midpoint is 7% and the bottom outlier is 1%. You could instead invest in something where the midpoint is 1%.
If the goal is 1%, then picking a low volatility asset class targeting a mid point of 1%, and buying that midpoint within it, is a much much lower risk than picking an asset class targeting a midpoint of 7 and then buying a small random bunch of sub-sectors within it with the aim of getting at least the 1% return after a lengthy wait through the ups and downs over two decades.
Generalising if you don't need 7%, don't buy assets that produce 7% with high volatility and risk of loss. Buy assets that target the easier hurdle of lower returns. If you *do* need 7%, buy the mid point of the 7% asset class to make sure you get it.
But you seem to be a bit different from the average investor because you don't really need the money (can afford to lose it or underperform massively vs the average) yet you still want to invest in relatively high risk assets in specialist volatile funds.
It would be boring if we all thought the same way but I hope you understand where we're coming from, even if you don't agree.
:beer:0 -
I was just putting a rebalance together on 9 fund portfolio (no emerging markets on this one as its low/medium). The research report shows th last 5 years discrete performance to on 30th Sept basis (i.e. 12 months to 30th Sept).
The US tracker was top performer in just 1 of those 5 years.
2016 was 34.41% compared to 41.31% Pacific exc Japan
2015 was 2.30% compared to 13.40% UK Long Dur Gilt
2014 was 18.59% - top performer
2013 was 17.76% compared to 31.76% Japan
2012 was 22.38% compared to 22.59 UK 250
If I was to look at cumulative growth over 5 years, then the US fund was the best. However, we need to remember it was coming off a bad period in the previous cycle. The contrarian investment strategists did well in that period.I am an Independent Financial Adviser (IFA). The comments I make are just my opinion and are for discussion purposes only. They are not financial advice and you should not treat them as such. If you feel an area discussed may be relevant to you, then please seek advice from an Independent Financial Adviser local to you.0 -
bowlhead99 wrote: »
All of the subsets are much more likely to diverge to the downside than settling for some mid point. You are right of course that they are also more likely to diverge to the upside than they are to hit the mid point. They are unlikely to hit the mid point because the mid point is a one in ten shot which you are much more likely to hit if you buy the whole market and much less likely to hit if you buy a subset.
You wonder why the focus is on the risk of underperforming to the downside. Well, most people prefer that their returns don't fall short of their expectation or needs.
Your contention is that you don't mind if your returns fall short of your expectations or needs, because you don't really have any expectations or needs anyway, so it is just play money and you are indifferent to whether you get a lot less than the market return if it gives you the chance to get a better than market return. So if your selection of a single specialist fund delivered 0% gain or 240% gain rather than 350 for the middle one or 500 for the top ones, you would just shrug and not really care because you didn't really need the returns and this 10% of your wealth was only invested for a bit of a laugh.
Most people don't have that approach to investing.
I thought the first rule of investing is not to invest money you can't afford to lose. After that it is trying to get the best returns at a level of risk you are comfortable with.
I have to make a decision and buy something. In 5 or 10 years time, I might find some other investment has beaten it. That's only with the benefit of hindsight.bowlhead99 wrote: »To think about it another simplified way:
Say a particular class of assets which each have similar risks has a disparity of returns which might average out so that the midpoint of returns is 7% in real terms a year (double your money in a decade, quadruple in 20 years)...but the top performer in the class over the particular period under review is 6% higher (13% a year on average) and the low performer is 6% lower (1% a year on average).
If your personal goal and critical objective is that you definitely need to beat cash by 1%, over the 20 years, but don't actually have any needs or goals beyond that simple aim, and cash delivers inflation+0% each year. You would say this class of investments seems fine for you, pick any fund at random from this class and worst case scenario the history books say you'll get 1% real terms if left long enough, which is fine.
However, to get there, you are investing in assets which are way way more risky than you need to.
You are investing in a class carrying the risks and rewards of investing in assets that deliver 7% a year on average (risk free rate plus 7%) which might go up to 13% which you really don't need, or down to the 1% that you really do need. That puts you in a pretty risky set of investments to achieve a modest goal, and the reason it puts you in this high risk asset class is that you are haphazardly picking only one specialist fund from the class and you have to prepared for it to be the bottom performer and still be as much as the 1% you really do need, if left long enough. So you have to use a class that takes the risks to get 7% average or 1-13% extreme.
Alternatively if you would take the approach of investing more broadly across an asset class, to get the average return rather than potentially getting the return of an outlier, you don't need to invest in something so risky where the midpoint is 7% and the bottom outlier is 1%. You could instead invest in something where the midpoint is 1%.
If the goal is 1%, then picking a low volatility asset class targeting a mid point of 1%, and buying that midpoint within it, is a much much lower risk than picking an asset class targeting a midpoint of 7 and then buying a small random bunch of sub-sectors within it with the aim of getting at least the 1% return after a lengthy wait through the ups and downs over two decades.
Generalising if you don't need 7%, don't buy assets that produce 7% with high volatility and risk of loss. Buy assets that target the easier hurdle of lower returns. If you *do* need 7%, buy the mid point of the 7% asset class to make sure you get it.
But you seem to be a bit different from the average investor because you don't really need the money (can afford to lose it or underperform massively vs the average) yet you still want to invest in relatively high risk assets in specialist volatile funds.
It would be boring if we all thought the same way but I hope you understand where we're coming from, even if you don't agree.
:beer:
I understand that you want to reduce uncertainty if you have a fixed target.
The goal is to maximise the return I can get at a level of risk I am comfortable with. If one investment is 0-2% and the other is 1-13%, I'd rather go for the second one.
The assumption in your example is that there is a symmetrical spread around the 7% mark. It's my opinion that there is a currency risk around foreign trackers so a FTSE 100 tracker would skew the odds in my favour. I could get a range of 2-14%. There are also slightly lower fees for the FTSE 100 and US trackers which would skew the odds in my favour.0
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