High level investment strategy - thoughts

[Gpop321]

So I've read Tim Hale's book, and considered the constructive criticism of aspects of it, and generally I've gathered my thoughts.

My current position is that I'm with an active manager and have been for 10 years. I'm seeking to reduce my costs and improve performance by moving to a portfolio of trackers and ETFs. My target is to double my money within 10 years, though I can live with a shortfall of a 1.5X gain instead.

My high level strategy is this:

Three pots:
Two passive equities trackers (80% overall)

For growth with risk
Two to split company crash risk (so make sure they have different underlying custodians)
One All world developed markets
One with developing markets tilt

One Bonds ETF (20% overall)

The defensive element

My risk attitude comes out at 5/6 out of 7, and this feels in line with that.
Without going into individual funds etc, what are your initial thoughts about this strategy?

Cheers,
G

[scrumpyjack]

Yes seems sensible.

I would avoid active managers not only because of the fees but also they represent increased risk. Personally I have also always avoided bonds because I grew up in an age of high inflation, which could return, and I was rich enough to be able to calmly go 100% equities. The only time I ever bought substantial bond holdings was in the 80s when I had a large holding of Index Linked Gilts. I prefer to have a mix of ETF trackers (mainly All World) and Investment Trusts.

The main thing is to avoid fees. When they salami slice 1 or 2 percent a year off your assets, that is a hell of a headwind!

[tacpot12]

You might simplify matters further by selecting a Vanguard LifeStrategy fund as one of your 'equity' funds, and choose the amount of bond exposure you want as part of selecting which Life Strategy Fund you purchase. If you buy the same amount of another all equities fund as you buy of LifeStrategy 40, you will end up with portfolio that is 70% Equities and 30% Bonds.

Apart from that suggestion, your idea looks sound. I wish more people paid attention to the charges they are paying. Many people see 1% and think this is tiny, but if your total return is 7%, then it represents nearly 15% of your return!

[AndrewInDevon]

Well....I am not advocating any of these investments, but this graph illustrates the potential cost of passive v active, and a 'balanced 60/40' strategy v 100% equities.

https://ibb.co/NT4SLHS

Over 10 years...

- a low-cost 60/40 strategy would have delivered 88% (Vanguard)
- a low cost global index tracker would have delivered 219% (Fidelity World Index)
- a high cost active global fund of <30 stocks would have delivered 313% (Fundsmith)

Yes, fees are important. But performance trumps fees any day.

If you're aiming to be a long-term investor and don't need income in the short-term, then avoid conventional wisdom and ditch the bond component. take your future income from capital gains where tax is lower (unless its all in a tax wrapper of course).

My only advice is beware the fundamentalists - those who believe that passive and Vangaurd is the only true religion!

[Gilesyb27]

And you are entirely comfortable that Fundsmith is a fair representative of the likely return of an average active fund?

I'm pretty sure any global index tracker I chose 10 years ago would give a broadly similar result to the fidelity tracker, but I'm really not sure that we can presume that I would have chosen that fundsmith fund from all those available to me......

[clissold345]

...
My target is to double my money within 10 years, though I can live with a shortfall of a 1.5X gain instead.
...

An all world etf would have returned about 136% over the last ten years (that's the figure for SWDA) so why not buy two all world etfs (and nothing else)?

[AndrewInDevon]

Agreed. There's risk in fund picking. I only used Fundsmith as its large, popular and features in some of the major platforms 'wealth list/favourate funds' etc.

Here's a few more popular global funds....these returns are shown after management costs are charged to the fund....all are better than the low cost index tracker - at least over 10 years. You get a different answer if your time horizon is short-term (say 5-years).

https://ibb.co/FD6n7h3

For what its worth (which isn't much) I hold a mix of passive index trackers and active funds - so far my best performing fund is a 'high cost' active global fund, just ahead of my 'low cost' S&P tracker (after costs). But this outcome is partly a function of timing (entry and duration), as well as alpha.

[DrFfybes]

Agreed. There's risk in fund picking. I only used Fundsmith as its large, popular and features in some of the major platforms 'wealth list/favourate funds' etc.

Terry Smith's Fund is in those lists because he's donw pretty well, as did Neil Woodford, until he didn't.

Berkshire Hathaway have a pretty good long term track record.

Here's a few more popular global funds....these returns are shown after management costs are charged to the fund....all are better than the low cost index tracker - at least over 10 years. You get a different answer if your time horizon is short-term (say 5-years).

https://ibb.co/FD6n7h3

Have you filtered for high performers, or was that just a random selection?

How about these...
https://www.hl.co.uk/funds/fund-discoun ... ion/charts
https://www.hl.co.uk/funds/fund-discoun ... cumulation
https://www.hl.co.uk/funds/fund-discoun ... cumulation
https://www.hl.co.uk/funds/fund-discoun ... cumulation
https://www.hl.co.uk/funds/fund-discoun ... cumulation

There is no shortage of Managed Global Funds that have done bugger all over the last 5 or 10 years, even from your choice Scottish Mortgage was not a good buy 2 years ago.

I just had a brief look at Global funds on the HL Wealth List - their "suggested" funds. Couldn't find a single one that had beaten a tracker. Plenty that did that aren't on the list, perhaps the list will change with hindsight

We should keep an eye one your list for the next 5/10 years, it will be genuinely interesting to see if their outperformance continues.

Paul

[tjh290633]

Agreed. There's risk in fund picking. I only used Fundsmith as its large, popular and features in some of the major platforms 'wealth list/favourate funds' etc.

Terry Smith's Fund is in those lists because he's donw pretty well, as did Neil Woodford, until he didn't.

Berkshire Hathaway have a pretty good long term track record.

FCIT and ATST would be good and consistent comparisons.

TJH

[AndrewInDevon]

Absolutely, there are actively managed global funds that are total dogs. I didn't use any filter on my list...they are all fairly large well know retail funds . Not come across the others on the list.

The point is that there are many who behave like fundamentalist religious fanatics and state that all that matters is cost or that passive is the only true religion. I am focused on performance and strategy. Cost and legal form (there are lots of structural IT and FTF fundamentalists as well!) is a second or third order issue for me.

[JohnW]

I won’t use the religious zealot characterisation, but some believe the ‘tracker way’ is preferred because the theory supports it and the empirical data shows it’s very hard to get better returns in the medium and longer terms. But some active funds have done better over a long (undefined) period, so how are we to best make use of that situation?
You’ve chosen to invest with both, so talk us through some logic as to how one might partition our money into passive or active funds. Is it ‘a little’ in active because only 10% of them do better over ‘x’ years, according to SPIVA? Or is it a lot, because increasing the risk can bring better returns? How long do we persist with the underperforming active ones? Essentially, given what we know about active and passive approaches to fund management, how do we choose a suitable mix of active and passive for ourselves?

[scrumpyjack]

I'm certainly not a religious zealot but it is unarguable that active managers are higher risk than a global ETF. They must be because they are choosing a tiny subset of the possible investments. For most people the global tracker has huge advantages - it is 'fire and forget', it is low cost, and it is lower risk than active management. Very sadly my dear wife died recently after a long battle with Alzheimer's but if I was setting up a portfolio for her when I was gone, that would be it.

Personally, I don't mind, indeed I like, some risk. It adds interest to this whole investment thing. So I have the likes of SMT, a large holding, and various individual companies, in my portfolio. Many are multi-baggers, but probably over the long term I would have been just as well off in VWRL with a lot less risk. Bit boring though!

[AndrewInDevon]

I think there's a lot to be said for the invest and forget simplicity of trackers, especially as we mature and more important considerations than managing money come to the fore. I am aiming to be an invest and hold (rather than forget) not a tinkerer so I generally go with larger funds with proven track records - not without risk of course. I avoid any fund sub £500 million and prefer £1 billion+ on the basis that such funds have earned a market 'vote of confidence', not a fool proof approach (Wasn't Woodfords Fund around £10 billion?)

Asset allocation is art not science. 60% of my portfolio is actively managed, so 40% is in passive trackers. The approach I took, set out below, is personal to my circumstances and my own views/prejudices and risk appetite. The active funds reflect the interest I take in investing. I don't want an entirely formula approach and prefer to take some 'measured' risks for the fun and hoped for higher return.

Most of my portfolio is in a taxable investment account which is where I hold my trackers (along with Fundsmith and Jupiter India Fund), all are Acc class shares equally allocated to the S&P500, Japan, the FTSE100, Jupiter India and Fundsmith. It was my choice to be underweight to the USA as my portfolio is only 1 year old (created at retirement) and I accepted the view that the USA is expensive and overly concentrated on the magnificent 7 (debatable if either of these are issues or not). I wanted to be overweight in Japan ( the tide is turning big time?) and India (now larger than the UK economy and will soon overtake Germany and Japan and has massive potential to grow over the next decade but comes with political and currency risk). Perhaps, when I made these choices I swallowed all the guff and received wisdom of press commentators.

My ISA holds actively managed funds, mainly with an income focus (which I plan to reinvest for the next 5 years or so). My largest holding is Greencoat UK Wind (I love its business model and high yield), with the rest equally allocated to Alliance Trust, Merchants Trust and a Royal London Sterling Extra Yield Fund. I plan to add one more high yielding fund to these in the next ISA subscription round and then leave the ISA at 5 funds.

On Fundsmith - I have held this since 2011 as my single quite modest ISA (it enabled me to buy a Mercedes C Class many years ago so I divested much of it as I am a spender not a saver!), its performed amazingly but gone off the boil over the last 3 years. But Terry Smiths approach is sound as a pound - invest in good companies based on fundamentals. The rise of the magnificent seven have put it in the shade, but will this last? (witness Tesla and the irrational exuberance of who will be the AI winners and losers in the long run?). As I gradually mitigate from my trackers to my ISA, Fundsmith will be my 'last man standing' in the investment account. That's my plan.

I am not anticipating much portfolio change, other than taking advantage of tax-driven bed and ISA subscriptions to move between accounts.

[JohnW]

Thanks. Trying to summarise and comment…
‘Invest and hold’ with trackers, no tinkering, is an easy approach without much room for regret or mistake: your returns are what the market has to offer (less costs), it couldn’t be fairer.
Bigger funds with a record of success, investors have voted with their money. I find it hard to measure the success of some fund types, by comparing returns. It’s easy with an ‘equity only fund’, as I can compare the returns with a global tracker since this is what I’d have bought if not the ‘equity only fund’. But with mixed funds that change their mixes over the years comparison is hard.
You’re after some investing ‘fun’, and will take more risk hoping for more returns. I’d say that’s common, but folk will vary a lot in how much money they assign to that category. The alternative for an index believer would be reduce your bonds and hold more equities if you want more return and risk, or borrow to invest. The active fund or asset approach adds uncompensated, diversifiable risk in theory, so it’s not the best trade off of ‘more risk for more return’.
You have a ‘stock picking’ approach, in part: ‘Japan looks promising, USA less so’. That’s a bet against the market to some extent, and needs more self-confidence than less. As well, the idea that GDP growth goes with stock returns is questionable: ‘For many of us, it seems intuitive that high GDP growth rates in a country or region should lead to high equity market returns. However, adding to a growing list of such studies, a recent paper by Jay Ritter of the University of Florida provides a few well-reasoned insights into why this is NOT true.’ https://www.bogleheads.org/forum/viewtopic.php?t=106252
You like high yielding funds, which I take to mean high dividend funds. Stock returns are made up of dividends and capital growth, to state the obvious for any novices.
You like fundamental analysis for stock picking by fund managers. Hard to lose out holding a large selection of decent companies’ stock.

[JohnB]

Reversion to the mean is a big danger for active funds. If their recent success was mostly luck, then they are likely to underperform in the next few years. Its like stock tips, once your read them in the paper its too late. A contrarian would buy active funds that have done badly, as their luck was bound to change...

People often only post about their sucesses with active funds, those who picked dogs keep quiet as they feel it reflects badly on themselves.

But the OP has read Hale and knows this. They should go for 2 brokers as well, not to avoid losing money, just to avoid losin access to it.

[mc2fool]

I'm certainly not a religious zealot but it is unarguable that active managers are higher risk than a global ETF. They must be because they are choosing a tiny subset of the possible investments.

Only if you define risk as variance from the market, and then it's a tautology.

Buffett defines risk as (a) the risk of a permanent capital loss and (b) the risk of inadequate return on capital, and I think that most investors would agree. Of course, if you define an "adequate" return as the market's return then at least you can console yourself when everything's going pear shaped and your losses are as "adequate" as the market's.

Buffett also says that risk comes from not knowing what you are doing, and I'm sure that applies to me; buying the market is a way of admitting that.

[scrumpyjack]

I'm certainly not a religious zealot but it is unarguable that active managers are higher risk than a global ETF. They must be because they are choosing a tiny subset of the possible investments.

Only if you define risk as variance from the market, and then it's a tautology.

Buffett defines risk as (a) the risk of a permanent capital loss and (b) the risk of inadequate return on capital, and I think that most investors would agree. Of course, if you define an "adequate" return as the market's return then at least you can console yourself when everything's going pear shaped and your losses are as "adequate" as the market's.

Buffett also says that risk comes from not knowing what you are doing, and I'm sure that applies to me; buying the market is a way of admitting that.

There are so many definitions of risk! Wealth managers tend to think risk is just volatility risk, which in my view is wrong. It is just that it is more easily measured so they can pretend that their software handles it.

I guess the bottom line is that risk, like beauty, is in the eye of the beholder.

[mc2fool]

Only if you define risk as variance from the market, and then it's a tautology.

Buffett defines risk as (a) the risk of a permanent capital loss and (b) the risk of inadequate return on capital, and I think that most investors would agree. Of course, if you define an "adequate" return as the market's return then at least you can console yourself when everything's going pear shaped and your losses are as "adequate" as the market's.

Buffett also says that risk comes from not knowing what you are doing, and I'm sure that applies to me; buying the market is a way of admitting that.

There are so many definitions of risk! Wealth managers tend to think risk is just volatility risk, which in my view is wrong.

And you are in good company. Another Buffettism: We regard volatility as a measure of risk to be nuts.

[Alaric]

There are so many definitions of risk! Wealth managers tend to think risk is just volatility risk, which in my view is wrong. It is just that it is more easily measured so they can pretend that their software handles it.

I guess the bottom line is that risk, like beauty, is in the eye of the beholder.

As an example, you could for instance invest in a basket of 100 large capitalisation stocks weighted by market value and there are packaged investments which will do just that and Indexes to measure outcomes. Alternatively you could just pick one or two stocks from that index.

I should think it obvious that this very limited selection will either do better or worse than the index. Equally obvious is that the risk of an asset devaluation is much greater the smaller the number of stocks held. On the other hand, depending on what is selected, the volatility could be less than the market as a whole.

[jaizan]

I'm certainly not a religious zealot but it is unarguable that active managers are higher risk than a global ETF.

I disagree. Some "global" etfs have about 50~60% of the investments allocated to the US. Which is near to a historically high PE multiple. One way of increasing risk is to buy expensive assets.

I don't think that's an appropriate diversification for UK investors.