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Investment Advice
Richard Proctor
Posted: 16 May 2017 22:01:10(UTC)
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Hello All

I'm afraid I have been one of the retail investors KL refers to who has earned only fairly meagre returns through the rather benign markets which have prevailed since 08/09. Too much time sitting on my hands concerned about overvalued markets and fear of capital loss. I'm well aware of the fact that I should have created a diversified portfolio, rebalanced regularly and not worried too much. However, I conspicuously failed to do that - cue the howls of derision! :-)

My situation is that I have between ten and twelve years to my planned retirement (all being well) and need to get a grip. My portfolio is currently worth £250k with roughly £120k in cash awaiting investment. Regular monthly contributions over the next 10 years should total around £200k - £225k and I am aiming to build a portfolio value of around £600k for retirement. I think I need an annual return of around 4.5% to achieve this. Not necessarily that easy when markets are flirting with all time highs and many investment trusts of interest are trading at premiums.

I want to create a portfolio of 12 - 15 investments (predominantly investment trusts) to make regular contributions / rebalancing manageable. I'm thinking in terms of 60% equity and 40% less correlated assets.
For the less correlated: Cash (15%), PNL (10%), Real Estate (TRY?) 7.50% and bonds 7.50% (strategic like M&G Global Macro Bond or maybe the Vanguard Global Bond Index).

Equities - both income and growth with a value tilt as well. UK and International and small cap as well as mid and large cap.

UK - Troy Income, TMPL, SLET & a small company trust - ?
Global - MYI (hold but not topped up due to premium) & Artemis Global Growth
EM - TEMIT and UEM
Asia - SOI

I have been wondering about EWI for a tech bias, but looks maybe better value than SMT and also the F&C Global small companies.

Sorry, the post is longer than intended, but I would be grateful for any advice as to how others would structure the portfolio if they we in my shoes.

Cheers

Rich


Alan Parker
Posted: 18 May 2017 09:58:34(UTC)
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A decent financial adviser would have prevented this impotence and probably delivered around 50% growth over this period.

Are you sure you want to go it alone again in the run up to retirement?

Remember, there's nothing stopping people cutting their own hair but there are still several barbers on each high street.
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Catch The Pigeon on 18/05/2017(UTC)
Richard Proctor
Posted: 18 May 2017 11:51:04(UTC)
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Fair comment Alan and the analogy at least made me chuckle!

A consideration obviously as it may at least counter the flaws in my temperament.............
Mickey
Posted: 18 May 2017 12:32:07(UTC)
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I wouldn't beat yourself up about it, we all make some wrong calls, certainly being too cautious may have been the wrong choice but plenty of commentators were doing the same thing, eg. Lyon of Troy fame. Perhaps take a look at some Global IT's, on Morningstar you can view their annualised returns etc which might show that your desired return is likely to be achieved.

Safer stuff to run alongside these would include Personal Assets, RIT Capital Partners and possibly New Star (on a big discount) if you think John Duffield might finally have gotten over his problems. My beef with PNL which I do hold is simply the charges for something holding high levels of Gold and Treasuries etc. However I treat PNL as my cash holding in the portfolio with rainy day money sitting in NS&I and a Credit Union.

If looking for UK Equity Income then Troy run an IT named Troy Income & Growth, performance figures are skewed over long periods by the poor performance of its predecessor Glasgow Income but TIGT is run along the same lines as Troy Income by Francis Brooke. I have added Edinburgh and Temple Bar recently but my main UK holding remains Finsbury Growth Trust run by Nick Train.

For a UK Smaller Co's IT then Henderson Smaller Co's is the one I am using and it is currently on a nice discount. There may be a better choice than this but I've held it for a long time and am happy with it.
Mr Helpful
Posted: 18 May 2017 15:17:02(UTC)
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Richard Proctor;46806 wrote:

I'm afraid I have been one of the retail investors KL refers to who has earned only fairly meagre returns through the rather benign markets which have prevailed since 08/09. Too much time sitting on my hands concerned about overvalued markets and fear of capital loss.

My portfolio is currently worth £250k with roughly £120k in cash awaiting investment.

I want to create a portfolio of 12 - 15 investments (predominantly investment trusts) to make regular contributions / rebalancing manageable. I'm thinking in terms of 60% equity and 40% less correlated assets.

For the less correlated: Cash (15%), PNL (10%), Real Estate (TRY?) 7.50% and bonds 7.50% (strategic like M&G Global Macro Bond or maybe the Vanguard Global Bond Index).



Like the term 'less correlated', far better than 'non-stocks', fixed income or just bonds. The term sums up very nicely what we hope for from such assets.

We don't know how the Non-Cash (invested) portfolio currently worth £130k? is currently invested.
I.E. It may be all Stocks or Stocks plus 'less correlated' assets.
If solely invested in Stocks the portfolio would be 52% Stocks; Balance Cash?
If not solely invested in Stocks then something less than 52% Stocks?

The snag is that since 08/09 "too much time sitting on hands concerned about overvalued markets", yet today with much higher Stock valuations now considering upping the Stock allocation?
Many, perhaps most, stock investors buy on the way to stock peaks. If they didn't the stock peaks would be less likely to occur.

Drawing up an Invesment Plan to address future scenarios is excellent. Commit to paper for future reference and for guidance at those moments of stress when doubts about keeping to strategy will creep in.
Also worth thinking about in such a plan is how to go from point A (today) to point B (the desired allocation), whether quickly or more sedately over a couple of years, and should that desired allocation be influenced in any way by stock valuations?
Catch The Pigeon
Posted: 18 May 2017 16:24:58(UTC)
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Vanguard Life Strategy 80 and forget about it.
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Richard Proctor
Posted: 19 May 2017 08:22:44(UTC)
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Thanks for the replies

Mr Helpful

The situation is that of the £130k invested, most of the less correlated element has been invested so cash, real estate & multi asset dealt with. PNL & real estate are 17.5% of the total portfolio = 33.50% of invested assets.

Still pondering bonds - a strategic bond fund or the vanguard option mentioned?

Suggestions for global trusts would be welcome.

TIGT - I did look at this but went for Troy Income due to the premium on the trust.

I'm thinking of using UK & Golbal Trusts as core holdings with satellites in EM etc, but finding it difficult to decide on weightings so any suggestions here would be welcome.

I know it seems as though I'm looking to increase equity when markets are at highs. However, I cannot continue to exhibit inertia, I need to be disciplined & follow a plan if I am to achieve my goals. The plan would be invest the remainder monthly / adding a little more on dips.

Regards

Richard
Alan Parker
Posted: 19 May 2017 09:17:54(UTC)
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Richard Proctor;46860 wrote:

Fair comment Alan and the analogy at least made me chuckle!

A consideration obviously as it may at least counter the flaws in my temperament.............



Glad you took it in the right way. For the record, I have actually done a very similar thing to you albeit only in the last 2 years and now have similar fears!
Mickey
Posted: 19 May 2017 09:22:49(UTC)
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Richard Proctor;46906 wrote:
I'm thinking of using UK & Golbal Trusts as core holdings with satellites in EM etc, but finding it difficult to decide on weightings so any suggestions here would be welcome.

Core Satellite is said to work best at a 70/30 split.
Mr Helpful
Posted: 19 May 2017 10:11:55(UTC)
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Richard Proctor;46906 wrote:

1. The situation is that of the £130k invested, most of the less correlated element has been invested so cash, real estate & multi asset dealt with. PNL & real estate are 17.5% of the total portfolio = 33.50% of invested assets.

2. Still pondering bonds - a strategic bond fund or the vanguard option mentioned?

3. Suggestions for global trusts would be welcome.

4. I'm thinking of using UK & Golbal Trusts as core holdings with satellites in EM etc, but finding it difficult to decide on weightings so any suggestions here would be welcome.

5. I know it seems as though I'm looking to increase equity when markets are at highs. However, I cannot continue to exhibit inertia, I need to be disciplined & follow a plan if I am to achieve my goals. The plan would be invest the remainder monthly / adding a little more on dips.
Richard


1. Still struggling a little with the percentages of the present allocations, but not to worry.

2. Bonds, esp Gilts, are indeed a difficult area with QE induced high prices and consequent -ve real yields.
It is possible but not certain that when interest rates do eventually rise capital losses will occur;
And the longer the duration the greater the potential capital losses.
IS15 is worth reviewing with short duration investment grade corporate bonds but would probably not be totally immune to rising interest rates.

3. If it sheds light, the global segment of our portfolio which is biased to income (in retirement),
holds IVPG, MYI, SCAM
Plus as a comparative bench-mark with rebalancing opportunities, the global tracker ETF VWRL.
Specific geographical areas are addressed separately (see below).

4. Weightings are tricky and some investors might vary weightings through time for various reasons. Others will have different views on weightings which will be equally valid. So don't take the figures below as inspired wisdom!!!
The main factor with weightings IMHO is to be consistent over time, or if not to have damned good reason for any inconsistency.
Our present targets for Stocks are :-
15% UK
42% Global
7% Commodity Income
10% USA (would like to increase at some stage)
10% Asia/Pacific
8% Europe
8% Emerging

5. The Investment Plan will be the key insurance reference document to avoid the tendency for many or most investors to buy high in exburance or frustration and then sell low in despair.
I.E. To determine in advance of the action how the investor will respond to whatever market conditions are thrown at them.
sandid3
Posted: 19 May 2017 10:54:11(UTC)
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It seems to me that if someone is taking a long time to decide to buy they are going to take a long time to decide to sell. The problem is that markets go down faster than they go up. Below is the chart for Artemis Global Growth (mentioned above) from Sept. 2000 to Sept 2010. The fund fell 70% and then stayed flat for 2 years after the dot-com crash. It fell 40% in the GFC.
Artemis

It's all very well constructing a portfolio and micro-managing picking funds but what happens if this is Sept 2000 or Sept 2007 all over again?

It seems to me pointless to buy something without knowing what the trigger is to sell it if it doesn't work out. Simply wishing things will be OK after ten years isn't good enough.
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King Lodos
Posted: 19 May 2017 17:23:46(UTC)
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That's why some (such as Ray Dalio of Bridgewater, David Swensen of Yale) think *more* than a third of your portfolio directly invested in a single asset class – such as Stocks – is a greater risk than most appreciate.

Because normally of course markets don't punish you for it .. But if there's even a 1 in 20 chance your portfolio's going to take a big hit in the first year or two, that might be too big a risk to take – for a retirement plan, college endowment, etc.

Accumulating gives you a lot more freedom, as you can think of all the money you're going to pay in as a giant virtual cash holding (of course, if there's any risk you won't be able to earn it, that has to be considered) .. But I'd say most successful portfolios do have three pillars, whether it's Buffett (Stocks, Bonds, Cash) or Yale (Private Equity, Real Assets, Hedge Funds) .. Hawksmoor Vanbrugh goes for a 1/3rd each allocation, and despite a high fee, does admirably against a comparable LifeStrategy fund – and could better protected from shocks.
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Richard Proctor
Posted: 20 May 2017 08:24:47(UTC)
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I agree Sandid, the danger remains that without a plan, the same inertia manifests itself when it comes to decisions
to sell which is why a plan is vital.

KL I agree, but what do you do when one of those pillars you would normally hold alongside stocks is very overvalued leading to doubts as to whether it will perform the diversification role you seek i.e. will bonds & stocks simply fall in tandem? I think most of the short duration bond options quoted are corporate bonds which are quite closely correlated with stocks. Government bonds are closer to inversely correlated, but very expensive so arguably may not work as hoped for.
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Mr Helpful on 20/05/2017(UTC)
Mr Helpful
Posted: 20 May 2017 15:52:45(UTC)
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Richard Proctor;46941 wrote:

KL I agree, but what do you do when one of those pillars you would normally hold alongside stocks is very overvalued leading to doubts as to whether it will perform the diversification role you seek i.e. will bonds & stocks simply fall in tandem? I think most of the short duration bond options quoted are corporate bonds which are quite closely correlated with stocks. Government bonds are closer to inversely correlated, but very expensive so arguably may not work as hoped for.


As think Yogi Berra is supposed to have coined
"it's difficult to make predictions, especially about the future".

But here goes anyway :-

If Stocks do eventually succumb, there is a fairly reliable history of a flight to safety effect to the perceived safe haven of Gov't Bonds, which then shows up as that famous Bond -ve correlation.

But superimposed on that 'flight to safety rise' is the broadly anticipated Bonds downward longer term trend from rising interest rates.
Surely interest rates must rise someday?
(Perhaps against a backdrop of significant rising inflation?)

The resultant exact path for Bond prices caused by these two influences is difficult to foresee.

The bigger problem perhaps with holding Gilts today means accepting a less than inflation yield.
I.E. A guaranteed loss of purchasing power from year to year.
If we really wanted that, we could simply hold Cash with no downside nominal risk at all.
The ultimate uncorrelated asset class.
Which brings us back full circle to the original question!
scubascuba3
Posted: 20 May 2017 17:15:05(UTC)
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You are looking to invest now after 9ish years of doing nothing when markets are at an all time high. Now may not be the right time. Someone mentioned gilts, have you noticed how much these have moved in the last few years?

Op, it feels like you are over analysing it now, maybe invest in a couple of OEICS or Unit Trusts that have a good track record subject to what you think the markets will do.
King Lodos
Posted: 20 May 2017 19:39:12(UTC)
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Richard Proctor;46941 wrote:
KL I agree, but what do you do when one of those pillars you would normally hold alongside stocks is very overvalued leading to doubts as to whether it will perform the diversification role you seek i.e. will bonds & stocks simply fall in tandem? I think most of the short duration bond options quoted are corporate bonds which are quite closely correlated with stocks. Government bonds are closer to inversely correlated, but very expensive so arguably may not work as hoped for.


That's exactly the problem.

- Burton Malkiel tackles it by replacing government bonds with investment grade corporates and some dividend growth stocks (and holding some cash .. some say cash is the ultimate diversifier).

- Yale and the endowment managers (like Swensen) don't really hold bonds, and instead use hedge funds .. I think the closest we've got to an endowment-like hedge fund available to us would be Highbridge Multi-Strategy Fund (HMSF) .. Or RIT Capital Partners (which I consider 50% market exposure, 50% hedge funds) .. I'm not entirely keen on the IT structure for diversifiers – because people sometimes sell needlessly – so I might look at Ruffer, Troy, Hawksmoor.

- Warren Buffett holds about 35% cash, 11% mixed bonds (mostly corporates) .. El-Erian also 'bar-bells' like this, with a big cash holding, and the rest in high risk stocks and start-ups.

- Ruffer and Troy Trojan hold the classic combination of short and long-dated TIPS and inflation-linked gilts, with 5-10% in gold .. One perhaps interesting thing to note (from my Ray Dalio thread/link) is that returns on developed world stocks – as rough as the estimates are – aren't very different from US treasury bonds, at around 2% .. Inflation was what ate bond returns up last time yields almost got this low.

- My own bond portfolio is about 60% GAM Star Credit Opportunities, and the rest Royal London Short-Duration: High Yield, Credit and Inflation-linked .. But I'm a trend-follower, so I may be 100% long-dated gov bonds if trends pointed in that direction at some point.
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sandid3
Posted: 21 May 2017 02:34:43(UTC)
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If you are a trend follower, KL, that involves selling and buying. It doesn't sound as though you just use Technical Analysis to make trade decisions. What are your triggers for selling? The problem with selling too early is that it may be a mistake, tempting the seller to buy again, only to be 'whipsawed'. Waiting too long to sell can mean selling on the day when everyone sells, knocking off another 5%.

It seems to me that the sell decision is by far the more difficult one. (Sorry if you've covered this before.)
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Big boy
Posted: 21 May 2017 10:19:56(UTC)
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Markets get overbought/oversold....just look at the yearly high/low of a stock/market. Investors always want to follow success and will get in on the crest of the wave.Strangly they then sell out on the slide. Woodford Patient Capital is a good example.

I recommend you look at discounts on Investment Trusts. Last June /July ...pre rise IT discounts slumped
ie oversold as Investors were cautious. Those discounts have narrowed sharply as we are on the crest and Investors are much more confident. Timing is very important for long term investment. Last June/July my system meant I went 100% into markets and that has not changed yet....I will at some stage take this figure down to 0%. as cash earning 0% is better than losing X.%. Unless you know what you are doing only buy big discounted (not many around at top of market) CONVENTIONAL Investment Trusts where NAV is quoted daily. 10 ITs will give you a massive spread of investments which you are buying at a discount. (other investors are paying full price.)
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dyfed
Posted: 21 May 2017 10:39:07(UTC)
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Big boy;46970 wrote:
.

I went 100% into markets and that has not changed yet....I will at some stage take this figure down to 0%. as cash earning 0% is better than losing X.%. )


Please let me know when u start selling!
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