How do I become investment literate?

[xeny]

Craikeybaby said:

It takes a lot of the fun out of it, but look at the Vanguard Lifestrategy funds.

Trouble is I suspect they'll bias in the wrong direction.

Maybe a global tracker with say 10% in each of a small cap fund and an emerging market tracker?

For the EM tracker, look closely at what it tracks - it may well not bewhat you expect.

[bitchstewie]

With things like Lifestrategy or a DIY approach how are people determining the equity/bond ratio?

I keep seeing "rules of thumb" like 100 - your age = the percentage equity and it feels like there should be some slightly more scientific way of coming to an opinion

[xeny]

I don't know of a magic formula. I did however find it very helpful to put together a "net worth" spreadsheet and characterise all my assets, housing equity, a bit in a final salary pension, ISA investments, pension investments, cash savings etc and then characterise them all as 0 risk, bond like, equity investment etc. That at least allows you to balance everything up, rather than just looking at say an ISA in isolation.

Equity Bond ratios also really come down to your investment time horizon, there are suggested ratios in the vanguard lifestrategy PDF I linked to a while ago, page 2 of https://www.vanguard.co.uk/documents/adv/literatur...

[BanzaiMan]

bhstewie said:

With things like Lifestrategy or a DIY approach how are people determining the equity/bond ratio?

I keep seeing "rules of thumb" like 100 - your age = the percentage equity and it feels like there should be some slightly more scientific way of coming to an opinion

It may be useful to look at the maximum drawdown for all of the LS funds and see how much pain you think you can stomach if we/when we next get a major downturn. You need to be very sure that with the equity exposure you choose are certain you won't sell because you can't stomach the (unrealised) loss/volatility. Not sure if you were in the markets in 2008/2009 but they were pretty scary times (especially if you were stuck on a trading floor).

[Jon39]

xeny said:

Maybe a global tracker with say 10% in each of a small cap fund and an emerging market tracker?

For the EM tracker, look closely at what it tracks - it may well not bewhat you expect.

I am always puzzled by the enthusiasm for global trackers, emerging markets, far eastern equities, balanced currency funds etc..
Is that not making investment too complicated?

Under our noses are vast global companies, doing business in up to 200 overseas countries, some mature others emerging, and operating in the associated foreign currencies. Moreover, these companies are domiciled in the UK, and therefore are subject to company laws which we are familiar with.

Therefore, they offer considerable diversification including, geographic, market type, and also a mixture of fluctuating currencies.
Somehow seems a simpler way of diversifying the same risks.

[BanzaiMan]

Jon39 said:

Somehow seems a simpler way of diversifying the same risks.

Unfortunately not. Historically you have been able to get better risk adjusted returns (on average, and also taking into account currency volatility) by buying a global tracker than staying local (using FTSE 100 as proxy)

[Jon39]

BanzaiMan said:

Jon39 said:

Somehow seems a simpler way of diversifying the same risks.

Unfortunately not. Historically you have been able to get better risk adjusted returns (on average, and also taking into account currency volatility) by buying a global tracker than staying local (using FTSE 100 as proxy)

Thanks. You should have told me that 29 years ago.
I thought an annual average of 14.16% per annum was a reasonable return.
Perhaps too late to learn a new way now.
Have to be selective within the FTSE 100 though. There is too much risk for me in some of the constituent sectors.

[Badda]

Jon39 said:

BanzaiMan said:

Jon39 said:

Somehow seems a simpler way of diversifying the same risks.

Unfortunately not. Historically you have been able to get better risk adjusted returns (on average, and also taking into account currency volatility) by buying a global tracker than staying local (using FTSE 100 as proxy)

Thanks. You should have told me that 29 years ago.
I thought an annual average of 14.16% per annum was a reasonable return.
Perhaps too late to learn a new way now.
Have to be selective within the FTSE 100 though. There is too much risk for me in some of the constituent sectors.

I think the general consensus is that if you think a FTSE tracker will perform better than a global tracker, you must have some kind of inside info otherwise why not diversify further and why UK rather than Germany, US etc?

Can't tell if your post is attempting sarcasm or not but suspect it is.

[Jon39]

Badda said:

I think the general consensus is that if you think a FTSE tracker will perform better than a global tracker, you must have some kind of inside info otherwise why not diversify further and why UK rather than Germany, US etc?

No, I am not saying an FTSE tracker will perform better than a global tracker. That would be ridiculous. Some years will be worse and some will be better.

I was simply pointing out, that a carefully selected portfolio of FTSE 100 businesses, will provide wordwide exposure, and therefore diversification of geography, new and mature markets, and currency. Worldwide investment exposure, but retaining the familiarity of UK practices. Some of the supposedly British companies, only have a very small percentage of their employees, working in the UK.

For an example of currency exposure, there were some instances last year, of dividend currency translations changing a 5% dividend rise, into a 20% UK payment increase. As always with FX, that effect can obviously also work the other way around.

I am sure that you will know, many of those companies do business in up to 200 overseas countries, some with manufacturing plants in numerous foreign countries.
Therefore plenty of overseas exposure, including the important markets of Germany and USA.

Edited by Jon39 on Friday 12th January 13:34

[Badda]

Jon39 said:

Badda said:

I think the general consensus is that if you think a FTSE tracker will perform better than a global tracker, you must have some kind of inside info otherwise why not diversify further and why UK rather than Germany, US etc?

No, I am not saying an FTSE tracker will perform better than a global tracker. That would be ridiculous. Some years will be worse and some will be better.

I was simply pointing out, that a carefully selected portfolio of FTSE 100 businesses, will provide wordwide exposure, and therefore diversification of geography, new and mature markets, and currency. Worldwide investment exposure, but retaining the familiarity of UK practices. Some of the supposedly British companies, only have a very small percentage of their employees, working in the UK.

For an example of currency exposure, there were some instances last year, of dividend currency translations changing a 5% dividend rise, into a 20% UK payment increase. As always with FX, that effect can obviously also work the other way around.

I am sure that you will know, many of those companies do business in up to 200 overseas countries, some with manufacturing plants in foreign countries.
Therefore plenty of overseas exposure, including Germany and USA.

Edited by Jon39 on Friday 12th January 13:27

You're not only saying that FTSE= global but that picking a few of the FTSE is even better and therefore a lack of diversification is better.
First time I've heard this.

[Jon39]

Badda said:

You're not only saying that FTSE= global but that picking a few of the FTSE is even better and therefore a lack of diversification is better.
First time I've heard this.

You can diversify to infinity, eventually for no benefit, but it has been generally accepted that 25 or 30 of the FTSE 100 constituents, provides a good measure of diversification. If you are in the fund industry, you will know more than me, but I don't think many tracker funds run holdings in every constituent company in the FTSE 100. Due to weightings being used in the index calculation, the performance of company number 95 (say), will have virtually no effect on the overall index movement. Hence the acceptance of a 25 or 30 selection, to obtain the required level of diversification.

Everyone's approach to risk will be different, but an achieved average return of 14.16% p.a. return over 29 years, shows that it can produce a good long-term result, and during that period there were a number of economic recessions.

I am certainly not saying you are wrong, just that you prefer a different approach.
I don't know for how long you have been investing, but of course during recent years with lower inflation, high number average annual returns will not be easy to obtain. The comparison to inflation though, does not necessarily mean there is much difference.

Edited by Jon39 on Friday 12th January 20:08

[xeny]

Badda said:

You're not only saying that FTSE= global but that picking a few of the FTSE is even better and therefore a lack of diversification is better.
First time I've heard this.

Depends on what your metric for better is. Volatility of a few stocks will almost certainly be Worse, but it is perfectly possible to get better performance out of the right fewcstocks than out of a global tracker. The trick is picking the right few stocks.

Personally I’d rather try and pick those few stocks on a global basis, but I can see an argument for picking from a local index if you think you’ll have better knowledge of your investable universe as a consequence.

[98elise]

NickCQ said:

JulianPH said:

Employer's NI is simply a tax on job creation and wages. It has no place in a developed country, IMHO.

It’s no different to income tax, surely? Just means that you have to look at the all-in rate. If you removed it and added 13.8% on to the relevant income tax bands you’d get the same outcome. The market would adjust wages to be neutral.

But it means that the true top rate of income tax in this country is 60.8%

That's why it's hidden as Employers NI. The employer pays all your PAYE tax to HMRC and your net salary to you. The Employers bit doesn't appear on your pay slip so employees are none the wiser.

[NickCQ]

Jon39 said:

Everyone's approach to risk will be different, but an achieved average return of 14.16% p.a. return over 29 years, shows that it can produce a good long-term result, and during that period there were a number of economic recessions.

14.16% p.a. is definitely a very good result over such a long timeframe! The million dollar question is what that 14.16% return would have been if, say, you had allocated 5-10% to a basket of less strongly correlated securities instead.

Portfolio theory certainly would suggest that you could add to the return without materially increasing the risk taken.

[dingg]

jon39

quick q if I may

during your 29 years and ave of 14.16% , what was the worst annual and best annual performance %age

tia

[Jon39]

dingg said:

jon39

quick q if I may

during your 29 years and ave of 14.16% , what was the worst annual and best annual performance %age

tia

Yes I can answer your question.

Best annual was in 1989 = +49·27%

That seems ridiculously high, but there are probably two explanations. First my fund was small then, so there can be bigger fluctuations, and secondly 1989 was an exceptional year for the stock market (FTSE All-Share + 30.01%). I cannot remember the circumstances, but that strong upward market movement was likely to have been the recovery from the famous October 1987 stock market crash. They called it 'Black Monday', but the panic went on around the world all week. I did not sell anything, but it was my first experience of trying to hold tight, when everyone was selling. Not an easy situation.

Worst annual was in 2008 = - 12·23%

No need for an explanation to you about that year. It was dreadful, with a market fall of -32·78%.
By that time I had more experience, so was confident that time to do some buying when everyone was selling.
It is a funny business, but doing the opposite from the City 'experts' does work sometimes.

The biggest market fall that I have experienced followed the 'dot com' bubble.
FTSE All-Share Index; 2000 = -7·97%; 2001 = -15·41%; 2002 = -24·97%. (£100 becomes £58 ouch!)
I was very lucky that time, by deciding not to purchase any of those trendy new technology company shares.
It appears to show that sometimes, just a few decisions which only later can be seen to be important, can leapfrog you ahead of the market, and often it seems to occur when the market is in decline.

[JulianPH]

Jockman said:

I don't correct Julian as he knows his stuff. When I join his posts it is generally to add to them

Cheers Phil, the same here.

[TiminYorkshire]

I'm watching this thread with interest as I'm just working through my own (probably less impressive) finances, I'm looking forward to reading some of the titles mentioned in this thread.

[Harry Flashman]

Thanks chaps - I'm deep in the reading/research phase now, as well as trying to pick the best investment ISA: any experiences on the latter would be good. HL seems user-friendly with a wide range of investments, but fees are (relatively) high.

Gibbon - your reasoning is like mine and having a London flat (sadly not old person suitable - it's floors 3 and 4 of a Victorian house with no lift) seems logical for all the reasons you state. I need to work on paying off the mortgage on it using the rent I think. Trouble is, tax breaks are disappearing soon...

[xeny]

You've presumably had a look at http://monevator.com/compare-uk-cheapest-online-br... ?