FTSE Tracker or something else.....

FTSE Tracker or something else.....

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Discussion

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Original Poster:

39,688 posts

195 months

Saturday 22nd July 2017
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I'm looking for somewhere to invest a lump sum amount. It's long term (10 years) but I will need to be able to dip in and out so It needs to be reasonably accessible (so no fixed term deposits). It needs to be low/medium risk, ideally generating something like RPI+2%.

Options that I'm considering are a FTSE Tracker like vanguard, or a Corporate Bonds fund. What's putting me off is...

Are equities overvalued?
Are bonds going to get a kicking if interest rates go up?

Thanks for any advice in advance.

DonkeyApple

54,921 posts

168 months

Saturday 22nd July 2017
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Who knows is the short answer. biggrin

Personally I wouldn't 'lump sum' anything at the moment as I believe we are close to a point of change. So, I would prefer to drip feed any large sums and focus on cost price averaging to protect my downside risk. You can either do it on a monthly basis but I always prefer to do it on market levels. Ie invest 15% each time the FTSE climbs 100 points. Nice and simple and most platforms allow you to place buy orders at levels.

As Brexit presents the possibility of large currency swings I wouldn't even bother with overseas indices as what you gain could easily be lost on the fx exposure or vice versa.

sidicks

25,218 posts

220 months

Saturday 22nd July 2017
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Countdown said:
I'm looking for somewhere to invest a lump sum amount. It's long term (10 years) but I will need to be able to dip in and out so It needs to be reasonably accessible (so no fixed term deposits). It needs to be low/medium risk, ideally generating something like RPI+2%.

Options that I'm considering are a FTSE Tracker like vanguard, or a Corporate Bonds fund. What's putting me off is...

Are equities overvalued?
Are bonds going to get a kicking if interest rates go up?

Thanks for any advice in advance.
Your requirements are a little bit inconsistent with each other for a single solution to make sense:

Your investment horizon suggests equities are the best choice (and a FTSE tracker is a good way of achieving that, but not really consistent with your requirements for low risk, particularly if you need to dip into and out of it in the intervening period, potentially when values are depressed.
As you highlight, a bond investment might be a more appropriate risk profile, but unless you are buying bonds that will mature at the end of 10 years when you need the money, you will be facing interest rate risk (and spread risk).

I don;t know how much you expect to dip in and out, but personally I'd put say 90% in the Tracker and keep 10% in cash.

Countdown

Original Poster:

39,688 posts

195 months

Saturday 22nd July 2017
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Thanks both.

As i suspected, no hard and fast answers really....I think VUKE is going to be the least risky option.

NickCQ

5,392 posts

95 months

Saturday 22nd July 2017
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DonkeyApple said:
As Brexit presents the possibility of large currency swings I wouldn't even bother with overseas indices as what you gain could easily be lost on the fx exposure or vice versa.
You get that on the FTSE 100 anyway. I'd be tempted add some global equity exposure, if only because I am generally pessimistic about Brexit.

Countdown

Original Poster:

39,688 posts

195 months

Saturday 22nd July 2017
quotequote all
NickCQ said:
You get that on the FTSE 100 anyway. I'd be tempted add some global equity exposure, if only because I am generally pessimistic about Brexit.
Wouldn't FTSE100 effectively be global exposure?

DonkeyApple

54,921 posts

168 months

Saturday 22nd July 2017
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Countdown said:
Wouldn't FTSE100 effectively be global exposure?
But only in a few sectors, which used to be Oil&Gas, Mining, Banks, Pharmaceuticals and Telecoms. Not sure Telecoms matches the others that much any more.

People used to add the Swiss for non tech/financial services and the NASDAQ for tech but it all starts to get overly complicated.

Ultimately, in very crude terms the FTSE is about digging things out of the ground and selling/managing debt.

fido

16,752 posts

254 months

Saturday 22nd July 2017
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DonkeyApple said:
Personally I wouldn't 'lump sum' anything at the moment as I believe we are close to a point of change.
I was told this last summer - sold out of everything bar a tiny amount of Investment Trusts (beta well with FTSE) which are now up nearly 20%.
Now waiting for that drop .. frown

DonkeyApple

54,921 posts

168 months

Saturday 22nd July 2017
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But surely dumping out is no different from lumping in? Why not scale out over time and speed up or slow down the process depending on how the markets develop?

sidicks

25,218 posts

220 months

Sunday 23rd July 2017
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DogRough said:
Pound cost averaging is actually busted as a theory; time in the market historically outweighs the PCA benefits.
Surely that very much depends on your investment horizon and the actual market performance over the period?

And PCA is about minimising risk rather than maximising return.

DonkeyApple

54,921 posts

168 months

Sunday 23rd July 2017
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DogRough said:
Pound cost averaging is actually busted as a theory; time in the market historically outweighs the PCA benefits.
Over what time frame though and what macro economic scenarios? Over a long enough horizon it shouldn't be of any use nor over geopolitically and economically stable periods but I don't think a single one of those criteria is currently arguable.

To me we are looking at a medium term time horizon for equity investment, being ten years mentioned earlier and we are facing one of the potentially largest macro economic changes in living memory looming almost certainly within that time horizon. I would argue that 'lump summing' at the moment is just punting rather than investing.

Also, if the investor may think they need to dip in and out over this period then the i invested cash theoretically delivers a yield that matches the cost of buying into and selling out of portions of the equity investment so carries a very different and elevated value to just being simple cash.

Edited by DonkeyApple on Sunday 23 July 09:56

DonkeyApple

54,921 posts

168 months

Sunday 23rd July 2017
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DogRough said:
That's an advertorial for a manager who makes the bulk of their money from switches from competitors. That's not an independent article written on the back of true market analysis. wink

What do you think Vanguard make the most money from, a client who lump sums from a competitor or one who drips in?

Also, what do you think client retention is like for clients who lump sum versus those who drip feed?

The clue as to the real purpose of the 'article' is probably this paragraph which very subtly ensures it doesn't cross a regulatory line but still manages to focus the potential client on the company's desire for them to commit everything to them as rapidly as possible:

'We counsel clients to take full advantage of the expected risk premiums in their long-term allocations by investing immediately. But we also work with clients who place a high value on minimizing the potential for regret. We advise them to set up a systematic plan, limiting the investment interval to no more than a year.'

But notice how they deliberately use the negative word 'regret' as a means to enforce the image that the action that does not economically favour them is bad.

And don't forget that 71 people out of 78 asked said distorted data to manipulate marketing messages was a good thing. The fact that the regulator doesn't place any governance on how [u]many[/u] people you can ask and how you select a section of your collected data for marketing means that a simple algorithm will tell you how many people you need to ask, at what time of day, where and how to structure your question to obtain a block of enough 'incorrect' answers in a row as to be able to create a positive enforcement. Same is true of market data and the wonders of curve fitting to display the answer that you desire. Why were those particular indices chosen, why those dates, why not publish the exact dates, why those weightings etc etc.

The important thing is that that link is to an advertorial not a scientific paper and it is written to the criteria and governance laid out by the regulator and not to any recognised scientific body.

sidicks

25,218 posts

220 months

Sunday 23rd July 2017
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DogRough said:
Bit desperate there chap. It is a serious study, with kosher numbers. Unless you can produce figures to counter, then you are whistling in the dark. As this link demonstrates, the numbers that Vanguard use were produced independently.

http://www.moneyobserver.com/our-analysis/pound-co...

Edited by DogRough on Sunday 23 July 11:27
Serious study - really?

Article said:
It is true that regular investing can mitigate the effects of downward share price movements, but it also limits gains in a booming market
That's exactly why you use PCA, in order to smooth your entry price and mitigate large drawdowns.

I'm not sure anyone has ever recommend PCA as a means to maximise upside returns!!

Article said:
Unfortunately for regular investors, the data suggests you are. Several studies of various portfolios over different periods have found that investing a lump sum and leaving it invested will in most cases net you a greater return than you would get investing fractions of that sum regularly over the same period.
Is this really a surprise, with equity markets generally trending upwards over time?!!

article said:
For example, he compared the return from investing £1,666 every month between May 2005 and April 2015 in a portfolio of global equities, with the return from investing £200,000 (the same overall sum) up-front in the same assets.

While a regular investor would have ended up with £290,000, investing the full £200,000 in one go would have produced a total of £380,000.
Again, who is this meant to surprise? In the lump sum scenario, the full amount of £200,000 is invested for the full 10-year period. In the monthly scenario, the £200k is invested for, on average, half of that period.

Article said:
The security that comes with a Steady Eddie approach might give some investors more peace of mind. A portfolio purchased with a lump sum rises and falls with the markets, while an incremental portfolio tends to exhibit a smoother - if slower and less impressive - rise in value.
Which is exactly the point of PCA...

Edited by sidicks on Sunday 23 July 11:49

Jon39

12,782 posts

142 months

Sunday 23rd July 2017
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Countdown said:
Wouldn't FTSE100 effectively be global exposure?

Some of the 100 constituents would of course provide global exposure, but many others would not.
Holding those global businesses produced a tremendous gain last year, when Sterling suddenly declined. Naturally it produced the opposite result on UK only businesses which import.

The weighting in the Index calculation also complicates matters, whereby certain individual price changes either make a large, or small difference to the Index movement.

I have never invested in an Index fund, or indeed any fund.

The 10 year period you (OP) mention, is highly likely to include a market decline (particularly considering how long the present bull market has been running). My own very long-term investment philosophy has been to consider recessions, so I have held individual FTSE 100 companies, which hopefully should be able to continue increasing their profits during bear markets. That is the reason for being selective and not wanting to invest in the entire Index. I miss out when the cyclicals are performing well, but don't need to try to guess when to sell cyclicals, which I would probably get completely wrong.

A few figures (close of business 21 July 2017) from 1st January this year, to illustrate how FTSE 100 defensives perform.
I don't consider that a 6 month period means very much at all, but here are the current figures.

FTSE 100 = + 4.34%

My best and worst FTSE 100 companies, showing the inevitable wide variation from the Index average.

BAT = + 19.4%
BT = - 15.3%

My overall result (incl 2017 divs. received) = + 12.80%
Total annual dividends increase, so far this year = + 5.88% (hopefully will increase soon, when the 30th June interim company results are announced).














Edited by Jon39 on Sunday 23 July 13:16

JulianPH

9,912 posts

113 months

Sunday 23rd July 2017
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Perhaps the OP should consider a well diversified managed portfolio that spreads investments across many asset classes - depending upon attitude to risk - using low cost ETFs.

A cautious managed portfolio (or balanced now moving to cautious) would appear to meet the conflicting requirements and they are available in abundance. Perhaps even a 10 year target dated portfolio?

It is all well and good highlighting how complicated the underlying mechanics actually are, but to put forward a simple solution helps the OP more. This could well be the (or one) answer.

Edited for typo and clarity

Edited by JulianPH on Sunday 23 July 16:25

sidicks

25,218 posts

220 months

Sunday 23rd July 2017
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DogRough said:
Or in other words, it is a factual article.
But hardly a 'serious study'. It's just basic common sense. And in no way demeans the benefits of PCA.

Countdown

Original Poster:

39,688 posts

195 months

Sunday 23rd July 2017
quotequote all
JulianPH said:
Perhaps the OP should consider a well diversified managed portfolio that spreads investments across many asset classes - depending upon attitude to risk - using low cost ETFs.

A cautious managed portfolio (or balanced now moving to cautious) would appear to meet the conflicting requirements and they are available in abundance. Perhaps even a 10 year target dated portfolio?
Edited by JulianPH on Sunday 23 July 16:25
Cheers - that sounds good to me smile

Any recommendations for low cost ETFs? Again I assume a Vanguard product would probably be the best....?

DonkeyApple

54,921 posts

168 months

Sunday 23rd July 2017
quotequote all
DogRough said:
Bit desperate there chap. It is a serious study, with kosher numbers. Unless you can produce figures to counter, then you are whistling in the dark. As this link demonstrates, the numbers that Vanguard use were produced independently.

http://www.moneyobserver.com/our-analysis/pound-co...

Edited by DogRough on Sunday 23 July 11:27
It's an advertorial. No idea how you define your statement 'serious study' either!

And the MO article (owned by Interactive Investor so that'll give you a clue as to their commercial interest) even backs up my argument re risk. Again, not sure why you have chosen to focus on absolute returns as that wasn't in the OP's remit.

'Unfortunately for regular investors, the data suggests you are. Several studies of various portfolios over different periods have found that investing a lump sum and leaving it invested will in most cases net you a greater return than you would get investing fractions of that sum regularly over the same period.

A study by Vanguard in 2012, for example, found that lump-sum investors won out two-thirds of the time.'

And it references the same advertorial data that I've already discussed.

It's not about being 'a bit desperate' it's about being somewhat experienced as to how financial products are vended to the retail market. wink. 23 years as a regulated broker, the last 7 spent owning my own brokerage. I know an advertorial when I see it and I know exactly how to select real market data to support any view and how to keep it compliant.

Jon39

12,782 posts

142 months

Sunday 23rd July 2017
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DonkeyApple said:
DogRough said:
Bit desperate there chap. It is a serious study, with kosher numbers. Unless you can produce figures to counter, then you are whistling in the dark.
It's an advertorial. No idea how you define your statement 'serious study' either!

You two are having quite a tussle about which performs better, invest at once, or drip in gradually.

I have not thought about these two ways, but my own portfolio might provide a clue to the answer.

The results achieved are average 14.16% pa over 29 years (incl. divs received each year, but not reinvested).
It probably became fully invested about 20 years ago, and after that there have been very few changes to the holdings.

Therefore, from 20 years ago, if the investment was put in each month, only reaching full investment now, there would have been less money invested throughout, until this year. With an unchanged portfolio, the percentage results would have been identical, but as the total sum invested would have been lower throughout, the Pound value of the portfolio would now also be lower.

That is how I see it, but if a fund had too many negative years, then the answer might be different.

An interesting point to debate, but I think looking for good businesses might be more important, and rewarding for investors.






Edited by Jon39 on Sunday 23 July 19:39

drainbrain

5,637 posts

110 months

Sunday 23rd July 2017
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Getting a funny tit-for-tat hyena feeling......is it time to summon the Dog catchers already? rolleyes