Index Investing, pros and cons of World vs UK type?
Discussion
Having read "Millionaire Teacher" and "How to Own the World" after wondering about how to start investing outside of my pension I am looking to set up some index funds in a S&S ISA with regular contributions. The plan for this money is a medium to long term plan, potentially to bridge some of early retirement between 50-55 (11 years time), and/or potentially to use for a big house improvement in 10 years time, and maybe use some of it to finish paying the remainder of the mortgage off in approximately 5 years time (less likely). Basically to provide options as life continues to develop.
The balance of home vs international equity index intrigues me, in HTOTW they state that people often over invest in their local market, yet MT seems to advocate a reasonable holding in home market funds. What further intrigues is that the FTSE trackers have quite a large number of international firms (currently) anyway, so I imagine this is different to if you were living in a country where the domestic stock market is made up of more national companies.
It has had me pondering currency, i.e if the pound dramatically strengthens in 5-10 years the value of my world tracker would be less, however I note that when the pound strengthens on a short term basis it can also have the adverse effect on the FTSE, so in effect does this not really matter when comparing the two options?
Brexit and the future of the UK also add complication, or should it be buying opportunity it's adding with a weaker/undervalued market that should recover nicely in 10 years. Or is the UK economy and markets similar to Antartica's ice sheet, slowly retreating?
Any thoughts on the above points, or others ? I'm bound to ponder some more with some more rambling thoughts appearing.
The balance of home vs international equity index intrigues me, in HTOTW they state that people often over invest in their local market, yet MT seems to advocate a reasonable holding in home market funds. What further intrigues is that the FTSE trackers have quite a large number of international firms (currently) anyway, so I imagine this is different to if you were living in a country where the domestic stock market is made up of more national companies.
It has had me pondering currency, i.e if the pound dramatically strengthens in 5-10 years the value of my world tracker would be less, however I note that when the pound strengthens on a short term basis it can also have the adverse effect on the FTSE, so in effect does this not really matter when comparing the two options?
Brexit and the future of the UK also add complication, or should it be buying opportunity it's adding with a weaker/undervalued market that should recover nicely in 10 years. Or is the UK economy and markets similar to Antartica's ice sheet, slowly retreating?
Any thoughts on the above points, or others ? I'm bound to ponder some more with some more rambling thoughts appearing.
Diversification is a fundamentally good thing, so you're right not to ignore overseas exposures.
The FTSE-100 does have a good deal of international exposure in terms of earnings, but bear in mind the sectors are also fairly concentrated as well.
Having a predominance of home market exposure is common, my personal view is looking at it from the UK its probably overdone for most people, if i recall we're about 6% of the global market cap, take from that what you will. So i tend to take a more global perspective.
As far as FX is concerned, there are hedged and un-hedged overseas funds available. That said i don't bother, the calls is 50/50 and you do pay for the hedging which in bad times offsets the savings made in the good, so to speak.
Also, worth looking at some smart beta plays if you're set on index plays only? Essentially, they take an overview via quants and aim to remove the real worst of the index leaving more of your funds in play with the elements that should do a little better. Relatively new to the UK, but some of the numbers look promising.
The FTSE-100 does have a good deal of international exposure in terms of earnings, but bear in mind the sectors are also fairly concentrated as well.
Having a predominance of home market exposure is common, my personal view is looking at it from the UK its probably overdone for most people, if i recall we're about 6% of the global market cap, take from that what you will. So i tend to take a more global perspective.
As far as FX is concerned, there are hedged and un-hedged overseas funds available. That said i don't bother, the calls is 50/50 and you do pay for the hedging which in bad times offsets the savings made in the good, so to speak.
Also, worth looking at some smart beta plays if you're set on index plays only? Essentially, they take an overview via quants and aim to remove the real worst of the index leaving more of your funds in play with the elements that should do a little better. Relatively new to the UK, but some of the numbers look promising.
Fundingthecars said:
It has had me pondering currency, i.e if the pound dramatically strengthens in 5-10 years the value of my world tracker would be less, however I note that when the pound strengthens on a short term basis it can also have the adverse effect on the FTSE, so in effect does this not really matter when comparing the two options?
Global bond trackers tend to be currency hedged so this will insulate at least part of your portfolio. As for the equity component, the argument is that equity volatility dwarfs currency vol so there's little point hedging.ellroy said:
Also, worth looking at some smart beta plays if you're set on index plays only? Essentially, they take an overview via quants and aim to remove the real worst of the index leaving more of your funds in play with the elements that should do a little better. Relatively new to the UK, but some of the numbers look promising.
Interesting, was just listening to a podcast featuring Bogle where he was very sceptical of them. You've got to be prepared for long periods of underperformance with the hope that long term you will do better than the index. For example the value premium has underperformed for most of the last decade, whereas long term (at least looking at historical data) it should outperform. Derek Chevalier said:
ellroy said:
Also, worth looking at some smart beta plays if you're set on index plays only? Essentially, they take an overview via quants and aim to remove the real worst of the index leaving more of your funds in play with the elements that should do a little better. Relatively new to the UK, but some of the numbers look promising.
Interesting, was just listening to a podcast featuring Bogle where he was very sceptical of them. You've got to be prepared for long periods of underperformance with the hope that long term you will do better than the index. For example the value premium has underperformed for most of the last decade, whereas long term (at least looking at historical data) it should outperform. https://www.wisdomtree.com/blog/2019-01-24/has-val...
fellatthefirst said:
I have made my ISA up accross 4 things. UK FTSE index tracker, US index tracker, world index tracker and then the rest in Uk bonds for stability. Much as the MT book suggested
Why just UK bonds?Why a bias to UK and UK equities rather than just hold a global tracker?
MisterJD said:
Have you checked how much of your US tracker is doubled up in the World tracker?
Very much this!. As stated in other threads on this forum, I switched from a 50/50 UK / Global index tracker to a 100% Global index tracker excl. UK. Except I stupidly checked the regional allocation after the fact and discovered that the regional allocation is 65% US and 35% ROW.putonghua73 said:
MisterJD said:
Have you checked how much of your US tracker is doubled up in the World tracker?
Very much this!. As stated in other threads on this forum, I switched from a 50/50 UK / Global index tracker to a 100% Global index tracker excl. UK. Except I stupidly checked the regional allocation after the fact and discovered that the regional allocation is 65% US and 35% ROW.Gassing Station | Finance | Top of Page | What's New | My Stuff