In Mark’s blog Confessions of a Private Investor, he laid out his position as a top-down investor, with rebalanced asset allocation according to economic / market cycles. The momentum style used to select funds that he invests in does have a lot of sense to it – selling the losers, picking up the winners and you outperform the index. I guess my question is whether it’s really worth it? The time taken to analyse, screen, trade, monitor and, of course then the additional annual charges of the active managers.

At the heart of all good investment plans is the concept of diversification – don’t have all your eggs in one basket. Most importantly to me, it means not having to second guess individual stock performance and, at the broader level, not even having to choose between sectors, or even asset classes? I don’t have the time or inclination – a business manager, with 3 kids at home, a high-flying working wife, 4 horses, 3 dogs, and the 13 chickens……. But I won’t go on. Anyway, I do need to think about asset classes, as each one has different inherent risks, but I don’t believe I should have to chop and change every 3 months, or every year – as many do. Mark? If I’m looking at performance, too, I don’t focus on absolute return, I look at risk-adjusted measures – telling me whether I’m getting my commensurate returns for the risk I’m paying. I always say that risk is a ‘cost’ – you wouldn’t pay it unless you get something back for it. And when evaluating performance, I like to see whether I’ve got my value for money, i.e. returns per unit of risk. And that’s returns being net of all costs.

Since I worked at what was Barclays Global Investors (BGI) in the early noughties, (sold to the BlackRock group before the big crunch) I have been a great fan of indexing with ETFs. The BGI iShares were the first brand of ETFs to arise – BGI were the innovators. I had the luck and pleasure to work with the people who conceived and created these fantastic creatures. Copy-cat monsters have been created since – like horrific 2x leveraged short silver funds. Not for the faint hearted, just for speculators and gamblers.

Like Mark, I am not a stock picker, but neither am I a fund picker. I like the asset allocation decision making, but typically I will rebalance my portfolio by just adding into assets I favour at the time, rather than fully rebalancing the whole portfolio. It’s simpler, quicker, and just as effective I like to think – especially net of charges.

ETFs are so prolific these days that you do need to pick carefully – but iShares have to me always been attractive for their fantastically low costs and consistently low tracking errors. You’re familiar with ETFs? Essentially you can get fund exposure by buying a single share in the ETF and they trade on the stock market – so nice and liquid and easy to trade. Of course, I have to admit I still have my legacy Barclays Stockbrokers account for this. For several years Barclays forgot to note I wasn’t an employee still, and I got the cheaper trading costs! Like a fund, the assets don’t belong to the administrator / operator, they belong to the owners of the fund – the investors; you. will tell you more.

The iShares Core FTSE 100 UCITS ETF has only ongoing charges of 7bps (0.07%) pa and in the 12 months to 30 September 2017 had zero tracking error, even net of fees. OK, I hate the FTSE 100, and wouldn’t invest in it as an index if my retirement depended on it – which it would if I did! Irony. It is just too undiversified – in sector, company and size. It’s too concentrated in energy, financial and telecoms companies. But how about the FTSE 250 UCITS? Ongoing charges of 40bps, but also it earned you 0.12% in securities lending returns. This is my favourite UK index investment vehicle. My £10,000 has turned into £44,000 since April 2004. That’s 12% compound pa. The FTSE 100 ETF? I’d only have £25,700. This is a lesson in staying diverse if ever there was one – lots of smaller bets, not a few big ones. Don’t worry about credit crunches, Brexits, global warming, Trump. Just stay diverse and sleep well at night. My kids will be pleased that their secret investments are cash, a little bit of bonds, and FTSE 250 equities.

So, what to do with the ETFs? Don’t stick with equities. In the ETF you have de-facto diversified exposure to asset classes – even sectors or themes if you want to go that deep – so all you have to do is decide on your risk appetite and appropriate asset allocation, and off you go. You can choose Equities (domestic, overseas, global, sectors, EM, themes), Fixed Income (global or domestic, HY or IG), Commodities (including ETFs that hold physical gold, not derivatives). I was told – quite reliably – that the BlackRock ETFs are the single biggest holder of physical gold in the world, excluding central banks!

But one question: what is an appropriate asset allocation?

I cannot give an answer to that, but I can give you a benchmark / starting point. If you’re looking at longer term, pension-like investment, then the rule of thumb is to have your age in years as the % to allocate to bonds. Allocate a small portion to ‘alternatives’ if you like – real estate, commodities, hedge funds, and the rest is developed equities. Always keep a bit in cash – for flexibility and opportunistic timing!

So, for me, that’s 49% in bonds, 36% equities, 10% alternative, 5% cash.

Interestingly, I did a quick bit of research just now, checking on the ‘typical’ corporate UK pension plan and how it allocates investments across the various asset classes. By pure chance I found that, due to de-risking, since 2003 the allocation to bonds for “broad strategic asset allocation” has actually followed my aging pretty well! But that’s just because pension plans have got nervous, not for any other reason:

  • -In 2003 the allocation was 31% bonds, 68% equities (wow!) and just 1% ‘other’.
  • -In 2017 it was 49% bonds, 29% equities and 22% other

But how would this play out over a 35 year horizon (a typical pension horizon?). Let me do a bit of research here, and I’ll get right back to you……