Market Musings 16/08/21: Why is it so hard to choose funds?

16th Aug '21 by Edmund Shing

12 comments 2369 reads

Why is it so hard to choose funds/investments?

Today's world is geared to borrowers, and loaded against savers. This is unlikely to change anytime soon
Cash and government bonds are "trash", i.e. historically unattractive for savers
Investors are thus pushed to invest in shares, corporate bonds, property, alternative investments
Looking at multi-asset one-stop shop funds - e.g. Vanguard's Lifestrategy funds
Factoring in Blackrock's 5-year asset class return assumptions
Some simple "active" bets one can take to improve upon the classic 60% global shares, 40% global bond portfolio

The simplest choices are most unattractive today

A lot of people just want to do the right thing. They want to save for the long term. In the old days, there were simple solutions for investing your savings. The default, no risk destination for your savings was an instant access savings account at a bank or building society. Back in 1990, this savings interest rate peaked at over 13%! Even in 2007, you could get 5.5% for your cash savings.

UK savings account rate: double-digit to just 0.45% today

Source: swanlowpark.co.uk

But today, the savings interest rate is a paltry 0.45% on average! For every £100 held in a savings account for an entire year, you can expect to add a miserable 45p in interest. Hardly an attractive return on your hard-earned savings.

The second popular option, government bonds, are not any better. In return for lending your savings to the US, UK or German governments for 10 years when you buy their bonds, you will only receive 1.3%, 0.6% or -0.5% respectively in annual interest from each. Yes, that’s right, in the case of German government bonds, you are actually paying the German government for the privilege of allowing them to borrow your money for 10 years…

So if you elect to look further afield for a home for your savings, where would you choose to invest? In order to potentially earn a higher rate of return than is on offer in cash and government bonds, you have to accept a higher level of investment risk.

10-Year UK government bond (gilt) yield: from 5%+ in 2007 to just 0.6% now

Source: marketwatch.com

The obvious choices: Shares, Corporate Bonds, Property

Moving up the risk spectrum from cash and government bonds, corporate bonds, company shares and commercial property are three…

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Lucky dip

16th Aug '21

I simply buy Fundsmith, SSON, SMT, HGT, BRWM.

Martin VT

I find Investment Trusts easier to research and identify opportunities, in particular thanks to the AIC website that gives great detail on the vast majority of Trusts.

And of course to answer Edmund’s dilemma, one can put together a portfolio of IT with differing characteristics…John Baron is very good on this stuff via the articles in the IC and via his dedicated website.

KevinS1

17th Aug '21

Hgcapital Trust (LON:HGT) seems to have a very high premium which appears to have been a recent thing - any ideas why jayrannejad?

Philip999

It’s certainly a conundrum that seems to be getting more attention in recent months. Two obvious options spring to mind, BH Macro IT (thrives on volatility and will act as a natural hedge to most equities), whisper it quietly, it’s a dirty word (hedge fund) with a whopping 2 and 20 charge. On the balance of risk I like it and since they tweaked their strategy in 2018, returns have been very good.

I also invest in the Saxo discretionary macro strategy. The irony is it’s super high risk, but again thrives with volatility.

Phil

gus 1065

Thanks Edmund.

FWIW, I moved my SIPP over to Vanguard at the start of the year and invested it a broad spread of their various Lifestyle and market specific mainly Index tracking funds. (The main drawback with Vanguard being that if you’re on their platform you can only invest in their funds/ETFs). This included a reasonable proportion into their Target Retirement Funds which automatically increase the proportion of fixed income to equity over time as a target retirement date approaches. This takes out one of the investment decisions as to when to reduce portfolio risk.

Although there is no specific property exposure option available (I feel I already have plenty of this as I own my house which probably represents about 40% of my TNW) I’m comfortable that I've achieved a pretty broad spread of equity/fixed income exposures at a very low running cost both in terms of the platform fee and the individual fund charges (one of Vanguard‘s principal USP‘s).

Having spent a bit of time thinking through where and how much to allocate funds, my intention now is to leave well alone other than to reinvest periodic dividend/ coupon payments maybe once or twice a year. Quite happy to now consider this a „coffee can“ and forget about it until further notice.

Gus.

raggedtp

And now there is https://doceo.tv/, which is easy to use. It doesn't have the whole universe of funds, but is growing.

jdwmarkt1

Any view on BlackRock MyMap funds ( vs Vanguard LS ), now they've been around a while and weathered the pandemic ?

John

Tommy H

Hi Gus

Have you read Rich Dad, Poor Dad by Robert Kiyosaki?

Just the note within that to think about, is that your house is a liability as it only ever costs you money (bills, repairs, maintenance, upgrades and all that) and not an asset.

If you are 100% committed to downsizing then you can include the portion that you figure you will get out after all the costs and fees becomes an asset. I guess if you are South East based and know on retirement you are moving to say the North West back to family that could be a big figure, but for most folks they tend to stay put until forced to move.

Something to think about, as I read that last year and now equate my Total Net Worth (excluding our home).

Cheers

Tommy

18th Aug '21

Hi Tommy.

Thanks for your suggestion. I’ve not read Kiyosaki‘s book although a quick trawl of the Internet threw up this rather brusque critique :-

„John T. Reed, a critic of Robert Kiyosaki, says, "Rich Dad, Poor Dad contains much wrong advice, much bad advice, and virtually no good advice." He also states, "Rich Dad, Poor Dad is one of the dumbest financial advice books I have ever read. It contains many factual errors and numerous extremely unlikely accounts of events that supposedly occurred."

Mixed review to say the least! I can see where Kiyosaki is coming from about a house carrying a lot of overheads, but then again the alternative would presumably involve renting which (for me) would cost considerably more per annum than the maintenance costs etc., of my current home. To my mind, this positive differential is in effect a kind of dividend stream such that my house is an asset like any other property investment and given in monetary terms represents about 40% of my TNW I’m quite relaxed about not having much additional property specific exposure in my SIPP.

Momoko Miyamoto

Haven’t read his books but enjoy watching Kiyosaki talk on YouTube. He uses highly exaggerated and embellished examples to simplify and explain how capitalism works and how the little guy can benefit. His core message is pretty simple, consume less and own real assets that generate a return or provide inflation protection. Difficult to argue with that really.

I looked at Vanguard’s platform fees for SIPP & ISA but despite the hype AJ Bell is cheaper for a reasonable sized portfolio. SIPP fee is capped at £120 p.a. (ISA £42) as long as no OEIC funds are held. I use their monthly regular dealing which is only £1.50. There are now index ETFs that undercut Vanguard, e.g. £LCUK charges 0.04% p.a.

Market Musings 16/08/21: Why is it so hard to choose funds?

Why is it so hard to choose funds/investments?

The simplest choices are most unattractive today

The obvious choices: Shares, Corporate Bonds, Property

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Edmund Shing

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