The FTSE

@SWP's back and @ChicagoBlue i enjoyed reading your exchange. It’s been dawning on me that I’m a little (well a lot) top heavy in equities since investing the balance of my lump sum after paying off the mortgage. Over two and a half years I’ve been happy with the returns but chatter about the bubble bursting worries me a bit.

I did a lot of research into funds before investing and they are well spread. What I don’t really understand are the safe alternatives that should make up 40% of a balanced portfolio. I think I’ve been spoiled by the returns I’ve had which makes the bonds I have looked at seem very dull. Hopefully won’t need to touch the money for a few years yet but I am prompted to review and at least put any future investment in safer bets
 
SWP's back said:
You’re still not getting it although I absolutely loved your post, I love it when you wave your willy at me.

As I explained more fully a few pages back, most normal, run of the mill laypeople do not have the capacity and appetite to hold only ETF Equity portfolios. You and I both know that if you stick your life savings in an S&P500 tracker and then didn’t check your value again for 20 years then you’re on to winner and you’d have no complaints about the growth - and if you back test it, it doesn’t matter which 20 year period you choose.

But in the real world people do check their value and when your 2001/2’s and 2008/09’s happen, people panic and pull their funds out when they see losses of 30-40%. This is obviously the worst possible thing that an investor can do as they crystallise what is only a paper loss (it’s also the opposite of what people do when there’s a housing slump - no one ever sees their house has lost £100k in value and immediately call the estate agent and put their house on the market). As such, and by having conversations with investors about what they would do should they see a negative 40% growth, we are able to slowly ascertain their capacity and appetite for risk (along with a risk profile questionnaire and spending 40 minutes discussing their needs and wants and what else they have available should they need to liquidate x amount of cash). So I repeat, returns are not the be all and end all for retail investors. It’s all about the maximum return for the amount of downside risk and volatility ‘x’ portfolio may produce.

Well done on studying finance, that will allow you to stomach market fluctuations as you understand the mechanics of whatever takes place in the market. But that’s not remotely the same as studying to give advice. I don’t know what it’s like in the States but the new ambulance chaser thing we see on adverts now is “have you been missold and lost money in an investment? Call this number and we can get your money back in 6 weeks...” Well despite these cunts and despite doing the job for the best part of 20 years, I’ve not had a single complaint (upheld or otherwise) and that’s because I ensure that clients I have understand how their investments work and what they can expect to see in any given period and I can count on the fingers of one hand the amount of clients I’ve had they are able to place 100% of their funds into equities and it be best advice.

If people want to self invest and go for the best returns and are aware of the volatility they’re buying into then great and I wish them well. My original reply to you was stating simply that Equity ETF funds will not give the diversification of a balanced multi-asset portfolio. Take last year, FTSE100 was down 22% at one point, none of my “balanced” clients saw drops of over 6% because their funds included commodities, alternatives, gilts, bonds and other non-equity correlating assets. Of course the vast majority of managed portfolios won’t beat ETF’s over the long term. That’s because ETF’s have greater risk and because 7-8 years in 10 see positive growth. Good managed portfolios offer greater stability and lower downside risk in volatile markets though.

The only investors I have that are 100% deep in equities ARE the very sophisticated investors (usually former bankers or traders themselves).

So going back to my original point, most people aren’t looking for the best returns above all else, most people are looking for the best returns that allow them to sleep at night, whatever the market conditions.
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That seems like a much more reasonable response. Thank you.

I think the misconnect is our language and what we think of as sophisticated or unsophisticated investors.

There are many dabblers, most of whom have a 401(k) or IRA (retirement accounts), but have no idea what is in it, what could be in it, or why what’s in it is in it.

You clearly entertain a more sophisticated retail consumer, because they have chosen expertise over self delusion, and YOU have done the initial interview and given them the required homework that lays out what they think their risk tolerance versus what it is when you don’t just ask them point blank.

Thank you for the response.
 
journolud said:
@SWP's back and @ChicagoBlue i enjoyed reading your exchange. It’s been dawning on me that I’m a little (well a lot) top heavy in equities since investing the balance of my lump sum after paying off the mortgage. Over two and a half years I’ve been happy with the returns but chatter about the bubble bursting worries me a bit.

I did a lot of research into funds before investing and they are well spread. What I don’t really understand are the safe alternatives that should make up 40% of a balanced portfolio. I think I’ve been spoiled by the returns I’ve had which makes the bonds I have looked at seem very dull. Hopefully won’t need to touch the money for a few years yet but I am prompted to review and at least put any future investment in safer bets
Click to expand...
Look at the Boglehead Forum, Three Fund Portfolio, Four Fund Portfolio, or even the Permanent Portfolio I mentioned earlier.
Conversely, of course, you can visit a regulated financial advisor who can act as your fiduciary to find your risk profile and develop an investment plan you would find suitable for restful sleep for the long term.

In addition, consideration can be given to diversification outside financial instruments into hard assets, like real estate, that not only created income, but generally appreciate while doing so.

A friend of mine just put $400K down on a $1.5M Condo in Hawaii. It is a $500/night, 2BR/2BA, beachfront condo on one of the worlds best beaches, with $10-20M homes. Appreciation potential is significant, and long term rental income (mostly repeat vacationers renting same weeks/months every year) was highly stable until COVID. So, while 250 nights per year gives you $125,000 income, about $100,000 of that us real cash flow and the $25,000 goes to reserves, maintenance, taxes, etc. That gives you a mortgage free property in 12 years (incl interest), or a mortgage free retirement property, if you want to live there full time or upto about $60,000 of income in retirement with the ability to still spend 3-4 months per year on the beach in Maui...with other peoples money!!!

Fwiw, her father developed an 8 figure real estate portfolio through rental properties, including a chalet park he developed from scratch and a large Florida RV park that only required concrete pads with water and electricity hook ups and a couple of decent shower facilities...no long term damage worries from asshole renters who tear up walls, block toilets, and break windows, etc.

The world is full of ways to make money, or more precisely create income, so no one should ever feel restricted to stocks and bonds just because that’s what people do. The key, as has been discussed, is having enough income streams, from enough diversified sources, that at any given time you have enough income to live as you choose with hopefully some overflow to increase your asset base over time to keep up with inflation...and possibly pass along a sizable legacy.

Different strokes for different folks, but the one constant is risk tolerance for stable living.
 
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journolud said:
@SWP's back and @ChicagoBlue i enjoyed reading your exchange. It’s been dawning on me that I’m a little (well a lot) top heavy in equities since investing the balance of my lump sum after paying off the mortgage. Over two and a half years I’ve been happy with the returns but chatter about the bubble bursting worries me a bit.

I did a lot of research into funds before investing and they are well spread. What I don’t really understand are the safe alternatives that should make up 40% of a balanced portfolio. I think I’ve been spoiled by the returns I’ve had which makes the bonds I have looked at seem very dull. Hopefully won’t need to touch the money for a few years yet but I am prompted to review and at least put any future investment in safer bets
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Bonds are dull until they aren’t! They have traditionally moved in the opposite direction to equities, which helps create balance.

However, in a world of historically low interest rates, one wonders whether they would provide the balance needed were the stock market to burp, if not bust.

I mentioned this earlier when I mentioned the Permanent Portfolio, which I feel doesn’t have history to make me feel the warm fuzzy I need to sleep at night.

However, there is also a full spectrum of bonds available, too, ranging from Treasuries/Gilts to high yield junk bonds to foreign bonds that may not track your home stock market at all. In the US we also have Municipal Bonds, which are tax free and very popular with retirees.

As always, good luck!
 
ChicagoBlue said:
That seems like a much more reasonable response. Thank you.

I think the misconnect is our language and what we think of as sophisticated or unsophisticated investors.

There are many dabblers, most of whom have a 401(k) or IRA (retirement accounts), but have no idea what is in it, what could be in it, or why what’s in it is in it.

You clearly entertain a more sophisticated retail consumer, because they have chosen expertise over self delusion, and YOU have done the initial interview and given them the required homework that lays out what they think their risk tolerance versus what it is when you don’t just ask them point blank.

Thank you for the response.
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Not a problem, enjoyed our chat. I think we had a miscommunication about what is best (total returns should people hold) vs what is best (if people shit the bed).
 
journolud said:
@SWP's back and @ChicagoBlue i enjoyed reading your exchange. It’s been dawning on me that I’m a little (well a lot) top heavy in equities since investing the balance of my lump sum after paying off the mortgage. Over two and a half years I’ve been happy with the returns but chatter about the bubble bursting worries me a bit.

I did a lot of research into funds before investing and they are well spread. What I don’t really understand are the safe alternatives that should make up 40% of a balanced portfolio. I think I’ve been spoiled by the returns I’ve had which makes the bonds I have looked at seem very dull. Hopefully won’t need to touch the money for a few years yet but I am prompted to review and at least put any future investment in safer bets
Click to expand...
I'm in a similar position regarding my investments in that I'm heavy on equities compared to bonds, gilts etc. Probably about 80:20. As these investments are in addition to my pension pot, which is a final salary DB scheme, I accept the risk of larger fluctuations. Over the years there certainly have been some eye watering paper losses, most recently from the end of Feb to the end of March last year. However they have fully recovered and I'm well ahead of where I was a year ago. Having been through that three or four times (including the dot com crash and the global financial crisis) I can get through it without shitting the bed in the knowledge there's a very good chance there will be some very good years in the years after the dips. If I was dependent on regularly drawing money from these investments it's not the way I'd do it but it works for me. As well as investments being mixed geographically I also have them split between actively managed funds and trackers. I also have property investments which provide a regular income stream as well as the day job, which also makes me less risk averse when it comes to financial product investments. I am probably overweight in individual share investments also which make up about 25% of the total, and they are mixed between speculative investments and fairly mainstream FTSE100 companies with a decent dividend. The big FTSE shares aren't doing particularly well at the moment but some of the speculative ones have more than made up for them. The key message is to put your eggs into as many baskets as possible and make use of expert advice (which you won't get from me).
 
ChicagoBlue said:
Look at the Boglehead Forum, Three Fund Portfolio, Four Fund Portfolio, or even the Permanent Portfolio I mentioned earlier.
Conversely, of course, you can visit a regulated financial advisor who can act as your fiduciary to find your risk profile and develop an investment plan you would find suitable for restful sleep for the long term.

In addition, consideration can be given to diversification outside financial instruments into hard assets, like real estate, that not only created income, but generally appreciate while doing so.

A friend of mine just put $400K down on a $1.5M Condo in Hawaii. It is a $500/night, 2BR/2BA, beachfront condo on one of the worlds best beaches, with $10-20M homes. Appreciation potential is significant, and long term rental income (mostly repeat vacationers renting same weeks/months every year) was highly stable until COVID. So, while 250 nights per year gives you $125,000 income, about $100,000 of that us real cash flow and the $25,000 goes to reserves, maintenance, taxes, etc. That gives you a mortgage free property in 12 years (incl interest), or a mortgage free retirement property, if you want to live there full time or upto about $60,000 of income in retirement with the ability to still spend 3-4 months per year on the beach in Maui...with other peoples money!!!

Fwiw, her father developed an 8 figure real estate portfolio through rental properties, including a chalet park he developed from scratch and a large Florida RV park that only required concrete pads with water and electricity hook ups and a couple of decent shower facilities...no long term damage worries from asshole renters who tear up walls, block toilets, and break windows, etc.

The world is full of ways to make money, or more precisely create income, so no one should ever feel restricted to stocks and bonds just because that’s what people do. The key, as has been discussed, is having enough income streams, from enough diversified sources, that at any given time you have enough income to live as you choose with hopefully some overflow to increase your asset base over time to keep up with inflation...and possibly pass along a sizable legacy.

Different strokes for different folks, but the one constant is risk tolerance for stable living.
Click to expand...
Good points you raise about the variety of mechanisms/assets that can be utilised to generate both incomes and capital gains. In my lifetime I have generated far more gains in the forward fx positions than I have on any other asset classes, but i did start my way in this world as the tea boy at 18 yrs old in the abn amro fx dealing room - boy did those dealers teach me how to drink properly :-)

One form of income generation that I am seeing a lot more frequently in my clients income profiles is in the peer to peer lending space - never looked to deep into it myself but speaking to clients that have gone down this route they seem very pleased with the risk/reward ratios in play here and it seems quite a mature and regulated market now for those looking for some income diversification.
 
AlgarveBlu said:
Good points you raise about the variety of mechanisms/assets that can be utilised to generate both incomes and capital gains. In my lifetime I have generated far more gains in the forward fx positions than I have on any other asset classes, but i did start my way in this world as the tea boy at 18 yrs old in the abn amro fx dealing room - boy did those dealers teach me how to drink properly :-)

One form of income generation that I am seeing a lot more frequently in my clients income profiles is in the peer to peer lending space - never looked to deep into it myself but speaking to clients that have gone down this route they seem very pleased with the risk/reward ratios in play here and it seems quite a mature and regulated market now for those looking for some income diversification.
Click to expand...
Be very wary of the p2p market. I have had some gains but also some quite big losses fairly recently. I suppose like everything else do your own research
 
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