Anyway, here goes: How to save and invest the easy way.
The mantra of investment is "buy low, sell high". It sounds easy, but due to human nature, it isn't. Most of us do not have time, and even less confidence to stock pick. Most of us fall into the retail investor's trap of following the crowd. All of which means that a depressingly high number of people end up doing the exact opposite of "buy low, sell high"!
So, here's a suggestion I gathered from "MoneyWeek" recently, and adjusted slightly, thus:
- Allocate a final sum to invest.
- Because tops and bottoms of markets cannot be judged, place say 10% of this final sum over some time, say 5 to 10 months.
- Review annually or 6 monthly.
- Suggest using funds listed in “The profits on the middle ground” article instead of just the Vanguard UK Equity Index Fund.
- Suggest holding some gold in physical form locally as well as ETFS Physical Gold.
BUILD A 'BUY-AND-FORGET' PORTFOLIO
by Phil Oakley
"MONEYWEEK" 6 September 2013 www.moneyweek.com
If I could give just one piece of investment advice, it would be this:
investing should be as simple as possible. You want a strategy that is
cheap – so you don’t waste money on costly managers or complex
products – and low maintenance, so you can get on with the important
things in life. This is exactly what American financial adviser
Harry Browne tried to design with his ‘Permanent Portfolio’. Having
lived through the awful environment of the 1970s, he wanted to create
a portfolio that could cope with whatever the world threw at it – recessions,
inflation, deflation – and also make decent money when times were good.
He wrote about it in 2001 in his book "Fail-Safe Investing: Lifelong
Financial Security In 30 Minutes".
The portfolio is split into four equal parts: a quarter in US
stocks, a quarter in US Treasury bonds (government debt), a
quarter in cash, and a quarter in gold. By holding just those four
assets, Browne reckoned that most investors could achieve their
financial goals with far less worry than most other methods. An
event that hits one bit of the portfolio should be good for one
or more of the other parts. And because each accounts for only
25% of the portfolio, no single disaster can devastate the whole plan.
Shares provide decent returns in good times. Bonds also tend to do
fairly well when the economy is calm and growth steady. Recessions
or deflation (falling prices) are bad for shares, but good for
high-quality bonds and cash, because their buying power increases.
Periods of high inflation, meanwhile, are bad for bonds but good for gold.
It’s simple to run too. At the start of each year the portfolio
is spread equally across the four asset classes. At the year-end it is
rebalanced back to equal weightings (25% in each investment).
So if an investment does well during the year, and ends up
accounting for more than 25%, the investor takes some profit and
reinvests it in an area that had performed less well.
This automatically means ‘selling high’ and ‘buying low’, whereas
many investors do the precise opposite, chasing rising,
expensive assets and avoiding falling, cheap ones.
Much of this is now conventional wisdom. A 2012 paper from asset
manager Vanguard backs up earlier studies that say that investment
returns come mostly from the assets you own, rather than the shares
you pick, or when you buy or sell. And spreading your money across investments
that behave differently to one another (are ‘non-correlated’, in the
jargon) is one of the best ways to reduce your risks. But
how does it do in practice?
In their book on Browne’s Permanent Portfolio, Craig Rowland and
JM Lawson found that, between 1972 and 2011, it delivered annual returns of
9.5% if rebalanced each year, or 8.8% if left alone. That may not seem
like a big difference. But over 39 years, the rebalanced portfolio only
lost money in four years, with a maximum annual loss of just 4.9%. The
other portfolio lost money in 11 years, with a maximum loss
of 21.6%. I know which I’d rather own.
So how would Browne’s strategy have worked for British investors?
I crunched the numbers and the answer is ‘very well indeed’.
Between 1983 and 2012, the Permanent Portfolio returned 8.34% a year,
compared to 12.53% for the British stockmarket.
You might be wondering: how is that impressive? Well, during the 30
years up to 2012, it’s true you’d have made more in the stockmarket.
However, you’d also have taken on much more risk. Indeed, the
risk – as measured by the standard deviation (SD – how much returns
bounce around their average levels) – was more than three times
higher for the stockmarket alone.
1983-2012 Annual returns Risk (SD)
Permanent Portfolio 8.34% 5.01%
British stockmarket 12.53% 16.3%
What does that mean in practical terms? Well, the Permanent Portfolio
only lost money in two of the 30 years, with the
biggest annual loss being 2.53% in 2001. Remember this is during a
period when the British market saw epic crashes in 1987, 2001, and 2008.
And between 2003 and 2012 (as shown below), a permanent portfolio has
not only involved less risk than stocks alone, but also higher returns.
2003-2012 Annual returns Risk (SD)
Permanent Portfolio 8.35% 3.34%
British stockmarket 6.8% 16.6%
Of course, short-term performance can be very variable. And so far,
2013 has been a poor year for the Permanent Portfolio.
Interest rates on cash are tiny and bond and gold prices have
fallen sharply. However, that rather proves the point –
this is a ‘buy-and-forget’ portfolio, not one to tinker with every other day.
HOW TO FOLLOW THE STRATEGY
If you like the strategy, it is cheap and simple to set up and
run. One approach for British investors is to put the 25%
cash component of your money in a savings account; 25% in
the Vanguard UK Equity Index Fund (a fund that tracks the UK market);
25% in the iShares UK Gilts ETF (LSE: IGLT); and 25% in the ETFS Physical
Gold (LSE: PHAU) exchange-traded fund. You then forget about these
investments until the end of the year, and then rebalance each back to
25% of the total portfolio value.
________________________________________________________________________________
THE PROFITS ON THE MIDDLE GROUND
By: David C Stevenson
"MONEYWEEK" 8 October 2013 www.moneyweek.com
Last time, I risked your wrath with the horrible technical term ‘smart beta’. I’m sure that more than a few of you felt your eyes glaze over, and found the thought of advanced root canal work suddenly more appealing – but my use of the jargon was in a good cause!
Investors can increasingly use easy-to-trade, low-cost, exchange-traded funds (ETFs) as an alternative to active fund managers (the ‘beta’ bit) – but in a rather clever way that helps to control risk in a portfolio (the ‘smart’ bit).
To repeat the key point from last time: in the past, actively managed funds charged you higher fees for picking stocks, rather than just tracking a benchmark. Their aim was to deliver better returns while taking less risk.
This was achieved by using a specific investment strategy, or ‘style tilt’. For example, the manager might only buy stocks with a high dividend yield, or those with robust balance sheets.
Smart beta does this too, by following systematic rules to pick stocks with specific attributes. Better yet, it does this at a lower cost, and without any of the behavioural flaws fund managers are prone to.
For example, those poor bullied active managers might be under pressure from their bosses to conform to market behaviour, and may change how they run the fund over time.
So smart beta offers a middle ground between traditional passive funds and active management.
But what to buy? I have three suggestions this week. The first is for the more value-orientated among you (those who like to buy good-quality equities at a decent price).
I’d focus on the fundamental indices devised by Rob Arnott and Jason Hsu of US-based Research Affiliates, and in particular the Powershares FTSE RAFI UK 100 ETF (LSE: PSRU).
RAFI were the first players in the fundamentals-driven, smart-beta revolution and, when it comes to value investing, they are still probably the best, bar Andrew Lapthorne over at Société Générale.
RAFI uses four fundamental measures of company size: book value, cash flow, sales and dividends. It weights its indices based on these fundamentals. So the stock with the highest fundamental value gets the biggest weighting, while the one with the weakest fundamental value gets the smallest.
According to ETF whizz Simon Smith, of www.etfstrategy.co.uk, you get a portfolio, “which, when compared to a market-cap-weighted equivalent, underweights overpriced stocks and overweights undervalued stocks”. This portfolio tends to tilt towards both value stocks and small-caps.
Better yet, says Smith, “when value stocks are out of favour and thus are cheap, the strategies tend to increase their allocation to deep value stocks. When value is in favour, the value tilt is much milder because these stocks tend to be priced higher. Rebalancing into unloved stocks and out of the most popular stocks is… essentially a contrarian strategy.”
Be aware that there are some potentially big disadvantages: the portfolios can become concentrated in a few large positions, while overvalued stocks can also become overweighted during different stages of the stock-market cycle.
But overall I think the RAFI indices are first rate, and I’d highly rate their emerging markets variation too: Powershares FTSE RAFI Emerging Markets (LSE: PSRM).
Those who are more adventurous and want to invest in firms that are cheap and growing at a decent rate should look at First Trust UK AlphaDEX (LSE: FKU).
First Trust’s highly successful AlphaDEX strategy, which has been around in the US for a while, aims to take the best of both value investing and growth investing (ie, stocks with fast-growing profits).
According to First Trust, the index screens UK stocks for “growth factors including three-, six- and 12-month [share] price appreciation, sales to price [ratio] and one-year sales growth”. It also looks separately at “value factors, including book value to price, cash flow to price and return ona ssets”.
What it boils down to is that you get the best of all worlds – decently valued stocks with solid earnings growth. Last time I looked in the summer, that meant a weighting towards the likes of budget airline easyJet, equipment rental group Ashtead and housebuilder Barratt.
Last but not least comes the Ossiam ETF FTSE 100 Minimum Variance ETF (LSE: UKMV).
The ETF has consistently beaten its peers since its launch in January 2012. It aims to deliver the return from the FTSE 100, but with reduced volatility.
In technical terms, the index picks and weights stocks based on their forecast risk and inter-correlations to build a lower-risk portfolio. In practice, you end up with an index that is less exposed to volatile stocks such as energy and mining stocks (plus banks), and more exposed to industrial goods and consumer companies.
In short, you end up with a more defensive index tracker focusing on British stocks you know and love, but in a cheap, cost-effective wrapper.
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