ETF The problem with Index Tracker ETFs

And all MySuper options which are designed to trade off some of the equity risk premium for reduced volitility, generally through the use of fixed interest and unlisted assets - aka "balanced" type options.

Personally I'll take low cost index with a conservative level of low cost leverage over a concentrated portfolio of timed 'picks'

 

It can always go either way, which is why the idea of trying to predict the future is futile.

To get equity-sized returns, you need to take equity risk. There is no way around that.

You can research funds to your heart's content, but SPIVA reports show that out of the funds that outperformed the index over 5 years, 74.8% failed to outperform the market in the following 5 years. You're going to need a whole lot of luck thrown in with your research.

Even funds that have gone bonkers come crashing back to earth. The most famous is LTCM. It was a company started by 4 people with PhDs. And not PhDs in other fields — PhDs in finance, including Nobel Prize-winning economists. These were experts in their field. Over a period of 4 years, their returns were incredible (due to leverage). As a result, over four years, they attracted over a billion dollars worth of assets under management. Two years later it went bankrupt (also as a result of leverage). This is just one of the most well-known cases, but the examples are endless.

A more recent example is Neil Woodford. His fund had to be gated while people left in droves to avoid a fire sale and now people can't access their funds.

The idea that you can select an outperforming fund manager or make changes in advance to avoid future market falls without an equivalent loss of expected return is nothing more than an pipe dream sold by people trying to convince others to pay them for predicting the future.

On a final note, the idea of a "free range of ideas" to get people to listen to sales tactics for actively managed portfolio is about as useful as someone using the idea of a "free range of ideas" on why it's ok that in the Chinese culture it is seen as acceptable to skin dogs alive before cooking them for food. Sure, we live in a free country where you can speak what you like and that freedom is precious, so go ahead and talk about these "ideas", nobody is banning you from the forum for speaking. But at the same time, everyone else also has the freedom to respond.

 

I look for ideas that are likely to disrupt the market and I believe that the ASX 200 is fully valued at this time. The reason it continues to rise is its access to cheap money and if that looks like changing then I will move to derivatives to protect my downside.
I did not invest in Afterpay, however I did invest in Hyperion which had an exposure to Afterpay. I spoke to the managers at Hyperion and they said, once Afterpay joined the Blue Chips, Index Fund Managers would have to purchase this stock and this would drive the stock up and that's exactly what happened.
When you understand the dynamics of the market, it becomes clearer on what to do.
I invested $25k in TZL and I expect that over the next 18 months it will double in its share price based on what its CEO has achieved in his previous business ventures and the passion he has with this business. This company has a smart lock and they offer various size lockers for use in the delivery of parcels to consumers that they can access 24 hours per day. When they pick up their parcel that locker becomes available for the next user. Westpac Bank have installed this system into their head office to facilitate the secure storage of personal possessions. Staff are now provided with hot desks and when they finish they can move their possessions to a secure locker on site. They now have a stronger balance sheet and they are now positioned to grow this business.
This is what I men by research as you need to have an in-depth understanding of the business and the people that run it.
I run my strategy of selling 50% of my holdings when this company doubles it share price and I expect this to happen within 12 to 18 months from purchase. I continue to hold the remaining 50% as a long term investment.

 

I remember thinking in 2013 that the asx at 5400 was high. The makets did not care what I think

 

You are right about predicting the future and we don't even try to do that, we spend time and effort in understanding what we are investing in and why.
I will give you a good example, Telstra was a company lacking direction and a stock that I gave a wide birth to until recently. The management of Telstra is getting its act together and the share price is benefiting from this effort. Successful companies have common denominator's, increased sales, increased profits, borrowings at modest levels, a clear focus on their business objectives and a passion to deliver value to their shareholders.
Sometimes events do not go to plan, however if you get the basics right, they will almost always recover.

 

And if you can manage to do this for clients and achieve outperformance than kudos to you.

My experience has been the opposite. Worked with 2 different advisers over 5 years. When I started with my first adviser he did his magic and picked something like 12 different actively managed funds for me. Hyperion Australian growth fund being one of them. At the time all 12 funds had been delivering outperformance compared to the index. Within 5 years all but a few are still outperforming. Out of the 12 active funds i am still holding 6. The other 6 I sold down and put it all in vas & vgs.

Working with advisers did give me the confidence to dip my toes into equities but if I had just put everything in vas & vgs from day dot and followed the all in as soon as available mantra rather than market time I’m pretty sure my portfolio value would be higher than it is today. That’s not even factoring in the cost of 5 years of advice fees.

 

Have been running my SMSF using low cost eSuperFund. Until July 2018 I had a grand total of 1 stock VAS (with DRP ticked) after that I added IVV (again with DRP ticked) to it (similar to how I invest outside super).

This is what sharesight says my returns are over the last 5 years



Sharesight's performance calculation is described here

Just goes to show having simple strategy of regularly investing (aka DCA) in low cost diversified index funds works. You don't need an active manager and associated costs (management, performance, trading, tax)

Cheers,
Oracle.

 

I have been investing for 39 years and one thing that I have learnt over all those years is two factors play an important part, one is luck and the other is strategy.
You must have a reason to invest as this increases your chance of achieving a profitable outcome. Every business goes through stages of growth and then plateau's, this is a time to take profit but not necessarily to sell out completely.
as with many companies they often reinvent themselves. Reviewing sales data is extremely important, because if sales are declining then you should sell 100% of your holding, whereas if sales are still growing the company maybe encountering some competition and maybe repositioning itself in the market.
Commonwealth Bank is a classic example of this scenario and it was not that long ago that you could buy CBA @ $53.44 and today you would have almost 100% profit. It could be very much argued that CBA is presently overpriced, however whilst it has access to cheap money it will continue to perform. The banks have a sweetheart deal with the RBA which ensures that they fully protected from the ravages of the market.
Your comment in relation to previous financial advisers maybe your expectation was the real issue. Investment selections will always change with time and there is one reason why this must happen. If you are managing a fund of say $500m, how easy do you think it is to trade that fund. If you want to sell say $50m of a single holding and you put that holding on the market, what do you think happens to that stock, it falls. Fund managers sell their holdings on the Dark Market (this is a market not visible to the ordinary investor) orders are placed by 11am each day and only stocks not sold by 3.00 pm are placed on the ASX to clear or they are held over to the next day. The Dark Mark is needed to ensure that fund managers do not impact the market with significant trades.
Financial advisers DO NOT work miracles, we have a better understanding of research and how to use it. I do not try and hold any one type of asset, but a blend of assets that gives me a diversified portfolio of assets that meet my expectations in relation to the returns I am receiving. I review this regularly to ensure that my returns remain stable.

 

@William@PFI It appears from your comments that you select individual stocks. For your equity portfolio, what's your current/preferred number of stocks to hold at any one time?

 

Do they also mention all the stocks they have all the good reasons for buying that go nowhere or backwards? Because I'm sure there are plenty of those too.

Good on them for outperforming for a couple of years. It's the long term I'm interested in. The chances of them continuing to outperform are as close to zero as makes no difference.

If it was as simple as "[w]hen you understand the dynamics of the market, it becomes clearer on what to do." there would be millions of people outperforming the market average with ease.

 

I've found when when you have the oppertunity to look behind the numbers of recent high performing funds/managers, ie at the actual holdings, it generally becomes clear where most of the outperformance has come from, ie. 1, 2 maybe 3 really good performers - has to be to make up for losers and performance fees. You then think about how unlikley it is that they are going to *continue* to pick a couple of really high performers year on year for the long term....

 

Trying my best to remain passive with certain commentary today excuse the pun:

 

Dam. Got all prepared and now no show.

 

I still give a rats I suppose but simple, happier take precedence hence joint names and SMSF only now compared to 2 x DTs, 1 x HDT, 3 x Coys, individual names, SMSF in the past.

 

He he, funny was thinking the same.

 

I definitely still give a rats (but you'd have guessed that I'm sure). I also like to keep the structure and implementation as simple as possible. Investments all in individual names and super with SunSuper index funds at this point. I explore lots of ideas and strategies though, and very occasionally implement a new one if I think the benefits are worthwhile. Super (maximising the use of the structure - as well as associated and overall estate/tax planning issues) is definitely an ongoing focus for me. I havn't changed anything significant with respect to our super strategy since 2018 though and it would be great if that can continue - but with the ways things are going - there might be good enough reasons to make some changes. But mostly its earn, buy/invest, repeat.

 

Since your enjoying the show so much I’ll keep it going for you .

Tick. I have a great reason. To make ship loads of money.

Don’t know about that. I think I am fairly realistic with expectations. I expect when any service provider tells me they will give me xyz then I expect to get xyz. That’s not too much is it?

Let me give you a short 3000 word big a style explanation .
I am a property only investor sitting with an adviser considering equities. I have never heard the term index funds, active , passive or anything of the like. Mr adviser tells me the way to do this is give your money to this selection of the best fund managers who will invest on your behalf and deliver you outperformance. Shows me a bunch of charts spelling out how well they have performed against the market for the last 3, 5, 10 years.
The argument for active management over index is so strong. I mean it’s a no brainer. A group of experts should have no problem looking through the asx200 taking out the obvious duds, buy the rest and bam outperformance. Sounds like child’s play.
I’m convinced and a selection of active managed funds it is.
Then I’m hearing all this rubbish about long term the majority of active managers can not outperform. The good folk here at PC are all telling me index index index.
I read some stats in a book by some guy I think his name was John Bogle and he rattles out some story about a piece of research that goes some thing like this. Over a 30 year or so period he reviews the results of over 300 active managers to see how many of those 300 plus could continuously outperform. If my memory serves me well it was something like 3.

That right there made me think maybe these guys over on PC are onto something here. Looked over my long list of active funds Mr adviser recommended and a few years in and the majority are now underperforming .

No I have been very clear with Mr adviser. I’m not looking for active managers who outperform for a year or a few years then underperform for a year or more. I’m not wanting to get into funds and try and time my exit to avoid the underperforming years.I’m a long term investor. Like a very long term investor. 30, 40, actually hopefully 100s of years long term investor. So unless the active fund recommended can outperform constantly over 100 years then why are you recommending them to me. I’m not interested in a fund that can outperform unless it can do it close to 100% of the time.

Now maybe what I’m looking for is unrealistic and he can’t confidently recommend me an active fund that can do that. So he should not recommend me an active fund. He should have said an index fund will match the market return minus a small fee for the next 100 years. That I can be sure off and if that’s what fits what I am looking for then that’s what should have been recommended.

How many words was that rant?

 

You are referring to this scenario but over a longer time-frame. And, no, I didn't keep the spreadsheet.

Listed Investment Companies (LICs) 2020 [LIC & LIT]

Listed Investment Companies (LICs) 2020 [LIC & LIT]

 

Perhaps the OP would get more love in the LIC thread