Thoughts on my investment Strategy

Thank you all for the feedback.

A few points in response. In this thread i kept it about equities and specifically the managed funds portfolio set up by my FP.

Outside of this I hold a significant portfolio of unlisted property trusts which is the base of my original investment portfolio. I also have a decent holding with Australian Unity in the select income fund. I also now only have 1 residential investment property holding worth around $500k. With the pain in the backside the residential property has been recently I now remember why I got out of investing in resi.

So the investments I hold outside the equities is what I have set up as my income stream when the need arises. The current income from this is significantly more than I need for a comfortable lifestyle. The purpose though is to support lifestyle one day and leave enough over to continue investing. Currently all income from investments flows back into further investments.

While my current working income is substantial without going into detail I am in a industry that is more volatile than the share market. Making a killing one day and nothing the next.

I am going to do some comparisons with the managed funds I hold against some of the LIC's regularly mentioned on here. If the performance of certain LIC's is showing that they have outperformed any particular managed funds that I am in, then will look at possibly moving out of some managed funds and into a few LIC's.

I agree that sometimes i am quick to take on an idea and run with it. Though in my experience if i see something and on first impression I like it and it makes sense, then unless in my initial research I can find significant negatives I will go for it. If i continue to over analysis and second guess then I will never commit to anything. I leave the over analysis and second guessing till after i have committed or else I will change my mind over and over. So far this strategy has worked most of the time.

 

This is recency bias. Your decision making needs to be much more considered than this.
Without the foundational knowledge you will struggle to make rational decisions. The good thing is the path is fairly well trodden.

Taking the mindset that works in private business - action bias, pushing through, determination, rapid changes of course is pretty much diametrically opposed to what works in public markets imho.

 

Think about this - any idiot can try and look smart by doing a 10 year analysis of all funds in the market and going with the past winners. This is first level thinking. You will always be able to find these "high performers" as the maths are simple, there will always be outliers....persistent performance is a different matter. FP's do this as it seems rational for the average client. They pretend to add value by swapping managers in and out. Long run a basket of managers is near certain to perform worse than the market when we consider fees and tax.

Understand SPIVA, performance attribution and persistence.

Investment guru Charley Ellis reveals how fund companies hide poor performance 

 

Thank you @The Falcon . If i am not making decisions based on a funds past performance compared with another funds or LIC's past performance than what am I making that decision based on? That and the reputation of the managers with the advice of your FP is all you could base it on right? The other option is to become a sort of expert yourself in analyzing the different managers and strategies.

The share market and stock picking to me is a world I do not understand and do not necessarily want too. Just trying hurts my brain. Hence why I went into managed funds so the so called experts can navigate that for me. Now I am getting lost in the process of choosing the type of managed funds I should allocate too. I went with an adviser to guide me on that process and here I am now questioning whether we have gone down the right path. Maybe that is why index funds make the most sense.

The more I think about it the more I see index funds are the way to go. But i still think having an actively managed allocation makes sense. Is that actively managed allocation better in managed funds or LIC's? Some managed funds will be outperforming at times and some LIC's will outperform at others. I don't know and was hoping that using an adviser would have dealt with that. But here I am more confused than when I started.

 

Thank you @The Y-man
I don't know if I would call it play money. I see it as the long term wealth building hopefully no need to ever touch pile that I can pass on to the next generation.

 

I am trying to show you the folly of manager selection, but don't worry. Stick with the adviser. You will do just fine. You clearly have an ability to make money, so just focus on that. If you aren't prepared to do the work then there is no point....and thats not a criticism, you dont need to know about this stuff.

 

@The Falcon I hope that didn't come across the wrong way. I do appreciate your input and your level of knowledge on this is way ahead of mine. My problem is I am an over thinker and worrier. I spend more time worrying about finances now than when I had a lot less. Thing is you work hard to get to this point and I worry about messing it up. When I first started this process 3 years back at one point I actually considered put all my funds in term deposits. Though over all in the 3 years it has gone well and now I see the benefit of investing.

Its not that I am not interested in understanding it. I always like to have a certain level of understanding of anything I put my money into. Its that I see the world of equities being fairly complex and requires a lot time and effort for even the smartest to decipher it all. Its full of many opinions and strategies from the so called experts to the every day forum members. I think no matter how smart or how much research you do there is no such thing as the right strategy or allocation. There is individual thoughts on what you believe is the right way based on your understanding of the information you gather. We only find out of we are right or wrong after the fact.

I have a weird way of looking at things. My mindset has been that if I need X amount invested to be comfortable I aim to have double that so if markets do take a 50% dive then i am still comfortable.

I could just invest more in sports cars. Financial return is terrible but less stressful and pays out 100% in smiles on your face.

 

My pleasure. Like wise its good to know that its normal to stress about money even when you have plenty of it at the moment anyway. Bizarre thing I find though is that even though I worry more about it now, I don't think i am more risk averse. A few years ago i wouldn't have dreamed of investing anywhere near these amounts in the stock market. But after reaping the rewards of investing in general over the last few years I believe there is a risk in not investing and accepting a return on cash of 2%-3% in fixed income.

 

IMO everything you need to know is available on this website and the books recommended throughout. The true value of a good FP in my opinion is estate planning.

Having said that, this thread is awesome and thank you for sharing your journey!

 

@The Y-man Your explanation on risk perspective makes a lot of sense.

Thank you @miximitosis I think i have divulged more info on my finances in this thread than I have to most people in my life.
While I am starting to see that FP / adviser cant give you an iron clad this i the way to go and you will achieve the best possible return I don't believe anyone really can. I think we absorb as much info as we can and make decisions based on what we believe is the best path forward. That goes for us as individuals or for the advisers assuming there bias is not towards them earning more fees.

From my gathering of information over the last few years from the advisers to online research including most recently this forum, this is the conclusion I have come to at this point in time: stock market investing is best done in index funds. There is also a place for an allocation in well chosen actively managed funds whether being managed funds or LIC's. That last one I will take some more time reviewing and looking into before I come to a conclusion. Hey it might be that a combination of the two Managed funds and LIC's with index funds might be a good option. Is that such a terrible idea?

There is research that says Index is best. Research that will tell you managed funds are best and research that will tell you LIC's are the way to go. Is having a combination of the three such a bad thing? A spread of index funds with a few quality fund managers and LIC's. Again quality fund managers and LIC's being judged on there past performance and reputation.

 

@Big Al it all seems confusing at first but the irony of it is that successful investing is contrary to most other things in life where it has been driven into us that success requires hard work, intelligence, skill, research and knowledge etc. But in fact it’s the exact opposite with investing thanks to index funds. The most difficult part is being able to accept this reality.

But rather than giving you more reading from those who are enthusiastic passive index investors or who have a vested interest in promoting index funds the following is from one of the most successful active investors that has ever lived, Warren Buffet:

It should be noted that Buffet sets a very high bar when referring too investment professionals as the consistently successful ones over a long period are quite rare. And it keeps getting harder and harder given the increasingly highly skilled competition that exists nowadays and availability of data.

I’ll also repost the most recent Spiva report which is really worth having a good look at but this extracted table shows the horrible track record of active fund Mgrs. In Australia the best chance one has of outperforming the index (to date) is in the small cap sector. And it’s important to note that the minority that do outperform the index are seldom the same Mgrs. Yesterday’s winners are often tomorrow’s losers. Trying to pick the consistent winners is very difficult and likely requires an element of luck.

 

You've done very well, congratulations.

With 50% in an index allocation and a tolerance to suffer a 50% drop and still meet your living expenses/financial goals I wouldn't sweat on any of this stuff too much.

The BT wrap fees aren't ideal IMO plus FP fees, they aren't outrageous like the 1%+ the bank FP wanted. You have the margin to let someone else think about it so why not do that? Concentrate on the things you enjoy.

 

Yes there can be a place for these although it is by no means mandatory or guaranteed to deliver any better performance than a simple index portfolio.

I hold LICs as well as ETFs as I have a long history (decades) of investing in LICs, I like the dividend focus, greater reliability / smoothing of dividends and how they enhance my sleep at night factor. Despite a huge amount of reading on investing over the years I, despite @dunno thinking I’m failing to comprehend much of it, still choose to invest in LICs. But my primary reason for investing in them is not to outperform the index, a difficult task nowadays. This is very different to what your FP is doing in that it appears he’s selecting these funds for you in the hope they will outperform the index as the primary reason. A very difficult thing to do.

 

Thank you @Nodrog I am fully on board. I have seen the light and walking towards the enlightened tunnel of index investing. I am happy with the average market return. I never went towards managed funds because I was after higher returns then the market average. I went there because I didn't know anything else and that's the direction the adviser pointed me in.

But now that I am here my contemplation is purely around having a mix of the two styles. Active whether that be managed funds or LIC's and index. I know no one can tell me exactly which way to go but based on the experiences of others which path would they take based on my circumstances. @Nodrog I know you have stated you like to hold a mix of index and LIC's. That makes sense to me. I am looking at holding managed funds and Index funds. I see the managed funds and LIC's as similar style, in the sense of both actively managed even though the structures and fees may vary.

Or is the line of thought that one should not bother with any active style of equities investing and go for pure index? At this stage I still like the idea of a mix with the only question on the active side being managed or LIC or split that part of the allocation into both.
If you are a believer of going 100% index would that still apply regardless of the size of the capital? Does 100% index make sense when investing 1mill or 20mill?

 

Thank you @Hodor I agree, some one in my position probably should not be worrying about this stuff to much. Unfortunately its in my nature to worry and overthink everything.

Yes the BT wrap fees are ridiculous. BT panormama are much more reasonable being capped at $2046 per year. While the adviser is on a flat fee and not % at $8000k a year. I will at some point this year have that chat and cut the service back. Happy to keep him on board to keep an eye on the portfolio for me while taking his advice into consideration but not at $8k a year.