AVC Fund Diversification Recommendations

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MG Midget

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Hi All,

I would appreciate the forum's views on where, if and by what percentage I should diversify my AVC fund from where I am currently invested.

Please note I am tied to the New Ireland range of funds

I am male, married, late 50's, financially secure with 2 teenagers.

I do not feel I need advice from a money makeover perspective.

However, I know that over the past few years I have gotten too concentrated in my AVC fund choices and would like suggestions as to other fund choices (within the New Ireland range) I should look to diversify my risk.

  1. My normal retirement age is 65 (although I hope to go earlier)
  2. I understand this AVC fund has a 30 year (hopefully) time horizon
  3. I am comfortable with the concept of high risk (as you can see from my fund choices) and it has served me very well over the years
  4. However, I know I am WAY too concentrated and need to look to diversify to other funds to mitigate some of this risk
  5. I am tied to the New Ireland suite of funds (this is the provider my main pension and AVC pension fund is with)
  6. AVC fund approximately €1 million

My current fund allocation is (hopefully the fund links will post)

Tech Indexed Fund 6 - 40% https://fundcentre.newireland.ie/#factsheet/f-522-null/
North American Equity Indexed Fund 6 - 40% https://fundcentre.newireland.ie/#factsheet/f-482-old/
World Indexed Unhedged 6 - 15% https://fundcentre.newireland.ie/#factsheet/f-522-null/
Pension Equity Fund 6 - 5% https://fundcentre.newireland.ie/#factsheet/f-52-null/

Appreciate your views, suggestions and opinions.
 
There is considerable overlap between the underlying holdings of those funds - simply adding more funds does not necessarily increase diversification.

If it was me, I would simplify and put the lot in the World Equity index fund.

Whether or not it’s advisable to be 100% in equities in your late 50’s is another question. We would really need to have a better understanding of your overall financial position to offer a view.
 
Why all the love for the world equity fund?

As per the thread i started there's no significant difference since at least 1986 in performance between MSCI World Index and the S&P 500. And about 70% of a world index is made up of US companies anyway.

The world index, s&p and Nasdaq 100 appear very highly correlated but the Nasdaq performs better historically.

An investment decision should be cold as ice and based purely numbers. I haven't found (and I've looked for) the numbers to support a preference for the world index. Or (as per my thread) anything other than the Nasdaq 100.

In the absence of empirical evidence to support it, a bias in favour of a world index (or any other investment really) smacks of emotional decision making which is guaranteed to make you poorer unless you're very very lucky.
 
As someone who is about to (finally) start making AVCs my plan was to go 100% in the World Equity Fund. Thanks for sharing your insights which have given me food for thought. Problem is in my case (and possibly many others) it will feel like flipping a coin to go with one well diversified index fund over another, because nothing is guaranteed, so we follow the herd.
 
Well, unless you think you have an investment edge, it makes sense to invest in substantially all major, publicly traded, companies of the world in proportion to their respective market capitalisation.

Of course if you had a crystal ball you would know in advance the companies of what sector or territory will outperform the broader equity market over your investment horizon.

Unfortunately, I don’t have a crystal ball so my equity holdings are all invested in a global equity index fund.

It definitely won’t be the best performing equity fund over my investment horizon but it definitely won’t be the worst.
 
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BIG-notorious said:
As per the thread i started there's no significant difference since at least 1986 in performance between MSCI World Index and the S&P 500. And about 70% of a world index is made up of US companies anyway.
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I think you have to take into account a long-term economic cycle that seems to be coming to a close - the post-Cold War era of globalisation that coincided with the Tech Revolution which seemed to harmonise the major economic blocs. However, I just don’t know if this increasingly nationalist, isolationist USA is going to dominate in the way that it has as the world’s sole superpower since 1990. Tariffs, shipping pinch-points, peak oil vs renewables, disinformation wars… there’s a lot in the balance over the next couple of decades imo.

I was considering replying on your other thread, but I believe you are conflating performance and risk. A diversified portfolio is to protect against risk more so than optimising return. And whatever way you look at it, the last 40 years have been relatively benign.
 
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BIG-notorious said:
Why all the love for the world equity fund?
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Of the funds listed in the original post it arguably makes most sense in order to likely maximise returns over the long term.
The original poster isn't obviously looking for a treatise on the comparative pros and cons of different market indices.
 
@CharlieMac i believe that following the heard is actually a stock picking method that's been empirically tested as being successful!

Clearly nobody can predict the future but we can at least look at the past. It may not be a reliable guide to future performance but there's no such thing so why not use past performance as a proxy? It's used as a proxy when you buy a car, why not for an index to track in your pension?

@conor_mc There's always risk- in the last 40 years there's been Afghanistan, the collapse of the Soviet Union, the Balkans, 9/11, Iraq, Afghanistan again, 2008 crash, 2015 migration crisis, Trump 1. 0, COVID-19, Ukraine (2008, 2014, 2022-), and now Trump 2.0. I'm not seeing why this time should be different?

Yes 40 years from a certain perspective is a short timeframe, but the Nasdaq 100 started in mid-1985 which is why i started my comparison from 1/1/1986. But in fairness you have to start somewhere. I do think looking at annual returns is ridiculous though- if you care about short term volatility keep your money in the bank. (Or as Ice Cube might say: if you're a scared MF go to church...). The shortest performance timeframe i considered relevant is 5 years.

I get that there's a tradeoff between certainty and reward. But 70% of a world index is US companies and there's not enough space between the S&P and the MSCI World Index in terms of performance to fit a toothpick, so where's the diversification in a world index?
 
BIG-notorious said:
Clearly nobody can predict the future but we can at least look at the past. It may not be a reliable guide to future performance but there's no such thing so why not use past performance as a proxy? It's used as a proxy when you buy a car, why not for an index to track in your pension?
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Because studies suggest that it has zero predictive value. Picking between investments of the same class by reference to their past performance produces, on average, in the long run, similar results to picking randomly, using a blindfold and a dart.

(What does produce better outcomes? Well, if you're choosing between otherwise similar pooled managed investment products — such as mutual funds — then choosing the ones with the lowest charges and expenses does tend to produce outcome than choosing randomly.)
BIG-notorious said:
I get that there's a tradeoff between certainty and reward. But 70% of a world index is US companies and there's not enough space between the S&P and the MSCI World Index in terms of performance to fit a toothpick, so where's the diversification in a world index?
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The other 30%, which is not a trivial proportion.

Long term, the peformance difference between a US index and a world index may be slim. This isn't simply a product of the ~70% overlap between the two ; it also results from the fact that the drivers for growth in the US are not that different from the drivers for growth in other major markets. In a globalised economy the indices tend to move in parallel.

(This isn't nessarily so true in the short to medium term; even in a globalised economy not all factors are replicated everywhere all at once.)
 
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BIG-notorious said:
But 70% of a world index is US companies and there's not enough space between the S&P and the MSCI World Index in terms of performance to fit a toothpick, so where's the diversification in a world index?
Click to expand...
A huge proportion of S&P revenue is global anyway at the moment - we nearly all use Microsoft in some form. But consider Tesla - a tariff war with EU/China/everyone would recentralise their revenues in the US. Pick an S&P index over 20+ years and you’re stuck with them. Pick a global index and you’ll gradually pick up BYD, Xpeng, a recovering VW or Renault, etc, etc….. whoever the global auto winners end up being.

I think this scenario is becoming increasingly likely with Trump’s rushed belligerence. Someone’s gonna call his bluff and refuse a trade deal… he’s acting like everyone else needs trade deals with the US, but the US is the one that needs to redress the balance. He doesn’t hold the cards he thinks/acts like he does.
 
@TomEdison can you link/name one or two of those studies showing zero predictive value please?

I've read before (a few times) that the vast majority of professionals can't pick stocks well (monkeys and dartboard comparisons usually). But I don't recall ever reading the same about indices- your post suggests all indices are equal while past performance (my fixation) suggests otherwise.
 
BIG-notorious said:
I've read before (a few times) that the vast majority of professionals can't pick stocks well (monkeys and dartboard comparisons usually). But I don't recall ever reading the same about indices- your post suggests all indices are equal while past performance (my fixation) suggests otherwise.
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No, no. Not all indices are the same — there are variations between them. Some indices do outperform others. It's just that past performance is not a reliable indicator of future outperformance.

Fair question about the studies. It was a while ago that I looked at this, so it's going to take me some time to dig the stuff up. What I saw was in hard copy. And, yeah, I can't put my hand on my heart and say the studies covered indices particularly, as opposed to equities, funds, etc. But my instinct would be that what isn't useful in predicting outperformance in particular assets is not likely to be useful in predicting outperformance in particular asset indices. Why would it be? (Especially as indices themselves do not pursue outperformance.)

And, to be clear, I'm not saying that past performance plays no role at all in selection. You can certainly look at the well-performing investments to try to identify why they performed well. And once you've identified the reason for the outperformance you can ask yourself whether the factors that led to outperformance are likely to persist into the future — if so, future outperformance is more likely. But, obviously, the tough parts of that process are (a) reliably identifying the factors that lead to past outperformance, and (b) reliably projecting whether those factors will persist. The mere identification of past outperformance doesn't contribute at all to these essential steps.

As between a US stock index and a world stock index, any outperformance of one over the other is largely going to be accounted for by the US stock market outperforming, or underperforming, other markets. And I think the same reasoning would apply. Why did the US outperform, or underperform, the rest of the world? Will those factor persist? Without an answer to those questions you can't make any useful prediction about which index will outperform the other in the future.
 
@TomEdison thanks for the quick reply and explanation.

I've thought before about reasons why tech & the US indices have performed so well in the past and my best guess is that it's been for the same reasons I've inclination to live (ir particular desire even to visit) there.

For a long time the US system has increasingly concentrated wealth in the hands of the few to the detriment of the many. Arguably the whole system is set up to produce Musk and Bezoz etc, and Teslas etc are just the vessels which produce them.

I don't see the US system changing to shrink the concentration of wealth in a small number of companies. That flatters the US stock market significantly.

Investment in the stock market in the US is far higher than in Europe- 65% of Americans have stock. You shove in more money/demand and the price goes up. So valuation multiples are way higher in the US than elsewhere.

Tech in particular is the future. I don't think there's been a time or place in history where advancing technology has caused backwards economic movement.

And regulation in the US is generally a joke. More dollars seems to be the ultimate goal. As posted in a different thread, if you want to increase activity reduce regulation. The US has done this in spades.

Europe may catch up in terms of retail investment (i hope so). There's an argument that it's never fallen behind in terms of innovation (a huge number of patents and academic publications are in German for example). I hope it doesn't even try to match the US in terms of regulation. And it seems unlikely that it'll encourage an oligopoly considering how it seems to be working out in the US & Russia. I'm not sure China will ever be open enough for the Chinese index to match the US- that'd require ceding ownership and control to international investors. I don't think Russia has the scale (demographics). Other countries may catch up in time, but not for decades.

All of which leads me to think the Nasdaq 100 will (as a US tech focused index) continue to outperform.

Although my line of reasoning as to why the Nasdaq 100 has outperformed may well just be confirmation bias. It could just be the monkeys are on a lucky streak with that particular dartboard.

Also I've read a few times that the economy is not the stock market and vice-versa. I don't con myself that US markets have outperformed because the US economy is great. Tariffs etc could be terrible for the US population while still being great for the US stock indices. Russian GDP grew by 4% in 2024, which also illustrates the value of GDP as a measure of anything other than GDP...
 
We're a long way here from picking on the basis of past performance!

Your core explanation for past outperformance is that the US has favoured increasing concentration of wealth/increasing inequality/light regulation. Not implausible. Let's assume for the purposes of the discussion that it's correct.

The big question is — will it continue?

All historical trends eventually come to an end, if only because they can't continue indefinitely. E.g. — when all the wealth is owned by one person, you can't conentrate wealth any further. But, actually, well before you get to that point, the problems caused by excessive inequality get bigger and bigger, and something has to give.

You could argue that we may be at that point now. My own view is that the trends you identify help to account for the (hard-to-explain) election of Trump. It's entirely possible that the actions Trump takes may have signficant economic consequences which — to put it no higher — may turn out not to be beneficial for the US markets.

You might disagree. You might think Trump will definitely be good, or at least not bad, for the markets, or you might think that a correction at some point is inevitable, but not for another few years. Or whatever.

Which of us is right? We don't know. But we can probably agree that looking at past performance is no help at all in trying to answer that question. "Are the trends which have lead to outperformance sustainable?" can't be answered by saying "Yes, because those trends led to outperformance".
 
I haven't the slightest understanding as to how Trump got elected. Simply being different may have been enough to convince voters he was the one for them.

Ultimately we're all monkeys throwing darts in terms of picking investments, to a greateror lesser extent.

In the absence of a crystal ball or convincing numbers I guess I'll have to rely cognitive dissonance to keep me happy in my investment choice. Fortunately cognitive dissonance has an exceptionally good track record in that regard!
 
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