Investment Portfolio Split

Hi Brendan

The big ETF providers (State Street, BlackRock, Vanguard) all offer ETFs that track the S&P500 to within ~10bps.

Vanguard's Total World Stock ETF (VT) (which tracks the FTSE Global All-Cap Index) has a TER of 0.14%.

It's worth noting that Degiro are currently offering ETFs on a zero commission basis.

Usual health warning re tax treatment applies.
 
Ireland's stupid tax on UCIT is the biggest killer on funds though. If going down the funds route, I would favour Canadian ETFs to avoid this (and also to avoid the US estate tax)
 
Brendan Burgess said:
....

The reality is that the OP has only a part of his wealth in shares and so each individual share will be only a small part of his overall wealth.....
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Hello Mr. Burgess,

Thank you for the reply and the links (I will read them with interest and hope to learn from them).

While I take your point on the shares only representing a portion of the person's overall financial wealth, this point is focused on diversification across different asset classes, rather then specifically on the lack of diversification in the share portfolio.

Having chose an asset class to invest in (be it shares, bonds, property etc.), I would still be of the view that we should seek to reduce risk to the lowest possible level, subject to being able to achive the desired returns over the long term.

For me, that means availing of the far greater diversification available through investing in funds, rather than 10 or even 100 individual shares.

Sarenco has provided an excellent example on the point about costs, so my thanks to Sarenco for the contribution.
 
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MrEarl said:
While I take your point on the shares only representing a portion of the person's overall financial wealth, this point is focused on diversification across different asset classes, rather then specifically on the lack of diversification in the share portfolio.

Having chose an asset class to invest in (be it shares, bonds, property etc.), I would still be of the view that we should seek to reduce risk to the lowest possible level, subject to being able to achive the desired returns over the long term.
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This is certainly the popular approach, but, in my view, it's completely wrong.

Why do we diversify in the first place? To reduce risk. It's not an academic exercise. It's to make sure that a person's wealth is not adversely affected by a dramatic fall in the value of something.

To take an exaggerated example. Let's say I earn €200k a year. I have a house worth €2m mortgage free. I have €1m on deposit. I think that Paddy Power is a good share. There is nothing at all wrong in investing €100k in just one share. If it crashes to zero overnight, I lose 3% of my wealth. I can handle it easily.

On the other hand a retired person depending on the state pension would be crazy to have their total wealth of €100k in just one share.

Brendan
 
Hi Brendan

That analysis appears to ignore any risk/reward considerations in relation to the investment itself and appears to focus exclusively on the ability of an investor to take a particular risk.

You seem to be suggesting that if an investor can afford to take a risk, and wants to do so, then they should fire ahead regardless of the expected return on the particular investment or whether the same expected return could be achieved by investing in a less risky asset (or pool of assets).

Is that fair or have I misrepresented your position?

 
Brendan Burgess said:
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....It's not an academic exercise.....
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There's a fella called Harry Markowitz who I suspect would disagree with you there Mr. Burgess ;)

Brendan Burgess said:
....To take an exaggerated example. Let's say I earn €200k a year. I have a house worth €2m mortgage free. I have €1m on deposit. I think that Paddy Power is a good share. There is nothing at all wrong in investing €100k in just one share. If it crashes to zero overnight, I lose 3% of my wealth. I can handle it easily.

On the other hand a retired person depending on the state pension would be crazy to have their total wealth of €100k in just one share.

Brendan
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While I understand your point perfectly, I think it continues to put the investor's money at unnecessarily high risk.

Sure, in the overall scheme of things, it's a small percentage of their wealth, but why expose that part of their wealth more than they might have to, to get a certain return ?
 
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Sarenco said:
You seem to be suggesting that if an investor can afford to take a risk, and wants to do so, then they should fire ahead regardless of the expected return on the particular investment or whether the same expected return could be achieved by investing in a less risky asset
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I am not suggesting that at all.

I was simply responding to Mr Earl's repetition of the commonly held view that people must diversify within an asset class irrespective of the proportion of the person's wealth that it makes up.

In my view, this commonly held view is completely wrong.

A person aged 60 who rents their home and has their entire wealth in equities would require far more diversification within those equities than someone with the same net wealth who has only 10% of their wealth in equities.

The Original Poster has most of their savings in deposits. They are gradually investing in equities. They are already well diversified. They do not need the same diversification within their equity portfolio as someone who is fully invested in equities.

A practical example of this is where someone is starting an investment portfolio and expects to invest €10k a year over the next 10 years. They already have a pension fund and have paid off their mortgage. From a practical point of view, I recommend that they just buy one share with the €10k. Next year, buy a different one. They will diversify their portfolio over time.

Brendan
 
Brendan Burgess said:
I was simply responding to Mr Earl's repetition of the commonly held view that people must diversify within an asset class irrespective of the proportion of the person's wealth that it makes up.

In my view, this commonly held view is completely wrong.
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Hi Brendan

Sorry but I'm really struggling to follow your logic.

Why would maintaining a degree of (horizontal) diversification across asset classes have any impact on the desirability of maintaining an appropriate degree of (vertical) diversification within an individual asset class?

It seems obvious to me that a rational investor would at all times want to achieve the best possible return on each euro of their capital for a given level of risk, over a given investment horizon. Surely a rational investor would always strive to pursue the optimum strategy to achieve their financial goals?

To put it another way, if there is no perceived benefit to taking the non-systemic, idiosyncratic risk of investing in an individual stock, then why take that risk in the first place?

Given the trivial cost of gaining exposure to the entire global stock market (or a very significant representative sample of that market), the only reason a rational investor would ever purchase an individual stock is because they have a conviction that the market is underpricing that stock for some reason and that the stock is likely to outperform the broader market over the intended holding period. Otherwise, why wouldn't an investor simply buy the "market"?

Brendan Burgess said:
From a practical point of view, I recommend that they just buy one share with the €10k. Next year, buy a different one. They will diversify their portfolio over time.
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Or they could simply buy an index fund and achieve an appropriate degree of diversification from day one. There is no logical reason to hold a concentrated portfolio of individual stocks unless you trying to beat the broader market.

I appreciate that you are absolutely wedded to your 10-stock portfolio and it is probably a fool's errand on my part to try and persuade you that this is inappropriate advice for the vast, vast majority of retail investors.
 
I don't understand this thinking either , I think its based on if you can afford to take more risk you should take more risk. I don't see the extra reward for more risk in investing in one share v an index. Your going to have higher variance in one share therefore you are much more likely to double your money but also lose half.

I am often faced with these scenarios gambling , where you have a value bets , you might have 5 bets that are value ranging from 5%-20%
you wouldn't put all your money into the 20% one or you would go broke fairly quick. Often the right thing to do is not the best thing to do. Like going on deal or no deal and turning down an offer for 100k on a box when there are two boxes left 250k and yours.
 
Hi Sarenco

I see where you are coming from.

If you are happy to buy a fund, then your thinking is absolutely correct.

But I am talking here about the OP who wants to build a portfolio of directly held shares, and about the rest of us who prefer the tax and cost advantages of directly held shares.

The common argument is that funds are less risky than directly held shares. I am saying that the risk is not relevant if the percentage of your total assets in the stock market is not material.

The return will be different, but there is no reason to believe that it will be higher or lower.

Brendan
 
Brendan Burgess said:
This is certainly the popular approach, but, in my view, it's completely wrong.

Why do we diversify in the first place? To reduce risk. It's not an academic exercise. It's to make sure that a person's wealth is not adversely affected by a dramatic fall in the value of something.

To take an exaggerated example. Let's say I earn €200k a year. I have a house worth €2m mortgage free. I have €1m on deposit. I think that Paddy Power is a good share. There is nothing at all wrong in investing €100k in just one share. If it crashes to zero overnight, I lose 3% of my wealth. I can handle it easily.

On the other hand a retired person depending on the state pension would be crazy to have their total wealth of €100k in just one share.

Brendan
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is it not the case though that most people are not smart enough to pick a winning share or shares ?, investing makes sense over the long term but is it not best to invest in a passive manner , therefore reducing risk through diversification while maintaining a disciplined long term investment strategy
 
Hello,

While I appreciate that this thread seems to be going no where fast, I'm afraid I don't see the logic in taking a higher risk with your money then you need to, in order to get a certain anticipated return on your investment.

The percentage of your overall wealth invested in equities does not matter, the question regarding the additional risk level remains unanswered for me - sorry :)
 
MrEarl said:
The percentage of your overall wealth invested in equities does not matter, the question regarding the additional risk level remains unanswered for me - sorry
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No need to apologise. I will see if I can try a third way of explaining it.

Do you accept that it would be very unwise for someone with total wealth of €1m to invest it all in one share?

Do you accept that for someone with €1m in cash to invest €1,000 in one share would be less unwise?

Brendan
 
Brendan Burgess said:
The return will be different, but there is no reason to believe that it will be higher or lower.
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That's actually not true Brendan.

There is a much higher probability that your randomly chosen 10-stock portfolio will under-perform the broader market - it's not a straight coin toss.

The reason is that market returns are always disproportionately driven by a small number of super-performers. For example, the S&P500 fell by less than 1% in 2015 but if the top ten performers are excluded the return would have been 3.7% worse. The odds of a randomly selected portfolio of only 10-stocks missing the super-performers are obviously high.
 
Brendan have you done any research over past performance to compare how these performed (5 or 10 blue chip shares versus the overall stock market they are in)? I would have believed the stock market (or in other words an index linked fund investing in the whole market) outperforms any individual share, even 5 or 10 blue chip shares but I'd be interested to see if that has proven to be the case over say the last 20 years.
 
Hi Ceist

A portfolio of 10 blue chip shares is as likely to outperform as to underperform the index.

A 10 share portfolio has a higher risk of losing money than a very low cost index. However, it has a roughly equal chance of outperforming the index.

The biggest risk from investing in shares is a long term sustained fall in the stockmarket. Whether you have 10 shares or 1,000 shares, you will be affected by this.

You increase the risk by a very small amount by investing in only 10 shares, but you can compensate this by higher returns.

Brendan
 
Brendan Burgess said:
A 10 share portfolio has a higher risk of losing money than a very low cost index. However, it has a roughly equal chance of outperforming the index.
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That's simply not true!

It's mathematically irrefutable that a randomly selected portfolio of 10-stocks has a much higher chance of under-performing the broader market. You are ignoring the dispersion of returns within the market.

You also seem to be suggesting that an investor will be compensated for taking a risk that can be diversified. Again that's not correct.

The only logical reason an investor would prefer a concentrated portfolio is a conviction that they can beat the market.
 
Hi Sarenco

I said roughly equal because of the dispersion of returns. There was a thread here some time ago about a lot of the returns being due to a few outperformers. If you picked 10 shares and missed out on any of these 10, then you would underperform the market.

"It's mathematically irrefutable that a randomly selected portfolio of 10-stocks has a much higher chance of under-performing the broader market."

Do you mean that it has a higher chance of under-performing than out-performing? If so, then the potential gain from out-performing must exceed the potential loss from under-performing?

The Expected Value of a 10 share portfolio must be the same as the index.

I think that there are two issues here
1) Under-performing the market
2) A sustained loss of money

My concern is about a sustained loss of money. I do not mind the "risk" of underperforming the market if it's balanced by the opportunity of outperforming the market.

Brendan
 
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