Money To The Masses http://moneytothemasses.com Putting you in control Thu, 05 Mar 2015 17:27:13 +0000 en-GB hourly 1 The Perfect ISA portfolio revealedhttp://moneytothemasses.com/8020-articles/perfect-isa-portfolio-revealed http://moneytothemasses.com/8020-articles/perfect-isa-portfolio-revealed#comments Thu, 05 Mar 2015 17:26:19 +0000 http://moneytothemasses.com/?p=18505 Research has shown that the sectors and asset classes you invest in are more important than the underlying stocks or shares which you buy. For example if the US stock market was to plummet the differentiator between the most successful investors and those who lose the most money is not which US shares they’d bought but...

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Research has shown that the sectors and asset classes you invest in are more important than the underlying stocks or shares which you buy. For example if the US stock market was to plummet the differentiator between the most successful investors and those who lose the most money is not which US shares they’d bought but whether they had any at all.

Yet for investors deciding which assets to buy to minimise risk yet maximise returns is a minefield, especially as there is a lot of conventional wisdom out there not backed up by research.

As it is ISA season one of the most popular questions I get asked is ‘where should I invest my ISA allowance?’ It’s a difficult one to answer as there are so many factors to take into account including your investment term, your attitude to risk and what is going on in investment markets.

Yet rather than shy away from this question I decided to do some analysis to discover what is the perfect ISA portfolio and even if one exists. Is there a perfect combination of different types of assets that can not only make you money but reduce the chance of you losing any?

Perfect ISA Portfolio

So I laid down the rules for the perfect ISA portfolio:

  • There would be no constraint over which assets could be included or in what proportions they are held
  • The portfolio must have made money every tax year since the last market peak back in 2000
  • and not lost money
  • It had to at least beat a FTSE 100 Index tracker and
  • The asset allocation had to remain constant throughout that time

So in essence I wanted to find the perfect ‘buy and forget’ asset allocation. One which would have achieved the above irrespective of the actual funds you’d bought. So to make sure I was only looking at the asset allocation I always used the sector average return for each asset.

The possible assets

I included the following unit trust sectors in my analysis:

  • Asia Pacific Excluding Japan
  • China/Greater China
  • Europe Excluding UK
  • European Smaller Companies
  • Flexible Investment
  • Global Bonds
  • Global Emerging Market Bond
  • Global Emerging Markets
  • Global Equity Income
  • Global
  • Japan
  • Mixed Investment 0%-35% Shares
  • Mixed Investment 20%-60% Shares
  • Mixed Investment 40%-85% Shares
  • Cash
  • North America
  • North American Smaller Companies
  • Property
  • Sterling Corporate Bond
  • Sterling High Yield
  • Sterling Strategic Bond
  • Technology & Telecoms
  • UK All Companies
  • UK Equity Income
  • UK Gilts
  • UK Index – Linked Gilts
  • UK Smaller Companies

The number of possible combinations of the above is almost mind-blowing. In fact it took me two full days to analyse it. Of course there was no guarantee that there was a solution to the problem, that’s what makes the best research and analysis.

The perfect portfolio revealed

Interestingly, despite the global possibilities the perfect portfolio is

  • 9% cash
  • 71% UK Gilts
  • 20% UK Equity Income

What is key is the ratio of cash/bonds to equities. As it turns out there was a hint towards this outcome in a separate piece of research which I also recently carried out on the correlations between different asset classes. It showed that over the 14-15 year period since 2000 the only negatively correlated asset to UK equities (i.e. when UK equities go down the other asset goes up) is UK Gilts. For those of you who are unaware gilts are essentially loans to the UK Government so have one of the lowest risk ratings of all assets, besides cash.

Also there seems to be some truth in the perceived wisdom that UK equity income funds tend to perform better than UK All Companies funds in a downturn, hence their inclusion.

So below are the returns achieved by this portfolio in each tax year since 2000 vs the FTSE 100 for reference:

Tax yearFTSE 100Perfect ISA
2000-11.133.23
2001-4.110.3
2002-24.520.63
200321.34.69
200414.466.38
200526.3410.27
20069.372.47
2007-3.630.86
2008-29.940.02
200950.497.71
20107.954.78
2011-1.749.87
201213.446.83
201311.040.6
2014 so far6.629.54

 

Here is how it actually performed over time cumulatively. The Perfect ISA portfolio is in red while the FTSE 100 is in black. You can see that an initial sum invested back in 2000 would have almost doubled using the Perfect Portfolio (click on the image to enlarge):

 

perfect isa

 

What is interesting is that the Perfect ISA portfolio is backed up by a piece of research I published in December titled Funds to ‘buy & forget’ in 2015 which highlighted Vanguard – LifeStrategy 20% Equity as a fund to buy.  At the time I speculated whether it had the perfect asset allocation due to its ability to make money in market sell-offs. The fund has 20% of assets in fixed interest (bonds and gilts) and the rest in equities globally, not just the UK.

Interestingly my findings also resonate somewhat with the “permanent portfolio”, advocated by the famous American investor Harry Browne, which invests 25% in gold, 25% in cash, 25% in US Treasuries (America’s version of gilts) and 25% in US equities.

The 80-20 Perfect Portfolio

Some of you might then ask whether you should just buy a passive tracker, like the Vanguard fund, with the split above.

The answer is no, not if you want to maximise your returns. Now let’s imagine that someone had used 80-20 Investor to choose the UK equity income funds to invest in for the 20% part of the Perfect ISA portfolio invested in equities.

Could using 80-20 Investor just on that tiny portion of the portfolio make any difference? Given that there are so few gilt funds we will take the average fund return for that sector in this exercise.

The table below shows how much money an investor would have today if at the start of each tax year they had invested their full ISA allowance into:

  • the FTSE 100
  • the Perfect Portfolio using trackers
  • the 80-20 Investor Perfect Portfolio where our algorithm chooses the UK Equity income funds (I’ve split the 20% across 3 funds each time).

The ISA allowance has increased from £7,000 to £15,000 over the last 14-15 years. So if someone had invested their ISA allowance each year they would have invested a total of £125,960

Total Invested£125,960
Perfect ISA portfolio£185,190
80-20 Perfect ISA portfolio£194,894

 

Being an active investor would have made you £9,704 more!

Is the perfect portfolio foolproof

It is foolproof to apply yet is not guaranteed to make you money going forwards, particularly as we near the end of a 30 year bond bull market. However, if you are a particularly conservative investor it provides a point of reference. There is a big upside tradeoff from having a portfolio which protects on the downside. By way of example if an investor had simply invested in UK equity funds using our momentum strategy their £125,960 would now be worth approximately £384,800.

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Latest scam: criminals now targeting social media usershttp://moneytothemasses.com/help-and-advice/latest-scam-criminals-now-targeting-social-media-users http://moneytothemasses.com/help-and-advice/latest-scam-criminals-now-targeting-social-media-users#comments Wed, 04 Mar 2015 12:29:29 +0000 http://moneytothemasses.com/?p=18495 Latest scam: criminals now targeting social media users According to Financial Fraud UK criminals are targeting social media users to act as unsuspecting money launderers. The proceeds these criminals obtain from drug smuggling, people trafficking and fraud are passed through other peoples’ bank accounts to prevent it being traced back to the criminals. New recruits...

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Latest scam: criminals now targeting social media users

Latest scam: criminals now targeting social media usersAccording to Financial Fraud UK criminals are targeting social media users to act as unsuspecting money launderers. The proceeds these criminals obtain from drug smuggling, people trafficking and fraud are passed through other peoples’ bank accounts to prevent it being traced back to the criminals.

New recruits (known as ‘money mules’) are being told that there are being employed as legitimate money transfer agents. They give criminals access to their bank accounts in exchange for a commission on money passed through their account. Funds are the moved around the world and used to fund the criminal lives of their ‘employers’

The consequences for being involved in money laundering are severe – they face a prison sentence which can cause problems with future employment and obtaining a bank account or mortgage.

Traditionally ‘money mules’ were recruited through classified ads or email and whilst these methods are still being used criminals are now regularly using social media. Recent recruitment examples uncovered include Facebook posts on closed groups and through instant messaging apps encouraging people to reply if they have a certain bank account.

Intelligence suggests that students are more susceptible together with people who have just entered the country.

How to avoid this scam

  • be cautious of approaches by email or social media promising an opportunity to make money
  • verify any company making you a job offer and verify their contact details (address, phone number and email address) and whether they are registered in the UK
  • be extra vigilant if the company is based overseas
  • never give your bank account details to anyone before you have made all the above checks
  • adverts for this type of job can be very enticing and may have professional looking websites set up
  • if you feel that you have already become a victim of this scam then inform your bank immediately.

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12 things to look for when choosing an investment fundhttp://moneytothemasses.com/saving-for-your-future/12-things-to-look-for-when-choosing-an-investment-fund http://moneytothemasses.com/saving-for-your-future/12-things-to-look-for-when-choosing-an-investment-fund#comments Tue, 03 Mar 2015 16:00:39 +0000 http://moneytothemasses.com/?p=4890 How to pick an investment fund Whether you are looking for the best investment funds or best ISA investments or even the best pension funds the choice can seem overwhelming. Yet it doesn’t matter whether you are looking at unit, trusts, investment trusts or exchange traded funds (ETFs) there are key criteria you should look for and...

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best isa investment funds How to pick an investment fund

Whether you are looking for the best investment funds or best ISA investments or even the best pension funds the choice can seem overwhelming. Yet it doesn’t matter whether you are looking at unit, trusts, investment trusts or exchange traded funds (ETFs) there are key criteria you should look for and compare before you decide what to invest in. This article runs through the 12 most important things you should look for when picking an investment fund.

If you are looking to invest in funds then I suggest that you download this FREE guide to investing in funds*. It is the best guide I’ve found on the topic and covers everything including how to get started with buying funds.

Also I’ve created a FREE short series of emails that teaches you the techniques and tools that turned £100,000 into £1.1 million. It’s FREE for a limited time only. Each of the concise emails will take you just 2 minutes to read and will tell you the simple techniques and tools the City fund managers use – which you can now use too.

12 steps to choosing the best investment funds

Fund manager rating

There are a number of rating systems out there, such as Citywire’s which attempts to evaluate an investment manager’s performance. Citywire give managers who have a better than average performance an A or AA rating. While an AAA rating is only given to the top 5% of UK fund managers. The rating takes into account the level of risk each manager has taken as well as their performance against their benchmark over the preceding 3 years. So check the fund manager’s rating for a subjective yet effective steer as to whether they are any good. Having said that research has shown that over 90% of fund managers fail to beat the market over the long term. So I would not place too much emphasis on the fund manager rating as they tend to be more of a marketing tool for the investment management houses themselves.

The fund’s fees and expenses

Research has shown that ‘Low-cost funds outperform high-cost rivals every time’. Investment companies work on the premise that their high fees are justified by their fund’s superior investment returns. The problem is that this simply doesn’t stack up in reality. The aforementioned research paper concludes that investors should make ‘cost’ a primary test in fund selection as it is still the most dependable predictor of performance. In reality the best way to screen funds is to not immediately screen by costs as a lot of investment returns are actually quoted net of charges. Instead once you have your shortlist of potential funds then use cost as a determining factor as to which investment fund to invest in. It is also worth pointing out that investment trusts and exchange traded funds (ETF) are cheaper than unit trusts. Whereas a unit trust will have an ongoing charge (OCF), which is what used to be called the annual management charge, typically of 1% – 1.5%, ETFs can be as cheap as 0.1-0.2%. If you are worried about charges then avoid Fund of Funds as these types of investment funds end up with multiple layers of costs and OCF’s, as much as 2% or above.

Active or Passive funds?

One investment tip is to buy passive funds (such as tracker funds) over active funds (investment funds run by fund managers) as the latter struggle to outperform the former yet charge large fees. Another piece of research has shown that active managers take extra risk and follow the latest trends when things are going badly in pursuit of returns. When the going’s good investment fund managers seem to do well but when things go badly they under-perform simple indexed passive funds (tracker funds). Not exactly what most investors would want to pay for. So there’s certainly a case for basing the core of your portfolio around tracker/passive funds. The added benefit is that passive funds are far cheaper than actively managed funds, which relates back to the point above. However, there’s a lot of propaganda around the active vs passive issue. The people usually arguing the case for active funds tend to be fund management houses while those championing passive funds tend to be those who create them. In my free email course (as mentioned in the introduction) I explain why both camps are wrong.

Sector and fund manager’s remit

It’s important that you know what a fund can and does invest in. If you are looking for the best UK equity fund then there is little point picking a UK corporate bond fund or one that invests in Japan. Similarly if you are looking for the best growth fund or the best income fund you need to make sure that the fund is designed to meet those requirements. But perhaps it is most important to not judge a book by its cover. This has been beautifully illustrated by the £7.7millon fine handed to Barclays by the FCA (previously the FSA) back in 2011 for advice relating the AVIVA Global Balanced Income Fund and the AVIVA Global Cautious Income Fund. Fund categorisation can also be misleading. For example cautious investors might, unsurprisingly, turn to a Cautious Managed funds, but, under the rules of the Investment Management Association (IMA) cautious managed funds can invest as much as 60 per cent of their assets in equities (depending on the sector they are in), but only need to have 30 per cent or more in safer fixed-interest investments, such as gilts and cash. This might not be cautious enough for some investors. Also consider what overall impact the fund will have on your portfolio’s asset allocation and risk. If you are picking a fund to compliment others within your portfolio from the same sector, e.g. UK equities, is the new fund sufficiently different to your existing ones to offer some form of diversification? Or is it invested in the same companies as other funds in your portfolio? Diversification reduces a portfolio’s risk – duplication does not. Fundslibrary.co.uk (run by Hargreaves Lansdown – HL funds) is a fantastic free online resource which allows you to easily compare and contrast funds and their holdings.

Consider a fund’s portfolio turnover rate

A fund’s portfolio turnover rate measures how often a manager buys and sells securities. A high turnover rate indicates that the manager does not hold on to stocks for very long. This may indicate active management but on the flip-side it can lead to higher trading costs and indicate a short term investment approach. By contrast a low turnover rate would indicate a manager with a long term buy and hold view to investment. You can find information of the turnover rate by using the above Fundslibrary link.

Performance and technical risk ratios

The standard risk warning that you will see on all financial literature is that ‘past performance is not indicative of future returns’, or a variation thereof. Now this is true for a number of reasons. But the analogy I would use to counter it slightly is ‘would you accept a lift from someone with a history of regularly drink driving?’ My point being is that if someone has a terrible track record then while this shouldn’t be the sole basis of a decision it certainly provides food for thought.
As mentioned earlier there are fund manager ratings out there which aim to rank a fund manager’s performance but they are purposely simplistic to aid understanding. However, there a number of objective statistics out there as well which can give you an insight into a manager’s performance as well as the amount of risk they are taking with your savings. Here are a couple of statistics you may want to look at:

Alpha

Alpha is a figure which measures a manager’s apparent skill at picking winning investments versus their benchmark. Alpha is the excess return versus the return of a fund’s benchmark. So a fund with a positive alpha indicates that the fund manager has outperformed. While a negative alpha figure would indicate underperformance.  So clearly you want to pick funds that have a positive alpha figure as it means that the manager is making returns ahead of what the general market is doing.  A positive alpha of 1% means the fund has outperformed its benchmark by 1%. Similarly, a negative alpha of -1% would indicate an underperformance of 1%. So the higher the alpha the better.

Beta

Beta is a measure of the sensitivity of a fund to general market movements. The market has a beta of 1 by definition. If a fund has a beta of 1.5 then that means that the fund’s return moves in the direction of the general market but to a larger degree. So if the market goes up by 2% the fund will go up by 3%. Conversely if the market falls 2% then the fund will fall 3%. Clearly, an index tracker fund should have a beta of 1. Yet a fund can have a negative beta figure. If a fund has a negative beta then it indicates that as the market falls the fund tends to rise.

Volatility

Volatility is usually measured by standard deviation. Standard deviation shows how much a fund’s returns vary from its average over a given period. A low standard deviation figure would suggest that a fund’s returns have been fairly consistent and not deviated much from its long-term average. So if a fund has an average annual return of 10% but a volatility of 15%, this means that the range of returns has varied between -5% to +25%. This high volatility obviously could give rise to higher returns but also higher losses. Volatility has huge impacts on your potential returns and should be considered when building a portfolio. Volatility and risk are technically different things yet funds with a high level of investment risk tend to have a higher volatility. Similarly low risk funds tend to have low volatility. So when choosing a fund compare compare its volatility figure to its peers within the same sector to ensure you are comfortable with the level of investment risk the fund is taking.

Sharpe ratio

The sharpe ratio is not a widely known statistic yet it indicates how much extra return a fund manager has achieved for the increased risk they have taken. There is nothing wrong with fund managers taking calculated investment risks if they result in additional returns for investors. So the higher a fund’s sharpe ratio the better.

R-Squared

R-squared gives a measure of how much of a fund’s movements can be attributed to movement in the fund’s benchmark or in other words it shows the relevance of the chosen benchmark and therefore the relevance of figures such as beta and alpa. A high R-squared figure (between 0.85 and 1) would indicate that the fund’s performance is closely correlated to the fund’s chosen index. Conversely a low R-squared (under 0.7) suggests the opposite. One of the biggest issues facing investors is actively managed funds which are in effect just closet tracker funds. These funds charge unjustifiably expensive fees but never outperform the market. Yet a fund’s r-squared can give an indication as to whether a fund is just mirroring its chosen index. A tracker fund would usually have an r-squared of 0.95 and above, so avoid actively managed funds with a similar r-squared figure. R-squared combined with the fund’s beta figure can also give you an insight into the risk/return profile of the fund. If a fund has a Beta below 1 and an R-Squared close to 1 this would suggest that it is offering high risk-adjusted returns, which is a good thing. This is because the fund is capturing the returns of its market benchmark (the R-squared bit) but is less sensitive to market movements up or down (the BETA part).

Gearing

If you invest in an investment trust (rather than via a unit trust /OEIC) then check the investment literature to see whether it is geared. Investment trusts are allowed to borrow money to invest with the aim of enhancing their returns. Obviously in a downturn this can have the opposite effect plus the debt can cause a liquidity issue. Gearing tends to lead to greater volatility.

Manager longevity

If you are trying to form an opinion on a fund check how long the manager has been there (it will be on the fund’s factsheet). Performance figures such as those above may carry little weight if the fund manager has been poached recently. Also the active funds most likely to outperform are those with longer manager tenures suggesting that truly skilled managers who are left alone to do their job will reward their investors. If the same manager is in place, past success may help predict performance in future. Obviously if a manager has been poached and is now heading up the fund you are looking at then you will have to take this into consideration.

Commentary

Fund data, such as that described above is historical so doesn’t guarantee what you can expect in the future. Google the fund manager in question and seek out recent articles and interviews with him/her. These can provide valuable insight into the investment style or ethos of a manager which statistics simply can’t provide.

Diversification

How many holdings does the fund hold compared to others in its sector? (Again, HL’s fundslibrary.co.uk will come in handy). A small number of holdings may be indicative of a manager who backs his convictions while a large number may suggest the manager is going to try and match the index. Both have their place, with the former being more risky yet more likely to give you outperformance/underperformance while the later may have a lower investment risk but not outperform the market, in which case you might think about investing passively instead. This leads me nicely on to my next point…

Size and age

Check the size and age of the fund. Small funds can be more nimble to investment opportunities and consequently can have good short-term records. The inevitability is that they will likely only invest in a small number of stocks due to their size. Larger funds may be able to diversify their holdings but the trade off is that the impact of their star stock picks are diluted. The other point is that as funds grow this dilution may impact on their returns and may mean that initial stellar returns are no longer achievable in the same way. Also if a fund buys shares in smaller companies then as the fund swells in size their investment universe becomes restricted as otherwise they’d end up owning the companies in which they invest if they bought anymore shares. Yet there is no hard and fast rule when we are talking about a suitable fund size. When it comes to age, the longer the better in my personal view as it allows you to see how the manager has performed in market downturns. It’s no good earning 10% per annum if he then losses it all when the next stock market crash comes along.

Income or growth and tax

Check whether the fund is focused on providing income, capital growth or a mixture of the two. This information can be found on the fund’s factsheet. It’s important that this matches your requirements. For example a young high rate income tax payer may be more inclined for capital growth as they do not need access to their funds. But obviously income from investment funds can be reinvested but you will still be taxed on it. So a higher rate income tax payer probably won’t want to generate any unneeded income. Capital gains on the other hand are only taxed once you sell the investment. So make sure you also know the tax implications of your chosen fund as you may want to invest in it via a wrapper such as a Stock and Shares ISA to mitigate any tax liability.

Image: zirconicusso / FreeDigitalPhotos.net

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Best Current Account switching offers & incentiveshttp://moneytothemasses.com/saving-for-your-future/best-current-account-switch-offers-and-incentives http://moneytothemasses.com/saving-for-your-future/best-current-account-switch-offers-and-incentives#comments Tue, 03 Mar 2015 10:10:12 +0000 http://moneytothemasses.com/?p=12827 From 16th September 2013 consumers have been able to switch current account within 7 workings days. Previously switching current accounts was seen as a nightmare, taking up to 30 days to complete, plus there was little incentive to do so. It is perhaps unsurprising that consumers have typically only switched their bank once every 16 years....

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From 16th September 2013 consumers have been able to switch current account within 7 workings days.

Previously switching current accounts was seen as a nightmare, taking up to 30 days to complete, plus there was little incentive to do so. It is perhaps unsurprising that consumers have typically only switched their bank once every 16 years. Yet banks are the number one source of complaints to the Financial Ombudsman.

Switching bank accounts has just got a whole lot easier thanks to the new Current Account Switch Service being brought in by regulators in bid to boost competitiveness within the banking sector. Plus there are now genuine incentives to change your bank or building society.

Switching current accounts is now quick and easy

Under the new Current Account Switch Service consumers will be able to choose the date on which they want to transfer their current account and the whole process will not take more than 7 working days.

Direct debits and standing orders will also be automatically transferred across to your new account as will any payments sent to the old account (for a period of 13 months).

Cash incentives

Banks and building societies are offering some fantastic offers to tempt customers away from rival banks. Below is a round up of the best offers out there at the moment, which I update continually, as well as the things to look out for when switching accounts.

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Best of the Sunday papers’ PROPERTY sectionshttp://moneytothemasses.com/news/best-of-the-sunday-papers-property-sections http://moneytothemasses.com/news/best-of-the-sunday-papers-property-sections#comments Sun, 01 Mar 2015 07:00:36 +0000 http://moneytothemasses.com/?p=16656 1st March 2015 The Independent Britain’s most unusual homes: grand designs and wow-factor conversions Millionaire developer Candy locked in £15 million affordable homes subsidy battle The London homes giving up floor space for height The Telegraph Why are we Brits such snobs about renting? Rightmove app will tell you what your house price will be...

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1st March 2015

The Independent

Britain’s most unusual homes: grand designs and wow-factor conversions

Millionaire developer Candy locked in £15 million affordable homes subsidy battle

The London homes giving up floor space for height

The Telegraph

Why are we Brits such snobs about renting?

Rightmove app will tell you what your house price will be in the future

Mapped: 10 years of Britain’s house price boom (and bust)

 

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Best of the Sunday papers’ MONEY sectionshttp://moneytothemasses.com/news/best-sunday-papers-money-sections http://moneytothemasses.com/news/best-sunday-papers-money-sections#comments Sun, 01 Mar 2015 06:00:48 +0000 http://moneytothemasses.com/?p=16650 1st March 2015 The Independent Cold callers and your pension: watch out for dangerous boiler room scams Fuel poverty could claim 100,000 lives over the next 15 years, warns energy charity Weekly Money: Round-up of the money stories you may have missed The Telegraph Why you WILL have to sell your home to pay for...

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1st March 2015

The Independent

Cold callers and your pension: watch out for dangerous boiler room scams

Fuel poverty could claim 100,000 lives over the next 15 years, warns energy charity

Weekly Money: Round-up of the money stories you may have missed

The Telegraph

Why you WILL have to sell your home to pay for care

Fraudsters use iPods and 3D printers to target cash machines

The 21 ways you can become a better investor

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The sectors with momentum right now…http://moneytothemasses.com/8020-articles/sectors-momentum-right-now http://moneytothemasses.com/8020-articles/sectors-momentum-right-now#comments Fri, 27 Feb 2015 23:15:50 +0000 http://moneytothemasses.com/?p=18450 80-20 Investor’s unique algorithm highlights those funds with momentum by risk as well as by sector. Yet it is always interesting looking at what is working in the current environment on a broad sector/asset basis. One simple way is to see which sectors have performed well over recent history. So below I show you the best and...

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80-20 Investor’s unique algorithm highlights those funds with momentum by risk as well as by sector.

Yet it is always interesting looking at what is working in the current environment on a broad sector/asset basis. One simple way is to see which sectors have performed well over recent history. So below I show you the best and worst performing sectors over the last 6 months and 1 month.

Don’t forget these figures are for the average fund within the sector so behind those figures will be funds doing much better and much worse. That is why the 80-20 Investor algorithm analyses funds without reference to their sector categorisations.

 

Top 5 performing sectors over the last 6 months

SectorTotal return of average fund over 6 months
Technology & Telecoms14.03
North America12.76
Japan10.25
UK Index
Linked Gilts
8.30

Worst 5 performing sectors over the last 6 months

SectorTotal return of average fund over 6 months
Global Bonds1.40
UK Smaller Companies0.92
Sterling High Yield-0.60
Global Emerging Market Bond-0.80
Global Emerging Markets-2.27

 

 

Top 5 performing sectors over the last 1 month

SectorTotal return of average fund over 1 month
European Smaller Companies4.21
Technology & Telecoms3.73
Japan3.23
UK All Companies3.18
UK Smaller Companies3.12

 

Worst 5 performing sectors over the last 1 month

SectorTotal return of average fund over 1 month
Global Bonds-1.50
Global Emerging Market Bond-2.23
UK Gilts-2.98
UK Index
Linked Gilts
-3.34

 

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Chatterbox: March 2015http://moneytothemasses.com/chatterbox/chatterbox-march-2015 http://moneytothemasses.com/chatterbox/chatterbox-march-2015#comments Fri, 27 Feb 2015 22:43:44 +0000 http://moneytothemasses.com/?p=18454 The place to talk about investing, what’s in your portfolio and other things that matter in the comments section below

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The place to talk about investing, what’s in your portfolio and other things that matter in the comments section below

Germany approves Greek bailout extension despite unease

Germany approves Greek bailout extension despite unease

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The £50,000 challenge – Damien’s portfoliohttp://moneytothemasses.com/damiens-portfolio/50000-challenge-damiens-portfolio http://moneytothemasses.com/damiens-portfolio/50000-challenge-damiens-portfolio#comments Fri, 27 Feb 2015 21:48:27 +0000 http://moneytothemasses.com/?p=18434 One of the biggest problems with the world of finance is that people just don’t have ‘skin in the game’. Funds are often run by managers who don’t have significant stakes of their own fortune invested in their own funds. Research has shown that when fund managers invest their own money, as opposed to their clients’...

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One of the biggest problems with the world of finance is that people just don’t have ‘skin in the game’. Funds are often run by managers who don’t have significant stakes of their own fortune invested in their own funds. Research has shown that when fund managers invest their own money, as opposed to their clients’ money, they take less risk.

80-20 Investor is the culmination of a career in investment research and analysis. 80-20 Investor was deliberately designed to allow experienced and novice investors to build portfolios to maximise their returns from minimal effort. Of course you have a wealth of articles , my data analysis of tens of thousands of funds by sector as well as our Best of the Best picks.

However, a number of you have asked me ‘what funds would you pick?’ or ‘how would you use 80-20 Investor?’ While obviously 80-20 Investor provides information and not financial advice it is an interesting point.

So I am launching a new portion of 80-20 Investor at no extra cost to you. From 1st March 2015 I am going to run my own portfolio live on the site.

  • I am going to invest £50,000 using 80-20 Investor
  • I will regularly update you with my progress
  • I will show you how I get the best from 80-20 Investor and the features I use
  • I will show you how I build a portfolio and…
  • How and when I decide to sell funds

Hopefully, it will help answer a lot of the questions you may have when running your own money.

A brave man

I am a brave man as I am investing my money right at the point when stock markets are at all time highs. Is that because I think markets are only going upwards? Far from it, if anything they are due a correction.

However, this is a long term project and I expect to be down initially but to outperform the market over the long term. A sensible strategy would be to drip the funds in over time (i.e. put in £10,000 a month) to minimise the impact of a market correction. But as I say I am investing for 10 years plus so am comfortable taking risk and short term falls. Remember it is a paper loss unless I crystallise it. in any event I plan to keep an eye on my stop losses.

Building my portfolio

So I am starting with £50,000, but where do I start?

A good starting point is the ‘age guide’. It is a broad rule of thumb but is widely used within the asset management industry. The guide is that a medium risk investor with a medium to long term time frame (5-10 years) should have at least a percentage of their portfolio equal to their age in low risk investments. Low risk investments include assets like bonds and cash.

If you want to see the sort of funds and sectors that are low risk then go to the Best of the Best Section and click on the low risk tab.

So for me that means somewhere between 30% and 40% of my portfolio in low risk funds. To start with I am going to go with around 30% as I am on the more adventurous side of balanced.

That then leaves me with 70% of my portfolio to deal with. I plan to split this 30% in medium funds and 40% in higher risk funds.

What funds to buy?

One self imposed criteria is that initially I am only going to buy unit trusts as the fund platform I am using offers limited choice when it comes to investment trusts and ETFs.

Yet this is fine as unit trusts are exactly the sort of investments most of you guys buy. In time I will likely move fund platforms so that I can invest in investment trusts and ETFs.

The next stage is to choose the types of assets (you can think of this as the fund sectors) to invest in. The important thing to point out is that my initial fund selection is not going to be the one that makes me money in the long term. Think of it like a garden, my initial fund choice is like starting with a barren garden. To get it to flourish I will sow the seeds that hopefully should grow given the weather conditions. Of course I’ve also got half an eye on the long term (i.e. what season we are in). Initially you might not be impressed with my choices.

However, with constant watering, weeding and pruning in time things should flourish. If we could jump forward a number of years to see the results you’d be shocked. But like gardening investing takes patience.

Watch out for bid/offer spread

Buying a fund is much like buying a car, the price you pay can depend upon where you buy it. So when choosing my funds I was careful to ensure that there was no bid/offer spread on the funds. A bid/offer spread is where a fund has a different price for those wanting to buy and a different one for those wanting to sell. If a fund has different prices it is said to have a bid/offer spread. A lot of funds these days have a single price which is the same for buyers and sellers. Let’s say that is £1. A fund with a bid offer spread might instead have a buy price of £1.02 yet a sell price of 98p. That 4p difference acts like a charge on your investment and means that you would have to make up the 4p before you broke even when you sold out (4p equates to around 4% in this example).

So before settling for a fund I check whether I could buy the funds at a single price with no bid/offer spread. Only one of the funds which I have picked had a bid/offer spread but if was fractions of a percent, rendering it negligible. Of course it could widen however it is unlikely to given that the fund in question is huge in size. Bid/offer spreads tend to widen in thinly traded markets and within assets/funds with few buyers and sellers.

How many funds will be in my portfolio

There’s an obsession with the number 10 when it comes to picking funds. Investors seem to simply divide the sum they have to invest into 10 funds to diversify. What they end up doing is buying multiple funds of a similar type (such as UK Equity funds) to hopefully minimise the impact of any one fund underperforming. Not only do they often fail to do this, as a lot of managers simply track the market so they don’t get fired for underperforming, but they also minimise the impact of a fund which is outperforming.

As I’m going to keep an eye on the stop loss alerts I’m happy with investing in just 7 funds. This number is not set in stone and I may increase or decrease that number in future.

My low risk funds

I am letting the 80-20 Best of the Best selection influence my asset allocation. Let’s start with the low risk funds.

There’s an interesting mix in the current Best of the Best selection with some managed funds (those belonging to sectors like ‘Mixed Investment’ 0%-35% Shares’) which have some exposure to shares but mostly invest in bonds. There is also a Targeted Absolute Return fund, these types of fund try and minimise any downside (unfortunately a lot fail to achieve this). Plus there are also some decent straight bond funds.

I have decided to go with

  • JPM Cautious Managed
  • Fidelity Multi Asset Defensive

and put £7,500 into each, both of which feature in this month’s ‘Best of the Best’ selection. in particular I like the Fidelity Multi Asset Defensive fund for reasons stated in my article Funds to ‘buy & forget’ in 2015 & the Perfect Portfolio.

I picked the JPM Cautious Managed because out of the low risk Best of the Best funds it has had the lowest drawdown in the last 6 months, plus it is not overly expensive. Part of the reason for its recent strong performance is its exposure to a broad range of global equities and bonds.

My medium risk funds

My fund picks are

  • Fundsmith Equity
  • Majedie UK Income

and I’ve put £7,000 into each. If you read my research piece Stock markets at all-time highs, where next & should you buy? you will know that despite the US market having a very strong run it appears to be in a bullish pattern. Similarly there is scope for Japanese equities to move upwards. Fundsmith Equity is a global fund but actually has about 60% exposure to US shares. It has a terrific track record and is run by a chap called Terry Smith who backs his convictions. The fund only has 28 different stocks which is very low for a fund (most have 2-3 times that). The fund also appeared in the Best of the Best Selection last month.

I’m not wholly convinced on the fortunes of the UK stock market given its unconvincing run up to its all time high. Yet I’m interested to see that UK fund’s have been flirting on the edges of entering the Best of the Best section this month, in particular the Majedie UK Income fund. However I am happy to take a punt on it this month to diversify my holdings.

My high risk funds

My fund picks are

  •  Jupiter European
  • Neptune Japan Opportunities
  • AXA Framlington Global Technology

with £7,000 in each. The sectors cropping up in this month’s Best of the Best high risk funds include Chinese equities, European equities, Japanese equities, Technology and Property.

The 80-20 Best of the Best funds has pulled through a Japan fund for the first time since its been running. Clearly there is momentum there but I’m going to choose to play it via Neptune Japan Opportunities. As mentioned in the article which I linked to above, the strength of the Japanese currency (Yen) and its stock market tend to move in opposite directions. When the Yen is weak, exporters get a boost and the stock market rallies. Given that Japan is still in full monetary easing mode I want a fund that removes exposure to the Yen, which is why I’ve picked Neptune Japan Opportunities.

As I highlighted in my research piece Buyer beware this Chinese New Year Chinese equities tend to perform better in the second half of the year so I am going to hold off investing for now. Of the remaining sectors I am more keen on European equities despite the potential problems surrounding Greece and Ukraine. Eurozone QE is about to officially launch and should provide support for European shares.

Meanwhile, technology stocks have been performing well. While they are due a breather there’s certainly no denying they have upward momentum right now.

Final portfolio

So my final portfolio looks like this:

  • JPM Cautious Managed – £7,500
  • Fidelity Multi Asset Defensive – £7,500
  • Fundsmith Equity – £7,000
  • Majedie UK Income – £7,000
  • Neptune Japan Opportunities – £7,000
  • Jupiter European – £7,000
  • AXA Framlington Global Technology – £7,000

It’s pretty bullish to start with, but as I said before we can trim and weed as we go. I also must add that all of the funds are held within a Stocks and Shares ISA wrapper to eliminate any tax liability upon future fund switching.

What’s in your 80-20 Portfolio?

Now you’ve seen what is in my portfolio, feel free to tell me what is in yours. The beauty of 80-20 Investor is that it is not prescriptive and empowers you to design your own portfolio. I would love to hear what you are investing in and how it’s going. Feel free to discuss this in our new chatterbox section.

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Stock markets at all-time highs, where next & should you buy?http://moneytothemasses.com/8020-articles/stock-markets-time-highs-next http://moneytothemasses.com/8020-articles/stock-markets-time-highs-next#comments Thu, 19 Feb 2015 16:21:10 +0000 http://moneytothemasses.com/?p=18393 In recent days the FTSE 100 has been hovering around its all-time high of 6,930 which it attained on 31st December 1999. The chart below shows what happened next when the dot com bubble burst (click on all the images in this article to expand them). Yet it’s not just the UK stock market that has...

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In recent days the FTSE 100 has been hovering around its all-time high of 6,930 which it attained on 31st December 1999. The chart below shows what happened next when the dot com bubble burst (click on all the images in this article to expand them).

ftse 100 - 15 year

Yet it’s not just the UK stock market that has been testing multi-year highs. The Japanese stock market (Nikkei 225) has just hit a 15 year high while the US S&P 500 has set yet another all-time high above 2,100. But even in Europe there are similar headlines. The German stock market (the DAX) has also hit an all-time high this month.

While market timing is an almost impossible task, successful investors buy low and sell high. So with stock markets at such highs where are they headed next?

Where are stock markets headed next?

Trying to predict the future of the stock market is akin to reading tea leaves. Personal predictions are almost always clouded by prejudices which reaffirm what we ‘want’ to happen rather than what is ‘most likely’ to happen.

That is why one objective method is to use technical analysis to try and judge likely outcomes. So what is technical analysis? One line of thinking is that stock markets are driven largely by human behaviour. At the simplest level you could argue that fear and greed drive a lot of investors’ actions. Let’s say that an opportunity presents itself and some investors jump on it and buy the shares in question. The demand then drives up the price. More investors jump on the bandwagon looking to profit. Then at some point the tide turns (fear sets in) as people think the price for the shares is looking expensive and so people start selling. More and more people start selling to take profits and the price falls. At some point the price falls until others think the shares look cheap and start buying, outnumbering the number of sellers. Again demand outstrips supply and the price goes back up.

This see-sawing explains the movement you see in the stock market charts such as the one above. The prices at which investors start bailing and selling the shares is called a point of resistance while the point at which they pile in is called a point of support.

As such there is a surprising level of predictability to human behaviour. In terms of the stock market that means when the price goes through historic points of resistance or support it can indicate an new unfolding market rally or collapse. Why does it do this? Part of it will be because traders trading in millions of pounds will use these points of resistance and support to trigger trades. Yet for a lot of investors they might not even be aware of these inflexion points. They simply are reacting to how other people in the market behave. Put it this way, when stock markets fall you feel tempted to sell, right? Also once it starts to rally, you are tempted to jump in? That’s why these patterns have a tendency to repeat.

Some investors and traders swear by it and trade solely using technical analysis. I don’t fall into that camp. I view technical analysis like a road map drawn by someone who has already completed a journey to somewhere near where you are planning to drive to. The road map won’t take you exactly to your intended destination, nor will it be entirely accurate. However, it will give you a better sense of what to expect. Then if you decide you like the look of particular market you can use 80-20 Investor’s ‘Best of the Rest‘ data to choose an actual fund to invest in. So where are 3 key stock markets now heading?

There are different types of technical analysis and over time I will introduce some to you. However, you don’t want to get bogged down into them. I find the most useful guide is to simply highlight the points of resistance and support.

FTSE to 7,000?

Click on the image to enlarge it. The first thing is to say that I have slightly rounded some of these numbers. The red lines are lines of support while the green is a line of resistance. However, lines of support also can work as lines of resistance once breached and vice versa (as can be seen by the diagonal red line).

ftse 100 technical analysis

So what do all these lines mean? At the moment the previous high of December 1999 is acting as a point of resistance. The market keeps testing it and then sells off when it gets near. At the moment recent highs of around 6,690 are providing a support level, although it has been breached and found support slightly lower. In a sense the FTSE 100 is at a crossroad moment with almost a binary choice of setting new highs or selling off. If the FTSE 100 can break 6,930 the diagonal line of support could suggest that we’ll hit 7,000 pretty quickly.

But the market is still susceptible to a sell-off. Imagine if things turn sour with Greece or the conflict in Ukraine escalates then you can see the potential for a pretty large sell off heading towards 6,000 with stops along the way. So the breaching of the all-time high is crucial to see which outcome we will get. The thing with technical analysis is that different people can draw different lines of support or resistance and in reality no one is going to be spot on. What I would take away is that we are going to need a good push upwards to make any serious gains (7,000 is only 1.5% above where the FTSE 100 is at the time of writing). Otherwise at best we could carry on in this sideways markets for a while.

US S&P 500 – where next?

The US stock market chart looks completely different. There are some headwinds facing the US stock market, for example there’s evidence that the strong dollar is starting to impact the profit margins of US multi-nationals. Also, in much of 2014 the rally was driven by investors buying shares of companies within defensive sectors (such as drug companies) and not companies most sensitive to the economic outlook (such as retailers). If a rally is going to continue then investors need to start backing the idea that the US economy is in escape velocity with their money (and not just say they believe it).  Yet looking at the chart below, a technical investor would certainly still be feeling bullish and buying US equities as they bounce upwards along the diagonal line of support.

s&p 500 outlook

 

Nikkei 225 – what next?

The Japanese stock market has spent decades in the doldrums as the economy was ravaged by deflation. Yet the stock market has seen a stellar rally driven by enormous amounts of money printing. Those who bought Japanese equities just as the Bank of Japan embarked on printing Yen back in 2012 would have doubled their money, assuming they had hedged out exposure to the Yen – which is always advisable (Neptune Japan Opportunities is a good example of a fund that does).

nikkei 225 outlookTechnical analysis would suggest that the continued loose monetary policy of the Bank of Japan continues to buoy the stock market. Having just set a new multi-year high by breaking through the previous highs of 2007 there is now a possibility of heading towards 20,000 if the upward trend shows signs of strength, which is around 10% above current levels. But Japanese equities have flattered to deceive and remain the graveyard of many opportunistic investors. The chart below puts the current moves into context and highlights that we are 50% below the bubble days of the late 1980s.

nikkei history

 

 

 

 

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