Good reads from around the Web.
Larry Swedroe is one of the best investing writers on the Web. He also writes books, and this week saw a chapter from his clever new one published on the Net.
The piece makes super reading for anyone interested in building simple passive portfolios that seek to capture the returns from various asset classes.
So that’s most of us around here, then!
The case for diversification
We’ve several times explained how simple asset allocation can improve returns and reduce risk.
Unfortunately, hunkered down here in our urban hideaway, surviving on scraps of the Financial Times that fall through the gratings and tuning to the BBC World Service for business updates on our homemade crystal radio, we don’t have access to the industry-strength databases to prove it.
But Larry Swedroe does, and his step-by-step run through building a portfolio on CBS MoneyWatch is clear and persuasive.
Because most investors have not studied financial economics and don’t read financial economic journals or books on modern portfolio theory, they don’t have an understanding of how many stocks are needed to build a truly diversified portfolio.
The answer is a lot. The solution is funds containing hundreds, and as we know the most effective funds to plump for are cheap index funds.
Simply the best
From there, beginning with a classic 60/40 portfolio – that’s 60% in equities and the rest in bonds – Swedroe builds several different portfolios, and shows how they would have performed from 1975 to 2012.
The funds chosen are all US-based and aimed at US investors, but the principles hold true here, too, and lie behind our own Slow & Steady Passive Portfolio, which naturally employs UK funds.
Importantly, Swedroe doesn’t finesse his asset allocations. There’s no “Next we add 3.32% of small cap stocks, as that’s been found to be the optimal percentage to maximise return” nonsense.
I’d be sceptical whenever you see anyone presenting ‘proof’ that you should put 2.33% in Spanish equities or 1.72% in the utility sector or anything like that.
This sort of fine tuning reveals that they’ve mined a database for specific and unrepeatable outcomes in the past. It tells you little about your future.
Instead, favour logic and simplicity over spurious accuracy.
Through the step-by-step process described above, it becomes clear that one of the major criticisms of passive portfolio management – that it produces average returns – is wrong.
There was nothing “average” about the returns of any of the portfolios. Certainly the returns were greater than those of the average investor with a similar stock allocation, be it individual or institutional. […]
By playing the winner’s game of accepting market returns, you’ll almost certainly outperform the vast majority of both individual and institutional investors who choose to play the active game.
Simple really is clever when it comes to investing.
It’s also clever when it comes to writing about investing. Must try harder! 😉
From the blogs
Making good use of the things that we find…
- Beware of back-tested market beating strategies – Oblivious Investor
- Cheap passive funds last straw for UK finance industry – Munro Fund
- New highs don’t lead to sell-offs – Rick Ferri
- On SuperGroup and the difficulties of stock picking – McTurra
- Financial alchemy, Einhorn, and Apple – Musing on Markets
- Amazon, Apple, and the beauty of low margins – Remains of the Day
- Portfolio asset allocation – DIY Income Investor
- Calculating that important retirement number – RIT
- The four biggest ways to stretch your income – Len Penzo
- Money, work, wealth, and wisdom – Simple Living in Suffolk
- The oil well you can keep in your pants – Mr Money Mustache
Product of the week: Cash ISA rates have fallen due to the Government’s Funding for Lending scheme, says the Telegraph in its pick of the best ISAs. The best one-year fixed rate ISA, paying 2.05%, is from the Nationwide.
Mainstream media money
Note: Some links are to Google search results – these enable you to click through to read the piece without you being a paid subscriber of the site
- Hedge funds getting correlated with index funds – Business Insider
- FTSE launches UK retail bond index – Fixed Income Investor
- How world stock market indices have shifted since 1900 – Business Insider
- Guide to VCTs, EIS, and other tax efficient schemes [Search result] – FT
- How to invest with style – Swedroe/CBS
- Einhorn on Apple – Business Insider
- Beware if you hold subordinated bank debt – Bond Vigilantes
- Is the “great rotation” out of bonds for real? – Telegraph
Other stuff worth reading
- Investors may have a too-rosy view of equities – The Economist
- Weekly shop would cost £450 if it had risen like house prices – Guardian
- New build property provides inferior returns [Search result] – FT
- Did new BoE Governor Mark Carney stoke a Canadian bubble? – Panorama
- What will £100,000 buy in the UK property market? – Guardian
- How leverage [temporarily!] killed Wall Street – Scientific American
Book of the week: Monevator reader and self-directed investor John Hulton has written another eBook. The slender tome, D-I-Y Pensions, offers an easy and information-packed overview of the UK pension scene. Best of all, it costs just £2.58 on Kindle, leaving more spare change for your pension.
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