I have fielded a few comments and emails recently accusing Monevator of inconsistency.

Actually “accused” is too strong a word to ascribe to our well-mannered audience.

Let’s say “querying” instead.

And I can see where they are coming from.

There are many publications and investing experts who talk in absolutes about investing. What you must do because such and such will happen and that guarantees some particular result.

Long-time readers will know I put little stock by such expressions of certainty.

Yet even among our own tight cadre of contributors, there are clear differences in thinking and even a few red lines where strong opinions get stated as something close to truth.

For instance readers have asked why we have run articles extolling using investment trusts for income when the bulk of this site warns you off managed funds like they were radioactive.

Or why we discussed the higher returns you might enjoy from investing in small cap or value shares, only to then warn that chasing these so-called return premiums may not be worth the bother – or that they could even be irrational investments.

Or why we explain how to create multiple ETF portfolios in one article, only to talk up using just a single global tracker fund in another.

Especially as I then write an article saying you shouldn’t put all your money into one of anything, be it a fund, a bank account, a gold bar, or a hole cut into your mattress.

You say tomato, I say portfolio

The answer is there are many ways to be an investor – and a successful one too on your own terms.

And Monevator’s contributors are all longstanding investors who have learned what works for them – and what chimes with their personalities.

That latter point is important.

For people in the real-world, investing isn’t just about theoretically deciding on the optimal mix of assets to deliver the highest returns over the next year, or even the next decade.

It’s about discovering what frame of mind is right for you when it comes to investing – and devising the best process to match or compensate for your mental and emotional strengths and weaknesses, as well as your particular goals and means.

Now that certainly doesn’t mean just doing what your gut tells you to do.

Perhaps in your everyday life you’re a freewheeling risk taker whose ideal holiday involves bungee jumping and shark diving – but you’ve read all the evidence and decided passive investing makes the most logical sense to you.

Accordingly, you might set up an automatic investing routine to lock your money away in a pension for 30 years, and perhaps even into a Vanguard LifeStrategy fund to take all the rebalancing decisions out of your hands to boot.

In this case it’s the opposite of how you drive your car, run your love life, or even choose your poisonous pet scorpion – but it’s a decision you made in the cold light of day that you believe will leave you best off over the decades. So you act to make it happen.

In other words, knowing your temperament and its potential downsides, you build a strategy around it.

On the other hand you might be like me.

When I started socking money into the stock market I was a pretty textbook believer in passive investing into index funds.

I still am – in theory – but how have I sinned!

Or another thing we see quite often at the moment is a commentator on the site chiding another reader or an article for highlighting the ongoing point of bonds in a portfolio.

The bond-hater can’t stand the thought of buying or owning an expensive asset that seems likely to deliver very mediocre returns over the next 5-10 years.

But the investor who decides to put say 40% of her assets into bonds and cash regardless can’t stand the thought of an equity crash that might halve her net worth in a matter of months.

Neither is right or wrong. They just want different things.

Investor know thyself, as they almost say.

You can go your own way

Undoubtedly the confusion factor is increased by the decision I made long ago to feature multiple voices on this site.

But in the light of my comments above, you can understand why I do it.

I believe we’re all best off understanding there are many roads to Rome, even if the one we take looks to our eyes like a glassy-surfaced superhighway compared to the potholed backstreets that others bump along.

That isn’t to say there aren’t truths in investing, or that returns are subjective.

Most people investing in hard-charging active funds will do worse than the average passive investor, for example.

It’s mathematically incontrovertible, and the historical evidence tells us the same story.

Yet some few will do better than average, and some of those who did worse could never have stomached index trackers anyway. Better they invested in active funds than sat in cash for 30 years – or worse didn’t save or invest at all.

When people turn up on Monevator in the comments writing “Of course you should only buy active funds, it’s easy to pick winners, I’ve done really well and passive investing is for losers” then they’re liable to meet a robust response.

Indeed when I’ve had spats with readers over the years, talking in absolutes has almost always been the reason why.

But if an active fund investor says: “Personally I decided to go for it and whether by luck, judgement – or likely both – I’ve done better than the odds would suggest” then I applaud their candor, their results, and their humility.

The voices of reasons

That’s not to say Monevator contributors aren’t prone to making the odd sweeping statement.

I guess I give them extra leeway as they’re working behind the bar.

• The Accumulator, my long-standing sidekick, clearly believes the logical approach for the vast majority of people is to invest passively. He is actually not against active investing if you are honest about exactly why you’re doing it, as revealed in our Christmas debate a few years ago. But he’s the closest thing we have to a passive fundamentalist.

One of The Accumulator’s strengths is he has never forgotten how bewildered he was when he first started investing. To that end, he believes that too many caveats and prevarication can hurt new investors as much as they appease old worrywarts like me.

This does bring us into occasional conflict when he writes “It is better” rather than “I believe it is better”. And for his part he chafes when I pull editorial rank and insert “mights” and “maybes” into his copy.

He even took fellow contributor Lars Kroijer to task the other day. I see this as a strength of our site, not a weakness.

• The Greybeard is the newest addition to our ranks, albeit our most time-seasoned contributor. He’s an investor of the old school who has picked stocks and likes actively managed investment trusts for retirement income. He makes coherent arguments as to why he prefers such trusts to both passive income vehicles and also to total market solutions where you’d sell capital if you required cash from your holdings, rather than bias towards income-generation in advance. I sympathize, but Lars and T.A. are in the other camp.

• Lars Koijer was a successful hedge fund manager who is still active at the board level in that industry. Yet Lars preaches efficient markets to the point of saying you should invest all your equity allocation into just one global tracker fund, and let the market get on with it. He eschews the lure of smart beta and return premiums and the like, believing even a 50-100 year record of superior returns could be a blip, and that it’s irrational to bet on it. On that score he’s even more of a purist than T.A. (who disagrees with him) and yet I wouldn’t say Lars is as pure a passive promoter as T.A., given that Lars still works with hedge funds who actively hunt for an edge.

• The Analyst hasn’t been able to contribute for a while for professional reasons. I hope this won’t last forever, because he’s a successful market-beating stock picker who has about the most focused investment process I’ve ever come across in person, as opposed to in a textbook. The Analyst and I have talked for hours in seeming agreement about various investing topics over the years, yet we’ve rarely been invested in the same things. Go figure, as he’d say.

• As for me, The Investor, at my worst I see myself as some sort of stock picking mixed martial artist, happily adopting all kinds of different investing ‘hats’ if I believe they’re appropriate at the time. Others may see me as some sort of rag and bone tinker man, shuffling my wares about to skim a few percent and lacking an investing core. I take the point, but there are some things even I always believe – the market is a fierce competitor, costs always matter, people are irrational individuals and can go mad in crowds, and nothing lasts forever. My investing toolkit suits my gadfly temperament, but I wouldn’t recommend it to anyone.

Definitely maybe

If that run-through of fanciful monikers sounds to you like a nerdy version of the X-Men, then perhaps you’re reading via an email subscription.

Monevator readers who don’t visit the site don’t always realize there are multiple writers here, albeit with myself and T.A. doing by far the bulk of the heavy lifting. That’s perhaps another reason for the recent confusion.

In any event, don’t expect this to change.

As my personal investing style indicates, I am pretty broad-minded about what can work investing (note: that’s not the same as what is most likely to work).

Moreover I believe hearing different (sensible) points of view is more beneficial to you guys – and to me, for that matter – even if it ultimately just reinforces our own contrary convictions.

Until I manage to get Warren Buffett signed up as a contributor (The Wallet, perhaps?) I don’t think any of us has earned the right to preach the one true path of investing, whether we happen to be writing articles or are readers responding to them in the comments.

“To learn which questions are unanswerable, and not to answer them: this skill is most needful in times of stress and darkness.”
― Ursula K. Le Guin, The Left Hand Of Darkness

The very best of luck in finding what works for you.

Many investors spend a lot of time worrying about their asset allocation. What’s the magic percentage that I should put into the UK market versus the US versus Emerging Markets?

Sadly, there is no magic percentage and no perfect answers to such questions. There’s only roughly right guidance that exploits the wisdom of the market.

I’ve always wanted an easy-to-use-tool that can guide investors through the process of building a diversified DIY portfolio, to short-cut all that worrying.

And the justETF Strategy Builder is the best asset allocation tool I’ve found yet.

What I like about it

• It’s free.

• It’s simple.

• It’s attractive.

• It’s founded on sound passive investing principles that enable you to quickly rustle up a decent global portfolio.

I think it could be useful for a novice investor who’s hesitating over their asset allocation. Here’s a quick run through of how it works.

Start here

From the justETF home page click on Model Portfolios in the navigation bar.

There’s no need to sign-up but it’s fun to invent a cheeky / absurd / massively portentous name for your portfolio. (I’ve just plumped for KISS below).

Drop in your starting cash figure and you’re away.

Risk profile

How will you split your holdings between bonds and equities? This is the stage that will have the most impact on your portfolio’s fate.

Use the slider on the left to set your risk speedo.

• Lower risk means slamming more of your allocation into bonds.

• More risk means upping your equities.

Here I’m going for a 70:30 split. That is pretty adventurous and similar to the divide in our Slow & Steady portfolio.

Note: Playing with this slider bears no relation to your actual ability to handle risk. That’s an ever-shifting target that no tool can reliably hit.

You won’t really have a clue about your risk tolerance until the market puts you through the ringer but, while you wait, there are some rules of thumb and asset allocation personality types that can help move you into the right postcode.

Also, consider how your investment objectives affect your need to take risk.

One thing I would love to see here is a quick visual of your chosen split’s historic volatility. It’s one thing to be gung-ho for 100% equities, but another to see how often that resulted in a terrifying freefall that cut your wealth in half.

Choose your strategy

This is my favourite bit of the tool. Choose from three equity strategies of increasing refinement.

The first is a simple, single ETF total world equity strategy. Notice how diversified it is with 2,470 holdings spread across 46 countries.

Note too the amber concentration warning (in the bottom right) triggered by the large allocation towards the United States:

• US = 52%
• UK = 7% (no home bias here)
• Japan = 7%

This strategy will unnerve many investors who worry that the US market may be overvalued. Moreover, it’s more reflective of the US domination of a global index rather than global GDP.

The second strategy – New International Economy – offers a quick fix.

Here we add an emerging market allocation in line with justETF’s estimate of that bloc’s share of global GDP.

Just add emerging markets

Now the US share is down to 38% and emerging markets are up to 35%, with China weighing in at 8%.

This kind of integrated data is the future for DIY investors. Until now we’ve had to laboriously piece together the puzzle from Googled fragments. But justETF conveniently collates everything in one place and presents it as readily accessible headlines that don’t fry your brain circuits.

Still, some investors will fret that this strategy is nowhere near complicated enough to feel right.

Balance of power

The third strategy – Regional Approach – carves up the world into five separate ETF blocs as if we were playing Risk for money.

Now the US influence is knocked back to 26% and the Concentration bar has crabbed into the green zone. That’s because the top three countries now constitute less than 50% of our equity allocation.

Using separate ETFs to build up your global exposure like this will reduce your ongoing charges but it can increase your trading costs. It’s more suitable for investors with pretty big portfolios or those who can make large contributions.

That’s equities sorted. What other asset classes should we throw into the mix?

Diversification

The instinct to spread our bets is one of the few human intuitions that serves us well when investing.

On top of the key equity / bond split, justETF suggests reserving a slice of your risk portfolio for commodities.

Gold is good during an end-of-days crisis while broad commodities can guard against stagflation – although various question marks hang over the index trackers that cover this asset class.

I personally don’t hold commodities but as you can see from the screenshot I have taken a wedge here to show you the idea.

I’m surprised that justETF doesn’t include property trackers as a diversifying option in this section. Hopefully that will come later.

Of course, you can pile on all sorts of sub-asset classes – including risk factors – but it’s probably best to keep things simple to begin with.

Bond strategy

This section could help a lot of investors who struggle to understand the various bond classes.

Short-term, domestic government bonds are the safest (although not entirely safe) option you can choose. They’re not likely to lose or gain much but they can help prop up your returns when fear stalks the markets.

The UK Government Bond strategy will put you in an ETF holding gilts with maturities stretching from 1 to 20 years. This is liable to offer more return in exchange for greater volatility than the short term option.

Finally, if you’re prepared to accept even more volatility in a bid to earn more yield, then choose the UK government and corporate bonds option.

Corporate bonds tend to correlate with equities during a recession so this choice could add a fair degree of risk to the part of your portfolio that’s meant to offer stability.

It would be nice to see an index-linked gilt option here, as linkers have a key role to play in protecting your portfolio from inflation.

Suggested products

You need to sign up to justETF (it’s free) to save your strategy and see its suggested ETFs.

You can choose to view the cheapest ETFs, or the largest, or the oldest (handy for track record) and to screen out synthetic ETFs.

The screen clearly shows the weighting of each ETF in your portfolio, how much money you should devote to each one plus the fees you’ll pay to the ETF providers.

Click each ETF name to drill into the key features, check the factsheet and other info.

Click the orange squares on the right to see a list of alternatives and swap them out.

The major problem I have with this section is that the suggested choices are restricted to ETFs that track the MSCI family of indices. So you’re selecting from just the cheapest MSCI trackers, rather than the cheapest trackers. That screens out Vanguard ETFs and others besides.

There are plenty of good MSCI tracking ETFs out there, and it’s a decent range to choose from, but as optimiser I don’t like to feel unnecessarily restricted.

Monevator’s cheapest tracker picks show a wider range of choice.

Premium features

If you’d like to see how your proposed portfolio has performed historically then you’ll need to sign up for a paid account. This will cost you £9.90 a month for a year’s subscription or £14.90 a month for three months.

Paying up also unlocks various extra features, including rebalancing alerts, performance tracking, and transaction lists.

Frankly, I think the justETF Strategy Builder is an excellent asset allocation tool. I also recommend trying the ETF Screener to help you unearth good ETFs.

That said, you should know I have written paid-for articles for justETF’s website and that the links to the website in this article are affiliate-enabled (but there’s no cost to you).

I am recommending justETF’s tools because I think they are genuinely helpful for DIY passive investors.

However it’s only right that you’re aware that I have a commercial relationship with justETF at the time of writing.

ETFs aren’t the only fruit

The main drawback with justETF’s take on passive investing from our perspective is that it focuses exclusively on ETFs.

I believe a passive investor should consider whether ETFs or index funds make most sense for them.

Small investors who make monthly contributions are particularly vulnerable to the whittling effects of trading fees with ETFs, and will often be better off with index funds.

Finally, you need a firm grasp of passive investing strategy before you can wield the justETF tools wisely, so don’t forget to do your research before jumping in.

Take it steady,

The Accumulator

Good reads from around the Web.

I couldn’t agree more with an article I read this week on BeyondProxy talking about how the world is chaotic, so you might as well deal with it.

Stability in markets begets instability. Always has and always will.

This is one reason I think financial regulation has its limits, incidentally, and why savers and consumers should sometimes take one on the chin for the common good. That way we’re all encouraged to be more prudent and self-reliant, rather than everyone being cushioned, compensated, and bailed-out to the point of abdication.

The more people believe that something can’t fail, the more of it they will take on, eventually including leveraging up to get more – if not explicitly through debt then through some shadow agent or the dumping of diversification or in some other way getting too much of the good thing.

Nothing can be pushed beyond its limit, not even supposedly risk-free assets.

Consider the negative yields on the average German government bond. One of the safest assets in the world is now guaranteeing a loss to its holders, and stoking the potential for myriad different outcomes (which is what ‘risk’ really means) that are not all pleasant (though some are – because risk doesn’t mean that only bad things can happen).

I’ve no more idea than anyone else how or when this slow death of yield ends.

But I suspect it will be with a bang, not a whimper.

Learning to fear stability

BeyondProxy author Michael McGaughy writes:

Twenty-five years ago as a young analyst I loved analyzing companies that had steadily increasing sales, constant profit margins and growing profits. This made my financial projections easy.

However experience has taught me not to trust steady returns and stability.

The business world is competitive and anything but stable. I now believe that ‘stable’, ‘no risk’, and ‘guaranteed return’ are some of the most frightening words in business and investment.

Consider the following:

• Bernie Madoff’s funds got big by seemingly delivering steady monthly returns in both up and down markets. As we know now, it was all a fraud.

• Before it went bankrupt, Enron was well-liked by sell-side analysts and investors for meeting analyst estimates. It steadily met expectations and was considered a stable and safe company. But it was mostly smoke and mirrors before it became America’s largest bankruptcy.

• The desire for, and fallacy of, steady growth is nothing new. Adam Smith (aka George Goodman) wrote about the illusion of steady growth in his 1972 book SuperMoney. “Everywhere you looked, there was a company with a neat stepladder of growing earnings. Some kept the stepladder right up to the day they filed for bankruptcy”

• In his commentary on Dell being fined by the SEC for fraudulent accounting designed to smooth earnings, author and Darden School of Business professor Edward Hess notes that, “companies that grow for more than four consecutive years without resorting to earnings games are the exception, not the rule”

McGaughy goes on to to sing the praises of instability for giving us all the wonderful change we see in the world – at the price of the occasional wobble.

Remember every investment can fail you. Don’t put all your eggs in one basket – and ideally have a few chickens about the place, too!

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