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Weekend reading: Should you pursue the perfect passive portfolio?

Weekend reading

Good reads from around the Web.

We’re all investing nerds at Monevator, so we love to dive into the minutia.

Take The Accumulator’s recent wide-ranging review of the various ways passive investors might get a slight edge over the market through return premiums – only to conclude at the end that perhaps it wasn’t worth the bother, anyway!

I love that we’re at a point where we’ve covered all the basics and can now indulge in these amuse-bouche.

But I also worry that newcomers might get the wrong idea.

Simple minds

Passive investing in broad index funds is extremely simple to implement, and it has the best shot of delivering what 98% of investors who stick with their plan require.

All the rest is so much noodling.

That’s one reason why I try to occasionally remind everyone that it doesn’t matter much what tried-and-tested asset allocation approach you pick, provide it’s cheap, sensible, and somewhat diversified.

Some asset mixes will of course prove more profitable than others over the long-term, but you almost certainly can’t know which in advance.

Baked potatoes

Another reminder comes from Canada’s finest index investing export – the Canadian Couch Potato – who has just revealed the 2014 returns for the various passive portfolios he tracks.

And this year, like most years, they all did about the same, returning from 9.8% to 10.8%.

Now if you’re already rushing over to see how to change your portfolio to be more like that 10.8% marvel, then you’re missing the point.

Next year the fortunes might be reversed. Or the year after. And anyway, it’s the 10-30 year return that matters.

As the Couch Potato himself says, the important thing is to just do it:

The point is not that cost is unimportant.

But if you’re just getting started and you’re intimated about building an ETF portfolio (and I’ve heard from many readers in this boat), a balanced fund is great choice, even if it isn’t the absolute-lowest-cost option.

The point is it’s easy to set up a portfolio to do 99% of what you need.

Indeed, Vanguard’s LifeStrategy funds make the entire thing trivial.

In contrast, I had a conversation with a good friend last night who again asked me how he should get started with investing.

I am not exaggerating when I say I’ve had this conversation with him for nearly a decade. He wants to get started, but he wants to do it best. So he puts it off until he has the time and interest to research it all properly (as he sees it).

A time that never comes.

Action paralysis has a cost. As Tadas Viskanta put it over at Abnormal Returns:

The pursuit of ever better outcomes is likely to lead to progressively worse outcomes.

Don’t worry. Be happy!

Reminder: The deadline for self-assessment tax returns is fast approaching. Act now to keep HMRC off your back, warns The Guardian.

From the blogs

Making good use of the things that we find…

Passive investing

Active investing

Other articles

Anti-products of the week: Many cash ISAs are paying just o.1% reports ThisIsMoney in its roundup of the worst offenders. It might not seem worth moving your cash for just 2% a year, but after five years of near-zero interest rates, the cumulative impact has been significant.

Mainstream media money

Some links are Google search results – in PC/desktop view these enable you to click through to read the piece without being a paid subscriber of that site.1

Passive investing

  • Beating the market seems to be getting even harder – Market Watch
  • Swedroe: Owning individual stocks is riskier than many think – ETF.com

Active investing

  • Dividends can power long-term returns – ThisIsMoney
  • John Lee: Hoping for a more eventful 2015 [Search result]FT
  • 2014 hedge fund winners [Nb: Average did just 1.6%!]Bloomberg
  • Housel: Don’t spout your hindsight bias around here – Motley Fool (US)
  • Fears of a property slowdown hit UK housing shares – Telegraph

Other stuff worth reading

  • 5 money lessons from Downton Abbey – CNN
  • Britain’s self-perpetuating property racket [Search result]FT
  • Some banks are granting 100% mortgages to students – Guardian
  • 500 miles in a delightfully dull self-driving car – Wired
  • We must leave these fossil fuels buried, warns new research – Guardian
  • How being active keeps us young – Washington Post

Book of the week: I don’t have any new investing books to point you to this week, but I can say Light Years by James Salter is the first novel I’ve been gripped by for years. Stunning, melancholy, sad, true.

Like these links? Subscribe to get them every week!

  1. Reader Ken notes that: “FT articles can only be accessed through the search results if you’re using PC/desktop view (from mobile/tablet view they bring up the firewall/subscription page). To circumvent, switch your mobile browser to use the desktop view. On Chrome for Android: press the menu button followed by “Request Desktop Site”.” []

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{ 11 comments… add one }
  • 1 Retirement Investing Today January 10, 2015, 4:24 pm

    Hi TI

    Up until now the majority of my portfolio has been built around the big broad market cap indices such as the FTSE All Share and S&P500 via trackers. My portfolio is now fairly significant though and so I’ve very recently been considering adding further diversification. For example a heavier weighting to the FTSE 250 via VMID or world small caps via Vanguard’s Global Small-Cap Index Fund are just 2 that spring to mind.

    Your comments bring it all home though. Is this going to actually make any difference or does what I already have “do 99% of what (you) I need”? As I write this and having tracked my portfolio for 7 years now I’m inclined to think it’s already doing what I need and any more is just tinkering…

    Cheers
    RIT

    PS Cheers for the hat tip.

  • 2 gadgetmind January 10, 2015, 4:40 pm

    > Some asset mixes will of course prove more profitable than others over the long-term, but you almost certainly can’t know which in advance.

    Blimey, you mean you don’t believe in The Efficient Frontier?

  • 3 The Investor January 10, 2015, 5:38 pm

    @Gadegetmind — Don’t understand the question. (I understand the words, but don’t understand what you’re getting at. 🙂 )

    Perhaps ‘profitable’ is the confusing word. I mean for the individual investor’s bottom line, not for the asset class itself.

    Otherwise, if for example the next 20 years turn out to be good for Japanese equities say versus US bonds, then a portfolio with more in the former and less in the latter will do better. But nobody knows for sure, and I’d imagine most readers of this blog aren’t well-placed to even make a half decent guess. Luckily the current snapshot of global of global asset valuations gives us access to a handy investable consensus, but it doesn’t mean it is going to be ‘right’. (E.g. The US market may or may not turn out to deserve its currently elevated valuation).

    For the record I don’t believe markets are perfectly efficient, all that said, and as you probably remember I personally invest actively. But I think nearly everyone will do better investing as if markets are efficient.

  • 4 The Investor January 10, 2015, 5:42 pm

    p.s. Ah, on 3 seconds further reflection, I guess you mean that I don’t believe you (i.e one) should keep adding further asset classes until I find the perfect tangent for my risk-reward circumstances.

    Well no, self-evidently I don’t! 🙂 In a simulation sure, but good enough in reality is good enough.

  • 5 Robert January 10, 2015, 5:44 pm

    TI, I recommend Patrick O’Brian’s Aubrey-Maturin series, for me they paint a vivid picture of life in Nelson’s Navy, very enjoyable reads.

  • 6 gadgetmind January 10, 2015, 6:43 pm

    I was being ironic. 🙂

    The Efficient Frontier is one of those things that investment professional puff and blow about to try to justify their fees, but the dirty secret is – as you identified in your article – that it can only be known in the rear view mirror.

  • 7 The Investor January 11, 2015, 1:22 am

    @gadgetmind — Aha! 🙂

  • 8 smiling vulture January 11, 2015, 6:13 am

    From monday I wont be a investment virgin.

    Very late in the game 54,i have paid off mortgage.

    Looking for a good nest egg,11-16 year time scale.

    Vanguard lifestyle 60/40

    not rich or poor but comfortable

  • 9 Passive Investor January 11, 2015, 5:59 pm

    Just noticed that your 2011 article in Vanguard Lifestrategy is out of date. They made quite a significant change to the asset allocation in early 2014. From memory the main change was a bigger percentage of US equities and the introduction of international bonds hedged to sterling as the main non-indexed fixed income allocation.

    In line with the thrust of your blog this is no reason not to use the LS funds. I like them because I think the automatic rebalancing is well worth the 0.1-0.15% extra cost of investing in the different index funds.

  • 10 dawn January 11, 2015, 8:29 pm

    I have driven my self up the wall deciding on asset allocation when the Isa opens again in april and I can move over some cash and get it invested. maybe this article is just what I needed to read. yes im similar to smiling vulture mortgage above,mortgage paid and 10 /15 year time horizon.

  • 11 Ben January 13, 2015, 9:46 am

    Hi Accumulator.

    Is there a website that ranks index trackers by management fee and perhaps other filters? My Isa is with Charles Stanley direct which does not have this facility when choosing funds.

    I usually stick with Vanguard, as if they are not the cheapest on the day, they will be in a few months time. But I would like to diversify as having all my money in Vanguard trackers makes me nervous of counter party risk.

    Cheers,

    Ben

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