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The Simple Path to Wealth

Index tracking funds and ETFs
1nvest
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Re: The Simple Path to Wealth

#317563

Postby 1nvest » June 11th, 2020, 1:43 pm

Yet another quick/dirty look at 70/10/20 stock/gold/cash blend instead of 60/40 Global Stock/Global Bond.

https://tinyurl.com/y9c9yeb8

In that I split US stock for the 70/10/20 equally between large and mid cap, to better reflect more equal weighting of holdings.

For Portfolio 2, Global stock/Global Bond I used 50/50 US/global exc. US as a proxy (in the absence of a Global Stock choice) as that reflects current levels.

The lowest chart - Annual Returns indicates similar looking outcomes, the Portfolio Growth and Portfolio Returns however indicate how the Global Stock/Global Bond has lagged over the years, perhaps indicative of the higher costs involved resulting is less reward for the investor, at least in part.

Way way more artful than scientific, but interesting to look at the comparisons anyway.

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Re: The Simple Path to Wealth

#317957

Postby Fluke » June 12th, 2020, 4:12 pm

1nvest wrote:The financial sector is one if not the worlds largest value sector, it is well versed in extracting money out of peoples pockets. Products marketed as 'low cost' more often hide multiple layers of costs. For instance the ballpark average of dividend withholding taxation is around 20%, so even with a relatively low 2% average dividend/interest = 0.4%. Add on perhaps 0.1% fund managers expense fees and ... 0.5% of your money ... gone, each and every year. 8 years, 4% ... gone, often the equivalent of a entire years real (after inflation) gains. But not so much a case of 7 years out of 8 you receive the gains, 1 year out of 8 you gift the gains to another, but a win/win for the other, where they get their 4% no matter whether stocks had risen or fallen.

Stock investors nowadays seem to have lost the art of investing in stocks, to instead be investing in products provided in order to extract value (money from your pocket into theirs).

Many firms (stocks) issue Corporate Bonds, they borrow. Buyers of those bonds lend to the firm. So should you buy into a entity (stock) that in part borrows via selling Corporate Bonds, and separately also buy those Corporate Bonds? Somewhat comparable to buying both into a long stock position along with buying into a short stock position in equal measure - that just ties up money for nowt in return (and even less after others take their cut).

Yes those selling books or investment products have a vested interest to attract you to their products. Caveat emptor. Take 'not for profit' Vanguard group for instance, whose wage bill alone for those it employs amounts to around a billion/year, and that's just a tiny tiny amount of the broader overall value-extract.

Think about the fundamentals. A firms stock price might have been bid up to twice its book value (assets) in reflection of the profits it makes. Perhaps the firm makes 10% in profits, whilst investors are content to achieve a 5% reward. As part of that operation the firm borrows money, broad average being around half of its stock book value, so around 25% of its share price value. A 75/25 stock/bond investor is therefore lending (buying bonds) that match what the stock is borrowing via issuing Corporate Bonds. Hamlet - neither a borrower nor a lender be. Sometimes borrowers win, other times lenders win, net zero overall (bonds might in gross terms average out at pacing inflation). Being short bonds broadly compares to being long bonds over the mid to longer term, and whilst there is potential benefits arising out of firms borrowing in order to invest, investors being both long and short bonds in equal measure is wasteful use of capital.

Think about what you are buying into. Initially equal weight a bunch of stocks and left to run over time that will see the weightings drift. One stock/sector will do well and have risen to possibly dominate the index. Should you buy into that tilt? That's a prediction that the stock(s)/sector(s) that had done well up to that point will continue to be at or above average. Historically initial equal weighting has tended to relatively outperform tilted (cap weighted). Often gains arise out of the few doing incredibly well, most achieving nothing, a few doing poorly but where the few good-un's outweigh the bad-un's, such that most under-perform the broad average. That applies similarly to whether you bought into a few stocks, or the entire stock set. With the entire set you have less invested in the best case(s), so even though those best might have risen more, with less invested the benefit of large gains is dragged down compared to a few stocks where the best case had risen much less, but where you had more £££'s invested in that holding. Extreme diversification isn't required, you don't need thousands of holdings. Some of the richest individuals portfolios often have around 20 different stocks, a couple of stocks in each sector for diversification (concentration risk reduction).

Some stocks are global mega-caps. Have economics/finances that often exceed the economies of entire countries. For a passive style investment, buying initial equal amount into single stocks listed in your domestic stock exchange (so no withholding taxes) with business activities in different sectors - bought and held, can achieve comparable if not better actual outcomes than buying total stock market/total bond market funds. Bogle, the founder of Vanguard, indicated his ideal choice was for something similar - but where he also stated that Vanguard would never provide such a static product due to economies of scale issues. https://www.forbes.com/forbes/1999/0614 ... e012c56874
Bogle recommends the ultimate in buy-and-hold investing: a completely static portfolio. He would buy the 50 largest companies in the S&P 500 and then never buy another.

Note how when Professor Jeremy Siegel back-tested Bogle's idea ...
Result: the buy-and-hold approach beat the market three-quarters of the time and it never underperformed by more than 0.6% a year.



Thanks for the post 1nvest, thought provoking. I’m reminded of the slide that Terry Smith always puts up in his annual shareholder meetings which lists the top 15 UK funds in the class (global equities), he’s addressing the criticism by some that his fund is expensive, down one column is the advertised ongoing charge where by comparison Fundsmith does indeed look pricey, then in the next column is the charge (as a percentage) generated by trading within the fund for that year, the next column is the sum if the first 2 and it makes interesting reading, no longer does Fundsmith look quite so expensive, in fact it looks quite competitive compared to the others. Here's a link to the video, if you scroll along to minute 22:35 you can hear it from the horses mouth.

https://www.youtube.com/watch?v=PZy9-4Z_4i8&t=1470s

I've often wondered how this ‘additional trading charge’ hidden from investors is calculated, so perhaps i can ask you where you get this information from re withholding tax and other charges relating to trading within the Vanguard funds, if true it rather changes the picture doesn’t it. It would be handy if there were a comparable table to the above that we could look at comparing different index funds, or perhaps you're only referring to the actively managed funds? TS always quips that the other fund managers don’t like him showing that slide. I bet they don’t.

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Re: The Simple Path to Wealth

#317962

Postby Fluke » June 12th, 2020, 4:16 pm

1nvest wrote:
monabri wrote:Would anyone advocate buying the 50 largest FTSE100 shares?

No. Better to initially equal weight across sectors, holding multinationals. For example (purely off top of head) HSBC for financials, VOD for tech, Unilever for consumption, BHP for mining/Australia, BP (oil/energy), Glaxo (pharmaceuticals) ...etc. Some of those are also listed in the US stock exchange.

Old school style - where when it was relatively expensive to buy/trade stocks, investors tended to hold relatively few 'blue chips', but selected to be diversified.

Initial equal weighting and one will go on to become the historic best performer of the set, the portfolio finds its own 'cap weighting' without having taken a biased initial stance (passive). Some like to rebalance back towards more equal weighted distributions periodically when sizeable drift become apparent (active - but relatively mildly so).


What, a bit like an HYP?

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Re: The Simple Path to Wealth

#317983

Postby tjh290633 » June 12th, 2020, 4:50 pm

Fluke wrote:
1nvest wrote:Initial equal weighting and one will go on to become the historic best performer of the set, the portfolio finds its own 'cap weighting' without having taken a biased initial stance (passive). Some like to rebalance back towards more equal weighted distributions periodically when sizeable drift become apparent (active - but relatively mildly so).


What, a bit like an HYP?

It's like some of us run our portfolios, which may be HYPs. Nominally equally weighted, but with holdings allowed to vary in weight between limits (there may be no lower limit). You set action limits when certain parameters are exceeded. That can be weight, share of income, share of cost, whatever rings your bell, or assuages your concerns.

TJH

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Re: The Simple Path to Wealth

#318248

Postby 1nvest » June 13th, 2020, 11:59 pm

I've often wondered how this ‘additional trading charge’ hidden from investors is calculated, so perhaps i can ask you where you get this information from re withholding tax and other charges relating to trading within the Vanguard funds, if true it rather changes the picture doesn’t it.

Sites such as https://www2.deloitte.com/content/dam/D ... -rates.pdf provide a indication of what each individual country levies in withholding taxes. As far as I know funds don't report such costs directly, has to be inferred/estimated i.e. how much a fund holds in each country, the average dividend that country might be yielding ... and estimate/deduct the withholding tax accordingly. The quick-n-dirty estimate I use as to the cost is to apply a average 20% dividend withholding tax estimate so assuming a average 2% dividend = 0.4% figure (or 0.6% if 3% ...etc.).

Look at France in that list, upper figure of 75% applied to what it considers to be 'unfriendly' nations/states. Personally I think the UK should do likewise post Brexit, applying a 75% withholding rate against the EU would see much of UK former assets quickly repatriated back out of the EU, rail, utilities etc.

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Re: The Simple Path to Wealth

#319261

Postby 1nvest » June 18th, 2020, 1:57 am

tjh290633 wrote:It's like some of us run our portfolios, which may be HYPs. Nominally equally weighted, but with holdings allowed to vary in weight between limits (there may be no lower limit). You set action limits when certain parameters are exceeded. That can be weight, share of income, share of cost, whatever rings your bell, or assuages your concerns.

TJH

A little old now, but a interesting equal weighting article ....
Get Higher Returns When You Create Your Own Sectors

https://www.forbes.com/sites/perrykaufm ... 09d9dd108d

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Re: The Simple Path to Wealth

#319670

Postby veeCodger1 » June 19th, 2020, 9:04 am

Fluke wrote:I came across this Google talk yesterday in doing a bit of research into index trackers, it's from a couple of years ago, the interviewee is JL Collins who has a book called 'The Simple Path to Wealth' and it's all about indexing.

https://www.youtube.com/watch?v=T71ibcZAX3I


Having seen your comments, I am now reading this book.

It seems to say, buy a world tracker, withdraw 4% each year to live on (if retired else leave the money in the fund), and leave the remainder to grow. VWRL compounded is I think 11.9% according to the book.

Do that and you will beat most managed funds.

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Re: The Simple Path to Wealth

#319922

Postby GeoffF100 » June 20th, 2020, 7:53 am

veeCodger1 wrote:
Fluke wrote:I came across this Google talk yesterday in doing a bit of research into index trackers, it's from a couple of years ago, the interviewee is JL Collins who has a book called 'The Simple Path to Wealth' and it's all about indexing.

https://www.youtube.com/watch?v=T71ibcZAX3I


Having seen your comments, I am now reading this book.

It seems to say, buy a world tracker, withdraw 4% each year to live on (if retired else leave the money in the fund), and leave the remainder to grow. VWRL compounded is I think 11.9% according to the book.

Do that and you will beat most managed funds.

If you draw 4% p.a. from the current market levels, you are very likely to go bust. Past performance is not a reliable guide here.

VWRL is expensive. VWRL = 0.9 * VEVE + 0.1 * VFEM. You can calculate the exact proportions of VEVE and VFEM from the percentages of each the three funds invested in the US.

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Re: The Simple Path to Wealth

#319927

Postby dealtn » June 20th, 2020, 8:31 am

GeoffF100 wrote:
If you draw 4% p.a. from the current market levels, you are very likely to go bust.


That's a very bold claim!

Your statistical background is what exactly?

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Re: The Simple Path to Wealth

#319947

Postby GeoffF100 » June 20th, 2020, 9:36 am

dealtn wrote:
GeoffF100 wrote:
If you draw 4% p.a. from the current market levels, you are very likely to go bust.


That's a very bold claim!

Your statistical background is what exactly?

It is not in the least bit bold. It would not have been unreasonable to say that you will go bust, but nothing is certain in the stock market. I do not particularly want to reveal who I am. Suffice it to say that I have taught statistics. My opinion is in any case irrelevant. Look at the evidence.

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Re: The Simple Path to Wealth

#319982

Postby dealtn » June 20th, 2020, 11:33 am

GeoffF100 wrote:
dealtn wrote:
GeoffF100 wrote:
If you draw 4% p.a. from the current market levels, you are very likely to go bust.


That's a very bold claim!

Your statistical background is what exactly?

It is not in the least bit bold. It would not have been unreasonable to say that you will go bust, but nothing is certain in the stock market. I do not particularly want to reveal who I am. Suffice it to say that I have taught statistics. My opinion is in any case irrelevant. Look at the evidence.


So you have now gone from "very likely" to "will". Perhaps you would care to enlighten the less mathematically gifted amongst us of your claim, and the evidence you ask us to look at.

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Re: The Simple Path to Wealth

#319995

Postby GeoffF100 » June 20th, 2020, 12:06 pm

dealtn wrote:
GeoffF100 wrote:
dealtn wrote:
That's a very bold claim!

Your statistical background is what exactly?

It is not in the least bit bold. It would not have been unreasonable to say that you will go bust, but nothing is certain in the stock market. I do not particularly want to reveal who I am. Suffice it to say that I have taught statistics. My opinion is in any case irrelevant. Look at the evidence.

So you have now gone from "very likely" to "will". Perhaps you would care to enlighten the less mathematically gifted amongst us of your claim, and the evidence you ask us to look at.

I have not said you "will go bust". I have said that would not be unreasonable to say that. I suggest you look at the FIRE board. This matter has been discussed at length there, with a number of links. 4% was considered too optimistic. There is large literature on this subject.

A Nobel Prize winning economist (William Sharp) said that this was the nastiest and most difficult problem in economics. I am not going to give a number. All I will say is that you are playing with FIRE. It is wise to treat any book that tells you that there is an easy way to wealth with a great deal of scepticism.
Last edited by GeoffF100 on June 20th, 2020, 12:08 pm, edited 1 time in total.

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Re: The Simple Path to Wealth

#319997

Postby JohnB » June 20th, 2020, 12:08 pm

Dealt, you will get more people to explain Safe Withdrawl Rates if you are not rude

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Re: The Simple Path to Wealth

#319998

Postby 1nvest » June 20th, 2020, 12:12 pm

Trinity study for US S&P500 since 1926 suggests that a 4% Safe Withdrawal Rate (SWR) against 100% stock had a 100% success rate across 20 years, 89% success rate of surviving 40 years. Lower the SWR to 3% and it had a 100% success rate out to 40 years.

4% SWR is different to 4%/year as it only uses the percentage amount at the start, and uplifts that amount by inflation as the amount drawn in subsequent years, which when stock prices are down may mean (potentially significantly) more than 4% of the portfolio value. That's a negative factor that has early year sequence of returns risk tending to be relatively high. Move to 50/50 stock/bonds and that risk is substantially reduced. At 50/50 4% SWR survived 100% for all 30 year periods. Part of the reason is that if you have say a £100,000 portfolio value, half initially in stock, half in bonds and are drawing £4K/year inflation uplifted, then that's £58,000 in each of stock and bond at the start (after having drawn your 4% SWR), and if stocks halve down to £29,000 and assume bonds break-even, then you're not actually selling stock at the lower prices, the stock purchase power of bonds has in effect doubled, and rebalancing has you selling bonds to provide the £4K SWR income (perhaps £4080 for instance being drawn at the start of the second year if inflation was running at 2%), and to add to stock holdings.

£53,920 bond value at the start of the second year after the 2nd years £4080 SWR had been drawn, £29,000 stock value, combined £82,820, and where you rebalance back to 50/50 weightings to have £41,460 in each of stock and bonds.

If at the start, the share price was £1/share and you'd bought 50,000 shares, then the rebalance event had you buy £12,460 more stock value, at half the price due to the decline, 24,920 more shares added to the 50,000 shares you already held (74920 total shares). Such that whilst the share price had halved, you'd increased number of shares by nearly 50%.

For all-stock, if you were drawing £4K from the original £100K - so 4%, but then after 50% share price declines and 2% inflation you were drawing £4080 from £50,000 stock value, then yes that's more than a 8% withdrawal amount at that time. However as per the Trinity study including such historic cases of that type of sequence did still have a reasonably good success rate (but even more so if you used a stock/bond blend rather than all-stock). And that historical period includes some pretty wild extremes/events. If it worked historically over some pretty bad times, then all else being equal if it fails in forward time, then that is suggestive of some pretty bad conditions that led to that failure, worse than the worst case events experienced during the past century.

The above is based on a bad stock year event. With 50/50 stock/bond the more typical year sees a case of stocks having risen such that you sell some stocks to provide the SWR income and also add to bonds (bond purchase power of stock had risen), such that the total number of shares being held was reduced. Adding to the number of shares held when prices were down, reducing number of shares held when prices were up, is a form of time cost averaging the average cost (price paid) per share.

Fundamentally you diversify in order to have better prospect of one asset being up at the time you rebalance/draw a income. Take 'old money' for instance, multi-generational wealth, where policy is broadly a third-third-third art/gold/land type assets. illiquid, but physical and in limited supply. Periodically they opt to 'rebalance' looking to replenish depleted (spent) cash and/or due to one of the assets seemingly having risen. If gold is up, they might 'rebalance' by selling some gold to add another art-piece to their portfolio - or whatever. And where that trading event also enables them to top up their depleted 'cash'. Since 1990 the indications are that has compared in annualised gains to all-stock in total returns (using Warhol art work auction prices for instance as a 'art index'). But subjectively. For instance if not rebalanced then that modestly bettered all-stock (total returns including dividends), if rebalanced yearly (not really viable with such illiquid assets) then it marginally underperformed all-stock. The indications being that it had the capacity to have taken the same amount of inflation adjusted income as what a all-stock portfolio might have provided but in a more sporadic manner (as and when cash had depleted). Could have yielded a better overall outcome for income production and surplus real gains despite none of the assets actually providing a 'dividend/income'. It's the adding-low/reducing-high type trading where the better performing asset(s) over a period of time typically offset the bad asset(s) and additionally supported a income being drawn. That's the broad nature when each asset has finite downside (maximum loss 100%), unbounded upside (could rise 1000% or more).

Personally overall I'd consider 4% SWR to be pushing your luck. Better to reduce that to 2% IMO as historically that has had far less risk involved (more inclined to broadly be perpetual preservation of wealth). More often the actual rewards will exceed that, such that additional periodic discretionary withdrawals can be made on top as/when deemed appropriate - and that in combination will tend to be comparable to 4% or more.

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Re: The Simple Path to Wealth

#320000

Postby Dod101 » June 20th, 2020, 12:13 pm

The only 'Simple Path to Wealth' is to do what I chap I know did; married a very rich man's daughter.

Dod

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Re: The Simple Path to Wealth

#320001

Postby mc2fool » June 20th, 2020, 12:17 pm

I seem to be seeing the following sort of comment fairly regularly in the financial press in recent years, this one from Chris Dillow in this week's Investors Chronicle:

"There are lots of uncertainties about drawing 4 per cent a year from your investments in retirement. This rule was devised at a time when returns on safe assets were reasonably high. But to get 4 per cent returns a year now requires you to take considerable investment risk, and run the danger of your wealth's value falling over time."

https://www.investorschronicle.co.uk/po ... versified/ (requires free registration)

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Re: The Simple Path to Wealth

#320002

Postby dealtn » June 20th, 2020, 12:21 pm

GeoffF100 wrote:
dealtn wrote:
GeoffF100 wrote:It is not in the least bit bold. It would not have been unreasonable to say that you will go bust, but nothing is certain in the stock market. I do not particularly want to reveal who I am. Suffice it to say that I have taught statistics. My opinion is in any case irrelevant. Look at the evidence.

So you have now gone from "very likely" to "will". Perhaps you would care to enlighten the less mathematically gifted amongst us of your claim, and the evidence you ask us to look at.

I have not said you "will go bust". I have said that would not be unreasonable to say that. I suggest you look at the FIRE board. This matter has been discussed at length there, with a number of links. 4% was considered too optimistic. There is large literature on this subject.

A Nobel Prize winning economist (William Sharp) said that this was the nastiest and most difficult problem in economics. I am not going to give a number. All I will say is that you are playing with FIRE. It is wise to treat any book that tells you that there is an easy way to wealth with a great deal of scepticism.


I agree. Anyone claiming that there is an easy way to wealth should be treated with a great deal of scepticism. I would like to think I would be as assiduous in pointing that out. It is something I have never done, nor would ever claim.

Similarly I would treat anyone making a claim of "very likely to go bust" in the same way. There has indeed been considerable literature on SWR, and the conclusions are much more aligned with the idea that 4% has risk, with potential for some that follow that percentage going bust. That is considerably different to "very likely to go bust".

Even outside of investment return, where 4% isn't considered particularly over ambitious, it is dependent, in practice, on the size of Capital, the size of expenditure, inflation and longevity (and no doubt other variables as well).

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Re: The Simple Path to Wealth

#320005

Postby dealtn » June 20th, 2020, 12:28 pm

JohnB wrote:Dealt, you will get more people to explain Safe Withdrawl Rates if you are not rude


Thank you. I hope I wasn't rude, and apologise if that was construed by anyone in that way.

I am very glad if people want to talk about SWR, and FIRE too, as in my mind it is an extremely important conversation. But just in the same way those who seek knowledge in this area shouldn't accept all the "good result" claims some make about it, similarly those who claim near certainty about "bad outcomes" should similarly be challenged.

I spent much of my career in the City dealing with the mathematics of modelling, and in particular "tail event" probability distributions so I am no stranger to this field. Anyone making claims about near likelihood is likely to come under scrutiny.

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Re: The Simple Path to Wealth

#320008

Postby 1nvest » June 20th, 2020, 12:34 pm

dealtn wrote:There has indeed been considerable literature on SWR, and the conclusions are much more aligned with the idea that 4% has risk, with potential for some that follow that percentage going bust.

More money chasing rewards = lowest common denominator effect. Over the time that the 4% SWR was measured it was

1. Based on a right-tail good case market/period (US)
2. Had far fewer 'financially comfortable' investors looking for a share of the pie.

Level down 1 to a broader average (global stock index, which the UK was more reflective of) and the SWR is lower. Also factor in that more individuals are 'financially comfortable' and the denominator is lowered. If most are OK with 2% then prices/valuations will typically be bid up to just providing 2% instead of the good-old-days 4%.

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Re: The Simple Path to Wealth

#320023

Postby xxd09 » June 20th, 2020, 1:35 pm

Withdrawal Rates are not a fixed star
Depends on so many investor variables
The 4% was a terrific guide when I was starting out over 20 years ago
A new investor could do worse than read the Trinity study as a starting point on this interesting subject
Then go from there
The variables are how much you saved, what your standard of living is, how good are you coping with risk etc etc
Personally I am 74-17 yrs retired
30/65/5% portfolio-equities/bonds/cash-Global Equities Index Tracker Fund and a Global Bond Index Tracker Fund hedged to the Pound-2 funds only-simple,cheap and easy to understand
2 years living expenses in cash
3.8% withdrawal rate pa
Portfolio bigger than when I started out
That does it for me-at the moment!
xxd09


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