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Some musings on portfolio construction based in the UK

A helpful place to also put any annual reports etc, of your own portfolios
Newroad
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Re: Some musings on portfolio construction based in the UK

#432181

Postby Newroad » August 3rd, 2021, 9:30 am

Hi 1nvest and ItsAllAGuess.

Thanks for the last two posts - I have no particular issue with either - they seem reasonably appropriate from what I understand to be your circumstances. However (and no criticism intended) not everyone has enough reserves to be only concerned about the risk of loss, or have "excess" capacity to have multi-year cash balances or secondary lines of defence or whatever. For these people, risk vs reward may be a very real consideration. As an aside, that is one area where I found the book interesting - optimising risk to hit a target reward (e.g. safe drawdown at a certain level) vs optimising reward to ensure a given level of risk.

Similar applies to me. Just like it took a while to get the point across above that no-one was suggesting paying for financial advice, no-one is suggesting Portfolio Manager style mathematics to optimise risk for the average punter. Indeed, if I (for example) were, I might have more than the four simple holdings per portfolio that I currently have.

Instead, I was suggesting that people are cognisant that reward (however it's measured) isn't the only game in town in the long term and that people should consider risk (however one is capable of measuring it) in so far as is reasonable for them. To do this, I was sharing my early path through that maze and some of the things I came across - both dead ends and useful ones.

Regards, Newroad

1nvest
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Re: Some musings on portfolio construction based in the UK

#432227

Postby 1nvest » August 3rd, 2021, 12:37 pm

Newroad wrote:not everyone has enough reserves to be only concerned about the risk of loss, or have "excess" capacity to have multi-year cash balances or secondary lines of defence or whatever. For these people, risk vs reward may be a very real consideration.

My background is from a family where now passed aunts/uncles etc. got by on relatively little, a generation where WW2 induced frugality and savings were very modest. Downsizing their homes to raise some cash and not 'speculating' with that cash but instead depositing it into interest paying accounts was their way of 'risk reduction'. I guess nowadays that might be like selling a £500K home to move to a lower priced area or smaller place that released £200K of cash, and then with a £9K/year state pension supplementing that with perhaps £6K/year of cash deposits spending, 15K/year net 'wage' type lifestyles. They at least seemed happy, ate well albeit via careful selection/spending - including growing some of their own food, and enjoyed life, albeit via the likes of coach-tour type weeks away as holidays rather than luxury cruises.

Some of that rubbed off onto me. My son for instance would be devastated to have to go without a regular Costa coffee at £5/whatever a pop. My aunt in contrast I suspect would have gone ape at seeing such 'waste of money' and likely told him off and say something like "bring your own tea-bag and ask for a cup of hot water".

William Bernstein alludes to similar, suggests if you've won the game then take the risk off the table. £10K/year state pension, £10K/year occupational pension, £30K/year spending lifestyle then £300K in cash/cash-equivalents covers 30 years of drawdown. Surplus amounts of savings/investments above that can be invested however you like or fund earlier retirement such as in-filling 6 years of state pension from age 60 along with £360K in cash covering a 37 year horizon.

Each to their own, its all very personal/specific. Important however is to be aware of the risks. Such as whilst its commonly recognised that stocks (and gold) can lose half or more, so can even cash after inflation and taxation. There is no easy answer other than accumulating more, if as above you have £600K in relatively safe investments/assets instead of £300K, then even if cash did halve you're still OK.

mickeypops
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Re: Some musings on portfolio construction based in the UK

#432233

Postby mickeypops » August 3rd, 2021, 1:20 pm

Thanks itsallaguess, I agree with all of that.

I’m comfortable with my level of personal risk, for many of the same reasons as you

- cash buffer of about 2 years
- income from other, guaranteed sources that mean we’ll never starve
- could comfortably still manage if the income from my IT portfolio halved
- the experience of investing in this portfolio’s core assets for over seven years, with never a missed or suspended dividend.

Risk management, as you point out, is more than just investment risk management , it’s about lifestyle too.

MP

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Re: Some musings on portfolio construction based in the UK

#432266

Postby Newroad » August 3rd, 2021, 3:41 pm

Hi MickeyPops.

I don't disagree. Indeed, my take on the "lifestyle" angle is trying to get optimal simple portfolio construction, which is why each portfolio only has four or so holdings. But maybe that's three too many.

To further illustrate some of the free functionality available, here's another graph

Image

It shows your portfolio ("My Portfolio"), my SIPP ("SIPP-Alt" - I had to use Blackrocks AGGG rather than Vanguard's VAGP, as the latter didn't exist at your start point), a synthetic form of your benchmark, the Vanguard Lifestyle 60 ("Synth-Van-60-40" - once again, I had to do this synthetically using Blackrock equivalents, for the same reason) and the UK Consumer Price Index. I've shown the chart options available (I chose "With Reinvestment", otherwise, yours would look unfairly lower etc).

As can be seen, neither of our portfolios has beaten the synthetic Vanguard Lifestyle 60 ETF, which to my eye has also appeared the least volatile. It is interesting to see that none of the three has been "winning" for the whole period. It's also brings into question rebalancing - imagine that happening, say, at the end of March 2020 and what effect that might have had on our two portfolios (I'm guessing Vanguard Lifestyle 60 does that automatically over some timeframe - indeed, that might explain some of the outperformance).

Regards, Newroad

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Re: Some musings on portfolio construction based in the UK

#432278

Postby mickeypops » August 3rd, 2021, 4:46 pm

Thanks Newroad. I take your point, but what if I’d been selling off Index units last year to fund our lifestyle “pound-cost ravaging?”

Anyway, as I’ve read in another post on the board somewhere, the debate about total return v natural yield investing has no satisfactory answer. And, after a lifetime working with spreadsheets, budgets, capital expenditure forms etc. etc., your very impressive charts tempt me to reach for the gin bottle!

Newroad
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Re: Some musings on portfolio construction based in the UK

#432288

Postby Newroad » August 3rd, 2021, 5:35 pm

Go for it with the gin, MickeyPops.

Or alternately, White Port goes quite nicely with tonic too :)

Your implied question about "pound cost ravaging" is interesting, and I haven't thought this entirely through, but might it not come out in the wash more or less? My initial thinking is that the units you might be selling lower depending on timing are the flip side of income coming into an accumulating fund being used to by new units more cheaply?

Regards, Newroad

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Re: Some musings on portfolio construction based in the UK

#432299

Postby Itsallaguess » August 3rd, 2021, 6:14 pm

mickeypops wrote:
And, after a lifetime working with spreadsheets, budgets, capital expenditure forms etc. etc., your very impressive charts tempt me to reach for the gin bottle!


Well one thing to celebrate is that looking at those charts, there's actually very little in it to persuade me that changing to a TR-based 'selling to generate income' approach would even deliver much of a long-term benefit anyway, and especially so for those of us personally disposed to a more dividend-based income-delivery model...

I mean, yes, there's a more pronounced dip in the yellow chart for a period following the initial carnage, but I'd expect that to be covered by some sort of safety-net fall-back of some sort or another anyway, so I've got to say that if anything, those charts are actually highly encouraging for anyone preferring to take an income-based approach, rather than having to be concerned with having to sell off units during market lows to generate that same income...

One thing has been clear to me over the years, both here and back on the Motley Fool boards, a little bit similar to the 'TR vs income' debates, is that there's investors who are disposed to take much more 'theoretical' and 'historical' views of 'risk', and there's investors who are much more practical and hands-on, who prefer to judge risk against long-term personal situations, and to generate fall-back positions to cope with many risks that are much more personal to their own strategies and lifestyles, and are happy to back-test those de-risking processes against their own known historical records, and similar to the TR vs income debates, I certainly don't think there's anything wrong with either approach, but I'm fairly convinced that investors preferring to take one approach or another is quite closely correlated with inherent personal preferences on how to approach these things, that ensure that they sit closely with their own investment personality, and is likely to be fairly hard-wired as a result of that....

Enjoy your gin!

Cheers,

Itsallaguess

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Re: Some musings on portfolio construction based in the UK

#432304

Postby mickeypops » August 3rd, 2021, 6:26 pm

Thanks guys

Mrs MP says it’s too early in the week for gin…. SIGH.

MP

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Re: Some musings on portfolio construction based in the UK

#432382

Postby JohnW » August 4th, 2021, 7:42 am

Itsallaguess wrote:One thing has been clear to me over the years, both here and back on the Motley Fool boards, a little bit similar to the 'TR vs income' debates, is that there's investors who are disposed to take much more 'theoretical' and 'historical' views of 'risk', and there's investors who are much more practical and hands-on, who prefer to judge risk against long-term personal situations, and to generate fall-back positions to cope with many risks that are much more personal to their own strategies and lifestyles, and are happy to back-test those de-risking processes against their own known historical records, and similar to the TR vs income debates, I certainly don't think there's anything wrong with either approach, but I'm fairly convinced that investors preferring to take one approach or another is quite closely correlated with inherent personal preferences on how to approach these things, that ensure that they sit closely with their own investment personality, and is likely to be fairly hard-wired as a result of that....

A James Joyce fan, I'm guessing.

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Re: Some musings on portfolio construction based in the UK

#432468

Postby Hariseldon58 » August 4th, 2021, 12:50 pm

Newroad wrote:Hi 1nvest and ItsAllAGuess.

Thanks for the last two posts - I have no particular issue with either - they seem reasonably appropriate from what I understand to be your circumstances. However (and no criticism intended) not everyone has enough reserves to be only concerned about the risk of loss, or have "excess" capacity to have multi-year cash balances or secondary lines of defence or whatever. For these people, risk vs reward may be a very real consideration. As an aside, that is one area where I found the book interesting - optimising risk to hit a target reward (e.g. safe drawdown at a certain level) vs optimising reward to ensure a given level of risk.

Similar applies to me. Just like it took a while to get the point across above that no-one was suggesting paying for financial advice, no-one is suggesting Portfolio Manager style mathematics to optimise risk for the average punter. Indeed, if I (for example) were, I might have more than the four simple holdings per portfolio that I currently have.

Instead, I was suggesting that people are cognisant that reward (however it's measured) isn't the only game in town in the long term and that people should consider risk (however one is capable of measuring it) in so far as is reasonable for them. To do this, I was sharing my early path through that maze and some of the things I came across - both dead ends and useful ones.

Regards, Newroad


This is very well put and the other posts are also very sensible.

Risk, I use the everyday meaning The possibility that something unpleasant or unwelcome will happen.
rather than volatility of price, or The chance that an investment's actual return will be different from that expected.

Has three components.

Can you tolerate the risk ? ( the sleep at night test)

Do you need to take the risk ? (Bernstein’s if you have won the game, stop playing)

Do you have the capacity for risk.
If your on a tight budget in drawdown,then capacity for risk may be very limited.

However, if your saving for retirement with limited means and a ‘safe’ portfolio is unlikely to obtain a sufficient retirement pot, then taking risk becomes necessary as you do not have capacity to not take risk.

It does all come down to personal circumstances and personalities.


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