Diversification is protection against the impossibility of knowing the future. You do not know how Square, Apple and Visa are going to do in the future.
You hope their returns will be above market average. Youâre understanding of these companies has led you to believe above average earnings should occur.
Your understanding based on current and past financial figures may be correct, and your hope may be justified.
But tomorrow Square could collapse, having had its market stolen by Apple. Apple could eat Visa. And then Apple could lose its edge. All perhaps unlikely for these extremes to occur, but possible. Itâs much more likely that they simply start underperforming, even whilst staying in business.
How much money you stand to earn from your investment depends on the price you pay for it. Itâs certainly possible to be late to an investment frenzy where the price has been driven up, such that you can only hope to earn a pitiful percentage over the next 5 to 10 years.
It doesnât matter how great and successful and unchallenged a company is. If you overpay for its stock, youâll underperform the market average.
Great points there, but you need to make the distinction between overpaying for a poor company and overpaying for a good company. You can very well overpay for a good company and come out ok, however, overpaying for a poor company will lead to massive destruction in capital.
The most important thing is the ability of a business to generate and grow earnings, everything else is secondary. You could have bought Apple at the 2007 peak, had half your investment cut in half, only to see it go up ten fold over the next 12 years (not including dividend reinvestment).
If it helps, Google IPOâd in 2004 with a P/E of 70. So buying Google was very risky then, at $24 a share after adjusting for splits. But it was profitable, even at IPO.
I will also mention one last thingâŠthe equity risk premium
Equities (also known as stocks) demand a higher return than every asset class because they are riskier. If you canât handle the down days in stocks (there will be many, and they will occur till judgement day), then you have no place buying stocks. Then I recommend sticking to bonds, where you know what you are getting and the only risk is default of the issuer.
A lot of people emotionally canât handle losing money (even if its a paper loss), they have no place in stocks then. If you can watch your entire portfolio drop 50% from top to bottom and be tempted to sell after the 50% drop, you should not be in stocks. If paper losses are causing sleepless nights, your equity risk is too high.
If you sat through December 2018, where we had a violent sell off and didnât sell anything, but added more to your good oversold positions, then you should be in stocks.
Intending on opening a Stocks and Shares ISA (effectively the UK equivalent of a Roth IRA used for equity investing, for any Americans out there) with Freetrade, with my first investment being an index fund, pursuing a dollar cost averaging / drip feed strategy.
Given the volatility of sterling right now, should I prioritise a US oriented index fund rather than a FTSE one?
Or should I treat the sterling crisis as short term noise and instead diversify, via Freetrade, using a fund that invests in UK, US and global equities?
I earn ÂŁ30,000 per annum at my current employer (who have a performance linked bonuses structure in place for which I am eligible), have about ÂŁ60,000 in savings, have ÂŁ3,416.85 as of 24th September 2022 from my previous workplace pension, and have no debt whatsoever, either short- or long-term (I did not pursue tertiary education).
Evening everyone. I am am relatively new to investing and I am building a long term investment ISA; planned for the next 20 years + to bolster my retirement pot.
I currently hold several investment trust after doing some research; Alliance trust, SMT, BG Japan, Fidelity China special and some Renewable infrastructures. Lots I know but I got excited and carried away with this sparkly new FT app and wanted diversification!
Thing is I have been reading more and looking at global tracking ETFâs. I want one! But itâs hard to add to them all as my monthly top ups are relatively small; ÂŁ50 am thinking.
I am thinking rightly or wrongly that it is better to have a smaller number with more money invested in them? Trouble is I like my choices and am loathed to sell as they are predominately in the green.
I know I have to make my own decision but interested in the experience of this community.
Welcome to the party, I have a similar investing profile to you and started about 6 months ago averaging about ÂŁ50 a month. I have written a little about my first few investments here,
I have been wrestling with exactly what your talking about. I intend to write a post about it soon when I get 5 minutes but essentially I am trying to think about some of the general stock categories I think will be important in the next 20-30 years and research some etfs that I think have a good spread across those companies e.g. robo, emerging markets.
There are some fairly standard ways of categorising stocks but I have really found they tend to be too generic for me. I wrote a few up in a spreadsheet a while ago and had a think about what % of my portfolio I want in each.
Ultimately as you say itâs your choice! But ÂŁ50 a month is plenty, there are loads of ETFs less than that and no harm in waiting a couple months to buy any more expensive ones that catch your eye.
Appreciate your input Jeff, itâs a mine field isnât it! I had a look at your post and noted the responses regarding the crossover between ETFâs (MSCI/S&P etc). Something I had not really considered. Will have to look into that. The ETFâs I have looked at are not yet on FT either.
I have the luxury of having a previous ISA that I cashed in so have invested a few K, and have a few K burning a hole in my pocket so to speak donât want to make the wrong choices though.
I think you have to decide where your priorities lie. Having learnt from your readings, would you still buy your current holdings today?
If you want to go global for a wise long term investment, VWRL is in the app and one of the best out there. Itâs currently ÂŁ66/share, but you could buy a share every other month, and get 2 shares when you have enough remainders.
VWRL probably holds everything your existing ITs hold (but do check), so if youâre of the belief and desire that you should diversify even more throughout the globe, then youâre not doing your strategy any harm by selling everything to go all-in on VWRL.
If youâve studied the numbers and think 1 or more of your ITs will assuredly outperform VWRL, you can easily justify keeping it/them in a 5-10% weight to give your returns a boost.
Definitely some good ideas there sendu, I had been looking at the Vanguard All World but not considered comparing the stocks held between the investment trusts. I will look into it.
I like the idea of looking into the numbers going forward between the VWRL and ITâs with regard to one out perform the other. Do you have advice on the best place to check this out? Morningstar maybe?
Good discussion to be having! I suppose starting points would be MSCI World or Vanguard as mentioned above, this will get you market exposure and is diversified regionally. You would then want to have a think about other ETFs; some are broken down regionally (S&P500 = US, China, EM etc), others thematically (L&Gâs Robo), so you can think about where you think growth may come from in the future, a macro approach, and decide to go overweight in that area.
ITs are managed and can out perform ETFs, which are designed to track an index or basket that falls into a certain category (companies focussed on robotics etc), but can underperform also. It can diversify you however as you can get diversification via management style i.e. their stock selection bias or criteria is different and may be differently correlated to the S&P500 etc.
Also worth thinking about asset type. All the above is publicly listed equity, you mentioned TRIG (renewables) which is generally private equity and one can gain diversification through this different asset class, a number of other Private Equity investment trusts can provide the same thing, and SMT you mention has a number of private holdings also. Same with Bond ETFs, different asset class.
No matter how big or small your investments can be each month they will soon add up with compound interest and natural inflation rates.
ETFâs are also very low cost for the S&P 500 and FTSE trackers by iShares and Vanguard. Youâll be looking at slightly more expensive ones for specific industries and special indexes. For example the L&G Robo one I think racks up 0.40% OCF compared to 0.07% OCF on the Vanguard and iShares S&P 500 ETF.
If youâve got enough money to do it my current savings strategy is a 20/30/50 split in to my Help to Buy ISA / First Direct 5% interest savers account / Freetrade . Any spare money I also chuck in the Freetrade account.
This gives me a nice split and diversity. I currently save about 65% of my salary. The rest I still have money for rent and bills and going out with friends. Gotta make sure you live that nice balance
So do you think itâs ok to hold several trusts like the ones I have as well as global ETF trackers? Or focus your attention on one IT? I have read lots of different theoryâs; one even saying 10-16, 20 at the most!!
I see where your coming from but compound interest as I see it is reinvesting dividend payments? If your dividends are really low due to you only being able to drip feed several funds with relatively small amounts then will it make much difference overall? Compared to focusing on one letâs say, increasing your dividends and receiving more compound interest?
Is ÂŁ66 per share relatively cheap in the fund/IT world I keep hearing this but to me itâs a dear do
By the way fair play on saving 65% of wages! I couldnât do that, think my balance is to enjoy more now in case I die before retirement
donât want to make the wrong choices though.
