How We Should All Invest – But Probably Won’t (Newbie Guide)

Yep, monkeys and random-allocation vs picking and all that :slight_smile:


Apologies, was high level and anecdotal. Was trying to keep it simple and understandable for the newbies out there.

When you tell people its 50/50 they understand that logic, however to explain “80/20” is more complicated.

I agree that the data for individual retail investors (your regular Joe) outperforming the market is much less favourable.

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I ran a 3-year experiment/competition based on ‘monkeys and random stock picking’.

The two winning portfolios showed gains of 141% and 90% (including dividends)…

Over the same period, the FTSE 100 Total Return was 39%.

If I had the courage, I would just do random investing! :grinning:


How did the worst 2 do?


Losses of 13% and 7% respectively.


A brief history of asset management.

Modern asset management began in the 1950’s with the Modern Portfolio Theory and the Capital Asset Pricing Model which, when combined, found an “efficient frontier” whereby the mix of 60% equity and 40% bonds provided the optimal mix of risk vs return, providing on average a return of c10% per annum.

This 60/40 model was so successful, it became know in the industry as “set it and forget it” and was the dominant model for 50 odd years. The bubble changed this, resulting into three strategies to boost returns, but with less risk and at lower cost.

  1. Investors sought to reduce the fees they paid by seeking out lower-cost approaches to obtain their equity market exposure. This gave rise to the ongoing shift from active management towards passive, and results in the popularity of indices and ETFs.

  2. Institutional investors shifted assets from high-risk equity strategies to strategies that offered equity like returns at bond-like risk profiles. This gave rise to hedge funds.

  3. They sought to take advantage of longer-term investment horizon to seek illiquid assets that could offer uncorrelated return streams to their portfolios, things like property, private equity, venture capital funds, SME loans, etc.

All this led to the gradual breakdown of the 60/40 model, accelerated by the Yale “endowment model”, which invested more heavily into alternative asset classes.

It all lead to a shift in AUM allocation, with in 1997 57% equity, 35% bonds and 4% alternatives, to a 2016 split of 46/28/24%

Therefore, you can take as a starting point this split for your own portfolio, ensuring that you have a similar coverage over equity, bonds and alternatives. From there, you adjust according to your own risk appetite.

There are then two questions left:

  1. How much do I trade myself vs taking an ETF or similar. Warren Buffet argues to “Consistently buy an S&P 500 low-cost index fund," as one of the best ways to grow wealth. “I think it’s the thing that makes the most sense practically all of the time.”, he said. I am of a similar opinion, most people won’t outperform the stock market themselves, and it’s best to put a high % into a low cost ETF.

  2. How do I get enough exposure to alternative asset classes if institutional investors have 24% allocation to them? This is difficult, as the route to market for these is more difficult in a D2C setting. More stocks in the FreeTrade universe will help, but until then you can check the allocation portfolio of ETFs yourself, or pick the few stocks that classify as alternative.

Personally, and I am not a financial advisor, but I follow the following path:

  • Max out pension contributions
  • Max out company share save scheme
  • Monthly contribute to private offshore pension
  • Yearly top up offshore bond to get kids through university
  • Remainder I invest - 80% in low cost ETF, 10% in start-ups through CrowdCube/Seedrs/Etc, 10% in personal stock picking with FreeTrade etc.

In my 3-year experiment, one of the portfolios was made up of just Vanguard’s Lifestrategy 60% fund. That portfolio showed an overall gain of nearly 35% so perhaps it might still be worth considering as a ‘set it and forget’ it strategy.

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It’s hard to argue with Lifestrategy…

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I am not arguing against a 60/40 split, just highlighting that the market generally has moved away from it. A 60/40 can still be viable, so can a 100/0 or a 0/100 split. At the end of the day, it all depends on your circumstances, preferences and risk appetite.

However, chances are that a high equity allocation won’t provide the historical returns one has come to expect. Why? Information symmetry.

One of the key components to generating alpha returns is information asymmetry - i.e. knowing something that others don’t. In the world of openly traded stocks with internet powered information sources, information asymmetry is increasingly difficult to get by, especially for DIY investors.

In short, alpha is being decomposed, a trend driven further by factor based investing and algo trading. This has driven institutional asset managers towards alternative assets, as they are more illiquid and thus more information asymmetry exists. The problem is, these are generally difficult to access for DIY investors. Tokenisation of assets will help, but that is some years away at best.

Therefore, a 60/40 is a good starting point, but then seek to lower exposure to equity if you have access to alternatives.

As a UK based investor, are there etf’s freetrade could add that eliminate the need to buy so many

My ideal allocation consists of 4 etf’s. Three of which are currently not available here.


The issue arises when you want to build up funds in developed world countries ex US. It’s awkward to separate US investing from the rest of the world when using the platform.

Any thoughts?


Greetings Ben,

So you don’t invest in individual companies? Out of interest what funds do you invest on freetrade.

This line aged well :wink: cough ggp cough :joy:


Thanks Captain hindsight :tipping_hand_man:

Hindsight bias is a very strong thing :muscle:

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Haha. Can’t believe how far I’ve come. Freetrade enabled me to invest in hundreds of companies before I found a few very good ones. And it was as late as July i realised GGP was practically the safest stock on the market despite no revenue or sales :grin:

I’m not all in ggp BTW :crazy_face:


Keep learning and improving, you may have to pay to learn by your mistakes but get a rebate on that cost by not repeating the mistakes. I cant imagine investing without the challenge of not just beating the market but smashing it. But you never will if you don’t believe you can


Same here. Completely different investing style on freetrade now. I’m researching things more than I ever have done now I know that I’m not paying dealing fees for small trades whenever I get spare cash.

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I read your article with interest. I’m 48 and a total newcomer to investing - haven’t had the courage to move forward but would like to now fund my ISA and get started.
I’m looking at long term (until retirement), low risk, low cost and have done enough research to understand that index tracker funds are probably the best option for me.
I have £5000 to invest, hopefully paying in monthly amounts also. My question is do I invest in one tracker fund or split the money between 2 or 3?
I’m currently looking at IUSA and ISF. My gut is telling me to split 50/50.
I know you can’t give advice on what I should do but knowing I’m at least on the right track would give me confidence to go ahead.
Thank you for any help or advice you can offer.

Why these two in particular? You want exposure in SP500 and FTSE100 only? The question doesn’t imply what I think of it. I’m just trying to figure out your reasoning.

Both indexes have plenty of companies with global reach, multinational companies that is, hence not fully dependent on the internal markets they’re in. But this is more prevalent with the SP500. To the point that the SP500 can almost be seen as a world index.

I think they are both decent options. The SP500 have performed better than the FT100 during the past 20 years or so: the SP500 nearly tripled and the FT100 has barely moved.

The SP500 accounts for around 50% of the weight of the world pie of listed companies. The FTSE100 for around 6%. By splitting 50/50 your share in the FT100 will be overwhelmingly higher than the SP500.

If you diversify into more regional indexes, you’ll cover more areas of the world, and then you could also consider having one world index as a single investment. Something like the IWRD would do the trick.

The road of investing through index funds is a good road. It works with lump sums. It works with pound cost averaging where you invest a set amount every month. It is said that 80% of active fund professional managers are unable to perform better than the index - this is widely published specially for the SP500. By indexing you’re automatically as a good investor as the top 20% of professional investors. Not bad. Not bad at all

If you haven’t read it already, the first post of this thread is a great starting point


By splitting it 50/50 between these, you overweight the UK by A LOT. The FTSE is a terribly performing index. I’d strongly advise against giving it so much weight -I’d even substitute it entirely with a MSCI world and an Emerging Markets one.


Thank you Raul and SebReitz.
Why IUSA and ISF - I’ve been looking mainly at costs and charges, trying to keep them low. I’ve also gone with the illustrative 5 year values and chosen those which seem to show good returns.
I am very new to this though and I admit to getting a bit flustered with numbers!
I was thinking that splitting 50/50 would be a safer option but your explanations of giving too much weight to ISF makes sense. I suppose part of me is still nervous so I think I still have some research to do before going for it.
I was originally looking just at Vanguard but the individual share cost is higher. Does this matter in the grand scheme of things when it comes to investing in this way?