Passive Investors - What’s your reason for not putting all your funds into an All-World ETF?

I’m fairly new to investing (2019) and before I threw my money in places I didn’t understand I decided to read some books, including Smarter Investing by Tim Hale. He made the known argument that passive almost always beats active in the long-term.

You may not agree — but in any case, I was convinced, and ever since I have been primarily putting some cash away in S&P 500 and FTSE 100, while dabbling in active stocks like Apple as part of a “whiskey and water” approach, as mentioned in the above mentioned book.

I’ve noticed that my Time Weighted Return as reported by Freetrade puts me very far below the returns of the FTSE All-World ETF. (My +10% to it’s +20%) It has made me consider moving to All-World over the long term.

I presume with the pandemic this is somewhat skewed or effected by Brexit and the British/American governments’ pandemic response.

I’m still not very well versed, but I’m presuming with All-World — while there is more diversity — there is also more currency risk.

In your opinion, are there many positives to sticking with less worldwide index funds? I have and will keep doing my own research on this, but would love to hear some opinions.

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I am a passive investor and majority of my holdings are in VWRL - I am also fully invested (no cash beyond emergency fund) and nearly 95% in equities, 5% in AGBP (Hedged world aggregate bond).

As much as I tried, I can’t bring myself to keep things simple :grinning:, and have separately brought extra EMIM, VAPX and IKOR due to relative cheaper valuations in those regions/countries - I am 3% above VWRL returns over the course of last 1 year.

Currency risk is a complicated area (and I am not an expert) but diversification does reduces the risk. The real risk is of a shock to pound close to the time when you need access to this money. This will be the FIRE for me in few years time, and I plan to spend my retirement in and out of country so it does not concern me great deal. I plan to continue to put more money to work until I retire through the ups and downs of currency moments.

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I’m a complete novice myself, but this is what I’ve come to understand;

I guess the argument is the collective weight of the All World should ensure consistent gains (in theory) because each region should offset any dips. And if everything pulls together the gains go further. It is unusual for the entire world market to drop all at once barring a crisis and if it did, regional funds shouldn’t make much difference.

Some of the all world funds have a lot of US firms anyway (Vanguard VWRL for example is 50+% in North America I believe).

On top of this, having a world fund is just a very simple broad investment. You shouldn’t have to worry about ratios of investment into different regions with your portfolio, or rebalancing things etc, that one fund will be hands off.

What arguments I’ve seen against the funds are the higher ongoing costs - you can supposedly create a world fund via individual regional funds for cheaper in terms of ongoing costs.

Secondly, the world funds are broad, so whilst you will make steady gains, you may not get the sharper rises had you got lucky and invested only in the specific market that is shooting up.

I don’t see any issues using a world fund (check which markets it targets, some do not include emerging markets, some do) and then investing in regions to supplement it as you go along - assuming you want to.

That’s my amateur analysis! Take with hefty amounts of salt, I stand ready to be corrected. :slight_smile:

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Thanks for the reply. Since you are near retirement, do you have any plans to reallocate to bonds to mitigate potential drops?

Always baffled by people’s passion for etfs. In an age of free trading why not buy 100 stocks and get better returns? See the Freetrade baggers thread. I find it so difficult to see how any investor buying 100 of these recommendations would do worse than an ETF.

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At least initially, the “hands-off” approach to ETFs is what draws me in. Actively managing 100 stocks would tempt me to day trade, something I would prefer to avoid as long as possible. The dangerous thing with mobile trading apps, it seems to me, is how easy it is to see your lovely green gains or your falling reds at a click of a button… The less dopamine kicks the better, for me anyway

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You don’t get exposure to small caps in a FTSE All-World ETF.

If you are going down the route of 100% passive (which I would advise against) it may be better to invest in a range of ETFs and do your own initial balancing and then rebalance on a yearly basis.

You can use an ETF Strategy builder as a starting point.

https://www.justetf.com/uk/etf-strategy-builder.html

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That’s bias on your side. Historical data shows that almost every private investor and also almost all professional fund managers underperform passive investing in the long run.
This is the data, while your argument is some peeps having a lucky pick in an insane bull market…

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Great link virtunus - wasn’t aware of that. Many thanks

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Three reasons from me:

Cost
You can replicate VWRL exposure with a set of smaller funds with a lower cost (the simplest example being VEVE and VFEM)

Factor Tilts
You may seek exposure to certain risk factors (such as small cap, value, quality) beyond VWRL

Fun
I think a lot of people realise that they are statistically disadvantaging themselves by picking other ETFs/stocks, but they want to anyway for fun, or Dunning-Kruger

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I have had great returns from ETFs like clean energy and trusts like China special. I guess its up to your personal risk tolerance if you want to use funds to chase trends or not.

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I wouldn’t classify investing in 100 companies for a year as getting lucky or active trading.

You get exposed to the fact that in ETF’s people pull out of them when markets crash and forcing the managers to sell stocks on lows. You lose value because others sell.

When you own the stocks personally and ride the falls as well as the gains you don’t.

I am not advocating trying to beat day traders. Though I think having a small pot you can learn a lot from it and ultimately pick good value stocks.

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Personal preference. I’m sure that GGP holding has reaped massive rewards for you. You’ve also put in a lot of time in research. Most investors would find managing a portfolio of 100 stocks a real handful.

It’s also risk/reward. Most companies on that thread are small cap and so investing 100% of your portfolio in them is too risky for most investors. Especially once you build up a large portfolio
.
I allocate ~5% of my portfolio to individual stocks but I haven’t got the time, knowledge or mettle to have a 100% stock picked portfolio.

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On-going charges, under looking smaller fast growing companies

The reason I don’t put all my funds into VWRL is because I’d like to believe I can beat it. It still is a part of my portfolio but there are some short-medium term trends/environments which will outperform it. If I can take on a bit more risk and tilt my portfolio towards those then I think I can eek out some more gains. It took me time to read enough about global trends and markets before I felt confident in pursuing this approach

I allocate 60% of my portfolio to ETFs and trusts, 40% to individual stocks. I prefer the convenience of them and it suits my risk appetite.

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Because there is a clear evidence that this strategy does not work. What you are effectively doing here is creating your own active fund. Even if there is no cost to pay, you are effectively be paying a 1% Forex charges (to buy and sell).

If you are prepared to do the reading, start with CAPM, Fama French 3 factor model to see why this does not work. Have a look at SPIVA report to see how Pros fare (nearly 80% can’t beat the market with access to all the reports and terminals). SPIVA

If you prefer - watch an excellent series of interviews on the Perfect Portfolio with Nobel prize winners with centuries of investment experience MIT Laboratory for Financial Engineering - YouTube - I don’t think I can do better than them.

Beyond the theory, it is also not a strategy that can be put in place for achieving long term financial goals, everyone is an expert in a bull market, can you seriously to do this for 40/50 years? I would rather buy two/three ETFs and sleep well knowing slow compounding will do the job.

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I intend to do that at the end of 2023. I am probably being greedy but I am willing to take a chance of working few extra years in case there is a large pullback and the market doesn’t recover. Max-drawdown on VWRL has been about 20%.

I can sleep ok with 20% down while I am still working and have a healthy emergency fund.

Yes, good idea. In practice the All-World index is mostly US. You’d do even better if you just bought a US index, preferably LON:ATT which is effectively QQQ. Just look at the chart on that fund, and I challenge you to find any better index performance.

Now people are saying one day tech stocks will underperform, but never give any compelling reason. If you MUST diversify, I’d do a China fund as well. Hey, what about a tech China fund!

You have to remember that home bias is a terrible thing, the FTSE consistently underperforms because a. it has no tech in it, b. it has too much oil and far too much finance (if you include insurance) c. it has a bunch of decidedly iffey foreign companies which trade at very low P/Es - not just KAZ and co, but also STAN, and to a degree HSBA (tool of the Chinese Commies) d. Brexit doesn’t help

Just check the charts. The #1 country is the world is the US, if that changes it will China. Why put your money anywhere else.

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Totally agree with you there. Investing in ETFs you can only ever mimic what average returns what the market makes.

Though in these volatile times, I understand, people closer to retirement, or younger risk-avere people are happy to minimise their risk in a passive tracker though.

98% equities me, but …
Horses for Courses.