Today’s post is more of the ‘thought for the day’ variety than a news update. With the Brexit talks reaching a real climax and the US and China still talking trade, I can’t add much of any value on the prospects for markets. My weekend comment on deflating soufflés looks to have been appropriate.
What has come up in a couple of discussions with NotHarry readers recently is something I thought worth emphasising with a brief post.
If you invest in a multi asset portfolio, actively managed or just a fixed asset mix of passive index trackers, you will be getting a diversified range of assets with built in risk controls based on the most up to date investment thinking. That does not necessarily mean the fund will deliver what you want (the reasons for that are for a longer article) but no-one could say they are not designed in line with good practice.
So why would you want more than one fund adopting such an approach? I suppose advisers would say to diversify your risk further? But if the two or more multi asset funds have similar asset mixes, are aimed at the same risk profile (hopefully yours) and statistical examination reveals that over long periods their prices have consistently moved almost exactly in line, what has been achieved? Zilch.
One fund may be called 80/20 and another Active Market or similar names implying something about the asset mix, but that is not diversification! One may use passives and other invest (more expensively) in the multi fund managers’ in house sub funds. They may even have slightly different stated objectives.
Believing that is enough is a schoolboy error – just assuming that multi asset funds are different because they have different labels. If one of a selection of funds is more expensive and it delivers no diversification whatsoever, it is an utter waste of money!
After the major stock market decline of 2000-2002 I assisted a very upset pensioner take a complaint to the Ombudsman service. He had been put in pension drawdown, arguably with good reason and assured his investments were diversified. In fact, they comprised a UK managed fund (virtually all UK equities), a UK equity fund and an international equity fund (with a UK weighting in it). Of course they were all very closely correlated and he lost so much money his pension income almost halved. He won substantial compensation, fortunately.
Nearly 20 years on and people are still being misled by advisers who don’t really know what risk management means.
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