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Portfolio Dilemma: we tackle six investment problems · On The Money

• 0:00
  Kyle Caldwell: Hello, and welcome to On The Money, a weekly show that tackles investments and pension topics in a practical manner. Today, we're gonna be talking through questions that have been submitted for our editorial portfolio dilemma series in which we tackle topics that are front of mind for investors. And joining me to provide his expert insights is Dave Baxter, who is senior fund content specialist at Interactive Investor. Today, So, we're gonna cover six questions. Yeah.
• 0:32
  But before we get to them, the majority of the correspondence that we've had for the series has been from Interactive Investor customers on our social trading network, II Community. For those not familiar, could you provide an overview of what II Community is, and why those listening to the podcast should get involved?
• 0:54
  Dave Baxter: So it serves a handful of different functions. One is acting a bit like a forum, so people can kind of talk on different pages for certain investments, for example, if you like to give an investment trust or a given share, you can kind of post more generally and you can simply raise issues with other investors. You can also do things like put updates of what you've kind of recently bought or sold and your kind of recent portfolio performance. And I think it's quite interesting because it can inspire some thoughts, but also it's quite a useful way to learn, so you get a mix of quite veteran investors on there from what they're saying, to my mind, and then you get some kind of newer people, some budding investors, so you can pick up some interesting knowledge.
• 1:42
  Kyle Caldwell: I absolutely love it. I mean, if I didn't work for an exact investor, I would be using it. I think it's great. Like you said, Dave, it's a great way to speak and deepen your investment knowledge with other like minded investors.
• 1:55
  Dave Baxter: Yeah, and you get very different kinds of investors on there, don't you? You get some more kind of like technical analysis people, and you get some more buy and hold, and ones with different preference, and there's a whole mix of stuff going on.
• 2:05
  Kyle Caldwell: Yeah, there's a real range of investors from beginners to, like you said, the more advanced investor that, you know, checks their portfolio every day, and is deeply engaged in the world of investing.
• 2:17
  Dave Baxter: Yeah.
• 2:18
  Kyle Caldwell: So let's move on to the six questions that are being submitted. However, before we do, if you have a question you'd like considered in future for our Portfolio Dilemma series, then the way to get in touch is by emailing us on editorial@ii.co.uk, or you can email the podcast email, which is otm@ii.co.uk. So the first question that we're gonna cover asks whether there's too much crossover in terms of holding both a US tracker fund and a global tracker fund. I think this is a question that a lot of people are considering at the moment, given the fact the stock markets are becoming increasingly concentrated. Yeah.
• 3:02
  A small number of companies, the so called magnificent seven, are a bigger influence for both US and global markets. So Dave, what are your thoughts when you tackled this question?
• 3:15
  Dave Baxter: I liked this question because it felt quite simple to me. So if you ask kind of is there too much crossover between say a I think they're asking about global tracker fund and a US equity tracker fund. To me the answer is yes, and to kind of flesh that out at the time I was writing that article, I think if you looked at say an MSCI World tracker, The US accounted for 72% of that fund. If you looked at a so called 'all worlds tracker', which includes emerging markets and is to be fair bit more diversified, The US still made up about 62%. And then, you know, you talk about concentration in The US, the so called magnificent seven shares are a big presence there, but they're still nevertheless a big presence in a so called global fund.
• 4:05
  So I thought that was important to bear in mind, and that leads on to two important points for you as an investor if you're thinking about holding both those things together. One is that if you look at past performance, then performance has been very similar and that's been fine in recent years when The US has, you know, powered ahead and done really well. But the perhaps more important point is that a global fund is not really offering you the level of diversification that you think it is. So I, yeah, I kind of highlighted those issues and then I wanted to highlight kind of a few potential solutions. So one is simply maybe not to hold a US and kind of global tracker together, but two is you might want to take more nuanced approaches even if you're simply using tracker funds.
• 4:56
  So one avenue I explored maybe a couple of months ago now in a column was the idea of, say taking the five main equity regions, so The UK, US, Europe, Japan and Emerging markets, taking a dedicated ETF for each one and maybe just sticking 20% of your portfolio in each. And if we look through the kind of past performance of that total portfolio, it's actually held up alright against the MSCI world. And then as we've discussed before, there are other more nuanced things like, you know, people like the Vanguard Life Strategy range that is a bit more kind of UK and Europe heavy, less US heavy, or you can do things like use MSCI World ex USA ETF and then you can add a dedicated US fund. And one of the thing is, of course, there are active funds, and they will have varied kind of approaches.
• 5:50
  Kyle Caldwell: And if you look at a performance line chart of, say, a US tracker fund following up and down fortunes as the S and P five hundreds and also a global tracker funds, they have been pretty similar
• 6:02
  Dave Baxter: Yeah.
• 6:02
  Kyle Caldwell: Over three, five years. And that is because of the high overlap for the biggest companies in both of those markets, both globally and in The US. Personally, I think there's too much overlap. I wouldn't hold both. And as you've outlined, Dave, there are lots of different ways about going about having different exposure.
• 6:25
  And for me, the key is that if you own a global tracker fund, if you hold something else alongside it, that invest globally, it does need to be sufficiently different. So and you could here consider an actively managed funds that is that is investing very differently from away from the global stock market. You know, Scottish Mortgage, for example, holds around 30% of its assets at the moment in unlisted companies. Does have a big position in SpaceX, of course, which at the time of this recording is around a quarter of its assets. So that is something to bear in mind, but, I mean, what you are getting with something like Scottish Mortgage is exposure that is very different from the global market.
• 7:09
  Dave Baxter: Yeah. And there are also some global kind of relatively US light funds, and what's been interesting in the last year or so is some global funds have actually been kind of ditching the Magnificent Seven or some of the Magnificent Seven on the back of those concerns about AI capital expenditure. So you do now get a bit of variety.
• 7:31
  Kyle Caldwell: And I think it'd be remiss me not to mention I do own shares in Scottish mortgage, but there are lots of other global strategies that are very different from the global market. They're like SurveyM, Blue Whale, Spring to Minds, Artemis Global Income, and there are there are many others as well.
• 7:49
  Dave Baxter: Yeah. And I guess to kind of give a different exposure to those, you have some of those dedicated value funds. Things like the old kind of Jupiter global value, that kind of thing. They should have a very different take on markets.
• 8:03
  Kyle Caldwell: Let's move on to the second question, which asks, and it's from an II community member. Mhmm. And the question is, how to approach whether to give up on slow or losing investments? For me, the first thing I'd say is, I think it's it's a it's a lot easier to buy an investment than to sell an investment. Even if you've bought an investment that's performing well, it is very tempting to hold on to it and to try, you know, try and run it as a winner.
• 8:36
  I think there's there is also there's still a fear of missing out if you sell too early. You think, oh, in hindsight, I could have made much more much more of a return from that if I did run it as a winner. Or that is a much e that's that's a much better position to be in, if if your investments have performed well. I think, again, it's a harder decision if you've bought an investment that's underperforming or the returns have been quite sluggish over time. For me, I think the important thing is to to step back and remind yourself as to the reasons why you bought that investment in the first place, and consider whether your investment thesis at the time, whether that still stacks up or not.
• 9:22
  And I do think, you know, we do stress on this podcast a lot about the importance of investing for the long term. I think if you're buying a fund or an investment trust, you should have a five year mindset when investing in any type of funds. However, while patience is often rewarded in investing, there are times when it can make more sense to move on. And there's also there's also the opportunity cost as well. If you if you hold on to an investment for too long, that money could have been put to better use elsewhere in another investment.
• 10:00
  So I take a step back and consider why is that fund or share underperforming? Is it because say say it's a value fund and the value style of investing is underperforming? Then, you you know, that's a pretty obvious reason why it's underperforming, and you might be more willing to hold on to the investments in the hope that the style will return to favor at some point. However, if, for example, you compare the performance of a fund against a similar fund, and there's quite a big difference in terms of of the performance, then it's ultimately, it could be poor Stockpichen is the reason why that fund has underperformed. And that might be time to give it greater attention and potentially move on.
• 10:46
  And I'd also think about management change as well. If the full manager jumps ship to another full management company, or if a founder leaves a company of an individual share that you own, then it might be time to move on. And I'd also consider succession succession planning as well, and whether that's been smooth or otherwise.
• 11:06
  Dave Baxter: Yeah. I think I guess it's interesting to note that perhaps with some stocks it's a bit harder to make that call than with some funds because normally funds, as you said, should be quite a broad call in your portfolio, like it's a value fund, it's a fund covering x region, that kind of thing, and as long as you don't have major changes to the strategy that should be fine. It might be more of an interesting call with certain companies if for example you're kind of you've spotted a, I don't know, an out of favor name or you think things are going to turn around and then you have to keep assessing, But maybe that's more of kind of a speculative holding that you're it's not gonna be such kind of a core part of your portfolio.
• 11:46
  Kyle Caldwell: And as we've mentioned on the podcast previously, rebalancing, taking some profits from your winners, that helps you be disciplined as an investor. So for example, if you bought a technology fund or investment trust five years ago, and you do rebalance, then that means you take some profits, and you're also reducing risk at the same time.
• 12:08
  Dave Baxter: Yeah. Yeah.
• 12:10
  Kyle Caldwell: We're now gonna merge two questions together as they cover similar territory. Again, both are from II community members. So one asks, what is a reasonably sized position? If you hold 50 different shares, then on average, each will be 2% of your portfolio. How small is too small?
• 12:30
  And the other question simply asks, how many stocks should I hold? So Dave, over to you for your thoughts.
• 12:37
  Dave Baxter: So the interesting thing, as I mentioned, I love the kind of US and global trackers question because that, in my mind, is quite a simple one to answer. But a lot of these questions, I think the answer unfortunately tends to be 'it depends' because it's so reliant on your individual preferences and your individual circumstances. So you know I answered the 'is 2% too small' question and that was interesting but very nuanced and idiosyncratic. So yes, 2% can be a bit small because even if you do very well or do very badly, it's not actually going to move the dial that much. And for a so called satellite position where it's not kind of a major part of your portfolio, maybe it's bit riskier, you maybe do want to start with 2% but maybe go up as much as say 5% or so, whereas a core position can be perhaps at least 10% and often it's a lot more, know, if you hold some big multi asset fund, if you hold a tracker that's kind of the backbone of your portfolio, that could even be 70% and then you kind of do more interesting things elsewhere.
• 13:42
  But to avoid the, you know, the risk of just not answering the question at all, I wanted to outline what I described in my piece as kind of three R's to consider when you're thinking about position sizing and I suppose you can kind of expand this thinking onto the idea of how many holdings you should have because the more holdings in theory the lower the position size. So the first R is risk you need to consider. So as I said, two to 5% can't do too much damage, 10% if that does really badly then it can. So if you're holding something more volatile like an individual share and perhaps an investment trust in a niche area like the beloved Sarah from Space, then those bigger positions can carry more risk and you just need to be aware of that and think how comfortable you are with those potential drops. The other side of that coin is the second R which is reward.
• 14:36
  So again, those small positions, even if your thesis works out perfectly, even if 2% position doubles, then it's not going to make an enormous change to your overall portfolio. So you might be the kind of investor, if you've got the stomach for it, where you want to kind of put more conviction into your holdings and you then want to try and reap the rewards. And the third is simply research because another consideration is just, you know, it takes time to do your due diligence on these things and also you only have so much kind of time, brainpower, effort and so on to monitor different things. So if you're putting loads of time into researching individual companies, then maybe you do want to have fewer positions and have bigger position sizes if you can kind of stomach the risk just to make it more of an effectively run portfolio. And then I couldn't find an R for this but another thing to think of is just maybe it relates to risk but it's kind of the stress and the keeping up at night factor.
• 15:39
  So if you're gonna worry a lot about your kind of fund performance, then maybe you don't want big positions in the riskier stuff. I mean, maybe you can do that in a broad portfolio, but maybe you want to have a more diversified approach.
• 15:54
  Kyle Caldwell: The question of how many holdings should I have, I think that is a very common one. And as you mentioned, Dave, the answer is, it depends. There's no there's no magic number, unfortunately. But I do think how much you have to invest is another factor to consider. I think if you're starting out, and you say invest in a thousand pound lump sum as your first investment, then you probably that just go into one fund, probably a multi asset funds.
• 16:24
  You know, you wanna you wanna diversify your risk. You know, you know, we speak you've already mentioned Vanguard, Life Strategy. There's other fund ranges, like Survey and BlackRock, MyMap, Legal and General, Multi Index. At Interactive Investor, we have our own managed portfolios as well. But then over time, if you're willing to be a hands on investor, and your portfolio grows, that's when you can introduce more positions.
• 16:52
  And one good tactic to consider is the so called core and satellite approach, which is having 70% of your portfolio in core holdings and 30% in satellite holdings, which tend to be more adventurous. So next up is a question about market timing. So in short, the person who wrote in said that they are quite nervous at the moment about a potential stock market correction being on the cards, and they referenced fears of a potential artificial intelligence bubble. And they asked, should I wait for a better opportunity to invest a lump sum, or will the price of staying on the sidelines be more painful? So my thoughts on this are that the reality is that it's almost impossible to try and time market peaks and call market troughs.
• 17:45
  I do think it's a little bit like when you first make a property purchase. I think, you know, some people try and time the property market, and I think the same with investments. It's notoriously difficult to do. And I think the key thing to bear in mind is that whenever you enter the market, there's always some sort of items on the woody list that could create a market correction. And I do think if there was no headwinds at all, that in itself would be concerning.
• 18:17
  Yeah. And I think the key things to bear in mind is that over the long run, the history books show that if you invest, that does tend to yield better rewards than leaving your money in cash savings. And, yes, stock markets, they are more volatile. But for me, that's that's the price that you pay for the fact that over the long run, investing does tend to yield greater rewards. And I think you just need to think about the fact that there are certain things you can do to reduce risk.
• 18:51
  And they are things that we speak a lot both a lot on this podcast. So it's be diversified, think long term, and also consider drip feeding your money on a monthly basis. Mhmm. So if you invest regularly, what this does is it it does away with the risk that you put all your money into the market at the wrong time, just before a nasty dip. And, you know, you could think about it like, you know, all the household bills.
• 19:15
  If you commit a affordable amount that you're gonna put into the market each month Mhmm. You can you can sort of forget that you're doing it, in a way, and And, automate you know, and with Interactive Investor, regular investing is free if you set it up. Dave, any other further thoughts that I've not mentioned?
• 19:36
  Dave Baxter: No, I think that's it. Mean, guess I would add, sound ancient here, but I've been writing about funds for twelve years and there's there's always been the concern of, you know, there obviously have been kind of difficulties and you could argue we've been in a very strange bull market, but people have made a lot of money while other people have kind of worried about the world kind of crashing.
• 19:59
  Kyle Caldwell: And this question actually ties in nicely with our final portfolio dilemma. So someone wrote in and said that they were looking for ideas for when it comes to bonds and absolute return funds to add some sort of resilience to their portfolio. Dave, you tackled this one. What were your suggestions?
• 20:22
  Dave Baxter: Thought this was a really difficult question because, at least in recent history, it's been kind of easy almost to make money, and it's been really hard, you know, you were well aware, to find good diversifiers. So diversifiers work and don't work depending on the conditions. So for example bonds have worked well at points in the past like in 2018 when equity markets fell, in the Covid sell off in 2020, but they did terribly in 2022 and that was because equity markets were stressing about interest rates rising and bonds hate that. I will mention a couple of names but I just want to highlight that even those kind of struggled because it was a difficult time for that asset class. So one kind of active fund that I've always found quite interesting is called 'twenty four Dynamic Bonds' and it holds some kind of more esoteric kind of bonds like asset backed loans and things like that and it has a good mix of stuff, but it did suffer in 2022.
• 21:20
  And a kind of passive option that holds a bit of a spread of defensive bonds is called the iShares Core Global Aggregate Bond ETF. But yeah, diversifying is tough, things don't always work and you know, touching on absolute return, again you do want to be careful. So this for good reason is a pretty, I guess, derided sector. You know, we had many of them proliferating on the back of the financial crash, and unfortunately, a lot of them have been very complicated. They do things that's quite hard for a regular person to understand.
• 21:58
  They do things like, for example, betting on a certain currency moving against a certain other currency and they don't always work. Equally, of them are actually very racy. They can make huge returns in one year and huge losses in the other year, so it's not really what you want as a buffer against your equity exposure. So yeah, I'm not a big fan of the sector but one name I would highlight is Janus Henderson Absolute Return. So that does kind of holding long equities and short equities, so kind of betting on a price fall and it does have a good track record, so it's tended to be kind of dull but quite steady, it's tended to like eke out decent returns every year and it's not suffered those kind of massive drawdowns.
• 22:48
  So that is one option but I yeah, I would just reiterate that finding buffers is not an easy thing. You should try and diversify among your buffers, so maybe hold different kinds of bonds. You can also hold things like, you know, property, infrastructure, defensive equities, and even some absolute return. But you do get conditions when most of these things struggle. So, again, 2022 was a terrible year for most investments, but you had bonds really struggled, equities really struggled, and then property and infrastructure actually can be quite linked to some of the things that bonds struggle with as well.
• 23:24
  So they equally had a bad time.
• 23:26
  Kyle Caldwell: So you mentioned twenty four. So that's a fund firm that specialise in bond markets. And when I'm researching funds for my own personal investments, I do like to see it see fund firms specialise in a particular area. And this is one of the reasons why I like the free wealth preservation investment trusts, capital gearing, personal assets, and rougher. Because the the investment philosophies of those of those free firms is wealth preservation.
• 24:01
  Mhmm. And that's that's what they do. And and and I do think as well, if you consider one of those options, you you can view because they have a sizable position in bonds, then you might have to have bond exposure because you're getting bond exposure through those vehicles.
• 24:20
  Dave Baxter: Yeah. And they do kind of specialize in worry, fear, and bearishness, don't they? They think about whether it's inflation or whether it's kind of AI exuberance or something that might topple markets and I guess it's interesting, it's worth checking out the different assets that they hold because they have very different levels of exposure to things like bonds and the kind of bonds they hold, gold and gold related assets, and then other instruments.
• 24:43
  Kyle Caldwell: Yeah. And I think when you're researching them, the main differences I can see is the equity allocation in terms of what is in that. Obviously, the percentage weightings do vary, but they do they all do have quite a low exposure to equities. When it comes to bonds, at the moment, they're all favoring US inflation bonds, call them tips. But I do think, yeah, the main differences is what is what is inside the equity part of the portfolios.
• 25:12
  Dave Baxter: Yeah. Yeah. They hold some very different stocks.
• 25:15
  Kyle Caldwell: So, Dave, we've gone through each of the six questions, and that's all we have time for for today. Thank you very much for coming on.
• 25:21
  Dave Baxter: Thanks for having me on.
• 25:23
  Kyle Caldwell: And thank you for listening to this episode of On The Money. We're now gonna be taking a two week summer break, and the podcast will return on Thursday, September 10. If you're a regular listener, we'd really appreciate a rating or a review on your preferred podcast app. Those ratings and reviews, they play a crucial role in getting the podcast into more and more ears. In the meantime, until the podcast retains, you can find plenty of investing information on Interactive Investors website, which is ii.co.uk.
• 26:01
  And until the September 10, I'll see you then.