What's wrong with this portfolio?

[HanoiRocks]

Hi guys,
I asked a financial adviser what he thought of buying these kind of funds,

https://www.hl.co.uk/funds/fund-discoun ... IMPR1&ir=1

which to me are simply FTSE100 tracker funds invested in companies that provide dividends. The companies are, to my mind, trustworthy multinationals like GSK, Lloyds, Vodafone etc, I was thinking of putting about 20k in about 10 similar funds to provide quite a nice basic income. However, he said

"Very rarely do I recommend a single asset fund these days like this as I prefer to have a Multi Asset fund that is managed by a professional fund manager who is qualified and has all the resources to research funds/investments to make all the financial decisions, putting a large amount of money into this fund would be a high risk strategy that could make you a lot of money but also you could lose a lot."

But what is the "high risk" in buying these funds? They are purely tracker funds invested in large FTSE companies, are they not? Which if I am investing for the long term, which I am, carry little risk surely, especially if I spread my money around 10 different ones. The FA is more like a family friend nowadays so I do trust him, but equally this is his job and I know he'd get a cut if I invested with a professional fund manager that he'd recommended. Also, fund managers have a very bad rep in the UK atm, with veyr few actually showing any improved stock picking than simple tracker funds, but charging 1% or so of funds held irrespective of performance, not even a flat fee. It's unbelievable really, but that's another issue, but I just don't see any improvement on performance, or lessened risk, by using a fund manager. Am I missing something? My brother agrees with him, and he has been an accountant for 20 years, but admits he doesn't know much about stocks and shares, but says I would be exposed to UK equity market risk. I'm not sure precisely what he means by that though. Those companies are not all going to disappear suddenly.

Any thoughts welcome.

[RetireJapan]

I asked a financial adviser what he thought of buying these kind of funds,

Well, that's kind of like asking a turkey about Christmas

With financial advice, I always recommend understanding what incentives your advisor is working under (the best is being paid for their time, the worst is working on commission) and learning enough to understand whether the advice is good (at which point you can probably go the DIY route).

That fund seems fine: low annual fee, somewhat diversified (128 companies) and high dividend yield. It wouldn't be the only thing I would invest in (recommend having some all-world equity funds and maybe bond funds too) but seems like a good alternative to actually buying dividend paying companies yourself.

Your advisor may even believe what they are telling you, but there's that quote by Upton Sinclair: “It is difficult to get a man to understand something, when his salary depends on his not understanding it.”

[captainspoke]

Goodness--that's a vanguard fund!

As Ben says, nothing wrong with that one, but picking 2-3 other vanguard funds to complement it would help (10 might be too many, maybe not).

Keep it in mind to diversify--across geography (countries), developed/emerging markets, asset types (stocks, bonds, maybe eventually commodities, REITs), and market capitalizations (large/med/small companies).

And you don't have to buy different funds to do that, since some funds serve you a little bit of everything (almost).

[HanoiRocks]

Thanks for the replies guys. So you wouldn't see anything that would make alarm bells ring concerning the fund itself either. Like you said Ben, you have to look at the FAs motivation, which as I mentioned would be getting a commission fee for business referral. My family had known him for probably 30 years now and he is more like a family friend but still. I don't see how a fund manager would be able to do any better than the returns the fund quotes,and probably a bit worse, for a fee!

[fools_gold]

Have you taken a look at the Vanguard Lifestrategy 80 fund? It has international as well as UK stocks and a 20% bond allocation.

[TelecInvestor]

"Very rarely do I recommend a single asset fund these days like this as I prefer to have a Multi Asset fund that is managed by a professional fund manager who is qualified and has all the resources to research funds/investments to make all the financial decisions, putting a large amount of money into this fund would be a high risk strategy that could make you a lot of money but also you could lose a lot."

".. so it is much better to pay a smart guy like myself to better allocate that for you". Financial freedom 101: Financial advisors and brokers are more salespeople than nothing else. Learn to spot them and you will save yourself from a world pain (fees and suboptimal returns)

[mighty58]

Sorry to hear this guy is a family friend, because he's trying to fleece you, and putting his commission above your friendship. You are not missing anything, everything you pointed out is spot on. He's trying to play on your lack of expertise and making the classic appeal to defer to the professionals, who must know more than you.

The only concentration of risk you have with that fund is geographic and (depending on what currency you earn in and where your brokerage account is based) currency fluctuations. I suppose the argument could be made that, if most of your money is in this fund, you are equities heavy, but I don't think that's what he's trying to say.

[Sybil]

Nobody needs a financial advisor to buy funds. I guess the online brokers in the UK still provide a bunch of example portfolios depending on attitude to risk.

[HanoiRocks]

Firstly, Happy New Year everyone.
Secondly, sorry, I hadn't noticed there had been more replies to my question. Thank you to those people.

So in general most would agree there is little risk (as in no more than any other stock market investing) in buying these funds?
Like I said I don't see why there would be less risk, when you're just investing in tracker funds, in paying a fund manager just to get you 4% returns.

How many different types of these funds would you go for? The FTSE100 hasn't gone up much in the last 20 years compared to the NYSE so I'd want to spread things around a bit related to that consideration, but how much? One person said get 1 or 2 others, captainspoke said to diversify across geography (countries), developed/emerging markets, asset types and market capitalizations, which sounds good to me. I had been thinking of around 10, putting about ￥3.5m in each. (held in sterling though, so don't need to worry about currency fluctuation). My aim is to get the dividends while the shares themselves rise in value. That is how these funds work isn't it?

[jcc]

Firstly, Happy New Year everyone.
Secondly, sorry, I hadn't noticed there had been more replies to my question. Thank you to those people.

So in general most would agree there is little risk (as in no more than any other stock market investing) in buying these funds?
Like I said I don't see why there would be less risk, when you're just investing in tracker funds, in paying a fund manager just to get you 4% returns.

Happy new years!

Bear with me for a longish answer since I think you're making a few common assumptions that aren't entirely accurate.

There are a couple general rules in trading: first, the more intrinsically risky something is, the more rewarding it is(on average). That's why stocks return better than bonds and bonds with high risk of default return higher than "safe" government bonds.

The second thing is that the risk of a type of financial device can be reduced through diversification. By diversifying you reduce the impact of fluctuations of individual stocks. By diversifying the types of devices you hold(stock funds, bond funds, reits and possibly even commodities) you can also reduce risk.

But you cannot eliminate the inherent risks of market risk(if the whole market goes down no amount of diversification will make it safe).

Fund managers generally do not beat the market. And to recoup the costs associated, they'd have to beat it by 1%, which is a lot(when the market returns are say 6%, they'd have to outperform that market by 16%).

How many different types of these funds would you go for? The FTSE100 hasn't gone up much in the last 20 years compared to the NYSE so I'd want to spread things around a bit related to that consideration, but how much? One person said get 1 or 2 others, captainspoke said to diversify across geography (countries), developed/emerging markets, asset types and market capitalizations, which sounds good to me.

This advice is correct. The number of funds is not important, what's contained in them is. You want geographic and industry coverage. So if you buy 5 different industries in 20 countries each covered by a separate fund, you'd have to get 100 funds. Or you can just get one or two low-cost broad funds that cover them all (such as vanguards VTWSX which is summarized as "Total World Stock Index Fund provides shareholders low-cost exposure to stock markets around the globe, including the United States, developed foreign markets, and emerging markets. In addition to stock market risk, the fund is also subject to currency risk and country risk.")

Going all in on something like VTWSX and a similar bond option would be one way to do things. Or you could overweight your portfolio to domestic stocks and allocate your stocks something like 50% vtwsx and 50% on your FTSE fund, which would eliminate some of your currency risk but reduce the overall diversity and thus risk of your portfolio.

I had been thinking of around 10, putting about ￥3.5m in each. (held in sterling though, so don't need to worry about currency fluctuation).

Just because you buy the fund in sterling does not mean it is immune to currency risk. For example if the fund you own contains MSFT shares, you will be taking on USD currency risk and US country risk. So long as the fund is well diversified this isn't too big an issue, but it's worth considering that most international funds are weighted by the size of their market so they have a LOT of US stocks in them, and are thus more vulnerable to currency risk relative to the dollar.

My aim is to get the dividends while the shares themselves rise in value. That is how these funds work isn't it?

In general you choose one or the other. Growth stocks generally produce low(or no) dividends, while dividend stocks often don't generate much growth. When a company generates profits it can either reinvest them(growing the company and its value) or it can release them as dividends(so they're not reinvested).

Honestly, whether it generates dividends or growth is MOSTLY an emotional issue: some people like to see those annual cash injections. But personally I have a weak preference towards growth since it results in deferred taxation(you're not taxed until you sell, while with dividends you're taxed immediately) and exponential growth. This is why some of the biggest tech stocks out there(think of FAANG) do not release much in the way of dividends.