I’ve had a number of discussions with investors over the last few weeks about investing in the Macrobusiness fund versus “do it yourself” investing and thought it worth aggregating the discussions into a post.
Part of what I want to do with the MacroBusiness fund is to de-mystify portfolio investing. Many parts of investing are the equivalent of changing a light globe – you can do it yourself for very little and hiring a professional to do it for you will be expensive. Other parts are more like electrical rewiring – it is entirely possible to do yourself but a professional can (usually!) do the work to a better standard, faster, and with greatly reduced possibility of electrocution.
Keep in mind that I’m talking about a broad-based, diversified portfolio solution here – not about trading in speculative stocks.
So, let’s look at how to do it yourself – then you can decide whether to call in the professionals or not.
There are two key decisions that an investor needs to make:
- Asset Selection: How are you going to choose which individual stocks or bonds to own within classes.
- Asset Allocation: How are you going to decide to allocate between different classes of assets like cash, bonds, shares or other assets
DIY Asset Selection
I’ve put this one first because it has an easy DIY option – an index fund or exchange-traded fund. These will deliver the index performance less fees – and the fees are usually relatively low. So, you will get slightly below index performance – you will never outperform the index but you won’t underperform by much either.
The downside is that you get everything in the index, at index weights. If you don’t like a sector or have a problem with a particular stock, bad luck. Fees are around 0.2%, lower for the US, higher for other markets.
Another way is to invest in individual stocks/bonds and build up a portfolio. The benefit is you can customise the portfolio to your investment outlook, risk preferences and you don’t incur any fees. There are often tax benefits to owning shares directly. However, if you want to do this yourself, be prepared to spend a lot of time. You’ll need at least 20-30 stocks, plus bonds, and if you are looking at a global portfolio then probably double that (at least). You need access to research, trading capabilities and risk systems. Say you have $200,000 and you own 70 securities. You have some larger holdings, some smaller. The smaller holdings will probably have $2,000 or less in them. You still need to research, trade and manage the risk for each stock – but it’s a lot of work for each stock for what is a small investment. This is not an easy option for most investors. With a round trip (buy and sell) cost of >$100 for international stocks the hurdles are high for outperformance.
Another way is to go to a broker and get them to help you by doing a lot of the research and trading for you. This is usually the highest cost option, and only barely fits the definition of DIY. Most brokers have a vested interest in you trading more often, which often doesn’t make for the best investment outcome.
Finally, you can move to a core / satellite solution. Choose a lower risk fund manager or an index fund to put most of your funds into (the core) and then surround that with a few stocks or higher risk funds that you choose yourself (the satellite).
DIY Asset Allocation
This is the hard one. For asset selection you can choose some form of index that will deliver similar returns, but for asset allocation there is no index.
Some people recommend a “strategic” allocation where you basically take long term risk / return numbers and create a portfolio based on these strategic weights. This is an admission that asset allocation is hard and essentially avoids making a decision by using long term weights. Which is fine. If you don’t mind waiting for 20 years for averages to re-assert themselves.
The other problem that you get is that assets that are in a bubble (by definition) have a great performance history, and so strategic asset allocation at the end of a 20 year bull run in Asset Class A will usually recommend buying lots of Asset Class A just before it crashes.
Your other option is “tactical” asset allocation, where you buy or sell classes of assets based on something else. Some rely on systematic (computer driven) models, others are discretionary, trying to avoid risks in one asset class or gain exposure to the upside in another. Valuation should play some part in your decision.
If you are going to do it yourself, then there is no “default” answer on Asset Allocation, you’ll have to decide what works for you.
How does MacroBusiness fit into the above picture?
Many of your fellow readers use the MacroBusiness website to help with their tactical asset allocation decisions already. We didn’t start the fund to stop people doing that, we started the fund to help them do more of it. In particular we want to:
- To provide an asset allocation solution for investors who agree with many of the Macrobusiness themes but don’t want to do it all themselves.
- To provide core portfolios for investors who want to run a core/satellite strategy (presumably using MB commentary and views as an input into their decisions)
On the asset selection side we have a team with considerable expertise in stock picking combing over a global portfolio of stocks.
On the asset allocation side, David and Leith’s view on asset allocation are publicly available for years on the MB site. I’m adding on-the-ground investment experience to deliver portfolios that put their thoughts into action.
Side note on the Foundation portfolio
The “Tactical Funds” provide investors with “the works” – asset allocation and stock selection, customized to your risk profile, income needs and ethical choices.
The goal of the “Foundation Fund” is to provide investors with smaller balances an opportunity to take advantage of the asset allocation. It only has a small amount of stock selection in it, because unfortunately you can’t buy half an Alphabet (Google) share – i.e. to get a broadly diversified portfolio, owning direct shares is not an option if you have a small balance. This is why we use exchange traded index funds for international.
For the Australian exposure, instead of using an exchange traded index fund (which will have banks and resources at full weight) we have used an ASX 20 and reweighted it to be underweight (but not zero-weight) banks and resources. Yes, MB doesn’t like banks or resources at current prices, and so we express that in two ways: (1) we are very underweight Australia, (2) we are underweight banks and resources within Australia. But the portfolio is a core holding, not a hedge fund and so we need to construct a portfolio that is diversified which means that given banks and resources are 50% of the ASX20 we need to own some of them.