Get all cash out of the bank

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Originally Posted by christopher leigh

Your position is quite natural considering our history.

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huh?

not sure what you mean.

Think you 2 should have a head to head via somthing similar to the link below, see who the shrewdest cookie is...............

http://www.bullbearings.co.uk/

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Originally Posted by christopher leigh

Paragraph 1) You stated in an earlier post that DIVERSIFICATION alone is not a guarantee to performance.

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Firstly, I never said it guaranteed growth in any post - I said it was an effective hedge against an economic downturn. Even with your simplistic example of 4 companies, there is a chance that you would lose less money (being an effective hedge doesn't necessarily mean you make money) than if you'd ploughed all of your money into one.

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Originally Posted by christopher leigh

Then you went on to the 'but' 'if you've asked all the right questions.' So I'm not spinning anything. You've gone from deterministic certainty about diversification to putting conditions on it, like 'asking all the right questions.'

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Let's put this to bed - you're intentionally missing the point now.

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Originally Posted by TheHeathens

Diversification is King.

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Originally Posted by TheHeathens

You need to diversify across a number of investments.

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Originally Posted by TheHeathens

I've mentioned twice that Diversification is Key and you've avoided it twice - very few of our clients have lost money in the last year even with the FTSE down by about 20% because we've diversified their portfolios.

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Originally Posted by TheHeathens

I'm not implying that diversification is good - it is good (and the FSA agrees - they could uphold a complaint for misselling against advisers if there was no diversification). The whole point of diversification is to lessen the impact on your portfolio if things go belly up - a case of not putting all of your eggs in one basket.

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Originally Posted by TheHeathens

Diversification alone is not a guarantee for performance, but if you've asked all the right questions then it should usually provide a better hedge against an economic downturn than investing in individual stocks.

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Ok, so where did I say at any point it would guarantee performance.

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Originally Posted by christopher leigh

The problem with your argument is the asking of all the right questions. You cannot ask questions when there are no answers. One example will suffice: A few years ago pubs were doing very well here. So if you decided to buy a busy pub, then you could expect to do well. Then the fascists in government sprang the smoking ban on them. Now pubs all over the country are going out of business. Not just because of the smoking ban I know, but a big part of it.

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Firstly, that's an very poor example - you could have foreseen the fact that a smoking ban was going to come in, because it had done in Ireland and a few US States to name but two beforehand. You should have asked that question.

Secondly, where's the diversification in just buying just one pub? You've perfectly proved my point with that example! If you ploughed all your money into one investment (like gold, or the pub in this example) you shouldn't be too surprised if it falls in value.

Diversification would be (for example purposes) buying a pub, and shares in Tescos (whose alcohol sales have risen). You wouldn't stop there though, because statistics show a correlation between Pubs and Supermarkets so you'd invest in something not related to them (for example, gold and gilts) and spread your investment around. The more uncorrelated your investments, the better the diversification. It's a very simple concept.

What I think you are trying to illustrate is called Systematic (or Market) Risk and is caused by things like legislation changes, inflation rates, exchange rates, political instability, war and interest rates. This is just a risk you have to accept as in investor (and applies to gold too) but you can make educated guesses about the likely outcomes.

Unsystematic Risk is specific to a company, industry, market, economy or country; it can be reduced through diversification (i.e not putting all of your eggs in one basket)

Ok, I'll give you a working example of one of our portfolios for someone with a risk profile of 6/10, but first, you need to take a few things into account:

1) These are invested in collective funds. Collective funds invest in about 40-80 individual shares (different companies within the same area - e.g UK All Companies) so you already have some diversification there.

2) The different funds are (generally) invested across different geographical areas / sectors so you've got further diversification.

THIS DOES NOT CONSTITUTE ADVICE!

Ok, the funds:

http://wareing.www.idnet.com/funds.gif

You can see that over the last year, the portfolio has lost 7.64% (remember I said it was no guarantee for positive performance) but the FTSE 100 has lost 22.53% over the last 1 year.

Over 3 years, the portfolio has gained 18.04% whilst the FTSE has lost 2.24%. Just a footnote - investing in shares should be seen as a minimum of a 5 year investment

Now the diversification bit:
http://wareing.www.idnet.com/Region.gif
Ok, notice the asset allocation split. Most is in equities (shares), but there's a little bit in cash and about a third in fixed interest.

Next the Sector allocations show you where the money is invested (product areas) and the Region Allocation show which countries the portfolio is invested in.

Lastly, look at the top 10 holdings: You've got Gilts, Oil, Pharmaceuticals, Telecommunications and Banking (HSBC are largely unaffected by the credit crunch). These do not react to the market in the same way.

Finally, the performance over 3 years v the FTSE 100:
http://wareing.www.idnet.com/graph.gif

They've pretty much been the same until the start of the Credit Crunch a year ago, when the diversified portfolio has come into its own, outperforming the UK shares (FTSE 100).

That's just one example - your problem is that you're thinking on a far too small level. Across those funds above, there are probably 400 - 600 individually held shares spread across Europe, Asia, North America, Latin America, UK, Oceania. Within each of those areas, you then have further diversification; for example, China banks, China Mining Companies, China Textiles, UK Banks, UK Oil, UK Gilts.

I'm not going to waste any more time on this, because it's clear you know nothing about it and are arguing for the sake of it. I recommend you visit the following website for a crash course : http://www.investopedia.com/?viewed=1

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Originally Posted by christopher leigh

Diversification is really for people who don't know what they're doing(the ignorant). Which is understandable considering the points I made about our government.

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However much you think you are, you are not Warren Buffett!

In my view most Financial Advisers have no more idea about a portfolio than any reasonably educated person.

Small gains = lower risk shares
Big gains= higher risk shares

simple rules. We have to eat, need water, gas, electric etc etc , dont risk everything in say the electronics sector, spread it about a bit. And yes like Heathens says 5 years minimum.
Its not rocket science.

Blimey - must be quiet in Theheathens office at the moment!

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Originally Posted by Boy Wonder

Blimey - must be quiet in Theheathens office at the moment!

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Working from home today - flexible hours you see and I was doing a Suitability report on that portfolio. But this has taken far too much time!

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Originally Posted by daz h

In my view most Financial Advisers have no more idea about a portfolio than any reasonably educated person.

Small gains = lower risk shares
Big gains= higher risk shares

simple rules. We have to eat, need water, gas, electric etc etc , dont risk everything in say the electronics sector, spread it about a bit. And yes like Heathens says 5 years minimum.
Its not rocket science.

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You're absolutely right Daz. But the difference between a good financial adviser and a bad one is huge. In my old job, there was a financial adviser who wrote a group pension scheme and put the default fund down as an ethical UK equity fund. Most employees joining their employer's pension scheme just invested in this fund, and it's gone down 22.1% over the last year.

The industry is getting more professional (at the moment the entry level exams are akin to A-Levels but this will hopefully be rising to the degree level ones) and this is being embraced by the majority of the profession. The main people opposing the change are the advisers who aren't very confident that they will survive the FSAs Retail Distribution Review.

A good financial adviser will spend a large amount of time going to seminars, researching the market and deciding where the smart money is to be invested. The trick then is then researching the best funds within that sector (not necessarily past performance - those funds that have done well over the last 10 years included banks etc). You can't stop there though because the economic conditions change and you need to continually re-assess your portfolio (at least annually).

Someone may look at index-linked gilts (that track indexation) and the performance over the last year, and decide to invest. In fact the current markets (lower demand) mean we're probably going to experience disinflation and you've probably already missed the boat. If (as many economists think) interest rates are reduced to about 3.5% then Corporate Bonds and Gilts may be the way forward, whilst index-linked gilts will probably reduce in value.

It's not rocket science but you do need knowledge of the markets and time to research properly, which is beyond most people's inclination.

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Originally Posted by TheHeathens

Firstly, I never said it guaranteed growth in any post - I said it was an effective hedge against an economic downturn. Even with your simplistic example of 4 companies, there is a chance that you would lose less money (being an effective hedge doesn't necessarily mean you make money) than if you'd ploughed all of your money into one.



Let's put this to bed - you're intentionally missing the point now.











Ok, so where did I say at any point it would guarantee performance.




Firstly, that's an very poor example - you could have foreseen the fact that a smoking ban was going to come in, because it had done in Ireland and a few US States to name but two beforehand. You should have asked that question.

Secondly, where's the diversification in just buying just one pub? You've perfectly proved my point with that example! If you ploughed all your money into one investment (like gold, or the pub in this example) you shouldn't be too surprised if it falls in value.

Diversification would be (for example purposes) buying a pub, and shares in Tescos (whose alcohol sales have risen). You wouldn't stop there though, because statistics show a correlation between Pubs and Supermarkets so you'd invest in something not related to them (for example, gold and gilts) and spread your investment around. The more uncorrelated your investments, the better the diversification. It's a very simple concept.

What I think you are trying to illustrate is called Systematic (or Market) Risk and is caused by things like legislation changes, inflation rates, exchange rates, political instability, war and interest rates. This is just a risk you have to accept as in investor (and applies to gold too) but you can make educated guesses about the likely outcomes.

Unsystematic Risk is specific to a company, industry, market, economy or country; it can be reduced through diversification (i.e not putting all of your eggs in one basket)

Ok, I'll give you a working example of one of our portfolios for someone with a risk profile of 6/10, but first, you need to take a few things into account:

1) These are invested in collective funds. Collective funds invest in about 40-80 individual shares (different companies within the same area - e.g UK All Companies) so you already have some diversification there.

2) The different funds are (generally) invested across different geographical areas / sectors so you've got further diversification.

THIS DOES NOT CONSTITUTE ADVICE!

Ok, the funds:

http://wareing.www.idnet.com/funds.gif

You can see that over the last year, the portfolio has lost 7.64% (remember I said it was no guarantee for positive performance) but the FTSE 100 has lost 22.53% over the last 1 year.

Over 3 years, the portfolio has gained 18.04% whilst the FTSE has lost 2.24%. Just a footnote - investing in shares should be seen as a minimum of a 5 year investment

Now the diversification bit:
http://wareing.www.idnet.com/Region.gif
Ok, notice the asset allocation split. Most is in equities (shares), but there's a little bit in cash and about a third in fixed interest.

Next the Sector allocations show you where the money is invested (product areas) and the Region Allocation show which countries the portfolio is invested in.

Lastly, look at the top 10 holdings: You've got Gilts, Oil, Pharmaceuticals, Telecommunications and Banking (HSBC are largely unaffected by the credit crunch). These do not react to the market in the same way.

Finally, the performance over 3 years v the FTSE 100:
http://wareing.www.idnet.com/graph.gif

They've pretty much been the same until the start of the Credit Crunch a year ago, when the diversified portfolio has come into its own, outperforming the UK shares (FTSE 100).

That's just one example - your problem is that you're thinking on a far too small level. Across those funds above, there are probably 400 - 600 individually held shares spread across Europe, Asia, North America, Latin America, UK, Oceania. Within each of those areas, you then have further diversification; for example, China banks, China Mining Companies, China Textiles, UK Banks, UK Oil, UK Gilts.

I'm not going to waste any more time on this, because it's clear you know nothing about it and are arguing for the sake of it. I recommend you visit the following website for a crash course : http://www.investopedia.com/?viewed=1

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Heathens you're a waffler. You're waffling to divert attention from the crux.I don't appreciate your snide comments either, about my education. You either want to debate properly or you want to waffle.

You stated that diversification is good. I say not necessarily. In other words it might be or it might not be. If I invest in the heroin industry in 3 countries is that good? If I invest in 1 or 2,3,4,5 pubs(diversification) and they all fail is that good?

Now you say that people should know that the government was going to bring in the smoking ban. How do they know? Because they did it in other countries? Why do you think countries have their own laws? They don't always follow suit.

The reason you advocate diversification is precisely because of the above. You don't know what's going to happen next. If you did you'd invest in one company. The most successful one.

To make this clear to anyone interested in this debate, I'll prove my point: If you invest in three companies and we'll assume for the sake of argument, they're all successful. In that case it's very unlikely they'll all succeed to the same degree. Therefore you didn't make the right decision, because if you'd invested in one(the most successful) you'd have got a bigger return than diversifying in three.

Diversification is for gamblers. Like people who play roulette and put five one pound chips on each square, in the belief that that, is better than placing one five pound chip on one square. It's called gamblers fallacy.

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Originally Posted by christopher leigh

I don't appreciate your snide comments either, about my education.

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It's all right, Chris.

I'm sure the forum don't judge your arguments on your education.

Though they may judge them based on the comments made by other people who know a little about sports science, financial advice, politics, economics...