Thoughts on Indexing as part of portfolio

10th Jan '23 by gary3980

9 comments 565 reads

Have been thinking about introducing some index trackers to the portfolio for a while - keen to hear others thoughts and experiences. My current portfolio is made up almost entirely of UK Small Caps (mostly AIM, albeit in the main profitable with manageable or no debt) and still plan to keep individual stocks.

I've a long term horizon (10+ years), so to reduce both volatility and risk that my stockpicking turns out to be rubbish I'm considering index tracking with any new money added, dollar cost averaging. (Boring, but after holding onto UK small caps the last few years maybe not a bad thing!)

I have a couple of questions and points for discussion:

1) How do you pick what indexes, and how do you weight them? Keen to hear any recommendations, approaches.

My thoughts are still to have bias towards small caps as they outperform over the longer term and I'm ok with this additional volatility. Thinking along lines:

25% S&P 500
25% All world
25% FTSE 250 (this looks good value for now, I am not sure it's buy and hold forever).
25% Small Cap - either Russell 2000 or an all world small cap

2) Do you have any suggested further reading, podcasts etc?

Cheers

Gary

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Paul2148

20th Jan '23

Hi Gary.

30% of my portfolio in an iShares MSCI world index ETF tracker which greatly 'steadies the ship' when my stock picks are under-performing. Idea was a third of the portfolio would just do its thing irrespective of my own ability at investing (which would hopefully provide the out-performance) plus it helps me sleep at night tbh.

I guess how much you split your portfolio is really dependent on your risk tolerance and confidence in picking stocks. The key is to pick which index your chosen ETF / fund tracks, understand what's in it and keep your fees low.

I would highly recommend spending an afternoon watching the PensionCraft videos on YouTube. He very much recommends index investing (low cost - pretty vocal about "star fund managers") as the core of a portfolio and has a back-catalogue of videos reviewing different approaches from All World to Thematic and even Leveraged. Currently he is running an ETF portfolio with a number of ETFs in different baskets based on momentum (equity, bonds, commodities etc.) which you may find interesting.

The channel is really an intro to an investment community he runs (subscription required) but good quality videos non the less. The presenter worked at investment banks and is published so has more of a background than many on the channel. He also has a weekly podcast that is pretty light-hearted and more on the macro. All great quality content.

Phil Mc

Idle investor

Sorry, don't know what happened there. Idle investor by Edmund shing may be worth a look.

DavidMcCabe

21st Jan '23

Hi Gary

I looked at index funds a few years back and at that time, investing in an 'All world' tracker meant that you were 60% correlated with a 'S&P 500' tracker, as the US market was such a large component of the total valuation of stock markets round the world. This may or may not be a good idea, but be aware that you would be heavily concentrated in the S&P 500 by investing in both the world and S&P500 trackers .

This is less of an issue for the FTSE 250 as these companys probably would not make it into an all world tracker, which despite their name, often are just in the top 700 or so companies.

Happy investing!

David

Edgeofchaos

I've invested my kids' jisas in index funds and hold a significant portion of my own portfolio in indexes. The plan being that when a cheap share pops up I can liquidate. Until then I may get some capital gains and will receive a dividend. There are probably better ways of doing this but it seems to work for me.

pka

23rd Jan '23

Hi Gary, you might find a Shares Magazine article from April 2021 about investing using index-tracking ETFs of interest: https://www.sharesmagazine.co....

In case the above link doesn't work, the article's title for an internet search is "Our simple, no stress ISA portfolio".

The article recommended only picking the GBP version of ETFs, to avoid any unnecessary foreign exchange charges for converting US dollars into poinds, for example. All the ETFs the article suggested were GBP versions.

The ETFs suggested by the article for someone who is NOT close to retirement were:

iShares Core MSCI WORLD (SWDA),

iShares MSCI World Small Cap (WLDS),

Vanguard FTSE Emerging Markets (VFEM),

Amundi MSCI World SRI (WSRI).

For someone closer to retirement, e.g. older than the mid-50s, the ETFs suggested by the article were:

iShares Core MSCI WORLD (SWDA),

iShares MSCI World Small Cap (WLDS),

Vanguard USD Corporate Bond (VUCP),

iShares UK Dividend (IUKD).

The article didn't suggest any relative weights for those ETFs.

I'm not recommending these portfolios, just passing on some ideas from someone else.

Personally I think one could do a lot worse than buying, and holding over both bull and bear markets, a portfolio comprising just a single low-cost global index tracker fund, such as SWDA, for someone with a 10+ year horizon who doesn't need to take an immediate income from the portfolio, and who can ride out the inevitable ups and downs in its capital worth. My guess is that SWDA's total return over many years will out-perform the portfolios of most investors, whether professional or private, because it's very well diversified for an equity-only fund (with over 1000 stocks in many countries,though its mainly invested in the US, so one is taking a punt on global economic growth over the long-term), and has very low annual fees and very low transaction costs. Unlike when buying shares directly, one doesn't pay 0.5% stamp duty when buying an ETF in the UK. However, buying and holding a portfolio comprising just one global ETF would probably be considered to be far too boring by most Stockopedia subscribers, possibly to their financial detriment!

gary3980

26th Jan '23

Thanks pka - had a look at the article, the all world and small cap ones look interesting. And agree, maybe not the most interesting for a site geared toward individual stock analysis but can be a useful tool to smooth out some volatility / reduce risk in individual stock selection. There is always the temptation/opportunity cost of what individual stock you could be holding too.

Good point David thanks - I hadn't realised that it was 60% (or 66% I seen when researching there) correlation between S&P 500 and all world index!

Thanks for suggestions Phil & Paul - will have a look into these.

Thoughts on Indexing as part of portfolio

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Gary3980

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