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Thoughts / tips on creating a diversifed portoflio?

Discussion in 'Investing Strategies' started by Crusher, 4th Nov, 2009.

  1. Crusher

    Crusher Well-Known Member

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    Hey all,

    I'm looking to expand what i currently have in investments to have a more diversified approach. I'm sorry if there are already threads out there with this same concept, but for a bit of fun, can some people provide me with some input as the whether im in the right direction, or suggest some things etc..

    So, hypothetically - I have $2000 upfront, and am going to contribute around $500-1000 per month into this portfolio, whether i buy more shares each month, or contribute to a MF, etc..

    I was thinking over say, the first 6 months having a portfolio of companies such as:

    BHP
    Woolworths
    NAB
    Telstra (maybe?)

    ... Thats all i can come up with at the moment :confused: .. And 2-3 managed funds.

    Just curios as to what some people may have done in the past, or.. what sectors i should be spreading across etc..

    Thanks for your help.
    /Alex
     
  2. Tim

    Tim Well-Known Member

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    Buying indivudal shares will eat up transaction costs - considering the ASX is still in the 4500 range, and will move back up to and beyond the 7000 range over the next while, you could consider opening a Colonial First State online managed fund, Australian Geared share fund. This fund will provide diversification into the top 20-50 ASX shares for you - now is an excellent time, particularly with $2k and adding your $500 as dollar cost averaging.

    ASX has outperformed all other global share market over the past 130 years.

    Tim
     
  3. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    Is there any particular reason you're looking at investing in individual shares?

    How are you selecting them? Do you have a criteria for when to no longer hold a particular share?

    As Tim mentioned - a managed fund or ETF may be a better choice as it gives you diversification automatically and avoids the high transaction costs of buying individual shares in small chunks.
     
  4. navjit6

    navjit6 Active Member

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    I am in the process of taking out a margin loan. I have 6 stocks in mind. FIrst 3 stocks are definite. the other 3, i cant as i don't have enough equity as i am going to make sure my LVR is between 40-50%. i will be aiming first to get $10,000 each in the first 3 stocks, and then completely buy then so no leverage, and then look at getting the other 3. and then look at buying others if the prices are still decent. The first 3 stocks, I am going to keep these stocks for long term (+10years), and enter into Dividend Reinvestment Plans if the stocks provide it.

    If i buy RIO in future, i could be tempted to sell if it skyrockets back up to to $150 or more, which i believe it will in the future.

    DEFINITE
    1. BHP
    2. NAB
    3. WOW

    FUTURE (HIGHLY LIKELY)
    4. RIO
    5. WES
    6. TLS


    The reason i don't like managed funds, is because of the investment/management fees, etc, some also have exit fees etc. Though i know they are still a great way to invest, and lots of money can be made, it would be safer, since there is more diversity. BUT I wouldn't want to pay fees for the next 10 years since i am looking at long term investment. Just paying capital gains and brokerage seem better to me.
     
  5. Tropo

    Tropo Well-Known Member

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    "..or.. what sectors i should be spreading across etc.."

    William O’Neil's quote: “Diversification is a hedge for the ignorant”.
    If you do not have a method/system to deal with one stock how are you going to successfully deal with any more than that?
     
  6. Crusher

    Crusher Well-Known Member

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    I'm aware my original post must have seemed quite limited in the amount of thought i've put into this, but i am just curios at how some other people throughout this forum deals with these scenarios.

    I actually do have a CFS geared share fund, worth around $10,000 at the moment.. So i will continue to contribute to that for several years to come.

    It is a good point however in regards to the brokerage, and it is something i have considered. I wouldn't go and buy 10 lots of shares, all at $500 lots, only to pay $20 to buy and a further $20 sell (approx).

    I did like the comment in regards to long term investing and the fees that come with MF and similar investments.. Perhaps i will look at investing in 2-3 MF for the time being, and putting money aside over the next 12-18 months until there is enough to make some individual purchases of shares with minimal brokerage.

    I did read somewhere, never to spend more then 1% on brokerage.. Which is probably not a bad idea.

    To buy say, $500 of XYZ company, trading at $1, and brokerage is $20 to buy and again to sell, that is equal to 8% of your initial investment being tied up in brokerage. So to profit 10% from the XYZ shares, your barely making a few dollars.. But to invest say, $3000 or so, with brokerage equal to 0.6-7% probably isnt to bad.

    But im sure you all knew that anyway :D

    As for some MF to suggest.. Im quite interested in BT, ive heard alot of good things about them and have a meeting with an advisor for BT next week.

    Comments, suggestions?
     
  7. Waimate01

    Waimate01 Well-Known Member

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    As an ex-CFS customer, i feel obliged to mention that CFS tends to have high fees and very average performance, but even worse, they churn their portfolio so you end up with a very large tax bill each year.

    Just to spell this out, if you buy BHP shares for $1000 and two years later they're worth $1500 and you still own them, you pay zero capital gains tax. With the five CFS funds I was in, if my units grew from $1000 to $1500 and I still owned them, I would have been hit up for a couple of hundred bucks in tax even though I never crystalised the gain. I'd have to find the tax money from other sources. When CFS quotes it's performance figures, it fails to mention all the extra money that you have to find to pay the tax even though you never realised the capital gain. With the BHP shares, you only pay the tax when you sell the shares and pocket the cash. CFS sucks, IMO.

    Also, when you look at managed funds in general, many of them will divulge their top ten holdings. When you look at them, you'll frequently find the same stocks popping up. The reason is that most funds base themselves heavily on the ASX200 so as to be sure they don't deviate too far from it. You might find 80% of the stocks held are all the same, and are mostly the ASX200.

    Specialist funds will be completely different of course, but *do* have a look at their holdings to see to what extent they are largely shadowing the ASX200. If you want the same exposure, but with lower fees, buy an ETF like STW or VAS, then maybe take a slice of your money and play some individual stocks or stick it in a completely off-the-wall managed fund.

    Putting your money in three different funds, all of which are heavily based on the ASX200, may not achieve the diversification you seek and ETFs are a cheaper way of achieving the same result.
     
  8. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    If they make you money, what's wrong with paying a fee?

    Why not look at a low cost index fund or ETF?

    You can avoid entry fees easily enough, and there are plenty of good funds/ETFs with no exit fee (exit fees are evil - never invest in a fund that charges exit fees).

    The management fees for index funds and ETFs can be as low as 0.25%pa and they remove much of the risk of picking the wrong stock.

    If just one of your stocks gets into trouble, it will have cost you far more than 10 years worth of fees.

    At the end of the day, there's nothing wrong with owning direct shares - but you do need to be aware of the risks - unless you are educated enough to be able to make good decisions about when to buy, when to hold and when to sell, you run the risk of losing quite a bit of money.

    Look at all those people who were suckered in to investing in Telstra and still haven't made any money!
     
  9. Crusher

    Crusher Well-Known Member

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    Some good points there also. I havent really heard much of ETF's so i might have a look into them.

    Sim - your right about owning one share and it going downhill, the difference will be much greater then 10 years worth of a well balanced managed fund, for example.. I bought 5500 shares in Rivercity Motor Group, at around 50c or so, now they are 16c. So im down well over 50%, say.. $1100 or whatever it might be (i bought shares at 50c and again at 36c or so) so $1100 in fees for a well balanced less riskier MF one would think they would have your portfolio at least in the green.

    Interesting point on the holdings of these MF, i have noticed majority that ive looked into hold the same, or very similar shares.. BHP, big banks, Telstra, etc..

    The mention of paying fees on un-realized-capital-gains with CFS MF is something i have come across.. Ive paid hundreds in taxes as it is, and the fund it barely water level from the amount ive put into it over the past 2.5 years. maybe this is something to consider for future.. However, all funds are probably similar right? I'll look into ETF's now, and see how they differ.

    Thanks for the feedback on the query though, much appreciated.
     
  10. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    That's because many of the larger funds are based around the ASX200 index as their investing universe. Our index is very top heavy, with a relatively small number of companies making the vast bulk of the weighting of the index - thus most broad managed funds tend to hold the same shares.

    You need to go to more specialist funds (sector specific or a different market segment) to find some real diversity.

    Investing in multiple managed funds which invest in the same universe with largely the same strategy is a waste of time in my opinion - all it does is diversify the manager risk slightly (and not always then!)

    It's called "churn", and relates to fund managers turning over the shares in their portfolio relatively frequently as they adjust their trading strategies. This leads to realised capital gains within the fund, which must be distributed to unitholders.

    No, not all funds are similar - some are much worse than others. Index funds generally have much lower churn - they only buy or sell shares when the structure of the index changes (which is only several times per year usually). ETFs are generally (but not always) index funds, so should typically have similarly low rates of churn. You do need to check this out for yourself though before investing - have a look at the income breakdown for the annual distributions to see how much of it comes from dividends and how much from realised capital gains and such.
     
  11. Crusher

    Crusher Well-Known Member

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    Thanks Sim. That does put alot into perspective.

    This 'churn' you mentioned - makes sense (you obviously know what your talking about :D) for example, i didnt receive distributions from the CFS MF for a period there, probably because the fund manager didnt turn over any shares, since they had dropped to such a low price. Now i see that when a distribution is paid, it is because the fund manager has seen that the shares are in the green, sold off the asset and distributed the profit accordingly.

    Learning alot. Thanks for the input.

    Another good one is the point on investing in say 2-3 MF that are all index based. Whats the point in paying 2% approx on the 3 MF that invest in the same type of strategies. Like you said, thats around 6% in fees for the same (similar) result across the board.

    I checked out the ETF, they seem quite interesting, from what i can gather.. a managed fund listed and traded like shares? This will prove quite interesting. i will be looking into these alot more.
     
  12. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    It's not quite that bad.

    If you have $30,000 in one fund that has a 2% management fee, you pay 2% of $30,000 = $600 pa

    If you have $10,000 in each of three funds that all have 2% management fees, you pay 3 x 2% of $10,000 = 3 x $200 = $600 pa in fees :D

    ... there is a slight extra cost by way of buy-sell-spread (effectively the equivalent of brokerage on share purchases), but investing three lots of $10,000 in one fund vs three lots of $10,000 in three different funds leads to pretty much the same result too.

    I think the more important message is to understand that investing in three different funds which all buy the same shares it not really diversifying your portfolio. There is such as thing as manager risk that you need to consider, but I wouldn't consider that it's worth investing in three different (but largely identical) funds.

    Yes, a managed fund which is listed and is traded like shares. They aren't valued in the same way that shares are and generally there is a "market maker" which ensures liquidity for the fund, unlike other shares ... but the mechanics of buying and selling them work exactly like shares.

    ETFs are relatively new to Australia and are only just starting to gain in popularity here. They are huge in the US - there are hundreds of them to choose from.

    The only real downside with an ETF is that the brokerage cost for relatively small amounts can be quite expensive compared to the buy-sell spread for a fund. Also, many managed funds offer automatic investment plans (a regular amount is deducted from your bank account to invest in more units), which is not really possible with an ETF (primarily for the same reason previously mentioned - the cost of brokerage).
     
  13. kajagoogoo

    kajagoogoo New Member

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    Hey,

    While we are talking about trading strategies I thought I would add my 2 cents worth.

    I have benefited from a couple of people and I thought I will share it. Two stock pros provide stock and ETF recommendations in real-time via email so you can immediately act on their recommendations. I have never lost money with them.

    You should check out this excellent source about market timing and stock investing, it's quite useful: Stock Market Timing Results Model|Gil Morales-Virtue of Selfish Investing

    -KGG
     
  14. Johny_come_lately

    Johny_come_lately Well-Known Member

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    Tropo has quoted O'Neil.

    William O’Neil's quote: “Diversification is a hedge for the ignorant”.

    I think diversification Is a hedge. But hedging doesn't have to be a bad thing. Hedging is a bet both way. And of course, it come with a cost.

    Studies have shown, that Asset Allocation determines 90% of the returns of a portfolio. However, picking the right assets, for the future, is like flipping coins. Nobody knows 'The next big thing' before it exists. By having a bit of everything, you will own the high flyers and the dogs. If you spread your portfolio across all markets in all sectors, then you get a Total Market return.

    Combine this market with Bonds/Fixed interest, according to your risk tolerance. This percentage will affect how high your total return will be, but also how much you will lose.

    ETFs are the cheapest way to diversify. And they are becoming more popular in Australia. Second best are index funds.

    A dozen ETFs/Index Funds can hold thosands of companies. This controls company risks. Of course, it does not control Market risk. That's what the bonds are for.



    Johny. :)