Ask investors what their portfolio is worth and they’ll give you a number. Ask what it owns, and things get vaguer. A video on the Bloomsbury Wealth YouTube Channel.
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Transcript: Robin Powell & David Jones / Formerly of Dimensional Fund Advisors
Robin Powell: Ask investors what their portfolio is worth and they’ll give you a number. Ask what it owns, and things get vaguer. That’s not their fault. We’re told what we own in fund names, and a fund name tells you very little. David Jones spent three decades as a financial planner before joining the fund manager Dimensional. He says most investors know far less about their own money than they think.
David Jones: There was this huge knowledge gap in investing as to what people actually had. And I suppose that’s why a lot of the work that I did was essentially trying to simplify things, so that people would actually understand the basics and be able to articulate: what is it that I have? How does it work? What’s it expected to do? How’s this going to help me in 20 years’ time? All of these questions. And my regular review meetings would generally just be hammering the same messages home, time after time, to make sure that they got it.
RP: Those four questions are harder than they look. And even investors who can name every fund they hold can be wrong about what they own.
DJ: You think, oh, I’m going to diversify. So let’s say I’ve got fund manager X’s UK equity fund. I’ll diversify with fund manager Y’s equity fund, and I’ll do 50/50. You go, okay, fine, you look like you’ve diversified that risk. But actually, if you drilled into the underlying holdings, you would find that there’s a massive amount of overlap. So you haven’t diversified at the holdings level. You’ve diversified at the fund manager name level.
RP: Two funds, two managers, two names on the statement — and underneath, largely the same companies. So why do so many portfolios end up looking like this? Partly it’s history. There was a long period when adding funds, and switching between them, was how the industry showed clients it was doing something.
DJ: Crudely, it’s where advisers saw a lot of their value add was — well, I’ve just been able to put a lot of funds in, and I can swap them in and out. This one underperforms this year, I can swap it out. And so there’s a lot of activity around that. Obviously, the cynical amongst us might say, which generated nice fees for that activity. But when you actually analyse the results of it, it was just money going round in circles. And it wasn’t typically generating great outcomes for clients, and it was an expensive way to access the market.
RP: So if adding funds isn’t the answer, what is? The alternative is simpler than the habit it replaces.
DJ: The point is, hold the market. You’ll have your diversification, and then reduce the frictions in accessing that. That’s the way to go. Then, if you’re going to do things that are different to that, then you use systematically the exposures to parts of the market that are expected to have higher expected returns.
RP: That last idea — favouring some parts of the market over others — is a deliberate choice, not a hunch. The bigger message is simpler. Diversification isn’t a count of fund names. It’s about what your funds own, and whether they own different things. Hence David’s four questions. What do I have? How does it work? What’s it expected to do? How will it help me in 20 years’ time? If you can’t answer all four, ask your planner.
Disclaimer — The information in this video does not constitute advice or a recommendation, and you should not make any investment decisions on the basis of it. If you do however require advice please do not hesitate to contact Bloomsbury Wealth.
