Many good points made by Richard, Darren and Sheldon above.
In the realm of asset allocation, the ‘allocation’ part is often a key driver of long-term returns. The other important part is of course the funds themselves.
How much you invest in each asset class determine the overall returns. When investing in funds, investors have to answer:
a) Is the fund’s allocation matching their risk appetite? b) Is this allocation in sync with their long-term investment views?
Take the Schroder Managed Balanced fund, mentioned by Richard above. According to its factsheet, the fund holds 74 percent of its asset in Developed Market equities and another 5 percent on Multi-Asset income. Commodities allocation is a small 2.5 percent.
While diversification is a core principle that all investors should adhere to, is the fund over diversified? It may be.
If you, for instance, allocate 10 percent of your portfolio to the Schroder Managed Balance fund, which itself is spread over 10 asset classes, whatever you choose for the other 90 percent will most likely overlap with that fund.
Moreover, a fund-of-fund does not allow you, as an investor, to express your long-term investment views fully, since the fund determines the broad allocation mix.
If you wish to take a more active role in fund investing, perhaps sticking to niche, ETF-type funds may be more appropriate.
For instance, you invest a percentage in global equities (VEU), another percentage to US (SPY) and US Tech (QQQ), another percentage to UK (ISF) and Europe (MEUD) equities, and then a portion to either regional or single country equity ETFs; and then a portion to bonds (TLT, IGLT) and gold/silver.
Passive, indexed vehicles like ETFs have lower costs than traditional funds.
The last point when investing in funds is this: What do you do when the fund is doing poorly?
In finance, fashion comes and goes regularly. Economic cycles push some asset classes deep into the red at some point. Think of bonds in 2022/3. When this happens, do you add, trim or just hold?
On the other hand, if a fund is doing well, do you add, hold or sell?
Strategic decisions like this are as important as funds selection. There are many ways to build a portfolio of funds. Having a plan, however simple, is critical when managing a portfolio of funds.
