Investing with Dozens and ideas for the future

Yes, I suppose its the wrong term. I have been asked to self declare as a sophisticated investor on other platforms (and met the criteria), but yes they weren’t mainstream products. My point however is simply that I think there should be a mechanism whereby we can opt out of hand holding and restrictions on choice.

I don’t think this is the right thread thread for discussing investment strategy as it will get in the way of discussion of the app/platform. It’s partly why I suggested earlier it might be a good idea for a dedicated thread on fund ideas. But to comment briefly - some of the 5 year periods your your graph have 40-50% swings in GBP/USD. I would say this is quite significant, even if generally dwarfed by equity movements. I’m prepared to lock in ~ 2% cost across 5 years (annual premium of ~ 0.35%) to guard against possibility of 40-50% negative impact due to currency movements. I wouldn’t do it across decades as your graph shows currency movements cancel out over decades.

I really hope it wasn’t the London Capital and Finance mini-bonds. :wink:

Yes, this part I totally agree.

TBH, I don’t think this is entirely off topic. Because the answer to my question actually shows investors have different believes and needs, and if Dozens want to attract experienced investors, this is actually pretty relevant.

As you’ve pointed out, some investors like you are willing to pay the small cost of currency hedging to avoid the possibility of 50% exchange rate down swing over 5 years (arguably, the equity return were much more than that, and the overall returns were positive), or catch a rare 40% exchange rate up swing, while others like me aren’t. It’s because we have somewhat different believes, strategies, or goals, and the time horizon also plays an important role. To cater for both types of investors, Dozens will need to have a hedged and an unhedged version of the same fund at the same time.

BTW, I’ve actually posted in another thread a few weeks ago, asking why do we not have an unhedged S&P 500 fund.

Off-topic, I don’t use any currency hedged fund in my portfolios, but I do manage the currency risk via other “cheaper” methods, such as exposure to FTSE 100 and gold, both produce returns while also have the tendency to move in the opposite direction of the GBP/USD exchange rate. To me, it’s better to manage the currency risk for free (or better, get paid to do it), than paying a cost to mitigate it.

I understand all the points above about perceived ‘babying’, but I think the hassle of a few extra clicks for a user needs to be weighed against the risk of the hassle / massive expense of even spurious claims/complaints of mis-selling.

I’m sure a lot of discussions were had / advice was taken on ensuring Dozens have sufficient record that customers understand the risks they are taking.

I’m sure nobody here would do it, but you can see the risks of spurious or just plain malicious claims? Blame the people who came up with PPI :slight_smile:

Personally, I think you should have to upload a video of yourself, each time you invest, clearly stating ‘Hello, me from the future. You risked losing this money and now it’s gone. There’s nothing you can do, just deal with it. If this video is being played to a judge/jury I direct you not to rule in my favour. I hereby plead guilty to any and all counter-claims made against me by Dozens / Project Imagine - throw the book at me’.

Maybe I’ve swung too far the other way? :slight_smile:

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Hi @dan_g,

The reality is, there’s dozens (no pun intended) of platforms out there, and you rarely see any platform “babying” their customers. They all got away with it by telling their customers: “Please remember that the value of an investment and the income from it can go down as well as up and you may get back less than you invested”. Perhaps equally important, they also make it clear that they do not provide advise.

Imagine how day traders will react to that. Although admittedly Dozens misses lots of features for day traders. Real-time charts, limit order, etc., just to name a few.

Yes, way too far. :wink:

I had hoped the sarcasm would become apparent at some point in there… My point was that there is a balance for Dozens, and they’ve stayed on the safer side.

No day trader would consider Dozens for that purpose, and I don’t think it is the market Dozens want (yet?). Anyone who thought they could use it that way would be clearly demonstrating they were not a ‘sophisticated’ investor :).

Its “Spender to saver to investor”, not (day) trader. If you take someone on a journey from managing day-to-day spending and no savings to building an emergency fund to risking some of your capital on the stock market all in the same app, then extra warnings are entirely appropriate.

I’m sure you’ve seen a correlation between strength of warnings an intended audience of platforms? Of course HL and co have less-stark warnings - because you only need to self-certify once as ‘willing to take risk’ and everything you do on their platform is investment, and a customer is firmly in that world with its associated risks every time they log in. That’s very different from 1 app to pay your rent, build an emergency fund and try out investing.

I agree that easing these warnings off with some sort of expert investor mode might be a nice-to-have, but I think there are other much more important/exciting/interesting things that could be done. In the mean time, a few extra warnings to see off bogus mis-selling complaints seems the right balance to me.

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That’s a part of the big picture I’m trying to understand. What is Dozens’s target market?

I’m fully aware that at the moment it’s focused on the spender-saver-investor, but what’s the mid to long-term plan? Do they want to target at experienced investors, or a step further, day-traders? It’s worth pointing out that the spender-saver-investors will gradually become more experienced, but unlikely to turn themselves into day-traders.

For those soon-to-be novice investors, I’d argue that there may be enough warnings on the app, but the recommendations/guidelines given to them are way too misleading, and may have dire consequences. See my comments on the irresponsible goal setter above.

Ideas to fix and improve the goal setter:

  1. Ask the user when do they need the money, instead of calculating it based on the risk level the user choose. If they need the money in 5 years or less, recommend them to use cash savings products instead.
  2. Ask the users whether they have expensive (as defined by APR) debts, and make it clear that this doesn’t include the student loan.
  3. Check (and ask if they don’t have enough on Dozens, because they might have it elsewhere) the user have enough emergency funds.
  4. Change the predicted annual return to a more conservative and realistic number. More on this points below.
  5. If the investment fall short of the expected return, what can the user do in order to meet their goal? (e.g.: delay the purchase, draw savings from elsewhere, or purchase something less ideal but cheaper instead, depending on what the goal is)
  6. Have some pre-build portfolios for each risk group. As a starting point, those multi-asset funds (perhaps the world equity fund too) can form a portfolio on their own. I’d argue that most if not all other funds are not suitable to be hold alone.

Let’s discuss the expected annual return. My best guess is, right now it’s using the annual return (CAGR) over a long period of time. This might be okay if your are investing for 30 years or longer, but we rarely do. For a shorter time horizon, it is a fairly misleading number. Invest for one year in the highest risk group, the reality will fall short of it more than half of the time. I.e. the user will have less than 50% chance to reach their goal. Even hold the EM fund for 5 years, there’s still 35% chance to loss money. The chance does improve if the user chooses a lower risk fund, but that’s not the whole story either. It becomes virtually impossible to reach their goal if the user chooses the lowest risk fund - short duration gilts. (this is exactly the reason why I said those funds are not suitable to be hold alone)

So, what number should you use in the app? I personally would recommend use the 85th percentile annualized real return (CAGR) over rolling N-years periods from a few decades worth of data, where N is the number years the user intended to stay invested or 10, whichever is smaller. For the examples in the post below, I use individual fund for the sake of simplicity. But the returns should be measured on portfolio, not individual funds. And the portfolio needs annual rebalancing.

For example, invest 10 years in the emerging market equity fund, the recommended method estimated annual real return is about -2.3% (using last 50 years historical data, before fund & platform costs and tracking error). That’s not a typo, it is negative. Because if you invest in EM equity alone for 10 years, there’s a non-negligible chance (more than 15%) that you will end up losing more than 20% (equivalent to 2.3% per year compound) of the initially invested money.

Note: if insufficient data is available (e.g.: the robotic fund, which tracks the STOXX Global Automation & Robotics Index, and historical data is only available since 20 June 2011), this becomes very tricky, and I don’t really have any good recommendation at the moment. Monte Carlo simulations may help, but I don’t like it because it’s hard to take the order of events into consideration without creating any bias. Anyone who can think of something that may work, please feel free to write down your ideas.

I’m gonna explain the methodology a bit.

Why percentile? CAGR is good for measuring past performances, but it’s biased toward to the extreme but rare values, so it’s not a good measurement for managing expectations. If a fund reliably returns 1% annually but had an one-off event doubled it’s value in one of the year over the last 50 years, it will have an average return of 2.39%. But can you expect that you will get a 2.39% annual return by investing in it for the next 10 years? I highly doubt about it. Anyone reasonable would expect a 1% annual return. A quantile number solves this problem nicely. You will get exactly 1% annual return for this fund, whichever percentile number you choose, except the 1st and 2nd percentiles.

Why 85th percentile? It result in 15%, or about 1 in 6.67 chance to fall short of the expected return. This is a small enough probability and should work for most people. You could pick 80th (20%, one-fifth chance) or 90th (10%, one-tens chance) if you like, but I wouldn’t go further than those two numbers. Go below 90th will include way too much noise and make the expected return unrealistically low. Go above 80th will introduce significantly higher chance to fall short of the expectation of the investors. You may also add an additional “average luck” scenario, which would use the median (50th percentile) number, this should give the user a good sense of what to expect from an average market condition. But if you do provide it, please be responsible and warn the user that they will only have about 50% chance to achieve this number.

Why annualized real return? Annualized percentage rate makes it easier to compare different products. You’d expect a bank to advertise a 2% AER 5 years fixed interest savings account, not 10.4% 5 years fixed interest savings account for the same reason.

Why annualized real return? For those who aren’t familiar with the terms, real return means inflation-adjusted return. The opposite is nominal return, which is not adjusted for inflation. The reason to use real return is because investment often involves a fairly long time horizon, and inflation cannot be ignored. Invest £100,000 at 8% can make you a millionaire in 30 years, how exciting? But by that time £1,000,000 would only worth a bit over £414,000 in today’s money if the inflation was 3%, not so exciting any more, right? If someone is saving for an university fund for their new-born baby, they will almost certainly use the cost of university in today’s money as their goal, unless they are financially well-educated, but then they should be able to read and understand the small prints on the app, and pick the correct numbers to use anyway.

Why over rolling N-years periods? For high volatility investments, such as EM equity, annual return over the entire time period (8.3% in the last 50 years) isn’t very representative and will give you a false sense of high return and low risk. The discrete returns is even worse - too many extreme values. You need one representative number that doesn’t over or under-estimate the returns, and doesn’t create a false sense of security, that’s why I recommend the percentile return over rolling N-years periods. When the N is close to the user’s time horizon (but capped at certain level, to avoid being too optimistic), this will give a realistic range of returns the user can expect, and probabilities to achieve the returns.

Why measure the portfolio, not individual funds? When you save £10,000 in a 5 years fixed rate cash savings account, do you care if the bank split the money into 5 different pots, some gains money and some losses money? No you don’t. You only care that you will get your £10,000 plus interest back at the end of the 5 years. The same applies to investments. You invest £10,000 in 5 funds for 10 years, the only thing really matters is what you get back in total at the end of the 10 years, not how these 5 funds individually performed.

The advantage of this method for measuring long-term returns are:

  • Being a percentile number, it’s less affected by very rare and extreme events. These events will have bigger impact on the CAGR over the entire period.
  • It still takes considerations of the very rare and extreme events, and both the frequency of them and the movement ranges matter too.
  • It takes consideration of the sequence of events, which is something often missing from Monte Carlo simulations based on standard derivation and average returns. E.g.: the market tends to bounce back up after a crash, but it’s not guaranteed (see Japan).
  • It also takes other indirect and often delayed factors into consideration, such as currency movements caused by the not always timely fiscal and monetary policies responding to the market movements, and the effect of the eventual unwinding of the stimulus.

Honestly, the expected returns with probabilities will benefit experienced investors too, and help everyone makes informed choice about the risk they take and the returns they can expect. For an example, even you are a very adventurous and risk-seeking person, if you can achieve your long-term financial goal with 99% chance by investing in a lower risk portfolio, why would you choose to invest in a higher risk portfolio and gives you only 80% chance to meet your goal?

Plus, I haven’t seen any platform offering this kind of tools. You will have a selling point if you made this.

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I’ve said enough about attracting experienced investors. I think I need to talk about another idea to attract the soon-to-be novice investors.

When the user had enough money in the “Grow” section, allow the user to switch to a virtual parallel world, so they can virtually invest their money without taking any real world risk (or gain :wink:). Ideally restrict this to predefined portfolios, so the user can’t mess it up themselves and end up never wanting to touch the “Invest” section again.

I haven’t found a good way to manage the synchronization between the virtual parallel world and the real world when the user makes deposits or withdraws in the “Grow” section. A few ideas and the problems they face:

  1. Retrospectively ask the user what would they have done when they visit the virtual world the next time. The disadvantage is the news about the stock market may create unconscious bias in the user behaviour, and affect the outcome. The user may also disbelieve the outcome, because they were asked to go back in time and make decisions about the “future”.
  2. Automatically buy and sell investments in the virtual world to meet the demand. This is what open-ended investment fund managers are doing. Depending on the amount of money invested and the frequency/value of deposits & withdraws, it may either positively or negatively affect the investment performance. The real disadvantage is this may irresponsibly encourage the user to think of investments as an easy-access savings account.
  3. Keep a cash reserve based on how the user has been using Grow, and invest the rest. This is closer to real world scenario than the two other options above. But, obviously depending on the user behaviour, it may keep a huge cash reserve and create a big drag on the performance, and automatic buy and sell investments is still required to meet demands when the cash reserve is not enough.

Discussions and suggestions are welcome.

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There’s too much for me to reply to here without further input from my colleagues and maybe some organisation of my own thoughts … but this is very exciting to read.

I just wanted to address one particular question which has come up a couple of times in order to keep the conversation on track.

The answer is categorically not Day Traders!

Our goal is to create Financial Wellness for a much wider group of people that have not had access to financial services that are often limited to those with much greater assets - which means you need money to make money and feel secure.

Dozens aims to innovate in the financial services we offer to a new audience, but also those who appreciate what we stand for and are trying to achieve (by, for example, creating a brand driven not by increasing credit but helping customers build their assets for the long term).

So, we will definitely want to make sure we do not exclude customers with existing investments and experience, but we are mainly focused on those who are only getting started.

We are not interested in entering a market to help customers take further risks with their money through buying individual shares, carry out ‘day trading’ or other such trading (as opposed to investing). The fact is that too many UK customers are already too used to conflating ‘investing’ with ‘trading’ and so are not looking after their own future interests.

We are still a small and young business. There are lots of plans we would love to bring to market, but not everything can be done at our scale, and without securing adequate funding. That is what we are working on while we also build the technical infrastructure, and yet we’ve achieved a lot in a short time - if nothing else to have a community like this, with participants like you having useful conversations.

This thread is incredibly useful to see what it is that interests and motivates our customers, so we really appreciate it and can assure you we will be reading it with great interest. I will also try to arrange the recording (or even live) conversation with our CEO @AC soon - so we can maybe go over these ideas and give you feedback from the very top. Keep an eye on the #askAC plans for this.

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A post was split to a new topic: Share your journey to becoming an investor

BTW, I do think that you need money to make money and feel secure. I wouldn’t be able to risk £100 when I only had £1,000, but I wouldn’t mind risk £100 if I had £10,000. Without risking the £100, I would be earning pity interest from the £1,000 in cash savings accounts. Yet when I had £10,000, I can invest a large chunk of it and still feel secure.

I’m having issues with summary sections of the app not always displaying my investment properly. Specifically:
Profile > Your Money
Invest > Your Goals

The issue is intermittent. Sometimes these show the actual investment amount, sometimes they display £0. I can confirm the money hasn’t vanished by drilling down to goal details and to Investment details and in this location I can see the expected amount.

This is similar to an issue with pending bonds and investments, but now I’m talking about confirmed/live investments rather than pending investments.

Is anyone else experiencing this?

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sorry about this. This is a known issue that has been shared with me before

it seems that there is an issue when we update portfolio values for some customers - and in some cases it gets reset in the app. Nothing affects your investment or account, it is just the data that gets sent to your app on a regular basis.

This is at the top of the list of things the team will be working on once they are back to full strength so we should get this updated for you soon

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On this point, I’m a bit concerned about the the current fund selection process, and whether that meets this goal.

Correct me if I’m wrong, you were deciding on some themes first, then selected the funds that fits into each theme. If I was right about that, I think the process isn’t well thought of. Because if the theme selection came before the risk and suitability studies, you’ll ended up with some very high risk themes such as India, China, Robotics and Cyber Security.

Experienced investors tend to stay away from single country (other than the US and their home country) and single sector funds, unless they want to take a punt on it, or they are building a portfolio based on many single country/sector funds (to either reduce cost or gain an edge).

I’d even argue that some single sector funds are even riskier than some low volatility single company shares.

You’ve expressed that your target market is mainly the people who doesn’t have experience in investment yet. That means they don’t have a good understanding of risk, shouldn’t take a punt on it, and they certainly don’t have the skill to build a portfolio from those high risk funds.

If you don’t want your customers to take the risk of single company shares, why do you allow them to “invest” in (bet on?) some equally risky single sector or single country funds?

Give those funds a risk rating of 5 (the highest) doesn’t solve the problem either, because inexperienced investors have no idea what’s the difference between risk level 4 and 5, other than 5 being riskier than 4. It’s like telling a 6 years old kid who lives in a hot country and has never seen snow that snow is like white and cold sand. They get the rough idea, but won’t understand it, until they experienced it themselves. That’s okay in terms of snow, but it will often be too late in terms of investing.

Right now, if anyone new to investing asks me about the funds on Dozens, I will tell them not to touch any risk level 5 fund (other than the BlackRock Consensus fund, but to avoid confusion, I won’t say it), and also warn them that risk 5 means your may loss more than half of your money in one week, and may not be able to break even for many years, or decades if they had a bad luck.

What can be done to fix it? I’d suggest remove all the following funds:

  • Single sector funds. This includes the lower risk level ones as well, such as Digitalisation and Ageing Population
  • Single country (except UK & US) funds
  • EM funds

They are too risky for inexperienced investors, and very dangerous to be held alone. They indeed can be a valuable part of a portfolio, but we aren’t talking about experienced investors here, and there’s no prebuild portfolio on Dozens for the inexperienced either.

Said enough about the high risk funds, the lower risk end has its own problems too. But I think that’s a topic for another day.

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I’m trying to consolidate the conversations around the same topic into one place. Therefore I’m quoting the contents from this thread below.

If you really want to cover risk levels, may I suggest you re-scale the risk levels on the app?

Currently, all but one risk level 5 funds and the only risk level 1 fund are considered (at least by me, but I’m sure many will agree) unsuitable for inexperienced investors. They all have very low risk-adjusted return on their own, and should be used as building blocks for a portfolio, not held on their own as an investment.

If we agree on that, and take action to remove those unsuitable funds, you will find that you’ve reduced the number of risk levels from 5 to 3.

Now let’s re-scale the risk levels by working from top to bottom.

  • Risk level 5
    100% equity single country funds, such as FTSE 100, UK SRI, and S&P 500, should be assigned this risk level group, as they are exposed to more country related risks (such as policy and political risk) than diversified equity funds.
  • Risk level 4
    All remaining 100% equity funds, such as Consensus 100, VLS100, World Islamic and World Equity, should be assigned to this risk level group.
  • Risk level 3
    Gold and GBP hedged bonds. Some multi-asset funds will fit in this risk group too.
  • Risk level 2
    Low equity % multi-asset funds.
  • Risk level 1
    The Dozens 5% bond. (Inflation risk. If UK inflation skyrockets, money in the bonds will lose their buying power)

I’m sure you will ask, why did I move bonds to the higher risk level 3? In case you didn’t pay attention before, they are currently in the risk level 2 group. I moved them to the higher risk level 3 group because bonds are sensitive to interest rate, and in the last decade interest rate has dropped to and remained at historically low level. The stable low interest environment has created a false sense of safety for bonds if you only look back for a decade or so. However, when interest rate moves up (and it will), new issued bonds will have a higher yield than the existing bonds, which means the existing bonds will be sold at a discount. In another world, bond price will go down. Combined with the low rate of return from bonds, when bond price go down, it can take a very long time to recover. So bonds are a lot riskier in the low interest environment than many people think.

You may have also noticed that I’ve putted the low equity % multi-asset funds at risk level 2, below the risk level 3 where the bonds are. Why is that? That’s because the small % of equity in those funds will reduce the impact of rising interest rate, and will also help them recover much faster than 100% bonds. That’s not all, the volatility of the equity is only affecting a small part of the fund value, because the funds are largely made up by bonds. So small % equity + large % bonds is actually less risky than 100% bonds.

Although, I want to say that if I was fully in charge of this product, I will remove the choice from user, and give them prebuild portfolios for each risk level instead (see Nutmeg). That’s because the human behaviour risk is much higher than the investment product’s risk for inexperienced investors. Prebuild portfolio doesn’t need to be a black-box approach as all other “wealth management” companies are doing. You can still explain to your user (and educate them) what is in the portfolio, and why is it like that. For example, you can show a list of big name companies in the portfolio, a list of interesting countries, even allow the user to pick one or two themes they like, and put no more than 5% of their portfolio value to those risky themes.

I agree with you except rather than remove it, allow users (with risk level 5) to invest in more than one fund to create a diversified portfolio. A major dislike at the moment is the need to set up a new goal for each fund invested in which makes it impractical to do so.

I like this suggestion a lot - move the Fixed Bonds to the Invest part of the app. Will make the proposition of investment products (S&S ISA/GIA) vs. (future) grow products (Cash ISA, Savings) a lot cleaner for Dozens.

It’s perfectly fine to keep those funds if the target market is focused on experienced investors, however that’s not the case here. Because Dozens is focused on inexperienced investors, my concern is that they do not have the skills needed to build a portfolio. What’s more likely to happen is they believe that they have created a balanced portfolio by randomly picking a few different funds (say, China + India + Robotics).

Dozens shouldn’t encourage first time investors to build their own portfolios. This is definitely not the right direction.

With the same logic above, you could argue Dozens should therefore only offer the Consensus and VLS funds which are already diversified.

If the short survey carried out tells me I’m a Risk Level 3, parking my funds in a Gold ETF or GBP hedged bonds as you note above is risky (albeit with lower expected vol). Risk Levels become meaningless in my opinion unless you can invest in more than one fund to diversify your portfolio.

Unless the fund is already diversified going back to the first point on the Consensus and VLS funds!

Which is exactly why I suggested that Dozens should remove the choices of non-diversified funds completely, and offer ready made portfolios with optional theme tilts.

If Dozens does go down this route, the options available to the users will be:

  1. Multi-asset funds, such as Consensus and Vanguard. Dozens can always add more multi-asset funds, there’s plenty of choices on the market.
    and
  2. Ready made portfolios, and allow the user to pick one or two themes to add to their portfolio. The weight of theme funds should not exceed 5% of the portfolio.

By doing this, you can be rest assured that the user will not be able to make terrible choice, and you will also have a wide range of choices available to them.

In the longer term, to attract existing experienced investors, a wide range of funds can be made available in “expert mode”, turned on by a switch on the app. Contrast to popular belief, you often don’t really need to prevent novice investors from doing this, just show them a warning before the switch, and scare them off with a profession looking UI and lots of abbreviations and jargon is usually enough to convince them to switch back (providing that they can still find the button to switch :wink:). Just type in “professional trading software” on Google image search, and you will see what I’m talking about.

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