Share this page:
Stay connected:
Welcome to the Citywire Money Forums, where members share investment ideas and discuss everything to do with their money.

You'll need to log in or set up an account to start new discussions or reply to existing ones. See you inside!

Notification

Icon
Error

Advice on portfolio with 10+ year investment horizon
Swiss Rich
Posted: 01 October 2017 18:58:20(UTC)
#1

Joined: 26/08/2017(UTC)
Posts: 5

Thanks: 12 times
Was thanked: 1 time(s) in 1 post(s)
Hi folks,

Firstly, I would like to thank all of you for the amount of insightful posts on this forum. I have learnt a hell of a lot since first registering here.

I would really appreciate your advice now on getting started with my investment portfolio.

My aim is to invest for the next 10-20 years, with the goal to buy a property with a substantial downpayment in 10 years. To do this, I do not want to spend too much time actively managing my investments, so would therefore like to invest passively taking advantage of dollar cost averaging and compound interest over that time period. Based on what I have read and understood, I should take a fair amount of risk due to the time period I am looking to invest over.

I am 32 years old and looking to invest an initial sum of 10k with monthly installments of 1.5k. To reduce the costs I will use the Interactive Brokers platform, which although rather advanced, is extremely efficient on costs.

Because of me being a complete investment beginner I would appreciate some advice.

I have seen the various depictions of a diversified forum online e.g. 70% equities, 20% bonds etc.. but I really have no clue where to start. For the amount of money I have invested is it even worth diversifying too much?

Could I simply invest in the Vanguard Lifestrategy 80 Fund? and leave it at that? To diversify based on geographical location maybe a FTSE 100 index tracker & S&P 500 index tracker?

i know there is no silver bullet, but I would appreciate some advice on where to start.. thanks in advance
1 user thanked Swiss Rich for this post.
sandid3 on 02/10/2017(UTC)
King Lodos
Posted: 01 October 2017 19:11:41(UTC)
#2

Joined: 05/01/2016(UTC)
Posts: 1,891

Thanks: 332 times
Was thanked: 2547 time(s) in 1041 post(s)
What I'd suggest first is: work out how much you can afford to save; work out how much you'll ideally need to put a downpayment on a house (assume today's prices plus maybe 3% inflation each year?); then work out what kind of average annual return you'll need.

e.g. If you need a 10% annual return, you'll have to take more risk, which means there'll be greater variability in your end result (a higher chance of a bad outcome) .. If you only need a 5% annual return, you could build a portfolio that is much more likely to get you there.

So the key is really defining your aim in terms of numbers (if only rough estimates), then using those numbers to build the optimal portfolio .. And I'd absolutely agree, a Vanguard Lifestrategy 80 fund would probably be the smartest core holding, whatever you do .. And the main things I'd be adding to that (depending on your aims) are cash, gold and bonds – which you'd hold at set allocations, rebalancing perhaps once a year.
4 users thanked King Lodos for this post.
Swiss Rich on 01/10/2017(UTC), Tim D on 01/10/2017(UTC), Harry Trout on 02/10/2017(UTC), Cyrus Zaydan on 15/10/2017(UTC)
Swiss Rich
Posted: 01 October 2017 19:35:04(UTC)
#3

Joined: 26/08/2017(UTC)
Posts: 5

Thanks: 12 times
Was thanked: 1 time(s) in 1 post(s)
Thanks for the fast and helpful response.

I would like to aim for a portfolio with a 10% return, so at a slightly higher risk. Would the Vanguard Lifestrategy 80 fund be, in your view, in alignment with that accepted risk?

So with a total monthly investment of 1.5k potentially 1k into the VL80, and 500 invested in cash, gold and bonds. Does that sound good?

Also could you recommend any ETFs for the gold and bonds part?
Sara G
Posted: 01 October 2017 20:41:11(UTC)
#4

Joined: 07/05/2015(UTC)
Posts: 480

Thanks: 745 times
Was thanked: 764 time(s) in 308 post(s)
Hi Richard

For a 10% annual return, I think you may need to be a bit more adventurous, for example, splitting monthly contributions between:

Legal & General UK Mid Cap Index - 20%
Legal & General International Index Tracker (Developed Markets ex-UK) - 30%
I-Shares Emerging Markets Index Fund - 30%
Vanguard Global Smaller Companies - 20%

I might put half of the initial lump sum into Troy Trojan and keep the other half as cash. The Troy fund has exposure to bonds and gold. When the other funds reach the same level, I'd add Troy to the monthlies and split them evenly between all 5 funds.

NB - just a suggestion, not advice!

Best of luck
1 user thanked Sara G for this post.
Swiss Rich on 02/10/2017(UTC)
Mickey
Posted: 01 October 2017 21:25:40(UTC)
#5

Joined: 21/06/2010(UTC)
Posts: 375

Thanks: 1043 times
Was thanked: 331 time(s) in 170 post(s)
How tolerant are you to risk, always a good place to start. In todays world the call is often look to passives as the best way to invest but are they really that good? I see that you want a hands-off approach which does suggest a passive such as VLS but it could also suggest holding one or more Global IT's.

Take Vanguard Life Strategy for example as that is one suggested, your time horizon is 10 yrs, over 5 yrs the VLS80 fund has achieved a 72% return according to Trustnet, now take a look at Global Investment Trusts, only one has not bested the VLS 80 fund (Hansa) whilst old & boring Foreign & Colonial is at 113.7% over 5 yrs and despite a poor period of form Brunner has achieved 98%.

We can't predict the future but I'd be inclined to consider Global IT's for a long term buy and hold strategy looking for decent gains over 10+ years.

I've no shout against passives, I am sure they can do a great job with lower risk than most IT's. We know Buffett himself recommends passives for his wife once he has passed but the point for me is that he is looking for something different to you. Now if you follow the earlier advice to calculate what you need then a passive may fit the bill, on the other hand if it doesn't deliver, then it may be worthwhile considering something a little riskier.
2 users thanked Mickey for this post.
Tim D on 01/10/2017(UTC), john brace on 02/10/2017(UTC)
Tim D
Posted: 01 October 2017 21:34:44(UTC)
#6

Joined: 07/06/2017(UTC)
Posts: 215

Thanks: 795 times
Was thanked: 272 time(s) in 128 post(s)
If you go and look at the data for VLS80, you will indeed see it has pretty much done 10% p.a over the last 5 years. (e.g https://www.vanguardinve...hares/price-performance and scroll down to "Past performance"; the dud year in 2014-2015 was well compensated for by the subsequent couple of years.

However! The last 5 (heck, pretty much the last 10) years have been one long QE-fuelled bull run for the markets (and VLS80's stellar 2015-2016 year would have had the tailwind of the sterling devaluation too). Take a long hard look at (total return) plots of global indices going back to pre-2000: VLS80's 20% bond holding element ought to provide a little bit of a shock absorber, but if global indices plummet like they did ~2001 and ~2008, VLS80 is going to go down too, and when eventually another such event happens (and it will), VLS80 could find it very hard to maintain a 10%pa long-term average return over any timescales including such a drawdown event. As Sara G points out, one "solution" could be to be more adventurous (small caps and EM). However you really do need to consider the fact you'd be taking on more risk.

Not advice; just my own thinking. Good luck whatever you decide to do. One thing is for sure; you're not going to make 10% leaving it in cash.
3 users thanked Tim D for this post.
Mickey on 01/10/2017(UTC), john brace on 02/10/2017(UTC), Swiss Rich on 02/10/2017(UTC)
King Lodos
Posted: 01 October 2017 21:59:53(UTC)
#7

Joined: 05/01/2016(UTC)
Posts: 1,891

Thanks: 332 times
Was thanked: 2547 time(s) in 1041 post(s)
Two sites I think are really useful for developing a plan:

Portfolio Visualizer lets you experiment with different asset allocations – really the best way to get a feel for how to build a portfolio, and how different each decade can be (and there are lots of presets you can try out)
https://www.portfoliovisualizer.com/backtest-asset-class-allocation

Research Affiliates gives you likely 10 year returns going forwards, given current valuations
https://interactive.researchaffiliates.com/asset-allocation.html

The problem is, from today's valuations, you're unlikely to get a 10% annual return easily .. The low risk return (government bonds) is only 1-2% now – which is almost the lowest in history .. So to return higher than that, you need to take proportionally more risk.

Global stocks are on PE/CAPE ratios around 20, translates to a (rough estimate) of a 5% annual return.


A global IT or two could be decent choices .. But part of the reason they've performed strongly is discounts narrowing after the financial crisis, and the rest is often gearing (borrowing money to boost their returns).

Vanguard LS80 is 80% stock market exposure; many global ITs are 120% exposure – so THAT's the outperformance .. (my reservation might be taking on leveraged stock market investments in such a debt-ladden world)

But if you want to aim for a 10% annual return, you might be best off using ITs (leverage) and investing more in Emerging Mkts and Small-Caps.


It's what I do .. I'm almost all EM and Small-Caps .. But it's certainly higher risk .. Things could go very wrong – perhaps in a China debt crisis? .. What an LS80 fund guarantees is (probably) the highest return per unit of risk.

Re: gold and bonds .. I'd probably go for ETFS Gold ETF or Bullionvault, and maybe a large active bond fund .. But if you're aiming for a 10% return – and investing regularly – you *might* be better off investing mostly in stocks, and just keeping a little aside in cash (NS&I bonds, savings accounts).
4 users thanked King Lodos for this post.
Tim D on 02/10/2017(UTC), Chris Howland on 02/10/2017(UTC), Swiss Rich on 02/10/2017(UTC), bill blayney on 02/10/2017(UTC)
Mickey
Posted: 01 October 2017 22:48:29(UTC)
#8

Joined: 21/06/2010(UTC)
Posts: 375

Thanks: 1043 times
Was thanked: 331 time(s) in 170 post(s)
King Lodos;51628 wrote:
A global IT or two could be decent choices .. But part of the reason they've performed strongly is discounts narrowing after the financial crisis, and the rest is often gearing (borrowing money to boost their returns).

Vanguard LS80 is 80% stock market exposure; many global ITs are 120% exposure – so THAT's the outperformance .. (my reservation might be taking on leveraged stock market investments in such a debt-ladden world)...

Some good stuff in the post but which Global IT's are on 20% gearing? The AIC site is showing none at the moment. Historically I don't see such high gearing but for sure the discounts have narrowed considerably.
King Lodos
Posted: 01 October 2017 23:46:34(UTC)
#9

Joined: 05/01/2016(UTC)
Posts: 1,891

Thanks: 332 times
Was thanked: 2547 time(s) in 1041 post(s)
Mickey;51629 wrote:
King Lodos;51628 wrote:
A global IT or two could be decent choices .. But part of the reason they've performed strongly is discounts narrowing after the financial crisis, and the rest is often gearing (borrowing money to boost their returns).

Vanguard LS80 is 80% stock market exposure; many global ITs are 120% exposure – so THAT's the outperformance .. (my reservation might be taking on leveraged stock market investments in such a debt-ladden world)...

Some good stuff in the post but which Global IT's are on 20% gearing? The AIC site is showing none at the moment. Historically I don't see such high gearing but for sure the discounts have narrowed considerably.


I'm not familiar with the AIC site – I'll have a look .. But just to take an example I've invested in very recently, FSCC is on 125% gearing (at least according to HL).

Global ITs perhaps wisely reducing gearing – but by extension reducing the probability they'll beat their benchmarks going forwards .. And as much as I can't stand passive investing evangelists, technically you're better taking 80% market risk with an LS80 fund, than 80% market risk with a geared fund (with multiple layers of fees), and bonds and hedging (which you'd presumably do, unless you've got a high tolerance for drawdowns).

It's incredibly tough knowing what to suggest going forwards .. Ray Dalio sees us approaching a point where you probably will want to get out of this market .. Some of us will cleverly navigate the next chaos markets find themselves in, but I find it's so much easier just to recommend buying the market, and not giving yourself too many moving parts or complex decisions
1 user thanked King Lodos for this post.
Tim D on 02/10/2017(UTC)
sandid3
Posted: 02 October 2017 03:53:50(UTC)
#12

Joined: 18/02/2013(UTC)
Posts: 269

Thanks: 150 times
Was thanked: 287 time(s) in 127 post(s)
Richard Fawcett;51615 wrote:
My aim is to invest for the next 10-20 years...

I do not want to spend too much time actively managing my investments, so would therefore like to invest passively taking advantage of dollar cost averaging and compound interest over that time period. Based on what I have read and understood, I should take a fair amount of risk due to the time period I am looking to invest over.

i know there is no silver bullet, but I would appreciate some advice on where to start.. thanks in advance

Just to add that one of the things we all learn over time is that we can be our own worst enemy in trying to achieve financial success (or any success). There is a whole area of investor psychology and cognitive bias study about this (but don't be put off).

One mistake when dealing with complicated subjects is to 'anchor' on some assumptions - that may fail in the future. Therefore, always question your assumptions and be prepared to abandon beliefs.

Ray Dalio puts it far better in this interview:
Billionaire Ray Dalio wants his principles to guide your money and your life

(See also The Ray Dalio Interview)
6 users thanked sandid3 for this post.
Jim Thompson on 02/10/2017(UTC), Sara G on 02/10/2017(UTC), Mickey on 02/10/2017(UTC), Tim D on 02/10/2017(UTC), bill blayney on 02/10/2017(UTC), Cyrus Zaydan on 15/10/2017(UTC)
Mickey
Posted: 02 October 2017 08:06:53(UTC)
#10

Joined: 21/06/2010(UTC)
Posts: 375

Thanks: 1043 times
Was thanked: 331 time(s) in 170 post(s)
King Lodos;51632 wrote:
Mickey;51629 wrote:
King Lodos;51628 wrote:
A global IT or two could be decent choices .. But part of the reason they've performed strongly is discounts narrowing after the financial crisis, and the rest is often gearing (borrowing money to boost their returns).

Vanguard LS80 is 80% stock market exposure; many global ITs are 120% exposure – so THAT's the outperformance .. (my reservation might be taking on leveraged stock market investments in such a debt-ladden world)...

Some good stuff in the post but which Global IT's are on 20% gearing? The AIC site is showing none at the moment. Historically I don't see such high gearing but for sure the discounts have narrowed considerably.


I'm not familiar with the AIC site – I'll have a look .. But just to take an example I've invested in very recently, FSCC is on 125% gearing (at least according to HL).

Hi,
FSCC, not sure what that is but FCS itself is on a gearing of just 3% according to HL and AIC. I am still not sure where you are seeing the 125% gearing. For the code FSCC you may be referring to the 3.5% Convertible Unsecured Loan Stock for FCS. Surely you wouldn't suggest that option for the OP when they wanted a fire & forget offering?

Thanks for the reply though, I was simply concerned your statement that many Global IT's are on gearing of 20% was incorrect and may unduly influence the OP.
1 user thanked Mickey for this post.
Swiss Rich on 02/10/2017(UTC)
Micawber
Posted: 02 October 2017 09:21:31(UTC)
#13

Joined: 27/01/2013(UTC)
Posts: 1,703

Thanks: 724 times
Was thanked: 2463 time(s) in 949 post(s)
ITs may have gearing facilities up to a stated maximum %, and drawing facilities to match, and that is what may show up in quick analysis. But the question at any time is what part of that, if any, their managers are currently drawing upon. Nearly all of the manager articles about their trusts that I have read in the past three months refer to the manager reducing gearing, sometimes to zero, in a climate where valuations are high and they see few bargains.
2 users thanked Micawber for this post.
Mickey on 02/10/2017(UTC), Tim D on 02/10/2017(UTC)
jvl
Posted: 02 October 2017 09:49:01(UTC)
#14

Joined: 01/04/2016(UTC)
Posts: 324

Thanks: 184 times
Was thanked: 375 time(s) in 165 post(s)
For investing with the specific aim of buying a property in 10 years, I wonder if there's a case for buying some index that's linked to that.

E.g. Buy an ETF of house builders or something based on a house price index. If that index goes up, it'll be in line with the price of the house the OP is buying. If it goes down, the price of the house should be cheaper (on average).
2 users thanked jvl for this post.
Tim D on 02/10/2017(UTC), Swiss Rich on 07/10/2017(UTC)
King Lodos
Posted: 02 October 2017 11:37:42(UTC)
#11

Joined: 05/01/2016(UTC)
Posts: 1,891

Thanks: 332 times
Was thanked: 2547 time(s) in 1041 post(s)
Mickey;51636 wrote:
King Lodos;51632 wrote:
Mickey;51629 wrote:
King Lodos;51628 wrote:
A global IT or two could be decent choices .. But part of the reason they've performed strongly is discounts narrowing after the financial crisis, and the rest is often gearing (borrowing money to boost their returns).

Vanguard LS80 is 80% stock market exposure; many global ITs are 120% exposure – so THAT's the outperformance .. (my reservation might be taking on leveraged stock market investments in such a debt-ladden world)...

Some good stuff in the post but which Global IT's are on 20% gearing? The AIC site is showing none at the moment. Historically I don't see such high gearing but for sure the discounts have narrowed considerably.


I'm not familiar with the AIC site – I'll have a look .. But just to take an example I've invested in very recently, FSCC is on 125% gearing (at least according to HL).

Hi,
FSCC, not sure what that is but FCS itself is on a gearing of just 3% according to HL and AIC. I am still not sure where you are seeing the 125% gearing. For the code FSCC you may be referring to the 3.5% Convertible Unsecured Loan Stock for FCS. Surely you wouldn't suggest that option for the OP when they wanted a fire & forget offering?

Thanks for the reply though, I was simply concerned your statement that many Global IT's are on gearing of 20% was incorrect and may unduly influence the OP.


FCSS .. typo (and gross gearing .. so you could refer to it as 25% geared)

http://www.hl.co.uk/shares/shares-search-results/f/fidelity-china-special-situations-ord-0.01

Gearing can be a bit of slight of hand .. If I open a fund that's really a closet index – that I'm adding no value to at all – but I gear it 20%, so it consistently beats the benchmark, and slap a 1% fee on it, most people and articles are going to look at the outperformance in isolation, and conclude it's worth paying for.

But in fact you're paying a management fee, you're paying for something that's probably incurring more costs than an ETF (because it's not efficiently run), and you're paying interest of perhaps 2-3% on the gearing .. And all you're actually getting is higher market exposure than you think – so your 60:40 portfolio might actually be a 70:30 .. There's absolutely no 'free lunch' in gearing – in fact it's a fairly expensive lunch

3 users thanked King Lodos for this post.
Mickey on 02/10/2017(UTC), Tim D on 02/10/2017(UTC), Swiss Rich on 07/10/2017(UTC)
+ Reply to discussion

Markets

Other markets