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Fund diversification and portfolio makeup
Savager
Posted: 11 November 2017 11:40:02(UTC)
#1

Joined: 11/11/2017(UTC)
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I'm 32 and new to investing. My wife and I are hoping to retire in 20 years (earlier would be nice, but we have to be realistic) and we don't plan on having children. I've saved up a decent amount (£20000) to get started but I'm having difficulty determining exactly how I should divide my money up.

My initial approach was to try a robo-advisor: I went with MoneyFarm and its approach was to divide my funds up as such:

Cash and short-term Gov. Bonds: 18%
Developed Markets Gov. Bonds: 11%
Inflation Linked Bonds: 9%
High-Yield and Emerging Markets Bonds: 26%
Developed Markets Equity: 31%
Cash: 5%

Correct me if I'm wrong, but that's rather high percentage of bonds (64%), especially for a relatively young investor.

My second approach was to open an investment platform and buy a range of index funds to cover a number of markets (UK, US, Europe, Pacific, Japan, Emerging, World, Technology). The problem is these all seem to rise and fall together rather than independently, which seems to defeat the purpose of diversification.

What other bond/fund combinations do people have? What approach would you recommend I take with my investments?
Law Man
Posted: 19 November 2017 15:02:37(UTC)
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1. What is your attitude to risk: with equities be prepared to accept a paper loss of 30% short term.

2. What is your investment period: 20 years, so long term; not to be drawn in the meantime.

This suggests put it all in equities.

What equity? Consider a a Global Index Tracker ETF. Over 20 years you will save a lot in costs.

Type of fund: a SIPP assuming you pay income tax.
chubby bunny
Posted: 19 November 2017 17:46:35(UTC)
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Robo-advisors are rather overpriced for what is essentially a basket of ETFs you could put together yourself for much less. They do like to talk up their investment processes but ultimately they are all very similar in strategy. I did give a few of them (including Moneyfarm) a crack when the cashback deals were on, but withdrew my money as soon as the cashback was paid.

Each of Moneyfarm's portfolios looks to have underperformed its Vanguard Lifestrategy equivalent since inception; it seems to be a similar story for other robo-advisors like Nutmeg and Wealthify. It does irk me somewhat when wealth managers don't compare their performance to a benchmark.

If you are looking to adopt a passive approach to investing, I would suggest that you swerve the robos and start off with one of the cheap multi-asset funds like Vanguard Lifestrategy, L&G Multi Index or HSBC Global Strategy. As you learn more about investing you may want to make some more active changes to your portfolio, using one of these multi-asset funds as the core holding.
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Keith Hilton
Posted: 19 November 2017 19:13:21(UTC)
#4

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For me that's far too much in bonds, especially given your age and the massive bull run bonds have been on since the 90's.

John Baron would probably think that you should be 100% in equities at this stage of your investing life ...

http://www.johnbaronportfolios.co.uk/

If you're not happy being 100% invested in equities, then you might find it useful to read the following book on asset allocation ...

http://freebook.mebfaber.com/
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Cyrus Zaydan on 28/11/2017(UTC)
Mickey
Posted: 19 November 2017 22:02:17(UTC)
#5

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In your circumstances I would take one of two options,

1. Open a Vanguard UK account, put the lot into either a Life Strategy fund or a Target Retirement fund. I would select the 100% equity LS fund or a Target retirement fund of a date around 2050 or near there.
2. Pay £160 to John Baron and learn from his 7 portfolios for a year. Then stay with him or go your own way with Investment Trusts.

I wouldn't touch the ROBO outfits personally, too expensive and yet to prove themselves.

Best of luck with it,
Mickey
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Tim D on 20/11/2017(UTC), dlp6666 on 21/11/2017(UTC)
Alan Selwood
Posted: 19 November 2017 23:51:19(UTC)
#6

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Definitely too much in bonds. Especially at a time when interest rates look as if they are on an upward trend, which usually is seriously bad news for bonds. The best time to buy bonds is when interest rates and inflation rates are uncomfortably high but there seems to be a strong possibility that interest rates and inflation are easing.

In that situation, try to buy long-dated bonds, preferably with high coupons, as these will both pay you partly to stay with them if the drop in rates does not materialise and give you big capital gains (free of CGT) if rates do fall back. Buying in 1980 or 1981 and holding to about 1984 would have been a one-way ticket to getting rich - and trying to do the same now when interest rates and inflation could rise from a 300-year low is a way to get poorer!

If the QE that we have got used to since 2008 is reversed, most real assets will fall since the pumping of money into the system with QE has driven those assets up.

If this occurs, you will not really want to be in bonds, equities or property, since all have been inflated by QE.

I would be thinking of some equities and some cash and a little gold at this stage, the cash being there to mop up depressed equities in due course, the gold to provide a counter to hyper-inflation and the equities to provide the means of doing well if neither rising interest rates nor high inflation come to pass.

But that's just my opinion. Currently, I hold no bonds, lots of cash, lots of equities and a fair bit of gold.

Others will see things differently, and nobody can predict what will happen in the short- medium- or long-term, so some of us will inevitably do better than others, despite the fact that we all think we know best!
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Tyrion Lannister
Posted: 20 November 2017 00:47:25(UTC)
#7

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With 20 years before (presumably) you,ll want to access the money you can afford to take way more Fisk than bonds.

If you want to invest and forget, I’d advise splitting the money 3 ways between a global tracker such as VWRL, a global small/ medium Companies fund such as FCS and a UK small cap fund such as Marlborough UK Micro Cap growth. You might also want to consider Chelverton UK growth as an alternative to the Marlborough fund.
King Lodos
Posted: 20 November 2017 01:34:26(UTC)
#8

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My portfolio's 1/3rd each:

High return: Emerging Markets, Private Equity and Micro-Caps (actively traded)
Hedged: RCP, GAM Star Credit Opps, Vanbrugh (stock-market-like returns with downside protection)
Cash (NS&I bonds, Virgin Money, current account offers, etc)

A simple principle could be 50% aggressive, 50% defensive .. And then add cash depending on how much you're earning.

e.g. If you've got £20k, and you're able to invest £5k a year, you can think of all the money you're going to invest as a virtual cash holding – which would mean you could stay fully invested in the market; ride out any turbulence; and keep buying when markets are down .. no need to hold cash in your portfolio – you could be 100% stocks.

If on the other hand you've accumulated a lot of capital, you're retired, or your job's unstable (e.g. freelance, or in an area that might be vulnerable to a market crash) then capital preservation may be more important – and with government bonds so historically expensive, a lot of investors are holding 25-50% in cash.



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dlp6666 on 21/11/2017(UTC)
MartynC
Posted: 20 November 2017 22:50:16(UTC)
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King Lodos;53428 wrote:
My portfolio's 1/3rd each:

High return: Emerging Markets, Private Equity and Micro-Caps (actively traded)
Hedged: RCP, GAM Star Credit Opps, Vanbrugh (stock-market-like returns with downside protection)
Cash (NS&I bonds, Virgin Money, current account offers, etc)

A simple principle could be 50% aggressive, 50% defensive .. And then add cash depending on how much you're earning.



I would also consider my house (either mortgaged or owned outright) as part of an asset allocation as it can give a significant exposure to the local property market.
King Lodos
Posted: 21 November 2017 01:22:15(UTC)
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MartynC;53464 wrote:
I would also consider my house (either mortgaged or owned outright) as part of an asset allocation as it can give a significant exposure to the local property market.


I'm on the fence with that one .. Robert Kiyosaki (of Rich Dad Poor Dad) makes the case that your own house isn't really an asset – although society certainly regards it as one.

I'd say it sits somewhere between asset and liability, in that it's more likely to cost than make you money, but it can give you purchasing power (by borrowing against or downsizing), or you can shift it more in the asset direction by renting a room or parking space out
MartynC
Posted: 21 November 2017 12:58:37(UTC)
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King Lodos;53466 wrote:
MartynC;53464 wrote:
I would also consider my house (either mortgaged or owned outright) as part of an asset allocation as it can give a significant exposure to the local property market.


I'm on the fence with that one .. Robert Kiyosaki (of Rich Dad Poor Dad) makes the case that your own house isn't really an asset – although society certainly regards it as one.

I'd say it sits somewhere between asset and liability, in that it's more likely to cost than make you money, but it can give you purchasing power (by borrowing against or downsizing), or you can shift it more in the asset direction by renting a room or parking space out


For me it would influence my asset allocation. Owning a house would give exposure to the local UK housing market and local economy which I may wish to diversify away from in the rest of my asset allocation.
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Mr Helpful on 21/11/2017(UTC)
King Lodos
Posted: 21 November 2017 13:53:38(UTC)
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I'd go along with that .. There's also the argument that you should tilt your portfolio away from the industry you work in.

Still the problem with the house you live in is you have to live somewhere .. There are Londoners whose council houses made them £1m, but unless they want to move out of London, it's never produced a single penny they could spend – more likely they wind up forced to downsize because they wind up paying half their wages in council tax and can't afford tea bags

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Keith Cobby
Posted: 21 November 2017 14:09:12(UTC)
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I think your main residence should be disregarded for asset allocation purposes.
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Mr Helpful
Posted: 21 November 2017 15:41:54(UTC)
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MartynC;53473 wrote:

For me it would influence my asset allocation. Owning a house would give exposure to the local UK housing market and local economy which I may wish to diversify away from in the rest of my asset allocation.


Worth thinking about! Some lines of thought it might affect :-

Risk (= Stocks) v Fixed Income balance, some liken housing to a bond, bit tenuous?
UK Stocks v International, yes? Opportunity to diversify currency, economy, etc
UK Bonds v International, ditto
Small Cap v Large Cap, no?
Commodity Income, no?
Real Estate, to the degree of underweighting UK residential or avoid RE altogether?
Infrastructure, maybe give more emphasis to International?
Cash, boost for ongoing house repairs/maintenance?
Other?
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Cyrus Zaydan on 28/11/2017(UTC)
Jim S
Posted: 21 November 2017 17:47:15(UTC)
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I can see the arguments both for and against. One way to decide whether to count your house in your asset allocation might partly depend on what your situation and goals are.

If you live in a mansion and plan to downsize to a shoebox in future, you are kind of overwright already. In that case I would avoid investing another penny in property at this point.

But if you live in a shoebox and hope to upgrade to a mansion in future, you are kind of underweight now. To acheive your goal, and cover the risk of house prices increasing so much that your mansion becomes unaffordable one day, you should probably start increasing your exposure to property prices.

I'm exaggerating to make the point, but hopefully you know what I mean
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Alan Selwood
Posted: 21 November 2017 20:52:53(UTC)
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Your own home apparently costs you, more or less, about 2% or 3% p.a. of its capital value on average to keep it maintained/renovated/repaired/updated, quite apart from what you might spend in council tax, stamp duty, mortgage instalments, etc.

If you are also heavily mortgaged, you therefore have a big drain on your overall finances to keep it yours and up to scratch.

If interest rates go up (usually accompanied by higher rates of annual inflation), that cost also increases further. For some unfortunates, as far as negative equity or bankruptcy/loss of the property.

However, in times of falling interest rates and reduced levels of inflation, those house costs go down, sometimes markedly. That is when owning your own house becomes a positive geared play that works in your favour.

All of this makes one's judgment of whether the house can be counted as an asset or liability quite complicated, and the position can slide one way or the other unexpectedly.

I do agree that if you are a house owner with a lot of equity in it, it makes sense not to increase the property weighting in your portfolio (just as it is risky to buy shares in a company that pays your salary, since if one element fails the other does too). Of course there is property and property - an industrial estate in Poland is quite a different beast from your own house in the UK, and may be much less correlated than you might be thinking when you say the word 'property' to describe both house and industrial estate.
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Mr Helpful on 22/11/2017(UTC)
Dennis .
Posted: 28 November 2017 10:07:55(UTC)
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King Lodos;53474 wrote:
I'd go along with that .. There's also the argument that you should tilt your portfolio away from the industry you work in.



Back in 2007 my son started work with Lloyds Bank, he had only been there are year or so when the crash came. It wasn't so much of a problem for him as he left and got a job in a different industry but there were people who had worked at the bank for 30 years who had taken advantage of the very generous Lloyds share option schemes and most of their savings (and ultimately their jobs) were wiped out.
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