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

Joined: 11/11/2017(UTC)
Posts: 1

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)
#2

Joined: 29/04/2014(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.
4 users thanked chubby bunny for this post.
Tim D on 19/11/2017(UTC), Alan Selwood on 19/11/2017(UTC), sandid3 on 20/11/2017(UTC), Micawber on 20/11/2017(UTC)
Keith Hilton
Posted: 19 November 2017 19:13:21(UTC)
#4

Joined: 20/08/2010(UTC)
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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/
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
1 user thanked Mickey for this post.
Tim D on 20/11/2017(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!
3 users thanked Alan Selwood for this post.
Mickey on 20/11/2017(UTC), Tim D on 20/11/2017(UTC), Guest on 20/11/2017(UTC)
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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