Global portfolio for young investor

mateo · 20 June 2016 at 9:02PM

Hello

I am a 26 years old "investor" saving for retirement with a modest pot currently around £15k.
Rules are I only invest money I don't need, I try to keep fees as low as possible and I want to make most of my time horizon (30 years).
I have already built an emergency fund of 6+ months of salary split between top savings/current accounts and fixed term ISAs and I save for other projects (property, travel, etc.) separately in a way less risky manner.

For my early years, I am tempted to go for a 100% stocks global (no home bias) portfolio.
I think I can handle the ride as I just add money to the pot every month (some lump sums throughout the year as well), whatever the market condition is and I never look back.
I invest the equivalent of 3/4 of my ISA allowance every year.
I also think it might be a good idea to overweight riskier categories (small caps, emerging/frontier markets) now in the early years and reduce them later to give space to less risky assets.

My current allocation is:
-
Dev World: 45%
Small caps: 25%
Emerging: 15%
Property: 10%
Frontier: 5%

with the following funds (rebalanced once a year):
-
World: 45% Fidelity Index World (0.13%)
Small: 15% Vanguard Global Small (0.38%)
Small: 10% Baillie Gifford Global Discovery (0.75%)
Emerging: 7% Vanguard Emerging Markets (0.27%)
Emerging: 8% Blackrock Emerging Markets (0.24%)
Property: 10% Blackrock Global Property tracker (0.23%)
Frontier: 5% Blackrock Frontier markets (1.50%)

(I'll merge emerging funds into either Vanguard or Blackrock soon)

Everything is an S&S ISA at Cavendish Online who add 0.25% to total fees, which I think is fine for the size of my portfolio and I can add to funds every month at no additional charge.

I don't plan to add bonds for the next 10 years unless the size of my portfolio starts making me uncomfortable (50-75k+ I guess). In that case, I would progressively add a Global Bond tracker to reach a 80/20 stocks/bonds allocation.

Most of my allocation goes to passive funds, except for:
- Baillie Gifford Global Discovery, which is a not-that-expensive global fund with a small cap focus which I think might offer something different than Vanguard Global Small cap.
- Frontier Market where I would like to be invested early on with maybe a lower correlation with other markets. Not cheap but my smallest allocation.

Finally, a bit of property still for diversification and lower correlation.

I have never confronted my allocation decisions to other people before but I would really appreciate your opinions.
(I guess my brain is looking for some kind of approbation here, but I hope it is going to be much more constructive than that).

Thanks!

racing_blue · 20 June 2016 at 9:46PM

ACED your first post!

My Qs:

Can you quantify the advantage you expect your plan to offer over eg. 100% Fidelity Index World?

If you are cool with 100% equities, why stop there? Why not leverage to 120 or 150%. (not suggesting you do this- but logically, with your objectives, how do you argue against it?)

AndyT678 · 20 June 2016 at 11:55PM

If the plan is to build up a pot for retirement in 30+ years time have you considered using a pension? It is kind of what they're for.

mateo · 21 June 2016 at 12:36AM

Thanks for the answers!

racing blue,

I have added other funds alongside Fidelity's mainly for diversification purpose. Even if the world index is already very diverse, it's mostly large-cap and doesn't include emerging markets.

I am 100% equities because I don't think I need much bonds at the moment. Or that would be for dampening volatility but worrying about it in the early years of a small retirement portfolio doesn't make sense to me.
Added to this, I have cash on the side to deal with the unexpected.

Having more than 100% doesn't make sense to me either. Sounds complicated (and expensive) any way.
I might be wrong but leverage sounds a bit like "debt" to me, like playing with more than you actually have.

AndyT678,

I'm using a S&S ISA because of its flexibility as I might not stay in the UK forever.
I have a pension via my workplace though. Not much choice there. I took the cheapest trackers available: 10%UK, 80% International, 10% Emerging

racing_blue · 21 June 2016 at 9:03PM

mateo wrote: »

I am 100% equities because I don't think I need much bonds at the moment. Or that would be for dampening volatility but worrying about it in the early years of a small retirement portfolio doesn't make sense to me.
Added to this, I have cash on the side to deal with the unexpected.

Having more than 100% doesn't make sense to me either. Sounds complicated (and expensive) any way.
I might be wrong but leverage sounds a bit like "debt" to me, like playing with more than you actually have.

My point is - if you think equities are likely to return more than bonds, and you don't require dampened volatilty - then why stop at 100% equities, who says the scale has to go from 0 to 100.

Why not 2x equities or 3x equities?

One of the best peforming US mutual funds of the last 10 years was Direxion Monthly Nasdaq-100 Bull 2X Fund, up 1873% in 10 years.

There are various ways of achieving leverage. "Mortgage your retirement" is a search term. Options, spreadbets, borrow against an asset. Even those of us with a mortgage and investments are arguably playing this game a little. Search term "mortgage as negative bond". [house + investments] are leveraged by the mortgage. Eg. I might consider my asset allocation 80% house, 60% equities, -40% bonds.

I think your portfolio & thinking looks basically excellent by the way- this question was more theoretical than anything else.

JohnRo · 21 June 2016 at 11:22PM

Well done.

Personally I'd be inclined to lop 5% off emerging and bung it in Vanguard small cap but that's just a personal preference. I don't subscribe to the view emerging markets are going to erupt and produce staggering gains, if such a view even exists. Of course I could be wrong.

If you can stomach the volatility though, which shouldn't be too difficult with a 30 year horizon and regular top ups, then Vanguard's global (not very) small cap index has a lot to recommend it when coupled with developed large cap. Not because small cap will consistently outperform but because the increased small cap volatility should give some valuable rebalancing opportunities based around an allocation model over the term both are held, even though they do tend to be loosely correlated.

grey_gym_sock · 21 June 2016 at 11:37PM

that looks sensible.

i make the average on-going charges (for the funds) 0.33%, which is pretty low. a little in more expensive funds is OK, IMHO, providing you keep the average low enough.

personally, i'm not so keen on emerging and frontier markets. i do like a bit in small companies. and ideally, a bit in small value companies (though it is harder to find suitable funds for that). but different people have different opinions ...

and the number of different funds is not excessive.

overall, nothing wrong with it. at least, providing you will stick with the plan even if stock markets crash. imagine stock markets falling by 40% or so, and emerging and frontier by 60% or so. in that situation, you need to be thinking: this is great, because my new contributions are buying lots of cheap shares. if you can do that, the plan is sensible.

TheTracker · 22 June 2016 at 7:10AM

racing_blue wrote: »

My point is - if you think equities are likely to return more than bonds, and you don't require dampened volatilty - then why stop at 100% equities, who says the scale has to go from 0 to 100.

Why not 2x equities or 3x equities?

One of the best peforming US mutual funds of the last 10 years was Direxion Monthly Nasdaq-100 Bull 2X Fund, up 1873% in 10 years.

There are various ways of achieving leverage. "Mortgage your retirement" is a search term. Options, spreadbets, borrow against an asset. Even those of us with a mortgage and investments are arguably playing this game a little. Search term "mortgage as negative bond". [house + investments] are leveraged by the mortgage. Eg. I might consider my asset allocation 80% house, 60% equities, -40% bonds.

I think your portfolio & thinking looks basically excellent by the way- this question was more theoretical than anything else.

Because it is hard to stomach the volatility. During the GFC it seems to have plummeted 90% from 36 to 4 over a period around 12 months. Indeed between new year and early February this year it dropped by a third.

As you indicated, most people are already leveraged if they hold a mortgage. If you have a £100k mortgage and a £100k portfolio you are essentially borrowing to invest, though it may not feel like it.

racing_blue · 22 June 2016 at 11:55AM

TheTracker wrote: »

Because it is hard to stomach the volatility.

That's really what I was getting at, obliquely. The OP is bullish and predicts they can stomach 100% equities.

But they would have been 18 years old in 2008 and 10 years old in 2000. I'm guessing they were not directly exposed to the last two 50%+ drops in equity markets. And don't yet have firm proof of an above-average gastronomy.

If the idea of leveraging the equity portfolio sticks in the craw, might this sound a warning? 100% and 120% are not that far apart, after all.

Anyway, I love the cut of their jib. This is the most well developed first post I have ever read on these boards.

TheTracker · 22 June 2016 at 4:39PM

racing_blue wrote: »

That's really what I was getting at, obliquely. The OP is bullish and predicts they can stomach 100% equities.

But they would have been 18 years old in 2008 and 10 years old in 2000. I'm guessing they were not directly exposed to the last two 50%+ drops in equity markets. And don't yet have firm proof of an above-average gastronomy.

If the idea of leveraging the equity portfolio sticks in the craw, might this sound a warning? 100% and 120% are not that far apart, after all.

Anyway, I love the cut of their jib. This is the most well developed first post I have ever read on these boards.

Fully agreed. There is a strain of investor that thinks they are full-on/macho/alpha male/extreme for saying yeah, I can do 100% equities. And it is important to point out 100% is just a point on a spectrum/gradient, not an end or extreme point. If you're so macho give 3x multipliers a go.

JohnRo · 22 June 2016 at 5:03PM

With ever increasing sovereign debt, record high prices and sub zero yields within the gilt market, there's nothing particularly macho about a globally diversified 100% equities portfolio imo.

Global portfolio for young investor

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