Is this portfolio balanced?

StuartGMC

I'm an occasional lurker here, but a regular poster on the mortgage-free wannabe forum where some of us post regularly on progress http://forums.moneysavingexpert.com/showthread.html?t=944413

So a bit of background, we hope to clear the mortgage either in October (10yrs early) or no later than February 2010. We have need to build funds to cover costs for our daughter once she is 18 and leaves standard education in summer 2016. Apart from that we have the usual spread of short term items to save for, e.g. annual holiday at about £4-4.5k and routine savings towards replacement cars (I want a Jaguar XF ) etc.

Presently we have S&S ISAs which are at -46% of their invested value (OIECs in UK Smaller cos, Latin America and Russia), the residual value being about 30% of our total savings, and we are still trickling £220 per month into the ISAs presently to gain pound-averaging while units are cheap. So I'm not averse to risk, but need to have it balanced, having currently experienced the down-side that can occur but looking at the 5yr or so horizon for growth.

We will be 45 in 2010 so now need to start planning in more detail our investments, recognizing I'm on a final salary pension scheme with my employer (NRD 65, 4% reduction each year early), I have an annuity from previous employer's pension scheme because company went bust in 1992 (should be a little over £4k per yr from 60), and wife has a local government pension (NRD 65, but only 1/80ths and she is part time still). So our savings etc should be "extra" to enjoy life with now and through retirement.

My calculations indicate that once mortgage-free we should have about £22k per year to save/invest at present salaries and costs (inc the savings for planned items) and so we need to derive a plan to take us to 50yrs old (looking for growth), then through to 60yrs old (reducing risk exposure in that time). The amount may increase if my wife increases her working hours in a few years time.

So with that background, what comments do you have on the initial strategy to take wife and me to 50yrs old thus (recognising daughter will need some £10-12k per annum if at colleage then for three years to when we are 53).

1) Fill Cash ISAs every year (£7.2k, 33% of savings)
2) Fill S&S ISA every year (£7.2k, 33% savings, see below)
3) Balance 34% in short-term ready access and higher interest earning accounts

In (2) I thought that we should have about 25% of our total savings in high risk funds (max) in this 5yr time frame and 8% in medium risk funds or even absolute return funds. This balance would change in the period of us going from 50-60yrs old, moving more into bonds, gilts etc and out of risk at say 10% per year.

a) Do you see any major errors in my planning, recognising that "anything" could happen in the interim, but life cover etc is in place separately?
b) Recommendations on good advice resources in this respect?
c) Should I be consulting an IFA due to the totals we are looking at and also considering IHT for daughter (I'm mulling this, but would wish to do so well "armed" with facts and questions etc)?

TIA

Lokolo

£10-£12k per annum for your daughter?

Um my grandparents give me just less than £5,000 and that pays for rent, food, bills + I can save a bit. Plus I have a partime job.

I wouldn't be trying to put your daughter through university without her learning about money. I learnt wonders from this site about budgeting, savings and investments, giving her that amount means she will just spend at will.

Only thing I can see is with your investments you are risking it being it only 6 years away. Although normally this would be ok for low risk funds I would imagine, but going high risk in this climate could be dangerous. With the amount you have it maybe wise to go and see an IFA. Ask around with friends and family to see if they know anyone they could recommend.

StuartGMC

Lokolo
Thanks for the reply. Remember we are talking 8yrs from now for the potential costs for daughter so I've "allowed" some increase, and don't worry, she has been brought up aware of money. In fact, at about 8yrs old jumped channels and saw "Spendaholics" and immediately commented that you can't spend so much money all the time! She actuallt watched the series on and off so I think she should be "ok" and won't have it easy, but I have no idea what may happen by then. If she doesn't follow education but needs to leave home/travel etc, then these funds would be there too.

On the risk of 6yrs, I guess if you think of moving out over a 10yr period to less risk then maybe it is nearer 10yrs exposure (when we'll be 54).

EdInvestor

At the moment your investments are Very high risk (emerging markets/commodities based ) and No risk (cash). Nothing in the middle.

I'd suggest that the extra third should be in medium risk, which would mainly be UK big blue chip stocks (perhaps equity income funds),along with (later on) some exposure to UK bricks and mortar commercial property, when the market recovers.

Lokolo

Whats the point in income funds unless you want the income to spend elsewhere? I was just thinkin about this and you lose 10% from tax anyway (or is this just shares?) so you may as well go for Acc and save some pennies if its for X period and you don't need anything inbetween.

dunstonh

Lokolo wrote: »

Whats the point in income funds unless you want the income to spend elsewhere? I was just thinkin about this and you lose 10% from tax anyway (or is this just shares?) so you may as well go for Acc and save some pennies if its for X period and you don't need anything inbetween.

There is no difference in tax on income and accumulation units. The difference is that income units distribute the income (which can be withdrawn or reinvested to buy more units). Accumulation units dont distribute the income but is used within the fund and reflected in the unit price. Both get the same tax.

In respect of the portfolio, it is anything but balanced. It looks like fashion investing.

Lokolo

dunstonh wrote: »

There is no difference in tax on income and accumulation units. The difference is that income units distribute the income (which can be withdrawn or reinvested to buy more units). Accumulation units dont distribute the income but is used within the fund and reflected in the unit price. Both get the same tax.

So the income isn't taxed when given to you?

sabretoothtigger

Isa would be tax free income afaik

dunstonh

Lokolo wrote: »

So the income isn't taxed when given to you?

Its taxed the same whether you take it, reinvest it or its in acc units.

StuartGMC

dunstonh wrote: »

In respect of the portfolio, it is anything but balanced. It looks like fashion investing.

Thanks for that comment, and your earlier point on the medium risk aspect, which you indicate needs to be in place much earlier than I had anticipated. Note the present high risk funds were "OK" for us at 40-42 when most money has been offsetting and paying down the mortgage, but of course these funds collapsed and I have decided not to crystalize losses at this time but have reduced by 1/3 the investment being made.

As I noted, it's early days presently in getting thoughts together for a detailed plan for next year on and now gaining information so I can have an informed decision and very likely discussion with an IFA (which I assume you would advise?). So for a portfolio for someone of 45 and looking forward 5 then 10 yrs you would recommend much lower exposure to the high risk investments (which I would expect to reduce anyway as time moved forward) and I assume no more than 10% of investments to aged 50 then get out of them into medium risks by 52 (remember pensions are outside this)?

Thanks all for the comments. I'll continue to gather information.

StuartGMC

EdInvestor wrote: »

At the moment your investments are Very high risk (emerging markets/commodities based ) and No risk (cash). Nothing in the middle.

I'd suggest that the extra third should be in medium risk, which would mainly be UK big blue chip stocks (perhaps equity income funds),along with (later on) some exposure to UK bricks and mortar commercial property, when the market recovers.

Many thanks for the input, certainly happy to modify the mix in the S&S ISA and will be taking time to research this year