Portfolio Advice

Hooloovoo

I'm looking to extend my savings to include an investment portfolio since I am currently holding too much in cash. I am hoping someone knowledgeable could look at my plan and see if there are any obviously stupid errors I am making.

Here is my current SOA.

I am 33 years old and so will be looking to invest for 20-30+ years. I am employed full time in a reasonably secure job that provides a final salary pension scheme to which I contribute 6%.

My house is worth around £150k and I have £11k left to pay on the mortgage paying £536 per month at 2.68% (base rate floored at 2% plus 0.68% differential). After filling my cash ISA each year I have been over paying the mortgage at the maximum allowed £500 per month. I plan to continue doing this and my mortgage free date is approximately February 2013. I know it's a low rate loan and I could probably make better returns elsewhere, but I just want to get rid of it and end the repayments. I wont be closing it entirely since I wish to keep the rate and access to my overpayment reserve.

Liquid accounts:

Previous ISA - £32k at 3.1%
Current ISA - £500 at 4.25%
Premium Bonds - £1k

I think you will all agree that I am holding far too much in cash and need to invest to protect my money from inflation.

I have been reading Smarter Investing by Tim Hale that has been recommended on here many times. I am fully sold on the passive investing idea and I am only interested in low cost tracker funds. I don't intend this thread to become a passive/active debate - I understand the pros and cons of each and I have made my choice. I've also been reading many posts over on Monevator.

Many years ago I had an Egg Investment ISA that later became part of Fidelity. I have recovered my log in details and I can see my old ISA that has a zero balance. I intend to invest through Fidelity again and I am currently in the process of changing the agent over to Cavendish Online as recommended on here in order to get the lowest costs.

Tim Hale recommends taking FinaMetrica's Risk Profiling psychometric test in order to determine attitude to risk and thus how your portfolio should be structured. As an aside, members of the public are supposed to go here in order to take the test at a cost of £30. But if you go here instead you can pose as a IFA wanting to check out the report and you can do it for free. I'm glad I didn't pay any money for this because it was a complete waste of time. My risk tolerance score came out at 59 putting me in risk group 5 which is pretty much what I expected. This suggests a portfolio of 60% risky stocks and 40% defensive stocks.

Looking at all the index funds on Fidelity I have picked out the following for whole-market investment based on lowest-TER and under 2% average index tracking error. It turns out that they are all HSBC funds.

FTSE All Share Index:
HSBC FTSE All Share Index Retail Acc
Fund Code HSUKA
Annual Management Charge 0.25%
Total Expense Ratio (TER) 0.27%

FTSE World Europe ex UK Index:
HSBC European Index Retail Acc
Fund Code HSEUI
Annual Management Charge 0.25%
Total Expense Ratio (TER) 0.31%

USA S&P's 500 Index:
HSBC American Index Retail Acc
Fund Code HSAMI
Annual Management Charge 0.25%
Total Expense Ratio (TER) 0.28%

FTSE World Japan Index:
HSBC Japan Index Retail Acc
Fund Code HSJIN
Annual Management Charge 0.25%
Total Expense Ratio (TER) 0.29%

FTSE World Pacific excluding Japan Index:
HSBC Pacific Index Acc
Fund Code HSPAC
Annual Management Charge 0.25%
Total Expense Ratio (TER) 0.37%

Index Linked Gilts
Legal & General All Stocks Index Linked Gilt Index Trust Inc
Fund code LGASI
Annual Management Charge 0.20%
Total Expense Ratio (TER) 0.25%


Now here is where I get a little stuck. Are there any indices that I am missing? Or better ones than I have selected?

How should I set the weighting between these funds? Clearly Japan and the Pacific should be low weighting. Give 33% each to the UK and USA? Or maybe I should give a low weighting to the US and start ramping it up after the election and inevitable market slump. What about a weighting to Europe considering the potential issues with the Euro? I'm happy to invest in a falling market because it means I get more for my money, and my investment period is long enough to cope. Any advice would be gratefully received.

I am planning to start investing monthly. I am not going to transfer over any of my cash ISA because I feel it would be very foolish to make any lump sum investment in the market right now.

I will probably start low at £250 per month, and increase that to between £500 and £1000 per month from 2013 once my mortgage is paid off. As I said earlier, planned investment period is 20-30 years or more.

Apologies for the long post and thanks for any help!:cool:

bigfreddiel

why not use etf's (iShares cover the funds you have picked) low cost and use td direct investing or iii - low cost dealing £1.50 per trade using their regular investment option and zero fees. i wouldn't use fidelity too restrictive - funds only - no etps or its (only their own!)

Hooloovoo

bigfreddiel wrote: »

why not use etf's (iShares cover the funds you have picked) low cost and use td direct investing or iii - low cost dealing £1.50 per trade using their regular investment option and zero fees. i wouldn't use fidelity too restrictive - funds only - no etps or its (only their own!)

Thanks.

Over six funds that would be £9 per month in trading fees. On a £250 monthly investment that works out at a 3.6% initial investment fee every month.

I understand what you're saying about Fidelity being restrictive. I did initially want somewhere I could buy funds and also direct trade in stocks. But having thought about it some more, I'm happy to just stick with index funds. I don't believe I can reliably pick winning stocks so I'm happy not to try - I'm no gambler. I'd just end up losing money.

coastline

With the current tax allowances frozen for pensioners around £10,000 in the future theres a need to protect your cash from tax situations...any second pension plan is likely to be hit by income tax considering the state pension could well be £7,000 shortly..
Cash Isas are ideal and you have access to your funds so I wouldnt say you have too much in them...its just a matter of choice...
Investing monthly is a wise choice as you have 20-30 years to build up a lump sum...maybe in an stocks and shares Isa....again well placed for tax purposes...

thelawnet

No corporate bonds, no commercial property?

No exposure to the Mexico, Brazil or Canada? Canada is behind only US, UK and Japan in market cap.

No Indonesia, Thailand, or India?

Is it possible to pay any more into the pension?

I'm not suggesting to buy it, but Vanguard's lifestrategy products show an asset breakdown:

https://www.vanguard.co.uk/documents/portal/factsheets/lifeStrategy60_equity.pdf

e.g., the 60/40 is 34% developed world ex-uk, 21% uk, 19% UK gilts, 12% GBP high-grade corporate bonds, 9% gilts and 5% emerging markets.

Note the low allocation to emerging markets, and note the blend of assets. And note that 60/40 is a stocks/bonds blend, not a risky vs. nonrisky stocks blend! Gilt returns and stocks are not correlated whereas risky and nonrisky stocks are, so by holding both, you reduce your overall risk and volatility. 60/40 is quite conservative in your situation, and since you don't want to do any stock picking (e.g., judging that the present economic situation makes 60/40 more profitable, but in the future 100/0 or 80/20 would be better), you might like 80/20.

As you can see
https://www.vanguard.co.uk/documents/portal/factsheets/lifeStrategy80_equity.pdf

80/20 buys a little more diversification in the stocks.

You've got quite a wedge of capital already there, you could easily buy something like this http://www.etf.db.com/DE/ENG/ETF/LU0322254383/B2PDKD0/FTSE_ALL-WORLD_EX_UK_ETF.html no need to make the monthly ISA the same as the lump sum.

Of course some people would say you should buy more emerging markets and less developed because the emerging have more growth potential, but then that's stock picking, and you said you don't want to do that, so buying a product like that, which covers the globe, eliminates that dilemma.

Then add in your choice of UK tracker, one or two bond trackers, and job done.

I'm pretty sure given that you don't want to stock pick, you've selected too many trackers already....

Hooloovoo

coastline wrote: »

Investing monthly is a wise choice as you have 20-30 years to build up a lump sum...maybe in an stocks and shares Isa....again well placed for tax purposes...

Yes, sorry I should have clarified. This will all be inside a S&S ISA.

amictus

[FONT=&quot]Great post![/FONT]

[FONT=&quot]

Hooloovoo wrote: »

Now here is where I get a little stuck. Are there any indices that I am missing? Or better ones than I have selected?

[/FONT]

Hooloovoo wrote: »

[FONT=&quot]How should I set the weighting between these funds? Clearly Japan and the Pacific should be low weighting. Give 33% each to the UK and USA? Or maybe I should give a low weighting to the US and start ramping it up after the election and inevitable market slump. What about a weighting to Europe considering the potential issues with the Euro? I'm happy to invest in a falling market because it means I get more for my money, and my investment period is long enough to cope. Any advice would be gratefully received.[/FONT]

[FONT=&quot]You’ve already mentioned monevator, so I would be surprised if you haven’t already come across Slow & Steady passive portfolio...[/FONT]

[FONT=&quot]http://monevator.com/passive-investing-model-portfolio/[/FONT]

[FONT=&quot]The portfolio is using the HSBC fund that you have identified, with the aim to broadly match the world index. Seems like a good starting point which you can tweak according to your own preference, for example increasing UK exposure as you suggested. An Emerging Markets index fund is also identified (deliberately overweight) which you may want to consider.[/FONT]

[FONT=&quot]Beyond bonds and equities, my interpretation of Tim Hales’ strategy would be to include commodities (~10%?) as the next step to increase diversification. In fact, he suggests that this would be a higher priority than the kind of developed world equity allocation detailed above (i.e. just stick with domestic FTSE All Share tracker). I know there are ETF variants, but perhaps someone here could suggest a suitable index tracking fund for commodities.[/FONT]

[FONT=&quot]Also, you may want to look beyond just fund TERs when choosing your funds. See my recent post in another thread…[/FONT]

[FONT=&quot]http://forums.moneysavingexpert.com/showthread.php?p=52680789#post52680789[/FONT]

[FONT=&quot]This is something that I want to try and get a better handle on before I proceed with index fund investing. This might well mean waiting for more data to become available. As I said previously, I don’t have much spare cash to invest at the moment, so I’m in no immediate rush![/FONT]

[FONT=&quot]

Hooloovoo wrote: »

Previous ISA - £32k at 3.1%[/FONT]
[FONT=&quot]Current ISA - £500 at 4.25%[/FONT]
[FONT=&quot]Premium Bonds - £1k[/FONT]

[FONT=&quot]I think you will all agree that I am holding far too much in cash and need to invest to protect my money from inflation.[/FONT]

[FONT=&quot]

Hooloovoo wrote: »

I am planning to start investing monthly. I am not going to transfer over any of my cash ISA because I feel it would be very foolish to make any lump sum investment in the market right now.[/FONT]

[FONT=&quot]I will probably start low at £250 per month, and increase that to between £500 and £1000 per month from 2013 once my mortgage is paid off. As I said earlier, planned investment period is 20-30 years or more. [/FONT]

[FONT=&quot]If you don’t transfer your cash then it will take a long time to get away from “holding far too much in cash” and with a 3.1% interest rate you probably will suffer from inflation effects. I agree that it would not be wise to make a one-off lump sum investment, but perhaps you could just increase the size of your regular payments by drip feeding from your existing cash ISA funds.[/FONT]

[FONT=&quot]I understand the concern is that the market looks like it may well drop from here and remain depressed a number of years, but I would see that as a good time to invest as much as I could over that period. Unfortunately I don’t have the money to do so myself![/FONT]

[FONT=&quot]

thelawnet wrote: »

I'm not suggesting to buy it, but Vanguard's lifestrategy products show an asset breakdown:[/FONT]

[FONT=&quot]https://www.vanguard.co.uk/documents/portal/factsheets/lifeStrategy60_equity.pdf[/FONT]

[FONT=&quot]e.g., the 60/40 is 34% developed world ex-uk, 21% uk, 19% UK gilts, 12% GBP high-grade corporate bonds, 9% gilts and 5% emerging markets.[/FONT]

[FONT=&quot]Note the low allocation to emerging markets, and note the blend of assets. And note that 60/40 is a stocks/bonds blend, not a risky vs. nonrisky stocks blend! Gilt returns and stocks are not correlated whereas risky and nonrisky stocks are, so by holding both, you reduce your overall risk and volatility. 60/40 is quite conservative in your situation, and since you don't want to do any stock picking (e.g., judging that the present economic situation makes 60/40 more profitable, but in the future 100/0 or 80/20 would be better), you might like 80/20.[/FONT]

[FONT=&quot]As you can see[/FONT]
[FONT=&quot]https://www.vanguard.co.uk/documents/portal/factsheets/lifeStrategy80_equity.pdf[/FONT]

[FONT=&quot]80/20 buys a little more diversification in the stocks.[/FONT]

[FONT=&quot]You've got quite a wedge of capital already there, you could easily buy something like this http://www.etf.db.com/DE/ENG/ETF/LU0322254383/B2PDKD0/FTSE_ALL-WORLD_EX_UK_ETF.html no need to make the monthly ISA the same as the lump sum.[/FONT]

[FONT=&quot]Of course some people would say you should buy more emerging markets and less developed because the emerging have more growth potential, but then that's stock picking, and you said you don't want to do that, so buying a product like that, which covers the globe, eliminates that dilemma.[/FONT]

[FONT=&quot]Then add in your choice of UK tracker, one or two bond trackers, and job done.[/FONT]

[FONT=&quot]I'm pretty sure given that you don't want to stock pick, you've selected too many trackers already....[/FONT]

[FONT=&quot]I like the simplicity of having a world equities tracker, either through an ETF or a Vanguard fund…[/FONT]

[FONT=&quot]http://www.etf.hsbc.com/etf/uk/retail?fundid=HETF017[/FONT]

[FONT=&quot]https://www.vanguard.co.uk/documents/portal/factsheets/ftse_developed_world.pdf[/FONT]

[FONT=&quot]https://www.vanguard.co.uk/documents/portal/factsheets/lifeStrategy80_equity.pdf[/FONT]

[FONT=&quot]For the kind of money you will be handling (up to £1000 pm), a single monthly transaction fee (£1.50) for an ETF each month will be very low. Similarly, a single Vanguard tracker would incur low handling fees (£2 pm). Infact, if the tracking difference associated with these options are lower than the free-free HSBC index fund route (as monevator and the limited data available suggests) then you would do far better to pay the fees upfront and go for the Vanguard funds.
[/FONT]

[FONT=&quot]Just some of the thoughts I have been having as I try and come up with a long-term index investing strategy for the future.[/FONT]

Hooloovoo

thelawnet wrote: »

No corporate bonds, no commercial property?

No exposure to the Mexico, Brazil or Canada? Canada is behind only US, UK and Japan in market cap.

No Indonesia, Thailand, or India?

Thanks. This is just the sort of info I was looking for. I am aware I am lacking in investment in those areas. The problem being Fidelity don't appear to have trackers for them, and if they don't have the product I can't buy it.

I would be happy to look at active funds for those markets but only if the TER is below 1%, preferably half that.

To a certain extent it's a question of time to do the research. Limiting myself to index funds greatly reduces the number of funds I have to look at and consider.

Is it possible to pay any more into the pension?

Yes, they do allow AVCs. To be honest I haven't really looked at that in any detail so I don't know how beneficial that would be. I know, I should, but again it's a question of finding time to research everything.

I'm not suggesting to buy it, but Vanguard's lifestrategy products show an asset breakdown:

https://www.vanguard.co.uk/documents/portal/factsheets/lifeStrategy60_equity.pdf

e.g., the 60/40 is 34% developed world ex-uk, 21% uk, 19% UK gilts, 12% GBP high-grade corporate bonds, 9% gilts and 5% emerging markets.

Thanks. That's a good idea to look at how the professionals handle market allocation. I haven't really looked at the "combined" funds like Vanguard because I am a bit of a control freak and I wanted to maintain my own control over the portfolio. Not that I believe I can do any better than anyone else ...

Note the low allocation to emerging markets, and note the blend of assets. And note that 60/40 is a stocks/bonds blend, not a risky vs. nonrisky stocks blend! Gilt returns and stocks are not correlated whereas risky and nonrisky stocks are, so by holding both, you reduce your overall risk and volatility. 60/40 is quite conservative in your situation, and since you don't want to do any stock picking (e.g., judging that the present economic situation makes 60/40 more profitable, but in the future 100/0 or 80/20 would be better), you might like 80/20.

As you can see
https://www.vanguard.co.uk/documents/portal/factsheets/lifeStrategy80_equity.pdf

80/20 buys a little more diversification in the stocks.

This is certainly an area where I need some help.

Am I wrong to be considering my current cash ISA to be part of my portfolio? I was taking long-bonds, short-bonds, and cash to be the defensive assets meaning my current portfolio is a 0:100 split in favour of defensive assets.

Hence what I am intending to put into my S&S ISA is mostly risky stocks with only a small percentage towards bonds. By paying in monthly it's going to take me a very long time to even get to a 50:50 split. I was intending to start out with moderately risky trackers keeping my cash as defensive asset, and then once I was heading towards 50:50 to diversify with some small-caps and emerging markets, and compensate volatility with additional investment in bonds.

I would guess it will take me 3-5 years to get to a 50:50 split based on my current cash ISA balance. Then push further to somewhere between 60:40 to 80:20 over the next 15-25 years.

Should I be planning differently?

You've got quite a wedge of capital already there, you could easily buy something like this http://www.etf.db.com/DE/ENG/ETF/LU0322254383/B2PDKD0/FTSE_ALL-WORLD_EX_UK_ETF.html no need to make the monthly ISA the same as the lump sum.

Thanks. I'll take a look.

Of course some people would say you should buy more emerging markets and less developed because the emerging have more growth potential, but then that's stock picking, and you said you don't want to do that, so buying a product like that, which covers the globe, eliminates that dilemma.

Then add in your choice of UK tracker, one or two bond trackers, and job done.

Yes I was planning to add emerging markets etc. once I have built up a base of basic market trackers.

I'm pretty sure given that you don't want to stock pick, you've selected too many trackers already....

I'm not sure I follow. I am working under the passive-investing reasoning that it's best to buy into the whole-market, which I believe I am doing with the trackers. Aside from missing some of the smaller nations which I agree I should address.

Isn't that the opposite of stock-picking? How can you have too many trackers?

Thanks for your help! :beer:

Hooloovoo

owains wrote: »

[FONT=&quot]You’ve already mentioned monevator, so I would be surprised if you haven’t already come across Slow & Steady passive portfolio...

Oh yes, I forgot about that! I have read the slow and steady portfolio. I must go back again and refresh my memory now that I am further along the decision making process. Thanks!
[/FONT]
[FONT=&quot]

Beyond bonds and equities, my interpretation of Tim Hales’ strategy would be to include commodities (~10%?) as the next step to increase diversification. In fact, he suggests that this would be a higher priority than the kind of developed world equity allocation detailed above (i.e. just stick with domestic FTSE All Share tracker). I know there are ETF variants, but perhaps someone here could suggest a suitable index tracking fund for commodities.[/FONT]

I think since I'm going to be investing monthly I need to build up a base on trackers first before adding anything more exotic. Maybe I am wrong.

This is my reasoning - I already have a solid cash base. If I started investing say 90% in a FTSE All Share tracker, and 10% commodities, that would give me a starting-out ratio of say 10% risky and 90% defensive when including my cash base since the S&S ISA would be so small in the beginning.

Making commodities a 10% share of a 10% share is practically nothing, hence my thought to start out building up a solid tracker base first. Maybe that's not the best course of action.

[FONT=&quot]

Also, you may want to look beyond just fund TERs when choosing your funds. See my recent post in another thread…[/FONT]

[FONT=&quot]http://forums.moneysavingexpert.com/showthread.php?p=52680789#post52680789[/FONT]

[FONT=&quot]This is something that I want to try and get a better handle on before I proceed with index fund investing. This might well mean waiting for more data to become available. As I said previously, I don’t have much spare cash to invest at the moment, so I’m in no immediate rush![/FONT]

Thanks. I have been looking at the tracking error when I was picking out funds last night. The Fidelity pages give a year by year tracking error which is quite useful. Luckily it appears that the HSBC trackers are not only the cheapest, but also in general have the lowest tracking error! There were some other funds available for certain indices that did have a very slightly lower average error, but these had more than double the TER so I decided cheaper would be better.

[FONT=&quot]If you don’t transfer your cash then it will take a long time to get away from “holding far too much in cash” and with a 3.1% interest rate you probably will suffer from inflation effects. I agree that it would not be wise to make a one-off lump sum investment, but perhaps you could just increase the size of your regular payments by drip feeding from your existing cash ISA funds.[/FONT]

I have been trying to work out how to do this. How would I go about drip feeding from my cash ISA without using up my current yearly allowance for S&S this year? If I did an internal transfer to keep the money within the ISA wrapper, I'd then end up with a large balance in cash earning practically no interest while it waits to be drip-fed into funds. I guess there's nothing to stop me doing several smaller ISA transfers throughout the year.

[FONT=&quot]

I understand the concern is that the market looks like it may well drop from here and remain depressed a number of years, but I would see that as a good time to invest as much as I could over that period. Unfortunately I don’t have the money to do so myself![/FONT]

Absolutely. Now would be a bad time to make a lump sum investment, but I feel it's a fantastic time to start a monthly investment plan.

[FONT=&quot]I like the simplicity of having a world equities tracker, either through an ETF or a Vanguard fund…[/FONT]

I think I'm too much a control freak to use those products

[FONT=&quot]Infact, if the tracking difference associated with these options are lower than the free-free HSBC index fund route (as monevator and the limited data available suggests) then you would do far better to pay the fees upfront and go for the Vanguard funds.

It's certainly tempting. I'll have to take a more in depth look at the tracking errors.
[/FONT]

Linton

I disagree that you should automatically give low weightings to the Far East and higher ones to UK and US. You need to make a judgement as to where the growth is likely to be and act accordingly.

By going for those broad trackers you are automatically highly focused on large multinational companies. IMHO it doesnt matter a great deal whether those ones happen to be quoted on the US, UK, or some other exchange.

What the different exchanges give you is a different range of sectors. IMHO for large multinationals it's the sector which is important, not the location of the head office. So for example the far east will give you major electronics companies and manufacturing, the UK wont. On the other hand the UK will give you a lot of miners and insurance companies.

Perhaps you may as well just go for a global tracker.

As to what you are missing out on:
1) Smaller companies. In the past this sector has provided good returns. There is the HSBC FTSE250 tracker which would help to some extent and perhaps something in the US.

2) Specific sectors. A particular one is technology - so there is the NASDAQ.

3) In my view you do need a reasonable holding in other asset classes. There are passive gilt and corporate bond funds which despite my being an agnostic as far as trackers are concerned I will admit do have attractions.

Hooloovoo

Linton wrote: »

I disagree that you should automatically give low weightings to the Far East and higher ones to UK and US. You need to make a judgement as to where the growth is likely to be and act accordingly.

Thanks. That's the sort of judgement I'm hoping to get advice for on here.

By going for those broad trackers you are automatically highly focused on large multinational companies. IMHO it doesnt matter a great deal whether those ones happen to be quoted on the US, UK, or some other exchange.

What the different exchanges give you is a different range of sectors. IMHO for large multinationals it's the sector which is important, not the location of the head office. So for example the far east will give you major electronics companies and manufacturing, the UK wont. On the other hand the UK will give you a lot of miners and insurance companies.

Yes, that makes absolute sense. That was in fact my initial thoughts on weighting, but everything I read suggested a lower weighting to the Far East so I assumed they knew something I didn't, and I bowed to the research.

As to what you are missing out on:
1) Smaller companies. In the past this sector has provided good returns. There is the HSBC FTSE250 tracker which would help to some extent and perhaps something in the US.

Would I be better doing this right away, or waiting until I have a larger base of less risky stocks first? Of course the FTSE250 would be included as part of a FTSE All Share tracker, but I could increase exposure by specifically adding a FTSE250 tracker as well.

2) Specific sectors. A particular one is technology - so there is the NASDAQ.

I saw that Legal and General had a technology tracker (LGTIA) but the fee was rather high (TER1.15%). I got burned on tech stocks when I jumped on the band wagon in the late 90s early 00s so I was hesitant to chose something like that again! Perhaps I am being irrational.

3) In my view you do need a reasonable holding in other asset classes. There are passive gilt and corporate bond funds which despite my being an agnostic as far as trackers are concerned I will admit do have attractions.

Even while my portfolio is still heavily weighted to cash?