Allocation for a 30 year old

marathonic

I'm changing my pension allocation at the moment and wanted to run it by you to see whether you thought there was anything wrong with my selections.

My fund stands at about 1.6 times my salary as I'd pretty high contributions in my mid-twenties.

I want to go pretty high risk given how long I've left to retirement and the fact that I believe that bonds may not be as low risk as they're made out to be in todays market.

I don't want to go for a global fund because I want it to be relatively easy to switch some money over to the part of the globe that may be underperforming (and, possibly, undervalued) at any point in time through re-balancing.

However, I also want it set up in such a way that I'm not overly worried if something drastic happens in the UK, Europe or any other area (and by overly worried, I mean that I can handle 20% drops over short periods of time if those drops are widespread - but I don't want the majority of my portfolio invested in a single geographical location and for it alone to go through a period of negative growth).

My selections are:

Blackrock Aquila European Equity Index: 20%
Blackrock Aquila UK Equity Index: 20%
Blackrock Aquila US Equity Index: 30%
Blackrock Aquila Pacific Rim Equity Index: 20%
Blackrock Emerging Markets Equity Index: 10%

I realise that the above portfolio is only diversified geographically and could be further diversified based on company size and/or sector. However, the majority of this extra diversification results in increased charges in my fund and I decided that, over the long term, the equity indexes are likely to outperform when these charges are taken into account.

The AMC on all the above funds are 0.3%.

mania112

Needs more UK, less US, EU and Asia.

Needs Property and Fixed Interest.

- Those 2 things I can say without knowing anything about you.

The rest is difficult on a forum (without going through a full analysis).

Those funds are all Index Trackers - a computer buys and sells in line with weightings of shares on a stock market (FTSE for UK for example).

Over long term that's not so much of an issue (and explains why they are cheap) but you need to realise there isn't a human checking this fund to ensure it's doing well and buying and selling to counteract any issues that may lay ahead.

marathonic

mania112 wrote: »

Needs more UK, less US, EU and Asia.

Needs Property and Fixed Interest.

- Those 2 things I can say without knowing anything about you.

The rest is difficult on a forum (without going through a full analysis).

Those funds are all Index Trackers - a computer buys and sells in line with weightings of shares on a stock market (FTSE for UK for example).

Over long term that's not so much of an issue (and explains why they are cheap) but you need to realise there isn't a human checking this fund to ensure it's doing well and buying and selling to counteract any issues that may lay ahead.

The first statement may be valid enough.

Regarding Fixed Interest, I'm not so sure as I've 30-35 years left to retirement. I can see inflation being pretty high in the coming years due to all the printing of money happening around the world.

For property, I own my own home which I do realise is a home and not an investment and should, therefore, be taken out of the picture. However, I do intend to buy a BTL in the future and use the income stream from that to increase my contributions to my pension (I'd not intend on buying unless I had a significant deposit though).

BLB53

I think you are correct to go for low charges - this more than any other factor will enhance your returns over the next 30 yrs.

Fund selection is a little arbitrary - for example, the UK allocation will consist of mainly large UK listed companies but over 70% of their operations and profits are global.

Also, given your age, I think you are right to select 100% equities.

One area it may be worth paying a bit more would be smaller companies (if you have an option) - they tend to outperform over long periods but also are more volatile.

Good luck - fwiw, I think you are on the right track!

guitarman001

My advisor told me that trackers go down with the market and it was worth higher AMC to go for Asia and Latin america managed funds. I always thought low charges over time were the way to go. Confused, so will prob do a mix of both. Will post my selection at some point. I'm 40% band now and trying to save for house deposit. Was going to suffer that 40% tax but isn't it more worth shoving in as much to your pension to get you down to the lower tax band? The 40% match by the government gives you oodles of dosh. Otherwise it's like you're passing up on 'free' money?

marathonic

In reviewing my allocation prior to a big transfer in from an old pension provider, I've decided to change it slightly.

I've reduce the US Index exposure to 20% from 30% and split that 10% between two managed funds: Natural Resources and UK Smaller Companies.

I'm going to stick with this allocation for a couple of years, perhaps rebalancing at some point next year.


Blackrock Aquila European Equity Index: 20%
Blackrock Aquila UK Equity Index: 20%
Blackrock Aquila US Equity Index: 20%
Blackrock Aquila Pacific Rim Equity Index: 20%
Blackrock Emerging Markets Equity Index: 10%
JP Morgan Natural Resources: 5%
Aegon UK Smaller Companies: 5%

There is an addional charge of 1% on the two new funds and they are higher risk than the rest which is why I limited them to 5% of my portfolio.

FatherAbraham

mania112 wrote: »

Those funds are all Index Trackers - a computer buys and sells in line with weightings of shares on a stock market (FTSE for UK for example).

A rather inaccurate hatchet job on index funds. There's a lot more skill involved in index tracking than an automated program buying and selling shares in line with weightings.

Here's an elementary article on tracking error, which alludes to several techniques employed to produce index-tracking behaviour: http://monevator.com/tracking-error-%E2%80%93-a-hidden-cost/

mania112 wrote: »

Over long term that's not so much of an issue (and explains why they are cheap) but you need to realise there isn't a human checking this fund to ensure it's doing well and buying and selling to counteract any issues that may lay ahead.

Of course there's a human checking the fund, to ensure that the tracking error is kept under control. That's one of the things that the fees pay for.

Warmest regards,
FA

FatherAbraham

marathonic wrote: »

I'm changing my pension allocation at the moment and wanted to run it by you to see whether you thought there was anything wrong with my selections.

My fund stands at about 1.6 times my salary as I'd pretty high contributions in my mid-twenties.

I want to go pretty high risk given how long I've left to retirement and the fact that I believe that bonds may not be as low risk as they're made out to be in todays market.

If you want to go high risk, then bonds are out in the first place, no matter where they are now (what you've said actually contradicts the concept of bonds as low risk, but I expect you mean that you think that bonds are a sure-fire way to lose money right now).

marathonic wrote: »

I don't want to go for a global fund because I want it to be relatively easy to switch some money over to the part of the globe that may be underperforming (and, possibly, undervalued) at any point in time through re-balancing.

You're saying that you're able to predict the relative movements of geographic markets. This is highly unlikely to be true. A good investor is not one who believes that he's better than average (because that is unlikely).

marathonic wrote: »

However, I also want it set up in such a way that I'm not overly worried if something drastic happens in the UK, Europe or any other area (and by overly worried, I mean that I can handle 20% drops over short periods of time if those drops are widespread - but I don't want the majority of my portfolio invested in a single geographical location and for it alone to go through a period of negative growth).

My selections are:

Blackrock Aquila European Equity Index: 20%
Blackrock Aquila UK Equity Index: 20%
Blackrock Aquila US Equity Index: 30%
Blackrock Aquila Pacific Rim Equity Index: 20%
Blackrock Emerging Markets Equity Index: 10%

I realise that the above portfolio is only diversified geographically and could be further diversified based on company size and/or sector. However, the majority of this extra diversification results in increased charges in my fund and I decided that, over the long term, the equity indexes are likely to outperform when these charges are taken into account.

You're over-estimating your market-picking skills. You will probably do better to take something like 90% in a BlackRock Aquila Global Equity Index (I like 40% UK, 60% RoW), and 10% in small-caps (UK only, for cheapness -- no-one can run a global small-cap fund cheaply). That's simple, and you only need to rebalance he 90/10 split periodically -- the Global fund will rebalance automatically.

Still, given that you will only accept up to 20% loss, then 100% equities is probably too risky for you, and you should listen to the folk mentioning bonds and real-estate.

marathonic wrote: »

The AMC on all the above funds are 0.3%.

I like the sound of that. How did you get it so low? What vehicle are you using? I'm jealous, I can't get those funds anywhere near as cheap as that in my pensions vehicles (my employer's FriendsLife GPP charges 0.70%!).

Warmest regards,
FA

mania112

FatherAbraham wrote: »

A rather inaccurate hatchet job on index funds. There's a lot more skill involved in index tracking than an automated program buying and selling shares in line with weightings.

Here's an elementary article on tracking error, which alludes to several techniques employed to produce index-tracking behaviour: http://monevator.com/tracking-error-%E2%80%93-a-hidden-cost/



Of course there's a human checking the fund, to ensure that the tracking error is kept under control. That's one of the things that the fees pay for.

Warmest regards,
FA

Not sure how your link disagrees with my comment about how the fund works, it is a computer that tracks the index.

It's the costs and delay in buy/sell that can cause a tracking error.

Here's an explanation: http://www.thisismoney.co.uk/money/investing/article-1583915/A-guide-cheapest-index-tracker-funds.html

marathonic

FatherAbraham wrote: »

If you want to go high risk, then bonds are out in the first place, no matter where they are now (what you've said actually contradicts the concept of bonds as low risk, but I expect you mean that you think that bonds are a sure-fire way to lose money right now).

I think we're on the same page... Basically, I think bonds are overpriced at the moment and, even if they weren't, I wouldn't want to invest in them over a 30+ year timeframe.

FatherAbraham wrote: »

You're saying that you're able to predict the relative movements of geographic markets. This is highly unlikely to be true. A good investor is not one who believes that he's better than average (because that is unlikely).

Not that I can predict them - that I can react to them. Basically, I'm a contrarian and like to skew my investment towards out of favour sectors.

If, for example, Japan is in the doldrums and the Nikkei drops 20% in value whilst other markets are stable, a Global Index will have less exposure to it due to it representing a smaller proportion of the global equity market.

By splitting my fund choices as I've done above, I can rebalance and bring my investment in the funds that have dropped up to the initial allocation - hopefully, purchasing at a low price at the same time (and definately purchasing at a lower price relative to my prior purchases).

FatherAbraham wrote: »

You're over-estimating your market-picking skills. You will probably do better to take something like 90% in a BlackRock Aquila Global Equity Index (I like 40% UK, 60% RoW), and 10% in small-caps (UK only, for cheapness -- no-one can run a global small-cap fund cheaply). That's simple, and you only need to rebalance he 90/10 split periodically -- the Global fund will rebalance automatically.

Again, my thoughts are above - whether they are correct or not is a different matter.

FatherAbraham wrote: »

Still, given that you will only accept up to 20% loss, then 100% equities is probably too risky for you, and you should listen to the folk mentioning bonds and real-estate.

For real estate, I'll be investing directly and outside the pension wrapper. With the long term returns on bonds being a couple of percentage points below equities, I'm going to steer clear of those too. With 20%+ falls in the price of equities, my intention would be to pump up my contributions to take advantage of the lows - as I done in the past few years.

FatherAbraham wrote: »

I like the sound of that. How did you get it so low? What vehicle are you using? I'm jealous, I can't get those funds anywhere near as cheap as that in my pensions vehicles (my employer's FriendsLife GPP charges 0.70%!).

It's with Aegon through my employer. The documentation states a "standard 1% charge with a rebate of 0.7% provided regular contributions are maintained".

Of course, for a lot of the funds, there is an additional charge.

Perelandra

marathonic wrote: »

I realise that the above portfolio is only diversified geographically and could be further diversified based on company size and/or sector. However, the majority of this extra diversification results in increased charges in my fund and I decided that, over the long term, the equity indexes are likely to outperform when these charges are taken into account.

The AMC on all the above funds are 0.3%.

Whilst I would generally agree with you, do you think this applies to the emerging markets equity as well? I haven't managed to convince myself yet that trackers > managed in these markets.