Critique (another) investment strategy please

racing_blue

TCA wrote: »

So your £113k is currently 60:40 equities#cash and your future ISA allocations are in the same ratio, so 60:40 is the end target?

Thanks, hadn't really thought this through until you asked. 40% lower risk / fixed income is the target I have in mind at the moment & probably for the next 5 years.

I guess later, if our plan crystalises into using the funds to pay off mortgage on a certain date, perhaps we should plan to move more towards lower risk investments?

I think the life Vanguard life strategy funds use gov bond index funds for their low risk/ fixed income side. One of my questions is, for the small UK investor, might cash ISAs work any better? From what I can see, the capital is at less risk and the interest rate may even be higher?

Partly because I don't know the answer to this question, the target currently in mind is 20% cash + 20% gov bond index ETF

I would also really appreciate any thoughts on whether there is any real risk in simply holding the whole pot in a Vanguard lifestrategy 40:60? As other point out it would be easier. Maybe too cautious, but I feel more comfortable with that idea in theory than in practice- has anyone else done this for ALL their savings/investments?

Thanks

bowlhead99

racing_blue wrote: »

& wonder if a small scale private investor can consider cash ISAs fixed income?

racing_blue wrote: »

I think the life Vanguard life strategy funds use gov bond index funds for their low risk/ fixed income side. One of my questions is, for the small UK investor, might cash ISAs work any better? From what I can see, the capital is at less risk and the interest rate may even be higher?

Under 'normal' (i.e. long term average) conditions, cash is worse than gilts and investment grade corporate bonds and if you were rebalancing your portfolio out of equities you would not be able to switch the proceeds into tax-free interest-bearing cash within your ISA wrapper.

But if the cash is already in a cash ISA wrapper, this switchability isn't a problem (you are allowed to rebalance the other direction if needed). At the moment, gilts/bonds are at all time high prices and low yields. A UK 10-year gilt is at 1.73% which is higher yield (cheaper) than the 1.65 a month ago but still crazy low in a historic context. The only way the gilt can yield more is by losing capital value. The cash ISA cannot lose capital value.

So I would agree with you that cash ISAs can return as much, without downside risk, as non-indexed linked gilts, and thereby (for the moment at least) take over their traditional role in the portfolio.

Partly because I don't know the answer to this question, the target currently in mind is 20% cash + 20% gov bond index ETF

You're aiming for 40% fixed income or lower risk. As discussed from your current position holding cash ISAs, cash is broadly able to take the role of gilts. If the total fixed income/lower risk portion is 40% and the half of it that was going to be gilts is now cash, IMHO the other half should not be gilts (except perhaps a bit of index-linked), but perhaps other non-equity classes like investment grade corporate, even high yield corporate, REIT etc.?

I would also really appreciate any thoughts on whether there is any real risk in simply holding the whole pot in a Vanguard lifestrategy 40:60? As other point out it would be easier. Maybe too cautious, but I feel more comfortable with that idea in theory than in practice- has anyone else done this for ALL their savings/investments?

If I remember right, the 60% version of the lifestrategy doesn't have the same breadth of holdings as the 80% or 100%. There are better portfolio funds around, and with one or two or three of them you could perhaps have better coverage. Also you wanted to have something other than largecap equities (e.g. small caps, REITs) and a bit more than 5% in emerging markets which you won't get with a 60% vanguard lifestyle fund.

IMHO index funds are not necessarily the best way to access smallcaps and emerging markets anyway, but I'm not saying you can't use index funds if you want, I'd just dissuade you from throwing away diversification and investment control in pursuit of an easier life.

The idea that you want to build up a huge mortgage offset pot rather than actually pay down some of the mortgage sends out slightly mixed signals about your appetite for risk. You want a large pot of assets and a large interest-only mortgage loan - which sounds like the sort of thing a risk-seeking person might want - but the assets are only going to be managed relatively cautiously with a large cash/low yield fixed income component and you are considering having them all invested in one product. Not sure what outperformance (vs a repayment mortgage) you are hoping to achieve over the next 10 years when western stock markets and all the bond markets are currently relatively high - but clearly it comes with risk.

racing_blue

bowlhead99 thanks for that excellent post which is really helping me think around the issues. Very grateful to you for taking the time & for your clarity of thought and expression.

donniej

I won't comment on the composition, but you've obviously thought about your asset allocation - the portfolio is well diversified, which is great as many people seem to invest in funds rather than in allocations.

A couple of thoughts on the individual sectors:
- trackers may not be best suited to emerging markets - information isn't perfect in those environments, so I'd expect fund managers to make more of a difference there than in UK large caps for instance.
- REITs typically have fairly high costs (and low liquidity.) Not a problem in itself, but worth keeping in mind.

If you're interested in that kind of thing, some of the fund factsheets report the turnover ratio data, so you can get an idea of what the impact of turnover on returns might be - if the fund has a high turnover rate and high dealing costs, you'll be paying quite a lot on top of the TER (as dealing costs are not reported in those.) Performance figures are inclusive of dealing costs.