Investment plan advice

stevo_78

Hi,

As you can probably see I'm new to this and learning on the job.

I'm about to embark on a pension savings investment plan. I intend to set-up and manage the fund myself through Fidelity. I will attempt to max out my S&S ISa allowance over the next year!

I will aim to invest 1000GBP / month. I want to start with approximately 70% Stocks and 30% Bonds. I want to be a passive investor.

My questions really involve what type of funds I should aim for. Here is what I'm thinking for the first 6 months of payments:

Stocks
2000 HSBC FTSE 100 Index Inc
2000 Legal & General Global Emerg Markets Index R Acc

Bonds
2000 Royal London Corporate Bond Fund A Inc

Is this a good starting point? Does anyone have any advice on this setup? Also where could I go from here? What about Gilts or Commodities?

Are those index funds regarded as medium/high risk?

About charges, if the annual management charge is 0.65%, what exactly is charged? Is the entire value of the fund?

BTW I have about 10,000GBP as an emergency reserve.

Any advice, input, ideas etc much much appreciated.
Thanks

bowlhead99

Some would say that looks nice and simple to start you off. Others (including me) would say "how come for your global stock allocation you have 50% in the UK and 50% in Emerging, what's wrong with the 80%+ of the world's investible economy that you are ignoring (US, Europe, Japan, Australia, South Korea, etc etc)"

Typically yes buying a fund with exposure to equities listed in just one geographical market is higher risk (FTSE100 can lose 40%+ no problem, check historic charts). The portfolio as a whole can be lower risk if you buy all the other markets too. Emerging markets are also inherently higher risk (and arguably index funds are not the optimum way to access the growth from inefficient less-developed markets).

Personally I would cut the %s of the UK and EM index funds down (the EM further than the UK, as you do live in the UK after all). And I would change FTSE100 to FTSE All-Share (which is still very much driven by the FTSE100 but a little bit broader), or perhaps have half in the FTSE100 and half in the FTSE 250. And personally I would hold one or two active EM funds in preference to an index, but each to their own) and make way for more global stuff.

One solution for your equities which someone will mention if I don't, is to just use a portfolio index fund like Blackrock Consensus 100 or Vanguard Lifestrategy 100, perhaps with a small side order of an active EM fund and a 'smaller companies' fund. They are global funds, so wider than the UK, and the '100' refers to the percentage of the fund made up by equities trackers. You can get lower percentages with the balance replaced with bonds if you prefer, and then just forget about buying your own separate bond exposure. I only use the 100 versions as I think there are more attractive bond solutions that can be bought separately.

On the bond side, recognize there are different types of bonds which go from gilts (government bonds) to investment-grade corporate bonds (lower risk companies) to high yield bonds (higher risk companies. Bonds are generally safer than equities but at current high prices (interest rates are low and everyone has been piling into safe havens in recent years), they can still fall a fair way. You might consider a "strategic bond fund" where the fund manager is making allocation decisions between the different types. Or at least buy more than one bond fund in case Royal London get it wrong within their sector. Personally I would also consider alternatives to bonds for my 'not pure equities' part of the portfolio which might include real estate or some 'slow and steady' investment trusts which have a strategy of capital preservation.

This may sound like I'm trying to overcomplicate things but I think with a Lifestrategy or Consensus fund for most equities plus a small EM fund and a smaller companies fund if you have a bit more risk appetite within the equities area, will give you a good balance, and then two or three non equities funds, you are covered. At the extreme end, a passive investor would just buy one Lifestrategy fund with an 80% equities allocation, and then one strategic bond fund to get their total equities down to 70%. But if you have 1000 a month you can easily split it 5 or 10 ways and just have it rolling on direct debit without going back to look for another year.

In terms of fees, a 0.65% expense ratio is getting charged daily on the net assets of the fund and so in month 1 with 1k invested it's running at a rate of 6.50 a year (a little over 54p a month), but by month 10 with 10k invested if you stopped there it would be 65 quid a year or 5.40 a month. If the investments then tank to half their value, you might only be paying 2.70 a month, which is scant consolation, but if they double you'll be paying a tenner a month. The fees and expenses are just paid by the fund out of the fund's own assets.

Separately you will pay a fee to your ISA provider depending what you hold on their platform, which might be a flat fee per quarter or per year, or a percentage (Charles Stanley is 0.25% a year for example)

badger09

As a newbie to investing (as opposed to saving) I'd like to thank bowlhead99 for taking the time to post comprehensive replies like the one above, in language which is easily understood, and particularly for explaining his/her rationale behind the replies :T

Tee

badger09 wrote: »

As a newbie to investing (as opposed to saving) I'd like to thank bowlhead99 for taking the time to post comprehensive replies like the one above, in language which is easily understood, and particularly for explaining his/her rationale behind the replies :T

I second that.

stevo_78

Wow, thanks for the comprehensive reply Bowlhead. I'll have a rethink about my diversification.
Thanks

bowlhead99

badger09 wrote: »

As a newbie to investing (as opposed to saving) I'd like to thank bowlhead99 for taking the time to post comprehensive replies like the one above, in language which is easily understood, and particularly for explaining his/her rationale behind the replies :T

His. Shout out to all the investment-grade single ladies...

stevo_78 wrote: »

Wow, thanks for the comprehensive reply Bowlhead. I'll have a rethink about my diversification.
Thanks

It's reaaaally tempting to congratulate and nod along with someone for putting any kind of money away for their future. Many don't. And it sounds so easy to just put half of your equities money into the index of the country you live in (it's mentioned on TV and the papers every day) and half into emerging markets (we generalise that they all live in rice fields or tea plantations or mud huts now, and imagine the gains when billions of them have the money to live in skyscrapers and drink at Starbucks).

But both are risky in their own way. We know buying a share of an individual company is risky, so we don't buy just a couple, we take a whole bunch of them inside a fund, whether picked for us by an index or a smart fund manager. But in the same way, putting your life savings into the fortunes of an individual geographic region or market sector is risky, so you should buy a bunch of them - a portfolio of funds, or a portfolio fund. Either of those choices is fine for you, as with 1000 a month you can invest 10x100 or 1x1000 or even 1x500 + 10x50.

Basically, don't just buy two things that would go in the portfolio and put all your money into them, because they might perform very badly and you're missing the other five to ten other things that would do well and average you out to something more acceptable. Of course, your two choices might be the best thing out there and be dragged down by the other five to ten things, down to the average, but it's the price to pay for a less volatile return over any given timescale.

Just a quick note on my suggestion earlier, that you could do something like a 100% equity global coverage portfolio fund with a smaller actively managed EM fund on the side - as well as maybe a smaller companies fund if the main portfolio fund was focussed on tracking the largest companies.

A portfolio fund worth its salt will generally already have exposure to emerging markets anyway (the Vanguard one I mentioned does), so any extra is doubling up that exposure, even if it has a different approach (active vs passive). This is not an issue for me, because I like emerging markets, and maybe not for you (you were going to put 50% into them...). But a general rule of putting a portfolio together is to make sure you know what you're getting in each fund and what exposure you have to risks and returns from different places when you add them all together.

stevo_78

Thanks again for your insight.

After consideration of your advice this is now what I'm thinking.

I use fidelity and already have bought some mutual funds through them.

I plan to start this in July and deposit 1000 per month for 9 months.

I will buy 1000 shares in the Blackrock consensus 85 fund. As far as I can tell this fund is diversified sufficiently for me to not have to really think about further diversification.

The costs seem pretty low.The allocation is 65/20/15 Equity/Bonds/Short-term investments, which seems to fit my model. Additionally the fund is described as more aggressive.

The actual regions included in the various trackers, seem to cover the majority of the globe. It seems like a one stop simplified shop.

Am I missing something obvious?

I would probably use the additional 3000/year and buy a fixed interest bond/cash ISA.

Firstly, does my thinking on this fund make sense? Where could I go with the second year of investing? Would you other with that 3000 cash ISA? SHould I just go the full 12,000 into Blackrock of the first year?

BTW I do not want the money back any time soon.

Thanks again for any input.

bowlhead99

stevo_78 wrote: »

I use fidelity and already have bought some mutual funds through them.

I did a quick search on the Fidelity site and I see they carry the 'A' class of BR Consensus 85 which has total expenses of 0.65% a year; elsewhere you could buy the 'D' class which is the same product with a 0.25% fee. It has a higher headline minimum investment (100k!) but you can buy it through other platforms who already have people invested in it, and thereby just invest normal amounts. By the time your portfolio is up to 10k, you're paying 40 a year more in management fees for the A class.

Obviously there is value in you staying with Fidelity for the convenience factor if you already have other things with them, and other places that offer the D class might have annual platfom fees which are higher and cancel out any management fee saving (example at Sippdeal, the fund would attract a 60 per year custody fee which is expensive for small amounts). I know nothing of the Fidelity fee structure and perhaps they rebate an element of fees to you anyway, or perhaps they have a swingeing annual fee and you should already have left them.

Charles Stanley Direct (of whom I have no experience, but have seen the decent pricing) would charge an annual fee of 0.25% for you to invest this year's ISA in BR Consensus Class D, with no dealing fees or other fees. That's less than the 0.4% saving from being in Class D rather than Class A. So it can be worth shopping around.

I will buy 1000 shares in the Blackrock consensus 85 fund. As far as I can tell this fund is diversified sufficiently for me to not have to really think about further diversification.

The costs seem pretty low.The allocation is 65/20/15 Equity/Bonds/Short-term investments, which seems to fit my model. Additionally the fund is described as more aggressive.

The actual regions included in the various trackers, seem to cover the majority of the globe. It seems like a one stop simplified shop.

To borrow from their marketing literature, they don't claim to be "one-size-fits-all product" (because an investment product can never be that) but "more of a one stop shop, for investors seeking low-cost, efficient and diversified market exposure. I see these Funds as the ideal backbone for a portfolio, saving you money and providing room for other funds and strategies". They note that using index funds with a tactical allocation overlay can be an inexpensive solution, and allows for a "core and satellite" portfolio with this at the core and more actively managed funds around the side.

You mention the fund is described as 'more aggressive' ; it's true that it's more aggressive than the 35 or 60 or 70 flavours of the fund, but obviously less than the 100. If I'm reading the prospectus right, over time it may differ from its current asset allocation which currently suits your model - the equities could go up to 85 or down to 40 based on tactical decisions made by Blackrock.

So they could be more aggressive when they thought the market called for it, and more conservative when they didn't. At the moment, you're right, their allocations broadly match your model. The high level asset allocation is a form of high level active management while the building blocks are passive index funds and you personally are completely passive because you just sit there and they move the money around between classes within the one product you hold.

You are right that the regions cover the majority of the globe. I personally would favour more emerging markets than they currently have (according to Trustnet http://www.trustnet.com/Factsheets/Factsheet.aspx?fundCode=EFFT9&univ=O, but these drill-throughs don't always give you the full picture).

I note that within their sector (40-85% equity) per Trustnet and their own site, they have been a third quartile fund in most recent periods (BR's website has them as 4th quartile in the month to 31 March). This is perhaps inevitable when other funds in their space will have been using more of the 85% maximum in equities during the strong recent boom; 40% cash and bonds will hve been a drag. But the performance seems OK.

Where could I go with the second year of investing?

Well as mentioned, having a broad allocation to global equities and bonds can be a decent 'core' to a portfolio. There are other things such as real estate, infrastructure, commodities etc, as well as emerging markets and smaller companies mentioned previously, which can round out a portfolio while adding 'alpha'. The BR Consensus, or Vanguard Lifestrategy, or a similar fund of global trackers, is only going to have indirect exposure to things like property and commodities (through the equities of companies involved in those sectors, to the extent that they make up the global indexes).

Or you could just add more to this fund, but from a core of your 10k or so (or 5k if the markets tank...) you can probably look to add a few more funds while still holding this at the middle as a one stop shop. If it meets your needs. You'll appreciate I really can't give an opinion on that, other than to say yes it has a bunch of global equities and bonds in it and you said you'd like a bunch of global equities and bonds in those broad ratios.

While it's always nice to have a plan, I couldn't tell you now what I'm doing with my 2014/15 ISA allocation other than I intend to have one. Or for that matter where my contributions are going in the second quarter of this tax year. It will depend on my view of markets at the time.

Would you other with that 3000 cash ISA? SHould I just go the full 12,000 into Blackrock of the first year?

With respect, I wouldn't touch a "should I put 3000 into a cash fund or an equity/bond tracker fund during February-April 2014" question with a bargepole. Even if we were talking May to July 2013 I wouldn't try to influence your decision. In May to July 2009 I would have said going Fund rather than Cash was a no brainer on a medium-long term view. Markets are currently double that level.

And whether you should put 9,000, or 12,000, or any 000, into a specific Blackrock fund or indeed any other fund, is entirely up to you. Good luck anyway!

stevo_78

Many thanks again Bowlhead for your insights.

With regards to fees I think I'll stay with fidelity purely for simplicity.

I now have a plan for the next few months. I will invest 1000/month into BRC85 for around 3-5 months. During which time I will research other options, e.g. emerging markets and fixed rate cash ISAs.

Thanks again