Final opinions before allocating tomorrow

trevor.dubois

Hey all,

Background and purpose
I will likely make the following allocations tomorrow or after tomorrow but I thought it would be a good idea to first see other what you guys, who have far more knowledge and understanding than I, think of the logic of my allocation decision, given my current circumstances.

Circumstances
-I am a final year undergraduate, hoping to do a masters in September which could likely require self-funding (unless I can find a means of funding it which isn't impossible).

-Since I might need the money in a few months I decided to choose a 40/60 allocation of stocks/bond. My logic is that any more stocks and it will be too risky and any more bonds and their low returns could also be risky (i.e., risky due to them not overperforming inflation).

Allocation

Principal: 23,200

60% Bonds
- 30% - Vanguard UK Gov Bond Index (0.15% ongoing charge figure; OCF, 0.1% initial)
- 20% - Vanguard UK Inflation Linked Gilts Index Fund (0.15% OCF, 0.1% initial)
- 5% BlackRock Global Property Securities Equity Tracker D (0.33% OCF) - I know some reactions will be along the lines of "since when was property equities in the bond category??" And I agree it is uncommon perhaps but my logic is based on Tim Hales's (Smarter Investing, 2009) idea that it makes sense to count property equity as a bond because it has similar returns to bonds and has a low correlation with equities (only 0.3).
- 5% Emergency money to be kept in easy access account

40% Equities
4% - iShares Euro Stoxx Total Market Value Large ETF (IDJV) (0.4% OCF)
4% - Vanguard Global Small-Cap Index Fund (VIGSCA) (0.4% OCF)
4% - BlackRock Emerging Markets Equity Tracker Fund D (0.32% OCF)
7.5% - BlackRock UK Equity Tracker D (0.17% OCF)
3.5% - Vanguard Japan Stock Index Fund (0.30% OCF)
3.5% - HSBC Pacific Index Fund ( 0.41% OCF)
5% - Vanguard US Equity Index Fund (0.20% OCF)
3.5% - Vanguard FTSE Developed Europe ex UK Equity Index (0.25% annual OCF)
5% - Funny money - as you guys know Bogle's suggestion of a way to ensure that you do not get tempted into putting more of your principal in individual stocks. I will invest in a few value stocks.


Potential weaknesses?
1. Perhaps allocation percentages are too small to adequately affect the overall portfolio, especially in a positive fashion. However, rather than allocating a good portion to a global developed market index, I have spread it among Japan, Pacific, UK, USA, Europe (=about 23%) which means that it is unlikely that the allocations are too spread out.

2. Too much correlation? - Equally to avoid too much correlation between equities, I have made allocations (excluding bonds) to reduce correlation to large cap equity. That is, according to Hale (2009) again, international equity has a correlation of 0.80 with domestic (UK) equity, as well as the following correlations: emerging market equity (0.7), UK value equity and UK small cap equity (0.85) - but note that the value and small cap equity I choose is not UK based. However, this is actually a benefit as international equity could correlate less with UK large cap equity.

Final remarks
- I will be interested in hearing your comments
- The one area I am unsure about is whether it is wise to invest 3 or 4 months before I find out what kind of money I will need to do a Master's. However, the reason for which I chose a 40/60 allocation is precisely in case I will need the money. Most of my investments will be fund investments and the discount broker I chose (Charles Stanley Direct), charges not cost to buy or sell funds, meaning I believe I would be able to move out of a fund and withdraw my money if need be.

- If there are suggestions that it is not wise to invest when I might need the money soon, please make suggestions as to what to do with it because having it in a low interest savings account seems like a crime against nature, keeping it in a low interest ISA (particularly with the currently low rates) does not seem great and letting inflation eat at your money if you choose to leave it in cash is not wise either.

bigadaj

Your choice, but investing with potentially a few months timespan seems crazy to me. That's before considering that many indexes are at many year or all time highs and many bonds have the potential for capital loss.

Getting less than 2% in a savings account might look a little pathetic, but compared to a 10% drop in markets, which is eminently possible over the next few months, it looks fantastic.

innovate

yep, your choice what you do with your money. But all seems very hasty. Too hasty for my taste, so I refrain from making any comments other than good luck.

Totton

I wouldn't invest in the markets for a 2-3 month timespan but if you do then I think you have too many holdings. Why bother putting 3.5% of £23,200 into 3 funds and a further 4% each into another 3 funds. All far too complicated for 23k imho. Why not just opt for the LifeStrategy 40% fund or give that 75% and add a few 5% higher risk funds? Either way, much too short a timespan to be going into the markets.

Best of luck

Sanchsoot49

I would also say that going into the markets for a few months is very risky.

Not something I would ever contemplate, however its up to you Trevor. You might get lucky or you might make substantial losses.

I would stick it in a savings account.

Shaolin_Monkey

Investing for a period of months is speculative and high risk. Any qualified financial adviser would probably tell you you were off your rocker... I suppose the question is, are you able to swallow possible substantial losses to your capital over the next few months? If not then don't do it.

Apart from that, if it were a longer term investment of at least a few years it looks reasonable.. Personally I would currency hedge any exposure to the Japanese market (for example using the ETF, IJPH) due to the specific reasons that market is going up currently. I would not allocate any money to conventional "all maturities" gilt funds. Short duration gilts would probably be reasonably safe but low return investment though. I would consider one or more quality actively managed strategic bond funds instead.

trevor.dubois

I'm glad I sought your guys' opinions. You do make good points that it is hasty, especially when I might need the money in a few months.

A part of me did feel that it was taking a speculative approach, the only issue I have now is what suggestions would you make about what it is best to do with the money?

Let's say equities are of the tables then.

That leaves me with:

1) Savings accounts

2) Gilts

(if you have any other ideas, I am interested in hearing them).

I suppose if the gilt idea is problematic then I will go for the savings account idea.

However, what negatives are there if for example I allocate around 75% to Vanguard UK Gov Bond Index and 25% to Vanguard UK Inflation Linked Gilts Index Fund?

Masomnia

Savings accounts for anything you might need in a few months, then look at investments for the rest, that's what I'd do.

I don't know why you're even thinking about gilts. The returns aren't going to be better than savings accounts, and you face an almost certain capital loss if you buy them directly, and a likely one if you buy in a fund.

innovate

If you need your money within the next 18-24 months and want to be certain you retain your buying power - - current accounts. Nationwide FlexDirect, Santander 123, Lloyds and BoS Vantage.

But if you feel brave, you could speculate on the stock market to keep rising for the next few months......I personally wouldn't, with just a few short months before I need the money, but I do have a relative low risk threshold

trevor.dubois

Masomnia wrote: »

Savings accounts for anything you might need in a few months, then look at investments for the rest, that's what I'd do.

I don't know why you're even thinking about gilts. The returns aren't going to be better than savings accounts, and you face an almost certain capital loss if you buy them directly, and a likely one if you buy in a fund.

That's a good idea to compromise and put what I might need in a savings account, which will be safe and anything I won't need soon I could be more flexible with and put in less safe investments.