Novice investor asset allocation - lifestrategy or roll-your-own

guymo

I'm planning to get started with an S&S ISA and have two questions about asset allocation which I'm going to post in two threads because I think they're orthogonal.

Background: I'm 41, married, 2 kids, mortgage of £220k on a £500k property, have a few months' expenditure in cash, pension in good order (final salary scheme), and a little spare money each month to stash away. My goal at the moment is to build up some funds to give myself options in 10-15 years' time -- e.g. the ability to pay off the mortgage early, or help the kids, or…

I'm looking at investing around £500 per month. For the stocks part of my planned portfolio, I am wondering about the relative advantages and disadvantages of using a simple LifeStrategy type fund versus rolling-your-own portfolio by purchasing a number of funds.

If I were to roll my own, I'd plan to invest monthly in a few tracker funds. [I think that ETFs are essentially ruled out from my approach because of trading costs --- please correct me if I'm wrong]. Taking my cue from Tim Hale's book, and thinking of avoiding small- and value- tilts for now, I might go for e.g.

10% UK broad market
65% global ex-UK developed market
15% emerging markets
10% property

It's easy enough to find appropriate tracker funds for these. As I see it, putting the portfolio together myself would have the advantage that I would get a better understanding of how the various parts are related and how things work, and more flexibility to adjust the asset allocation as time wears on, the portfolio gets bigger and I gain confidence.

On the LifeStrategy side, though, of course I'd have experts doing the asset allocation and rebalancing for me, and less temptation to mess about, which could also be an advantage.

By the way, I think I prefer the look of the Blackrock Consensus funds to the Vanguard ones, because they exhibit less UK bias. I can't see a good reason to overweight UK stocks --- is there one? I feel like I have enough exposure to the UK economy anyway, because I live here!

And what are your thoughts on the benefit of the property element in Hale's recommendation? I'm uncertain about this.

All and any thoughts gratefully appreciated! Thank you.

pip895

Why avoid small cap exposure?

Wilkins

guymo wrote: »

I can't see a good reason to overweight UK stocks --- is there one? I feel like I have enough exposure to the UK economy anyway, because I live here!

The LSE is often the exchange of choice for global companies. Don't make the mistake of assuming that UK companies reflect what is going on in the UK economy. Many of the FTSE 100 and some of the FTSE 250 constituents have substantial foreign trading activities and if you minimise UK equities in your portfolio you will actually be excluding some of the most successful players on the global scene.

Linton

I like the way you have looked into what your potential funds invest in to help make a rational decision on which way to go. I dont see any advantage in going for a high UK content, especially as the larger UK companies that a tracker will mainly hold are a fairly random collection of global multinationals that just happen to have their shares quoted in the UK, there isnt necessarily much UK specific investment there.

In the first few years I see little financial point in setting up you own diversified portfolio, in 3 years time maybe but not yet. Of course you may want to purely out of personal interest.

As regards property, in the past this was always seen as a good solid though unexciting investment, with returns coming from a steady rent income, to be held alongside bonds to provide diversification from equity. However these days property often means modern high rise office blocks and the property fund prices are driven more by the commercial valuation of such property which rises and falls in parallel with the wider economy. Property funds can be pretty volatile.

I am looking into the sector to see if it does provide any alternative to bonds, these currently being unusually expensive. There are a few property funds which appear much less volatile than the average. Royal London is a possibility for me, but I dont think a property tracker would provide sufficient diversification.

Linton

Wilkins wrote: »

The LSE is often the exchange of choice for global companies. Don't make the mistake of assuming that UK companies reflect what is going on in the UK economy. Many of the FTSE 100 and some of the FTSE 250 constituents have substantial foreign trading activities and if you minimise UK equities in your portfolio you will actually be excluding some of the most successful players on the global scene.

I dont think the proposal is to minimise UK content, but rather not have it extremely high, way above that justified by the size of the UK market. It is true that there are some excellent companies in the upper ranges of the FTSE100, the problem is that from a sector point of view they are very arbitrary. Why are oil & gas and finance so important and manufacturing, technology, IT etc hardly represented at all?

In my view you would be better investing in Europe, the US, and the Far East to cover a good spread of the world global business.

cathybird

Linton wrote: »

In my view you would be better investing in Europe, the US, and the Far East to cover a good spread of the world global business.

hi Linton, do you mind my asking whether in your view this would be better put into a single "Developed World ex UK" fund or separated into funds covering the different regions? Or doesn't it matter? ...

Linton

cathybird wrote: »

hi Linton, do you mind my asking whether in your view this would be better put into a single "Developed World ex UK" fund or separated into funds covering the different regions? Or doesn't it matter? ...

In my view it depends on how much money you are investing and the effort you want to put into it. If you are taking about say £10K or less then one global fund seems the best solution - the benefits of what would be small holdings in specific sectors would be pretty small and so arguably not worth the hassle of setting them up and subsequently managing them. I see no particular reason to go for a fund that specifically avoids the UK, but you may.

With more money it may make more sense to go for geographically focused funds if you want more control over where you are investing. So for say £30K you could perhaps have £10K US, £5K UK, £10K EU, and £5K Asia-Pacific. With even more money you could consider whether to split the geographical holdings into Small Cap and Large Cap.

On the other hand if you really have no interest in managing your investments and no views on how your investments should be split globally there is nothing wrong with keeping one very broad fund.

In my investing I wouldnt buy less than £5K in any one fund and £2.5K in any one share. It is these sorts of limits that determine the extent one goes for multiple funds.

cathybird

Linton, many thanks. I wasn't meaning to exclude the UK per se, rather referring to what you said re "investing in Europe, the US, and the Far East" and wondering whether it would be better to tackle these regions separately or together.

I do notice that with single developed world funds you get coverage of regions that you wouldn't if you tried to split your investments across, say, the US, Europe ex UK and Asia - I was looking at the Vanguard developed world fund earlier and noticed that it has a biggish chunk in Canada, a country that I haven't particularly seen mentioned or singled out in the discussions I have come across on investments.

There are though (I have no doubt) advantages to using separate funds as well - it would obviously allow you to bump up exposure to a particular region (eg Asia, if you felt there was more potential for growth there) and minimise others (US, if you felt it was overvalued, etc). But obviously this would only matter (as you point out) with larger holdings.

Anyway, thanks for responding, your answer gives me food for thought.

Wilkins

Linton wrote: »

I dont think the proposal is to minimise UK content, but rather not have it extremely high, way above that justified by the size of the UK market. It is true that there are some excellent companies in the upper ranges of the FTSE100, the problem is that from a sector point of view they are very arbitrary. Why are oil & gas and finance so important and manufacturing, technology, IT etc hardly represented at all?

In my view you would be better investing in Europe, the US, and the Far East to cover a good spread of the world global business.

Good point about sector allocation but I still think 10% UK is too low. However, my point of view is that of individual companies not funds.

guymo

pip895 wrote: »

Why avoid small cap exposure?

I didn't quite mean avoiding small cap exposure; rather, not trying to deliberately overweight it at the outset.

guymo

Linton wrote: »

In the first few years I see little financial point in setting up you own diversified portfolio, in 3 years time maybe but not yet. Of course you may want to purely out of personal interest.

Many thanks for your responses in this thread.

At this point it was purely for personal interest, as an added incentive to me to actually get on and do it! It sounds as though you don't see any major downsides to putting the portfolio together myself, other than the additional effort it will require -- is that right?

My understanding of asset allocation is that broad strokes are good enough -- the precise percentages aren't so important because one can't predict how things are going to go. Please correct me if I'm wrong on that, because it is that thought that makes me believe I might get away with DIYing this!