My first portfolio

yatinsardana

I started investing last year but that was with very little money. This year onwards I start earning and apart from having cash (around 4 months salary) I want to start investing regularly.
I definitely won't be needing this money for the next 6-7 years but probably a lot longer. Obviously it's difficult to predict whether I'll need it after but I imagine I won't. I would hope that my suggested portfolio would represent a decent amount of risk as well as a good core. Please do give me some feedback.

So I propose investing £600 regularly

1) Vanguard Lifestrategy 100% - £120 (20% of portfolio)
TER 0.33%
2) Blackrock emerging market stock index - £60 (10%)
TER 0.25%
3) Marlborough UK Micro Cap Growth - £90 (15%)
TER 0.76%
4) Artemis UK Growth - £120 (20%)
TER 0.73%
5) AXA Framlington Biotech - £90 (15%)
TER either 1% or 0.84% - I'm not sure. I'm getting different quotes from different places on the web site !!
6) Individual shares - £120 (20%) - I intend buying a maximum of two shares in the year which so essentially I'll be saving 120/month until around 6 months at which point I might buy a share and so on.

My thoughts on the portfolio are as follows:
1) It gives me decent diversification to start off with. Although VLS sort of serves the purpose I intend adding a global equity fund maybe the following year when I invest more money (something like Rathbone global opportunities or vanguard ftse developed world ex uk)

2) Having a specific budget and a maximum of two stocks that I can buy in the year will make me more disciplined towards choosing stocks. At the same time it will give me the freedom to buy shares if an opportunity arises that matches my risk profile

3) in terms of buying a uk equity fund - there were lots! I couldn't decide - it was more or less a throw of there dice that made me go for Artemis. Others included Cazenove uk growth and income, m&g recovery, AXA Framlington uk select opportunities.

4) the biotech fund might seem out of place but I suppose I put it in there to reflect my risk profile - at the end of the day I want to be responsible but also a little adventurous and daring. Maybe I allocated too much? Any thoughts?

I'm with HL so I suppose we should add 0.45% to all the funds above to work out the true cost. Also the TER takes into account the HL savings (I think I pay the full AMC but HL refunds the savings later or something)

boglehead

yatinsardana wrote: »

I started investing last year but that was with very little money. This year onwards I start earning and apart from having cash (around 4 months salary) I want to start investing regularly.
I definitely won't be needing this money for the next 6-7 years but probably a lot longer. Obviously it's difficult to predict whether I'll need it after but I imagine I won't. I would hope that my suggested portfolio would represent a decent amount of risk as well as a good core. Please do give me some feedback.

So I propose investing £600 regularly

1) Vanguard Lifestrategy 100% - £120 (20% of portfolio)
TER 0.33%
2) Blackrock emerging market stock index - £60 (10%)
TER 0.25%
3) Marlborough UK Micro Cap Growth - £90 (15%)
TER 0.76%
4) Artemis UK Growth - £120 (20%)
TER 0.73%
5) AXA Framlington Biotech - £90 (15%)
TER either 1% or 0.84% - I'm not sure. I'm getting different quotes from different places on the web site !!
6) Individual shares - £120 (20%) - I intend buying a maximum of two shares in the year which so essentially I'll be saving 120/month until around 6 months at which point I might buy a share and so on.

My thoughts on the portfolio are as follows:
1) It gives me decent diversification to start off with. Although VLS sort of serves the purpose I intend adding a global equity fund maybe the following year when I invest more money (something like Rathbone global opportunities or vanguard ftse developed world ex uk)

2) Having a specific budget and a maximum of two stocks that I can buy in the year will make me more disciplined towards choosing stocks. At the same time it will give me the freedom to buy shares if an opportunity arises that matches my risk profile

3) in terms of buying a uk equity fund - there were lots! I couldn't decide - it was more or less a throw of there dice that made me go for Artemis. Others included Cazenove uk growth and income, m&g recovery, AXA Framlington uk select opportunities.

4) the biotech fund might seem out of place but I suppose I put it in there to reflect my risk profile - at the end of the day I want to be responsible but also a little adventurous and daring. Maybe I allocated too much? Any thoughts?

I'm with HL so I suppose we should add 0.45% to all the funds above to work out the true cost. Also the TER takes into account the HL savings (I think I pay the full AMC but HL refunds the savings later or something)

Great initiative - but I am struggling to see why you are investing in so many funds (most of which having very high TER%). Unless you know for sure that some of those index will outperform the market (as a reminder 90% of the fund managers ie. professional investor do not beat the market over a 10yr period) - I would recommend you just buy the market ie. all world index aligned with the stock market participation.

Depending on your age (sounds like you're in your early/mid twenties) - I would go for the vanguard lifestrategy 80 - which is fairly reasonable in terms of management fees.

I would only recommend funds if you can find a broker that doesn't charge for trading fee - otherwise paying £10-£15 per order (especially if you go for that many funds), will properly dent your returns.

If you cannot find a commission free fund broker, I would consider investing in lower cost ETF, with a broker that offer regular monthly saving plan - cutting the commission to £1.5 only.

Same comment for your decision to buy stock - give the amount of commission you need to pay to acquire them, it makes little sense to buy stocks directly - and would really increase your portfolio risk exposure.

Don't try to beat the market, just buy the market based on your age/risk profile - either through limited number of funds or ETF based on your trading costs - and buy regularly to replicate the market average.

Hope it helps.

yatinsardana

boglehead wrote: »

Great initiative - but I am struggling to see why you are investing in so many funds (most of which having very high TER%). Unless you know for sure that some of those index will outperform the market (as a reminder 90% of the fund managers ie. professional investor do not beat the market over a 10yr period) - I would recommend you just buy the market ie. all world index aligned with the stock market participation.

Depending on your age (sounds like you're in your early/mid twenties) - I would go for the vanguard lifestrategy 80 - which is fairly reasonable in terms of management fees.

I would only recommend funds if you can find a broker that doesn't charge for trading fee - otherwise paying £10-£15 per order (especially if you go for that many funds), will properly dent your returns.

If you cannot find a commission free fund broker, I would consider investing in lower cost ETF, with a broker that offer regular monthly saving plan - cutting the commission to £1.5 only.

Same comment for your decision to buy stock - give the amount of commission you need to pay to acquire them, it makes little sense to buy stocks directly - and would really increase your portfolio risk exposure.

Don't try to beat the market, just buy the market based on your age/risk profile - either through limited number of funds or ETF based on your trading costs - and buy regularly to replicate the market average.

Hope it helps.

Thanks for your suggestions. So the reason I went for so many funds was to essentially go for diversification. Apart from VLS, which goes for global equity in general, there's one fund for EM, one for small caps UK, one for larger caps UK, one specialist (biotech).

Apart from VLS and EM, the others have a significant TER% - I agree with you. I thought about going for trackers all the way through but I feel I want to mix it up. Reading the posts here I've got a feeling that TER around 0.7-0.75 is acceptable or do you think it will really drain onto my return later on?

My broker doesn't charge me for fund trading - there's a 0.45% management fees so that's why I feel ok going for going for so many funds as ultimately it's the amount of money I put in total that will define how much management fees I pay rather than number of funds.

What I'll do is I'll look at some index trackers - like you said it is quite appealing that their management charge is tiny. I'm guessing what you're proposing is something like this:
Index trackers for:
1) FTSE all share
2) small cap
3) global index
4) VLS 80%

My overall guess is that the average TER in this portfolio will be roughly 0.25% vs the average in my original one which will probably be roughly 0.7-0.75%. In a years time that is very roughly a difference of £36? Does that sound right?

SlapShot

I agree with boglehead's sentiments: great idea but you could implement it better.

I detect two aims, one explicit, the other implicit... The explicit aim is to make money! Great, so this means pursuing a sensible investment strategy. But the implicit aim (I suspect, please correct me if I'm wrong) is to find your feet a little and learn about investing through doing. Both are entirely valid! But I think that does change a little what you should be trying to do.

There are fundamentally things you need to learn, and two pillars of investment, and if you get both right, you'll do well. 1) Asset allocation. 2) Stock selection. There are a bunch of other important things too: low cost, low turnover, etc.

Asset allocation. Diversification is important but, the way I see it, you're not particularly diversified (UK- and equity-centric) nor will you learn much about diversification from the portfolio you have. I'd suggest actually running your own index tracking portfolio (along the lines of Tim Hale/Monevator blog) - you need about 6 funds/ETFs to cover the main asset classes (say, UK equity, world developed equity, EM equity, property/REITS, IL bonds, regular bonds). The beauty about doing it yourself is that you get to see the disparities in movements of the prices of the individual asset classes - if you just buy e.g. a Vanguard life strategy fund, you don't see this, you just see the smoothed return! There's nothing like: a) noting that one fund is down 30% while the other is up 10%; b) forcing yourself to buy the one that's down and sell the one that's up. This is the crux of it! If you can do this, you'll learn a lot!

The alternative is to pick a couple of multi-asset funds. You've mentioned the LifeStrategy fund (I'd look at the 80/20 in your position, actually), but there are others. E.g. L&G multi index (similar, but with a tactical asset allocation overlay); 7IM (as per the L&G, but more aggressive and with some active management thrown in where appropriate); true active fund of funds (e.g. Troy Spectrum); true active multi-asset funds (e.g. Ruffer Equity & General, Odey Portfolio); generalist ITs (e.g. RIT Capital Partners). By holding a few of these with different approaches, you'll get a good feel for what they're doing and how they make money. The factsheets/annual reports for some of these are particular interesting to read alongside watching the progress of your fund!

Stockpicking. Active management is problematic. There can be reasons to pursue it, chiefly to get exposure to value, quality, size "factors", also when fishing in less efficient markets. But it's hard to pick correctly/wisely, and it's particularly hard as a novice to make sense of this. The best advice I can give is actually to ditch the active funds you have completely in preference to pursuing investing in company shares directly, as you'll learn more about investing strategies and what you're comfortable with this way. You express a willingness/desire to take on some more risk (and you sound like you've got long-ish investment horizons) so this is how to achieve this. Particularly if you stick with smaller companies - this makes sense for a number of reasons: large-cap investing as a private investor is not sensible, because you're fishing with the big boys; below about 100M market cap, you don't get many institutional investors so the potential to make outsized returns increases; smaller company accounts and business are generally easier to grasp. There are risks, and you'll likely make mistakes and lose your shirt a couple of times. But you'll learn a *lot*, and this will stand you in good stead in the future, when your portfolio is bigger.

So, my suggestion would be:

Something like half (£300 a month) into a multi-asset strategy, either DIY index fund portfolio, or say 3 different multi-asset funds.
Half towards individual share purchases - as you say, save the cash while you do your research and buy a few times a year when you have enough to make this worthwhile (£1000 minimum I'd suggest, so looking at 3-4 purchases a year at this rate - two years sees you holding 8 companies, which is a good sized portfolio to manage, not too big that you lose track or lose focus, big/diversified enough that you spread your risk).

I started investing quite young in smaller companies and it was the best thing I did, not only is it now a profitable activity (because I know what I'm doing now, and I didn't when I started) but also in my career it's been extremely useful, as I've seen a number of industries and business models up close, and this has definitely influenced how I now approach business decisions in the company I work for, where I'm now quite senior.

Hope this helps!

Daniel

PS
Did you see the recent biotech thread? My comments there still stand, I don't think this looks like a good proposition at all. (I can't post links as a new user here but the thread ID is 4897798).

boglehead

Here is the composition of the VLS 80

U.K. Corporate Bonds 6.2%
U.K. Index Linked Bonds 4.7%
U.K. Gilts 9.2%
U.K. Equities 28.0%
European ex-U.K. Equities 9.4%
North American Equities 27.8%
Japan Equities 4.7%
Asia ex-Japan Equities 3.9%
Emerging Markets Equities 6.1%

So by also investing in FTSE all share, and global index, you will only be creating redundancy in your portfolio.

What VLS80 gives you is simplicity. Then if you want to increase the participation of small caps, do so - but I'd be careful with that. If you truly intend to follow the market - then I'd consider sticking to VLS only. Your call.

Who is your broker? I am surprise you still have one that doesn't charge any trading fee for funds - as of April, I thought they all charged something (lowest I could find was £5)...

boglehead

SlapShot wrote: »

true active fund of funds (e.g. Troy Spectrum); true active multi-asset funds (e.g. Ruffer Equity & General, Odey Portfolio); generalist ITs (e.g. RIT Capital Partners). By holding a few of these with different approaches, you'll get a good feel for what they're doing and how they make money. The factsheets/annual reports for some of these are particular interesting to read alongside watching the progress of your fund!

Stockpicking. Active management is problematic. There can be reasons to pursue it, chiefly to get exposure to value, quality, size "factors", also when fishing in less efficient markets.

I would disagree with active funds - and still! - I would stay away from them. The main reason is that you will lose a lot of yield due to the CGT those funds have to pay due to the high level of turnover (sometimes as high as 20% a year if not more). Passive funds usually have a 2 to 3% turnover, limiting your CGT liability - hence return.
Also - keep in mind that 90% of professional cannot beat the market over 10yrs (and 99% cannot over 20yrs) - so active fund manager will not perform better, but will cost you more in terms of tax and commission - STAY away from them.

I also disagree with the argument you should buy stocks - you'd invest £2-3k a month, it might make sense (although refer to my comment about the ability to beat the market), but with £300 a month, you will waste your cash on trading fees (10/300 = 3% commission up front). Unless you can drop those trading cost to a negligible amount through regular savings, it is just not worth it.
Also, those stocks are probably already included in your VLS80. If not they will be super small caps and will never qualify for regular saving plan (the ones that give you access to the £1.5 trading cost with some brokers)

That's just my 2cent - if you want to learn more about why low cost is THE way to invest (and again reiterated many times by Warren Buffet) - I suggest you read that book:

How a Second Grader Beats Wall Street

It is an easy read, cheap book (£10) and quite entertaining too

Please let me know which broker you're using - the one with no funds fees... I am still surprised about that.

Drp8713

He said he is with HL, so should maybe be looking at the Blackrock Consensus 85


http://www.hl.co.uk/funds/fund-discounts,-prices--and--factsheets/search-results/b/blackrock-consensus-85-class-i-accumulation/fund-analysis


Its similar to VLS80 but instead of the VLS at an OCF of 0.77% (0.32% + 0.45%) it comes in with an OCF of 0.58% (0.13% + 0.45%)



Top 10 holdings

BlackRock UK Equity Tracker Class L 28.04%


BlackRock Continental European Equity Tracker Class L 14.34%


BlackRock North American Equity Tracker Class L 10.77%


BlackRock 100 UK Equity Tracker Class D 6.30%


BlackRock Overseas Corporate Bond Tracker Class L 5.87%


BlackRock Cash Class A 5.10%


BlackRock Japan Equity Tracker Class L 4.09%


BlackRock Pacific ex Japan Equity Tracker Class L 3.71%


BlackRock Corporate Bond Tracker Class L 3.13%


BlackRock UK Gilts All Stocks Tracker Class L 3.12%

yatinsardana

Thank you all for your suggestions, some absolutely great ideas! I genuinely appreciate a lot that you all are taking the time out to write out things you've learnt in the investment world over the years.
I had heard it a lot previously and I think hearing it from you guys have also sold me the idea that in the long term, low cost funds would save me much more money. I am liking the idea of trackers. I definitely like the idea of VLS80 and it's something that I think will take up majority of the money allocated to funds.
DRP8713, I'll look into BlackRock - first impressions are it seems fairly similar to VLS80 but like you said with lower costs.

Daniel, you've got my ambitions spot on. I think in terms of having my own tracking portfolio, I might prefer the VLS80 approach.
Initially, I wanted to invest a fair chunk of my money into stocks (obivously saving money until it becomes cost effective when you take into account the transaction fees). I just hope that I remain disciplined enough to invest wisely. It's frustrating that the human tendency is to get carried away by the next big thing. I just read your biotech thread and it makes so much sense, just because something has done well doesn't mean that it will continue to do well. Buffet said it perfectly - be greedy when others are fearful and be fearful when others are greedy. With biotech, it's hard to predict, but I think I should be fearful and stay out for it right now.

In terms of smaller companies where institutional players haven't come in yet, I feel it's difficult to do that because:

1) How do you find out about these companies? you either find out about them in the FT, IC, forums, media - in which case the institutional investors are either already in it or will soon be. Or you find out about them through your friends and colleagues, in which case you may well find a gem - the only thing is you find very very few stocks with the latter way.

2) Being an individual investor with no background in finance, I fear I may be going out of my own limitations. Buffet said that for individual investors, it's easy to make money as long as you recognise your own limitations and know that you may not be able to accurately perform a company valuation and that therefore, the best bet is to invest in a tracker and let the professionals do their job.

Don't get me wrong, I did invest in some smaller companies over the last year - some were good decisions and some weren't. What I learnt from those experiences was just that making money gives you a great feeling, but losing money gives you a worse feeling.
You come back to square 1 if you make money from one small company and lose from another.

So I thought that I would invest in stocks but ones that are big enough and stable enough - and then hope for a steady growth over years.

Maybe that'll work, maybe it won't. (Or maybe I'll lose my discipline again and end up investing in companies I don't know much about!)

All in all, I appreciate your advice and it's really helped me have some clarity in my own investing principles this morning.
The end result is:
1) Go for low cost trackers
2) Invest in individual companies (but try to be disciplined)
3) I'll take out artemis and biotech from my portfolio.
4) Might still keep the EM index as it's low cost and it's had a bad year so they say it MAY be a good time to get in.
5) I just want to think about small cap funds - what to do about it (the marlborough one). it's higher cost - it's done well. All small cap funds seem to be similar TER. I'm tempted to go for it ......... aaaah ..I Don't Know.

SlapShot

boglehead.

I don't disagree with much of what you say, but I do think you're missing a key point here, which is I'm not saying that there's alpha or that you might be able to spot it, rather you might use active management to gain exposure to factors that you can't otherwise get in efficient markets (e.g. particularly value & size being the classic ones); also to get exposure to less efficient markets where that kind of zero-alpha result doesn't hold (e.g. small caps in smaller markets, emerging markets). Additionally, tactical asset allocation has been show to improve returns if well done. (e.g. there's a Vanguard paper on this).

In efficient markets (typically the US is used, there being lots of data), fund performance is regressed according to the Fama French 3-factor model (beta, size, value) and studies find that alpha doesn't exist, especially after fees. That's not to say you can't outperform the index in a raw sense (e.g. S&P 500), rather that the only way you can reliably do so is to gain exposure to these factors and minimise costs. From the point of view of a UK investor, this is almost impossible to do with passive funds because they don't exist; however, you can do this with active funds, you're not buying alpha, rather you're buying factor exposure and this might or might not be worth it. This is why this is problematic, this point is subtle and not well understood, and there are costs/risks, and this is why I don't recommend holding active funds directly.

The point about direct investment in small caps is that these may be outside the all-share, they're giving your portfolio a definite small-cap bias (good from a Fama French factor point of view), and there is the potential to add value because the small cap market is very inefficient.

Put another way, you can invest using strategic asset allocation (SAA) via cap-weighted trackers and it's also entire rational (i.e. backed up by evidence) to attempt improve your returns by adding one or more of: tactical asset allocation (TAA); factor exposure; inefficient strategies. So, in terms of sophistication, you might ranks things (least to most sophisticated):

Vanguard LifeStrategy (passive SAA)
DIY passive portfolio (passive SAA)
Various flavours of multi-asset funds (passive SAA, +TAA, +factor exposure, +inefficient)
DIY active portfolio (SAA +TAA)
Direct share investment (inefficient markets)

As sophistication goes up, so does execution risk (i.e. you don't achieve what you try, or costs outweigh the benefits, or what has worked historically doesn't work over your investment timeframe). But if you're young and can/want to take the risk, then this is the way to do it. Not buying alpha, which doesn't exist and yet is marketed by most active funds! (Where we agree!).

Hence my suggestion, start with the least sophisticated (LifeStrategy or DIY Index Portfolio) and if you want to add sophistication (or, rather, learn to add sophistication), branch out either to the other end of the spectrum (direct small cap investment) or ratchet it up a notch, e.g. passive +TAA (L&G Multi Index), or passive +TAA+factor (7IM). I like the 7IM funds a lot, their construction shows they understand all this very well.

Separately, funds don't pay CGT, you only pay CGT on sale of the fund, so gains roll up within the fund. That said, there are large and hidden costs to high turnover, and you should avoid this. There is also another good reason for low-turnover, in that one of the assumptions of efficient market theory is that all market participants have the same timeframe, which in the case of the city is something like 6months. An investment strategy which exploits longer-timeframes is exploiting a market inefficiency (e.g. well understood by a fund such as RIT Capital Partners, or Lindsell Train).

Sorry, this has turned into a ramble! LifeStrategy funds are great, as are DIY passive portfolios, but they're not the end of the story and if you're looking to learn with a view of improving returns via increased sophistication then this is the way to go about it.

A_Flock_Of_Sheep

All I see in that list is a load of your hard earned wonga lining the pockets of the industry croupiers.

All you need is a few cheap trackers and Vanguard Life Strategy fits the William nicely.

If you want to diversify perhaps look at ETFs and Investment trusts. My portfolio is now a core of Vanguard and a few riskier investments round the edges. But you are investing small sums to dealing costs should be on your mind.

Looking at your list the word Diworseification springs to mind. I'm with Boglehead!

I have VLS 60/40 which is about 70% of my portfolio but also EDIN £5k for income and Unicorn UK Income £5k plus a dedicated smaller company fund with just £2,000 in it and also MIDD with £3k but I am considering selling MIDD with its profits to put into my VLS.

The income from my income making side I feed into VLS.

VLS is so beutifully cheap!

SlapShot

yatinsardana,

Knowing your limitations is very important, and it may be this is not a route for you. For me, it took a bunch of failures and lots of reading to get to a point where I got comfortable with things. My percentage returns in the first few years were likely terrible, but I was only investing small amounts then (£1000 per holding); now my returns are much better and I'm investing much larger amounts, so the benefits of that learning process are beginning to acrue!

Sources: various books; stock screeners (e.g. Stockopedia); Paul Scott's column on Stockopedia is good (but I quite often disagree with his opinions, so use it for ideas not tips!); Simon Thompson in the IC raises some good ideas (but never buy on his tips, wait for the sheep to buy then sell, then buy when the valuation is more reasonable, valuation is key!); I read the FT daily and this is a good source of ideas about sectors. All manner of sources, lots of reading and thinking! The point being, that in a low turnover portfolio, you don't need many good ideas per year, but if you hold your good ideas for a good length of time, you understand the company much better and are better placed to commit capital in response to valuation anomalies. It's very much the case that striking valuation anomalies can exist for some time despite news being public but sentiment being poor or demand not being there. It's hard to convey this unless you've seen it close up!

But again, know your limitations, this may not be for you.

One thing I am certain about, however, is that direct investment in larger companies in more efficient markets (e.g. most of the FTSE All Share) is a complete waste of time for a private investor. I'd advise you not to do this.

Also, I'd be wary of making tactical asset allocation decisions yourself, e.g. a sector bet on Emerging Markets. By all means, invest in a fund that might do this for you (e.g. employ a manager who understands that carefully constructed TAA can add value; a number of the funds I mentioned are overweight EM on a tactical basis) but attempting to do this yourself is a few notches up the sophistication scale and comes with additional risks. Again, in the spirit of learning, invest in a fund that does this for you and observe by comparison with a less sophisticated fund how this works out in practice.

All the best!

Daniel