Portfolio Comments Welcomed

WinSomeLoseSome

This is my first post so please be gentle with me!
My husband (61) and I (56) stopped work earlier this year and we have a sum of money to invest to supplement our pensions (which we are not yet drawing) and hopefully grow some capital.
Originally we planned to (cash) buy a property to let, but have decided to invest our money instead.
We are both spending considerable time caring for elderly parents and we don't need the additional hassle of running a BTL.
I would say we are reasonably cautious investors but realise we need to get some growth to keep pace with inflation and for the money to last throughout our old age.
Due to the sum involved we have contacted several IFAs and visited two of them for an initial (free) consultation and both suggested Investment Bonds (life insurance product).
In addition to the cost for the initial advice and setting up the bond both IFAs also expected annual fees (% based) and my gut feeling from what I've read on this forum and elsewhere is that we would be better investing in Unit Trusts. Seems to me the IB route might benefit the IFAs more than us but perhaps I'm being cynical.
My husband has been completely put off using an IFA and now wants us to set up and manage an investment portfolio ourselves (using AJ Bell / YouInvest platform) which we are now trying to do.
I would be grateful if someone can review our financial status and comment on our investment proposals below. I have tried to include everything I think might be relevant.
- We own our house and are mortgage/debt free. Children are grown up and are financially independent.
- My husband has a deferred final salary pension that he plans to take at age 65 in 2018 (est £19k pa) when his state pension will also start.
- He also has defined contribution pension funds with Scottish Widows and Standard Life (£97k in total).
- I have defined contribution pension funds with Blackrock, Halifax, Scottish Widows and Legal&General (£190k in total).
- I also have a tiny deferred final salary pension that I plan to take at age 60 in 2018 (est £3k pa).
- We are thinking of transferring our DC funds into SIPPS with YouInvest and leave them invested until after April 2015 when we know what products are available to start accessing the pension money.
- We have put aside cash to live on for at least the next 12 months but will need to start drawing from the DC pension pots in 2016.
- Our cash ISAs total £145k in the Virgin Bank 3% deal until 2019 - prefer to keep these for now but can be transferred out (ie not completely fixed).
- Our S&S ISAs total £100k and do need moving somewhere else as they are all FTSE trackers with 1% management charges (SW, Halifax and Virgin).
We have recently invested £100k directly in Vanguard Lifestyle 60/40 and we now have £250k remaining that we need to invest somewhere (excludes the existing S&S ISAs).
Our current thinking is to put £50k more into VLS 60\40 then spread the remaining £200k across 3 or 4 different funds so all eggs not in Vanguard basket.
So our portfolio might look like this:
- vanguard LS 60/40 £150k
- first state asia pacific leaders fund £25k
- cf woodward equity income fund £50-75k
- legal&general international index trust £100-125k
- new home for the existing FTSE tracker ISAs £100k ??
Does this fund list and split sound reasonable? What other fund would you suggest for re-homing the existing FTSE trackers?
Thanks in advance for taking the time to read and comment on this post.

Linton

A bit more information required which I dont think I have seen in your posting....

I assume you will want the pot mainly to provide a steady income increasing with inflation with the rest going to the children on your demise. How much income/year are you aiming for from the pot?

Ryan_Futuristics

I think that's a sensible looking portfolio - Woodford equity income and First State Asia Pacific Leaders are two of my favourite funds

It's obviously equities-heavy, so it could be quite vulnerable to market movements - there are potential worst case scenarios, such as a prolonged bear market (and a fall in bonds when rates rise) which could negatively impact the capital for some time

It's unfortunate there aren't many good alternative asset classes at the moment - I'm putting 10% or so of my portfolio into Funding Circle (the P2P lending firm), which many here are cautious of, but which seems like an acceptable alternative to me, with returns estimated around 7%

So my personal preference might be to have more income-paying equities (held as Income, rather than Accumulation, funds: so they pay you an income straight into your bank regardless of market movements) - to fill in the gap left by (quite reasonably) not having a greater fixed income allocation

Woodford Equity Income I obviously like a lot ... I think Newton Asian Income could be a good diversifier

I like the Murray International Investment Trust a lot - it's a complete portfolio (very internationally diversified, good exposure to emerging markets, mostly equities but with some fixed income) ... Over the long-term, it's been very successful at building capital, cushioning market drawdowns, and increasing income - it currently pays just under 4%

There are also some advantages to holding investment trusts over unit trusts - they're much more flexibly run, so they've really been able to benefit from active management (where for unit trusts the benefits can be constrained), many have been around since the 19th century too, so their track records are quite hard to knock

In my own portfolio, Woodford and Murray are core holdings - both good income payers, both cautiously managed, and both weighted towards good value regions and sectors with good growth prospects

Linton

Ryan_Futuristics wrote: »

I think that's a sensible looking portfolio - ......

Sorry Ryan but I think its far too early to say. Before picking funds surely we need a better idea of what the OP wants to achieve. Then we need a strategy that has a reasonable chance of achieving the objectives. Only at that point does it make sense to pick the funds that have the appropriate characteristics for the strategy.

WinSomeLoseSome

Thanks Linton for replying so quickly.
Yes effectively we intend to use the investments to provide an income increasing with inflation but I think we prefer to reinvest the dividends automatically and sell some of the funds once a year to draw out enough to supplement our pensions to live on for the next 12 mths (keeping within our annual CGT allowance). Anything left in the pot would be passed to our children on our deaths (plus the house if we still have it). That was basically our plan but obviously very open to other suggestions. Our total target income is 60k pa nett (but we expect to need less in the later years of our lives) and from the investment pot we would hope to draw around £20-25k of this pa.
Our house is worth around £400k (4 bed and bigger than we need) so we might downsize at some point too.

Ryan_Futuristics

This is the difference good active management can make - Murray International vs the FTSE All Share (and that's without dividends) - showing how entry point's generally less vulnerable to the market cycles of an index

Linton wrote: »

Sorry Ryan but I think its far too early to say. Before picking funds surely we need a better idea of what the OP wants to achieve. Then we need a strategy that has a reasonable chance of achieving the objectives. Only at that point does it make sense to pick the funds that have the appropriate characteristics for the strategy.

Well, many would say that there aren't really many good alternatives to holding equities at the moment ... As much as I'm not a fan: Vanguard LS60, and as much as I am a fan: Woodford, I'd certainly call those two sensible

Linton

Ryan_Futuristics wrote: »

Well, many would say that there aren't really many good alternatives to holding equities at the moment ... As much as I'm not a fan: Vanguard LS60, and as much as I am a fan: Woodford, I'd certainly call those two sensible

We arent talking about a portfolio for the moment - we need to be thinking about one that will last perhaps 35 years with minimal management, not something that could be very different in a couple of moments time nor anything that requires continuing monitoring of performances and CAPEs or whatever.

Your chosen funds may be sensible part of the portfolio. However what % and why? What else do we need? For example if the OP wants a steady income it would be foolish in my view to rely completely on as needed equity sales and dividends as any repeat of the credit crunch would result in forced sales at a loss.

To return to the OPs problem...

From the mass of figures I think I have determined you have the following sums to play with:
Cash ISA £145K
S&S ISA £100K
SIPP £287K (ex DC pensions)
Unsheltered investments: £350K

Total: £882K

Is this roughly correct:? Is the money for the next 12+months included in this figure?

Assuming you do have £882K, your desired income of say £25K/year inflation linked is rather unambitious - you could safely drawdown perhaps £35K/year without significant risk of running out of money during your lifetimes. To play with possible scenarios look at http://www.firecalc.com .

However you need to fund your £60K life between now and when you get your state and FS pensions. So £60K X say 4 years to allow for you not getting your SP for a while = £240K which leaves you with £640K. Now £25K looks about reasonable.

Please confirm that my figures are roughly right before I go any further!



Seeing the complexity involved and that we havent come on to tax optimisation nor detailed suggestions of specific investments I do think that the amount of money you have and the amount you could lose by poor investment decisions justifies a few £K paid to an IFA.

Ryan_Futuristics

Well I wouldn't necessarily call a portfolio sensible if it were just based on the stable asset allocations of the past 20-30 years

The bond bubble looks to have run its course, many Buy-to-let owners are struggling to break even, and one of the big predictions for investors over the next 35 years is the emergence of all-new alternative asset classes (with P2P lending possibly first among them)

Warren Buffett's 'no-brainer' is to leave his wife 90% equities and 10% in a short-term bonds ladder ... I'd struggle to find anything more sensible with so many unknown unknowns, and I wouldn't be buying expensive looking assets now with a vision that they'll pay off eventually

Linton

Ryan_Futuristics wrote: »

Well I wouldn't necessarily call a portfolio sensible if it were just based on the stable asset allocations of the past 20-30 years

The bond bubble looks to have run its course, many Buy-to-let owners are struggling to break even, and one of the big predictions for investors over the next 35 years is the emergence of all-new alternative asset classes (with P2P lending possibly first among them)

Warren Buffett's 'no-brainer' is to leave his wife 90% equities and 10% in a short-term bonds ladder ... I'd struggle to find anything more sensible with so many unknown unknowns, and I wouldn't be buying expensive looking assets now with a vision that they'll pay off eventually

In my view and personal experience, for a retirement portfolio the main requirement isnt maximum return. You only need sufficient return to meet the need but it must be at maximum safety. That safety requirement will be different for different timescales. I personally am insuring I have my needs for 3 years in cash and needs for the following perhaps 5 years in bonds and wealth preservation funds. Overall retirement investing requires a very broad diversification using investments that currently dont look good if necessary. You also need a consistent sustainable approach to taking the income. These strategy concerns are far more important than which funds you happen to choose.

One result that may well arise, as it has in my case, is that to provide sufficient sustainable income requires a different sort of portfolio to that for long term extra monies possibly for inheritance or personal care in 30 years time.

The other point I would make is a portfolio the size of the OPs isnt best constructed by taking a typical long term investor pot of say £40K and buying 20 times the amount in each fund. Individual fund choices are less important the larger the pot.

Daniel54

WinSomeLoseSome wrote: »

I would say we are reasonably cautious investors but realise we need to get some growth to keep pace with inflation and for the money to last throughout our old age.

Just a few quick comments:

Your current and proposed investment strategies seem much riskier than your statement above suggests you should be comfortable with.I would suggest a closer focus on capital preservation

I'm not a great fan of index funds in retirement as I find them altogether too volatile

You have a large amount of unsheltered capital.I assume you will be feeding £30k pa into ISA's.

I can see why the IFAs suggested offshore bonds with this much capital open to tax.Was it just the costs which put you off?

You appear to be rather more focussed on costs than outcomes.

It comes across as a hotch potch without any underlying rationale for the asset allocations and without separation into short,medium and longer term time scales

It seems estate/IHT planning is not a particular concern.That's fine,but worth checking with you.

Personally I am glad to have used an IFA and would echo Linton's recommendation to use one,even if this is for a one off report that helps clarify your thinking and helps formulate a coherent,tax efficient plan.

Good luck

WinSomeLoseSome

Thanks for all the responses.
Yes Linton, the figures are correct but the 882k excludes our income for the remainder of this year and all of 2015. We have an extra £150k put aside for this, and for some other planned spend on home improvements and as an emergency cash fund.