Portfolio Comments Welcomed

Linton

Daniel54 wrote: »

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

The OP could reasonably consider taking the DC pensions as annuities, possibly fixed rate rather than indexed. This would provide a very safe basic income at a % of capital in excess of that which could safely be drawndown enabling more risk to be taken with the investment portfolio. This would also simplify its construction.

Linton

WinSomeLoseSome wrote: »

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.

My view of how to proceed. Other people may have different approaches....

Lets try and construct a portfolio and see what the implications are for the funds........

On the assumptions made so far you need £240K for cover until you get your pensions. I would have much or all of that in cash, outside an ISA ready and safe for use. Interest rates arent high enough to justify an ISA, and it is better used for investments in my view. As time goes by and you drawdown from the cash pool, you will need to refill it at times from the investment pot, perhaps once a year or so. The cash pot can be allowed to fall to 5X£25K = £125K by the time you take your pensions.

Which leaves as with £640K. Say you adopt my strategy of havings 5 years in pretty safe investments. That's £125K in Real return finds, bond funds, wealth preservation Investment Trusts, and other similar things. Perhaps P2P investing could live here.

Which leaves us now with £515K for long term investing. A number of different equity funds that cover world geographies, industry sectors, and company sizes would in my view be appropriate. The % of each would perhaps match your view of the likely or possible futures. But everything should be covered - your view of the future may prove to be wrong.

Very occasionally, ideally at times of high equity prices, the 8 year timeframe pot would need to be replenished from the long term investments.


OK its just an example of the type of thinking that could be used to construct a portfolio. The results would be very different to that which would arise from the random picking of "good" funds.

In the real world I would need to go further - which investments live in which type of platform (ISA/SIPP/unsheltered) to minimise tax has to be sorted out and have course which specific investments do you buy. Though in any case you should be putting £30K of your unsheltered funds into ISAs every year.

I cant help feeling that if the Investment Bond proposal makes sense (I am not qualified to comment on it) with funds chosen by your IFA then it would be far easier to go down that route. However if you enjoy investing as a hobby, have the time, and dont mind the stresses of price rises and falls, my way may be right.

Ryan_Futuristics

Linton wrote: »

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.

I totally agree with you in essence, and certainly not disputing your rationale

However, with the potential for a prolonged rising rates environment from next year - along with poor current yields - there are many questioning whether it's worthwhile or even safe to be holding bonds at all

I'm wary that you could be inviting capital loss as severe as a worst case scenario in equities ... I've pondered a 3 year bond ladder, but I think it's questionable whether current yields justify default risk

For me, it's whether bonds have fallen below equities both in terms of risk and return (and even whether they're likely to offer much draw-down protection) - at which point something may just be a bad investment

Certainly no disagreement with a high cash holding

WinSomeLoseSome

Thanks to all who replied. Some very helpful comments which I will discuss with my other half. Just to clarify, it wasn't so much the cost of the (on shore) investment bond and associated financial advice that was putting us off. We had also read some bad press about the products being recommended by some FAs even when unsuitable for clients because they paid high commission. In some ways they do appeal to me (much less hassle) but hubby needs a lot of convincing that he can trust they are the best option for us.

Linton

Ryan_Futuristics wrote: »

I totally agree with you in essence, and certainly not disputing your rationale

However, with the potential for a prolonged rising rates environment from next year - along with poor current yields - there are many questioning whether it's worthwhile or even safe to be holding bonds at all

I'm wary that you could be inviting capital loss as severe as a worst case scenario in equities ... I've pondered a 3 year bond ladder, but I think it's questionable whether current yields justify default risk

For me, it's whether bonds have fallen below equities both in terms of risk and return (and even whether they're likely to offer much draw-down protection) - at which point something may just be a bad investment

Certainly no disagreement with a high cash holding

As part of the need to diversify, as well as sectors, asset type etc you also need to diversify in economic theories and future predictions. In retirement you cant afford to rely on one thing that might be wrong.

I dont believe the possible capital loss in bonds would be anything like as severe as you think. Firstly it is likely to be very slow and will be compensated for by the ongoing income and the continuous maturity of the old bonds. Also timing is very unclear. Can one afford not to have the income whilst waiting for something on the capital side? I am relying on Strategic bonds to minimise the potential problems.

Ryan_Futuristics

Linton wrote: »

As part of the need to diversify, as well as sectors, asset type etc you also need to diversify in economic theories and future predictions. In retirement you cant afford to rely on one thing that might be wrong.

I dont believe the possible capital loss in bonds would be anything like as severe as you think. Firstly it is likely to be very slow and will be compensated for by the ongoing income and the continuous maturity of the old bonds. Also timing is very unclear. Can one afford not to have the income whilst waiting for something on the capital side? I am relying on Strategic bonds to minimise the potential problems.

Well the main reason I'm here is to have my biases challenged - so I'm going to ponder bonds again and see whether I can start to feel more positive about them

I was holding Jupiter Strategic Bond until recently - I'm still uncertain how well they'll be able to limit downside (they seem to hold quite a lot of long-dated bonds)

I have found a less doom-and-gloom simulation of an intermediate fund performing through a 1% annual rates rise



http://www.schwab.com/public/schwab/nn/articles/Should-You-Worry-About-Bond-Funds-if-Interest-Rates-Rise

But then even after 6 years we'd be struggling to match cash savings (after fees) ... History would suggest this becomes much less relevant over longer horizons, but I'm unsure what the end of this bond bubble might look like

WinSomeLoseSome

Linton wrote: »

My view of how to proceed. Other people may have different approaches....

Lets try and construct a portfolio and see what the implications are for the funds........

On the assumptions made so far you need £240K for cover until you get your pensions. I would have much or all of that in cash, outside an ISA ready and safe for use. Interest rates arent high enough to justify an ISA, and it is better used for investments in my view. As time goes by and you drawdown from the cash pool, you will need to refill it at times from the investment pot, perhaps once a year or so. The cash pot can be allowed to fall to 5X£25K = £125K by the time you take your pensions.

Which leaves as with £640K. Say you adopt my strategy of havings 5 years in pretty safe investments. That's £125K in Real return finds, bond funds, wealth preservation Investment Trusts, and other similar things. Perhaps P2P investing could live here.

Which leaves us now with £515K for long term investing. A number of different equity funds that cover world geographies, industry sectors, and company sizes would in my view be appropriate. The % of each would perhaps match your view of the likely or possible futures. But everything should be covered - your view of the future may prove to be wrong.

Very occasionally, ideally at times of high equity prices, the 8 year timeframe pot would need to be replenished from the long term investments.


OK its just an example of the type of thinking that could be used to construct a portfolio. The results would be very different to that which would arise from the random picking of "good" funds.

In the real world I would need to go further - which investments live in which type of platform (ISA/SIPP/unsheltered) to minimise tax has to be sorted out and have course which specific investments do you buy. Though in any case you should be putting £30K of your unsheltered funds into ISAs every year.

I cant help feeling that if the Investment Bond proposal makes sense (I am not qualified to comment on it) with funds chosen by your IFA then it would be far easier to go down that route. However if you enjoy investing as a hobby, have the time, and dont mind the stresses of price rises and falls, my way may be right.

Sorry for the delay replying, and thanks again for all the useful advice given previously. We are now thinking along the lines below, does this sound like a reasonable plan?


Year 1 : 60K (2015)
cash
Year 2-4 : 3 x 60k (short term)
145k Cash ISA 3% to 2019 (switch to VLS 20/80 if int rates rise)
35k M&G Optimal Income Fund
Year 5-9 : 5 x 30k (medium term - pensions start to kick in 2019)
100k VLS 60/40
25k Aberdeen high yield bond
25k Kames high yield bond
Year 10+ : 545k (long term - £23k pa - last pension kicks in 2024)
50k First State Asia Pacific Leaders
200k L&G international index trust
150k CF Woodford equity income fund
145k VLS 100%


We will try speaking to one more IFA before making any decisions (cost of financial advice is not an issue) but we would like to understand and manage the portfolio ourselves if possible.

Linton

WinSomeLoseSome wrote: »

Sorry for the delay replying, and thanks again for all the useful advice given previously. We are now thinking along the lines below, does this sound like a reasonable plan?


Year 1 : 60K (2015)
cash
Year 2-4 : 3 x 60k (short term)
145k Cash ISA 3% to 2019 (switch to VLS 20/80 if int rates rise)
35k M&G Optimal Income Fund
Year 5-9 : 5 x 30k (medium term - pensions start to kick in 2019)
100k VLS 60/40
25k Aberdeen high yield bond
25k Kames high yield bond
Year 10+ : 545k (long term - £23k pa - last pension kicks in 2024)
50k First State Asia Pacific Leaders
200k L&G international index trust
150k CF Woodford equity income fund
145k VLS 100%


We will try speaking to one more IFA before making any decisions (cost of financial advice is not an issue) but we would like to understand and manage the portfolio ourselves if possible.

I think that looks a sensible approach as it follows the strategy I use

Each year you can look to rebalance keeping the 1, 2-4, and 5-9 pots topped up to meet the future income requirements presumably rising with inflation. Also you would need to look at the %s for each pot so that if the 10+ one does very well/badly you may chose to reflect that in increased/decreased planned income. Very much a judgement call, so rebalancing isnt just a simple mechanical exercise.

To get extra diversification I also have a parallel income portfolio of dividend paying shares and for global income, funds. The other difference between our approaches is that I like more risk for the long term and hold significant Small Companies investments and other niche funds. But it all depends on your attitude to risk.

One detail - check your high yield funds. You can get very high yields from bond funds, but such funds tend to be risky as they are correlated with the equity market. In the bad times high yield companies are more likely to cut their dividends or go bust and so the funds become less desirable and cheaper along with shares. For years 5-9 wealth preservation is a partial concern.

WinSomeLoseSome

Thanks Linton, much appreciate the feedback you've been most helpful.