Critique my Investment Strategy

HSVX

Hi everyone. Long-term lurker here finally ready to get some advice of my own (I hope I can begin to make meaningful contributions to the community as I get more experience in the future!).

I am 21 years old and about to graduate from university. I have landed myself a job which I will start soon after graduating, I currently have around £25k of savings which is currently held as cash in an ISA. I hope to have around £1-1.5k to invest per month during the first year (after tax, student loan repayments (9% of the difference between salary and £21k), national insurance, rent, 5% pension contributions, and living costs) and am hoping this will increase as years go by. I am willing to take a fairly high risk strategy with my saving.

I have done quite a lot of research and at the moment I am thinking of keeping around £20k in a cash ISA as a buffer (this will earn next to no interest at the moment but I feel it's necessary as a safety net). With the monthly savings, I was thinking of opening a S&S ISA with HL and saving 60% into Vanguard LifeStrategy 80, with the other 40% split into various other funds for some extra flavour/diversification (commercial property, small-cap, corporate bonds, tech funds), I will look to keep the charges as low as possible with these, unless I take a punt on a high risk technology fund which obviously comes with much higher fees.

My main reservations are whether or not I should be saving some cash every month (even with the interest rates at this low level and considering I already have a decent buffer of cash and no current exposure to the markets), and also the horizon I should be thinking of. I don't want to work for someone else forever and would like to turn to property development in the future. This obviously requires a significant capital investment and probably a sizeable withdrawal from all of my fund holdings (which might take place in say 7-10 years time), should this affect my strategy?

I also need to consider saving a deposit for a house, although I am in no rush to buy as I believe London property is overvalued and renting will give me the flexibility I want in my younger years if I decide to move around. I would however consider buying buy-to-let properties "up north", where £30k could get me a £100k buy-to-let property (assuming 70% LTV).

Lastly, the S&S ISA will have a ~£15k cap next year and I will probably want to save more than this (especially in subsequent years when hopefully(!) my salary increases). What sort of platforms should I be looking at for the remainder?

Thanks a lot, I realise there is no perfect solution but I am looking forward to hearing some opinions!

bowlhead99

HSVX wrote: »

I have done quite a lot of research and at the moment I am thinking of keeping around £20k in a cash ISA as a buffer (this will earn next to no interest at the moment but I feel it's necessary as a safety net). With the monthly savings, I was thinking of opening a S&S ISA with HL and saving 60% into Vanguard LifeStrategy 80, with the other 40% split into various other funds for some extra flavour/diversification (commercial property, small-cap, corporate bonds, tech funds), I will look to keep the charges as low as possible with these, unless I take a punt on a high risk technology fund which obviously comes with much higher fees.

My main reservations are whether or not I should be saving some cash every month (even with the interest rates at this low level and considering I already have a decent buffer of cash and no current exposure to the markets), and also the horizon I should be thinking of. I don't want to work for someone else forever and would like to turn to property development in the future. This obviously requires a significant capital investment and probably a sizeable withdrawal from all of my fund holdings (which might take place in say 7-10 years time), should this affect my strategy?

I also need to consider saving a deposit for a house, although I am in no rush to buy as I believe London property is overvalued and renting will give me the flexibility I want in my younger years if I decide to move around. I would however consider buying buy-to-let properties "up north", where £30k could get me a £100k buy-to-let property (assuming 70% LTV).

Lastly, the S&S ISA will have a ~£15k cap next year and I will probably want to save more than this (especially in subsequent years when hopefully(!) my salary increases). What sort of platforms should I be looking at for the remainder?

Thanks a lot, I realise there is no perfect solution but I am looking forward to hearing some opinions!

The cash in a cash isa for your emergency fund at next to nothing is a waste. You could stick your £20k in a Santander 123 current account and get 3% before tax (£600) which is better than the £100ish you could get on an instant access cash ISA.

The reason not to do this would be if you expect to max out your ISA limit every year, where cashing it in is a 'waste' of the existing allowance as it gives you a smaller tax wrapper overall than you could otherwise have had. It sounds like you intend to be maxing your allowances and so the larger allowance extrapolated many years into the future, particularly when you become higher rate taxpayer if you're not already, could be valuable. However, at some point you will presumably be cashing it in for your BTL investment or a property purchase so you can't presume you'll get 80 years of tax advantage from it.

As for choice of funds, each to their own. Make sure you are putting a sensible allocation together - no point buying a fund that's 60% equity and 40% bond and then buying more equities and more bonds on a whim. For your first year's worth of contributions your average amount invested (as it increases from £0 to say £15k) is less than £10k and so having 5% in a high risk technology fund is not going to make a major change to your absolute returns.

If your timescale is 7 years before a major withdrawal then as you dripfeed from nothing up to your ending balance over those 7 years, your money is on average only invested for 3.5 years. That is too short a timescale to produce 'expected' returns out of any sector - an economic cycle could be two or three times that - so it becomes more of a gamble. You say you are willing to take a 'fairly high risk strategy' with your savings; and this is already due to the nature of your plan - without adding a bunch of small companies and high tech etc etc.

Of course there is a difference between saving and investment so if you only need to access half of the money you saved in 7 years time then that could be 'lower risk' and the other half more 'normal/higher' risk. But risk is relative and anything in an S&S ISA will not be risk free on a shortish timescale.

I was thinking of opening a S&S ISA with HL

the S&S ISA will have a ~£15k cap next year and I will probably want to save more than this (especially in subsequent years when hopefully(!) my salary increases). What sort of platforms should I be looking at for the remainder?

HL is a relatively expensive platform as you get more saved (0.45% a year compared to others e.g. Charles Stanley Direct at 0.25%), so shop around. When the S&S is maxed, all the platforms will have normal unwrapped versions of the account for you to use, which have the same investment options.

However the obvious thing to do as you get pay rises (and presumably high rate tax bills on your income) is to put more than 5% into a pension because 5% might be the minimum you have to put in to get the employer contribution but is not necessarily enough to live on in retirement from age 55 to 105.

Pensions have the same investment options as ISAs and the tax advantages are useful. The price of the tax advantages is locking your cash up until you are late 50s (may be 60 by the time you get there) and if you want to buy your own home and specific other types of investments you might not want too much tied up in a pension wrapper. But you should not ignore the opportunity completely.

Ryan_Futuristics

I'll say what I always say, which is: You don't have a strategy until you understand valuation and asset allocation

Valuation is how to tell if you're buying something at an historically high price, or at a cheap price ... I'm very cautious about Vanguard LS myself because its two main asset classes (US equities and bonds) are at unappealingly high valuations

If we use average market data, your US stocks should return about 2% (real) per annum over the next ten years, while bonds return 1% ... The actual figure could many times higher or lower either way, but this is the median value you're looking at

Property is another potentially overvalued asset ... As you know, London is not looking attractive, outside London may have some growth left in it, but look back over 10+ years at commercial property values - the dips can be quite painful ... Property prices may be fairly inflated from years of aggressive QE - and a few years more may simply delay a capital-destroying drawdown

Now don't mistake me for being pessimistic - just understand that over your investing timeframe, you'll probably have at least one asset go through a severe drawdown - so you want to be properly diversified ... There have been times historically when equities have under performed bonds for as long as 68 years

Some of the best portfolios in the world are the Yale and Harvard endowment funds ... These may surprise people who read blogs which suggest equities and bonds are your bread and butter assets ... These often have very low allocations to bonds, and often only 30% in equities ... They invest in property, but also in commodities, agriculture, private equity and alternative investment strategies (like Absolute Return funds) ... Making money on the markets is easy when everything's rising; not losing it when they aren't is the secret

Two of the best books I think you can read on portfolio construction are Global Value and The Ivy Portfolio, by Meb Faber ... And also Global Asset Allocation, which you can get on Kindle for about £2

Trust Tim Hale's Smarter Investing at your own peril (just my opinion)

232607

Off topic slightly but could you sum up (briefly) why you're not keen on Tim Hale's Smarter Investing.

Thanks.

HSVX

bowlhead99 wrote: »

.

Thank you for your input.

Agreed with what you are saying about the cash in an ISA. It is annoying that the investment is earning nothing but for me personally I think keeping it in the ISA wrapper for now is fairly attractive (relative to £500 of extra interest which would also require me to switch current accounts etc.).

I'd be interested to know what your opinion is on selecting funds. I realise that an average length of 3.5 years is a fairly high risk strategy whatever fund it goes into, do you think it might be better to park some money into an absolute return fund maybe instead of looking for even riskier options? Just want to confirm that the 7-10 years is just a shot in the dark prediction of when I might want to take out a chunk of money, and a lot of it is quite likely to stay in there for a very long term period (15 years+).

Regarding pensions I am not sure how I feel about contributing more and more, as I really don't see myself working for a company in the long term and it could be painful having so much of my savings tied up in something I can't touch for such a long period.

HSVX

Ryan_Futuristics wrote: »

I'll say what I always say, which is: You don't have a strategy until you understand valuation and asset allocation

Valuation is how to tell if you're buying something at an historically high price, or at a cheap price ... I'm very cautious about Vanguard LS myself because its two main asset classes (US equities and bonds) are at unappealingly high valuations

If we use average market data, your US stocks should return about 2% (real) per annum over the next ten years, while bonds return 1% ... The actual figure could many times higher or lower either way, but this is the median value you're looking at

Property is another potentially overvalued asset ... As you know, London is not looking attractive, outside London may have some growth left in it, but look back over 10+ years at commercial property values - the dips can be quite painful ... Property prices may be fairly inflated from years of aggressive QE - and a few years more may simply delay a capital-destroying drawdown

Now don't mistake me for being pessimistic - just understand that over your investing timeframe, you'll probably have at least one asset go through a severe drawdown - so you want to be properly diversified ... There have been times historically when equities have under performed bonds for as long as 68 years

Some of the best portfolios in the world are the Yale and Harvard endowment funds ... These may surprise people who read blogs which suggest equities and bonds are your bread and butter assets ... These often have very low allocations to bonds, and often only 30% in equities ... They invest in property, but also in commodities, agriculture, private equity and alternative investment strategies (like Absolute Return funds) ... Making money on the markets is easy when everything's rising; not losing it when they aren't is the secret

Two of the best books I think you can read on portfolio construction are Global Value and The Ivy Portfolio, by Meb Faber ... And also Global Asset Allocation, which you can get on Kindle for about £2

Trust Tim Hale's Smarter Investing at your own peril (just my opinion)

Thanks for the alternative view.

Just for a bit of background, I am economics student and will be working in finance so I have an adequate amount of knowledge in this area. However, I am of the view that it is very very difficult to predict when something is going to crash, and doesn't drip feeding into a (relatively) diversified investment like Vanguard LS 80 help to 'insure' against crashes that might happen? Because if, in the unlikely event, that it falls 40% in one year, you are still dripping the same amount in (and this amount is likely to see subsequent higher gains after a crash has happened). I could be off the mark here but would be good to know your thoughts.

I recognise the need for diversification and Absolute Return funds are definitely something I would look into more. Are there any other fund types I should look at in particular to try and achieve as much diversification as possible?

Thanks for the book recommendations - I'll take a look!

JohnRo

HSVX wrote: »

...and Absolute Return funds are definitely something I would look into more.

Personally I wouldn't bother, they're overrated imho. It's been said elsewhere, the only thing absolute about absolute return funds is how absolutely bad the returns are.

HSVX

JohnRo wrote: »

Personally I wouldn't bother, they're overrated imho. It's been said elsewhere, the only thing absolute about absolute return funds is how absolutely bad the returns are.

Any suggestions of what to look at instead?

jimjames

HSVX wrote: »

Thank you for your input.

Agreed with what you are saying about the cash in an ISA. It is annoying that the investment is earning nothing but for me personally I think keeping it in the ISA wrapper for now is fairly attractive (relative to £500 of extra interest which would also require me to switch current accounts etc.).

I'd be interested to know what your opinion is on selecting funds. I realise that an average length of 3.5 years is a fairly high risk strategy whatever fund it goes into, do you think it might be better to park some money into an absolute return fund maybe instead of looking for even riskier options? Just want to confirm that the 7-10 years is just a shot in the dark prediction of when I might want to take out a chunk of money, and a lot of it is quite likely to stay in there for a very long term period (15 years+).

Regarding pensions I am not sure how I feel about contributing more and more, as I really don't see myself working for a company in the long term and it could be painful having so much of my savings tied up in something I can't touch for such a long period.

Lots of points there to pick up

1) pensions tend not to be company specific unless you're one of the lucky ones with a final salary scheme. Even so you can still put additional contributions in outside your company scheme too

2) I don't see any benefit holding the cash ISA when you can get at least double the return after tax. You don't need to move accounts at all.

3) Others have covered absolute return funds but you can mix your own portfolio to whatever risk level you want with bonds and equity funds but as someone young you gave plenty of time on your side.

JohnRo

HSVX wrote: »

Any suggestions of what to look at instead?

Do you want to be involved in the process and micro manage your investment portfolio, spending time studying it and making purchasing, selling and rebalancing decisions etc. or have a more passive approach with something simple and arguably just as effective, if not more so, like a VLS100, perhaps with additional, equally passive, Global Small Cap and Property elements?

HSVX

JohnRo wrote: »

Do you want to be involved in the process and micro manage your investment portfolio, spending time studying it and making purchasing, selling and rebalancing decisions etc. or have a more passive approach with something simple and arguably just as effective, if not more so, like a VLS100, perhaps with additional, equally passive, Global Small Cap and Property elements?

The latter option sounds more interesting to me. I wouldn't mind making (relatively small) punts on sectors like you suggested (commercial property, a particular region etc.) but passive overall and limited to maybe 4-6 products. I am deeply interested in investing but once I start working I don't think I'll have the time or desire for micro managing (and also don't think it will help me to achieve higher enough returns to make the effort worthwhile in the long run).