Investments advice on funds & ISA

Random47

Hi


First post so go easy.

Have decided its time to save/invest for the future (pension, kids uni or other) and have £450 available to invest each month and 8K in capital. Mildly averse to risk, but over 15-20 years investment period I am willing to accept some risks as not expecting early 'fast' returns.

Both wife and I have pensions with our employers which will help keep wolf from door. I retire in @ 20yrs and we have 2 young children who will likely need financial support (above the normal) in about 15yrs or so. We are both 20% tax payers and its unlikely we would need emergency access to any investments.

My thoughts on investing are breaking it down into:

• 4 different tracker funds with 2k capital and £50 per month each, all over 20yr period (fidelity have some low cost trackers and would preferably keep all trackers with same fund manager/company)
• 2 stocks and shares ISA (1 for wife & 1 for me) at £125 per month over 5yrs then revert to normal savings ISA's for next 10 (help minimise overall risk).

Have not really got to grips on tracker choice, but would like to spread (diversification) across market sectors.

Would appreciate on recommendations for trackers and also if my breakdown plan is reasonably sound or advice if there is better way to invest.

Thanks

bowlhead99

I can see you are trying to have two 'pots', one starting as S&S ISA contributions for five years which is then held to grow for ten years with no new money, and the other in trackers with a 20 year plus time horizon which you will keep plugging away at.

However, the total £450 a month all fits inside an annual ISA allowance with lots of room to spare (over £15k annual limit each, which you are nowhere near). So by all means, invest £200 a month in your tracker strategy and £250 a month in other stocks and shares funds, but there is no point having the tracker funds be outside the ISA wrappers. It all fits quite easily.

Over 20 years, if your £8k in trackers grows at say 7% a year annualised it will grow to £31k, even without any new money. To avoid capital gains tax on this (and income tax if you become high rates taxpayers) it would be sensible to put the trackers inside S&S ISAs - along with whatever else you were planning on buying with the £125 a month for the next 5 years - to protect them from tax.

I can't think of what 4 trackers you would put money into in equal proportions to make a balanced portfolio. UK, US, Asia-exJapan, Europe, Japan, Emerging Markets is 6? Adding bonds, if there was such thing as a single bond tracker, takes you to 7 minimum? Typically if you are trying to construct a portfolio out of different building blocks you would be looking at more than 4 funds. Although I suppose you could do UK, entire rest of the developed world, emerging markets, bonds for your 4, but it would seem quite an unusual portfolio construction to do that with equal weight to each.

The simpler approach to deploy your money is just to buy one or two multi-asset funds which spread your money across lots of asset classes and geographies. If you want to do that using funds built on trackers, and presuming you don't want 100% equity because you are 'mildly' averse to risk but you are not very averse to risk and you have a nice long 20 year horizon to ride out the dips so you want to be mostly in equities - you could use something like L&G Multi-Index 5 or 6, Blackrock Consensus 70 or 85, Vanguard Lifestrategy 60 or 80. The numbers refer to the level of equities versus non-equities (bigger is more).

IMHO, that takes care of the 'tracker' portfolio (£8k + £200pm) but I don't know if you already have something specific in mind for the £125 per person per month. You say S&S ISA. ISA is just the type of account (the choice being ISA wrapper, pension wrapper, unwrapped). It doesn't say what type of investments are in the account. So, that could be more tracker-based funds, or it could be actively managed funds.

Once you have decided what you want to hold, stick it all with the same company (i.e. one broker / fund supermarket).

One thought is that if you do not need a chunk of the money for the next 20 years at all, by which time you'll be retirement age, a portion of this money can go into a pension wrapper instead of an ISA wrapper. The downside is you definitely can't get it back until you're 55 (or maybe later by then, 57, 58, 60?), so it may not be available to help your high-spending kids in 15 years, but the upside is tax relief. So if it is true that you don't need emergency access and there is some portion of it that you don't need to spend on the kids in the time period that the pension money would be locked away from you, you could put some of the £450 a month into a personal pension or SIPP for each of you, rather than S&S ISA.

dunstonh

4 different tracker funds with 2k capital and £50 per month each, all over 20yr period (fidelity have some low cost trackers and would preferably keep all trackers with same fund manager/company)

It takes about 10 funds to get a bespoke portfolio to have suitable sector diversification. You can bring it down to around 5 if you eliminate the global sectors and have a catchall global fund. However, 4 funds would leave your coverage short. Your allocations would also mean you are making management decisions on investments. What makes you think your management decisions will be better than a fund manager?

With the small amounts you are looking at, would it not be better to utilise multi-asset funds?

Random47

Thanks for replies, so realistically true full diversification is a bit out of my reach. Also I definitely do not have experience or time to managed my own portfolio and don't want a fund manager due to increased fees / charges - so its trackers.

it would be sensible to put the trackers inside S&S ISAs - along with whatever else you were planning on buying with the £125 a month for the next 5 years - to protect them from tax.

Good point. I was looking at the management fee with fidelity (dependant on fund) around .42%, and ISA wrapped fund having 1.3% but I forgot to recognise non ISA wrapped funds would attract tax.

simpler approach to deploy your money is just to buy one or two multi-asset funds ... like L&G Multi-Index 5 or 6, Blackrock Consensus 70 or 85, Vanguard Lifestrategy 60 or 80.

Sounds like a suitable option for me.

don't know if you already have something specific in mind for the £125 per person per month. You say S&S ISA. ISA is just the type of account (the choice being ISA wrapper, pension wrapper, unwrapped). It doesn't say what type of investments are in the account. So, that could be more tracker-based funds, or it could be actively managed funds.

Definitely tracker to reduce mgt fee, though not considered what, will probably go for low risk on this though.

.. pension wrapper instead of an ISA wrapper...the upside is tax relief. ....

I did think about SIPP but fortunate to have career average defined benefit pension. If I did go SIPP as its a personal pension what would happen if I pop my clogs, do my beneficiaries get the full pension value paid out to them like any other financial assets? Got the answer to this (Your dependants can have your total pension account free of any tax as a lump sum if you were to die before taking any benefits)

Another question I was going to ask advice on was as the market is quite buoyant at the moment is putting the 8K capital in wise at moment (just do monthly buys at going rate) or Is there something better for it and wait till market is more depressed before putting into funds. I realise this is a very subjective thing to ask.

bowlhead99

Random47 wrote: »

Thanks for replies, so realistically true full diversification is a bit out of my reach. Also I definitely do not have experience or time to managed my own portfolio and don't want a fund manager due to increased fees / charges - so its trackers.

If you accept that diversification is out of reach with 4 trackers then the solution is to not use trackers. The solution is not to get a poorly constructed portfolio to avoid a fund manager fee.

An active managed fund might be half a percent more costly than a passive one. The difference between two sectors could be that one goes up by 15% while another goes down by 20%. The performance difference that year is seventy times the money you 'saved' by constructing your portfolio with a cheap clunky solution using a few trackers. That is not to say that managed after fees will always outperform passive. Just an example of why you don't want to put together a poorly diversified or badly allocated portfolio in the name of 'saving' costs.

Good point. I was looking at the management fee with fidelity (dependant on fund) around .42%, and ISA wrapped fund having 1.3% but I forgot to recognise non ISA wrapped funds would attract tax.

Many brokers/ platforms will give the ISA version of the account for same or similar as the non ISA version.

For example TD Direct charge 0.3% platform fee on any funds you hold with them (nothing on ETFs or ITs or shares), but the £30+VAT ISA fee is waived if you have over £5k of value in your ISA, which you would.

Charles Stanley Direct are 0.25% platform fee on funds (and also charge it on ETFs and ITs or shares) but don't have a separate ISA admin charge.

So, there are a myriad of charging structures but both of those are among the many which are cheaper than Fidelity. Whether you choose to buy a fund with a charge of 0.1% or 0.7% it would typically come in at under 1% including the platform fee.

Definitely tracker to reduce mgt fee, though not considered what, will probably go for low risk on this though.

IMHO there are not as many options for low risk or low volatility with trackers because, generalising, something that just tracks one index up and down will give you the volatility of that market index, and not all markets have decent trackers available. Active funds such as absolute return funds, cautious strategic bond funds or higher income funds may do well in a downturn but employ a mix of complementary or uncorrelated assets which do not always move in the direction of 'the market' together.

And, with only £250pm it would be a hassle to put together a porfolio out of individual tracker components. So, a multi-asset fund would be useful here too.

I did think about SIPP but fortunate to have career average defined benefit pension.

So, that DB pension will give you your annual steady reliable income that you need throughout retirement; meanwhile the personal pension can be cashed out whenever you like (subject to minimum age criteria) so it is not an either/or; using a personal pension is just an alternative tax wrapper to an ISA which should get you an income tax saving, so it should be considered if you won't need to access the cash earlier than the allowed date.

If I did go SIPP as its a personal pension what would happen if I pop my clogs, do my beneficiaries get the full pension value paid out to them like any other financial assets?

Yes, and with the benefit that it would go to them direct from the pension trustee and therefore be outside your 'estate' for inheritance tax purposes (the feature that it is outside your personal estate is also useful if you face bankruptcy, means tested benefits etc, though it is clearly less useful if you actually need to take the cash before 55+).

As an aside your choice for pension planning is not just SIPP; a regular personal pension is absolutely fine if you are not going to use a wide variety of investment options. If you want some very specific trackers or funds or ETFs that are only available with 'whole of investment market' SIPPs then I guess you have to use one, but you specifically said you don't have experience or time to manage your investments. A Self Invested PP is just a specialist type of PP which might be more or less costly than a regular PP and has the same tax benefits.

Another question I was going to ask advice on was as the market is quite buoyant at the moment is putting the 8K capital in wise at moment (just do monthly buys at going rate) or Is there something better for it and wait till market is more depressed before putting into funds. I realise this is a very subjective thing to ask.

It is always better to make investment purchases cheaply. We don't know reliably if or when an opportunity to do so will present itself. It could be a month from now, year from now, three years from now, or perhaps the 40% crash will only come after the market has gone up 70% hence today is the all time low price you will ever see.

If you are investing, it is because you presume the prices of investments will go up over the long term and you will receive income along the way. If you don't think that will happen, don't be an investor. Statistically, markets do go up over time and so statistically the best time to invest is whenever you have the money available. That won't be any comfort if the market crashes the day after you invest it, but c'est la vie.

If you are cautious, and do not want to have your £8k in the market today, you might prefer to take the blended average return between the return from cash and investments by dripping the cash in over many months from cash to investments over time. If the market goes up, you only get half the return and half the dividends. If the market goes down, you only get half the return and half the dividend.

If your ultimate aim is to be fully invested, it can be frustrating to miss out on a year or two's returns while putting off investing, if you are only going to end up with your money fully in the markets and subject to a crash, at some point anyway.

So yes, whether one should invest tomorrow or next year or half tomorrow and half next year, is subjective because it depends what risks you want to be exposed to. The objective view is just to invest in something you are comfortable with and be done with it. If you feel that you want lower risk than investing into a single market equity tracker, don't invest in that; find a lower risk fund. The options are not just a UK FTSE Allshare tracker or cash, there are probably five to ten risk levels in between depending on how you calibrate your scale.

Random47

Thanks for guidance.


Going away for few days so will consider and decide when I'm back.


Leaning towards two pensions with 4k +£100 per month in SIPP or personal pension for self & Mrs, get tax relief which is like your fund performing 20-25% up in first year, pretty much no brainer (excluding risk factor of fund) if you can forgo access till at least 55.
&
Multi asset funds in Isa for self & Mrs with other £125 each.


Undecided on which funds and what risk factor as yet - suppose getting that right is the magic ingredient. Will do some research and ask some more advice before pulling the trigger.


On side note did call Fidelity and the fee I was quoting (earlier post) on Isa investment was a general fee. Guy almost chocked when I said why do they charge 1.25% on Isa based fund when fund is say .42% outside Isa - he confirmed 0.42 is same whether inside Isa or not and he confirmed it was a example fee shown on ISA web page.


Thanks again for advice.