Big mistake with ISA. How do I sort out this mess?

Eco_Miser

Damage wrote: »

Thank you all.

Eco Miser, yes I was a bit confused. I have been reading up on this almost non-stop since I first posted, so keep learning new things (I've just started reading Tim Hale's book yesterday). I understand what you are saying regarding funds, but what category of a portfolio should they placed in for the purpose of estimating an overall risk profile for the portfolio? Is it the lower risk part because they aren't actually direct equitites, or is it the higher risk part because those funds are (or can be) reducible to equities anyway?

There are low-risk funds, and there are high risk funds. Basically, funds are the same risk as the equities, (or bonds, etc) they hold. Trustnet and Morningstar will give an indication of what that is. So if the fund invests in high-risk equities, it goes in the high-risk part of your portfolio.

Damage

Thank you; that makes sense.

I'm up to page 61 of Tim Hale's book so far. I'm glad I saw it mentioned on one of the threads in here or I can't imagine what mistakes I'd have made without reading what he has to say. I think due to my previous lack of knowledge on the subject I'd have trusted that the actively-managed option was the best, and that the professionals knew how to beat the market.

I have noted JamesD's point regarding the current riskiness of bonds (post #31), so perhaps the book I'm reading (2006 issue) is out of date in that respect. I'll need to take that into account when planning my portfolio, but at this stage it seems that I would be better off having a larger percentage invested in equities than the age/risk formula might suggest.

coyrls

The latest edition of the book recommends short term bonds as a protection against rate changes. I don't think this was in the earlier editions.

Damage

Okay, thanks.

I've just opened an Income Bonds account via the NS&I website to put half of my money in for now whilst I finish reading up on everything (the rest is in my Premium Bonds account). The interest rate isn't much to speak of, but it's better than my bank account.

Alter_ego

It may help to know that I inadvertently opened 2 cash ISAs a couple of years ago. HMRC instructed the provider of the second to void it and return my cash and interest minus basic rate tax.
It took them (and me) about 18 months to notice the mistake, but they seemed to deal with it very smoothly, and said it happens all the time.

Damage

That's reassuring to know!

How things stand at the moment is that M&G say they are going to cancel the ISA (the first one that I set up), so if that happens then all well and good.

Failing that, I have the option to cancel the HL ISA (within 14 days), but I have looked at their terms and conditions, and if I cancel then I'll have to bear any losses. Considering that it is down about £104.00 from when I set it up, it looks as if I'll lose at least that, so I'll try to avoid that option if I can.

Cottage_Economy

jamesd wrote: »

But there's a catch. Risk. Bonds are very risky at the moment, with a real prospect of a 30% drop in say a 15 year term gilt if interest rates increase to 4%. This is because we're decades into a bond bull market and interest rates are now very low for bonds. Bond prices drop on the markets when the interest rates go up because that is how they deliver the buyer the current interest rate. This is not good news if you're the seller taking the 30% capital loss on a gilt that is only going to pay you 1% or less a year in interest.

So what's the implication for people who hold funds like, for example, the Vanguard Lifestyle funds etc? Most of those have large bond holdings.

Damage

I've just been reading about the Vanguard LifeStrategy funds, and was wondering if these were suitable for constituting a complete portfolio.

Is a suitable level of diversification part of those funds as they are, or should one diversify by investing in funds that aren't Vanguard LifeStrategy? I'm looking at the LifeStrategy 80, but thinking perhaps the 100 would be a better choice at this stage.

bigadaj

Damage wrote: »

I've just been reading about the Vanguard LifeStrategy funds, and was wondering if these were suitable for constituting a complete portfolio.

Is a suitable level of diversification part of those funds as they are, or should one diversify by investing in funds that aren't Vanguard LifeStrategy? I'm looking at the LifeStrategy 80, but thinking perhaps the 100 would be a better choice at this stage.

They provide a reasonable level of diversification based on your assumed risk profile. They are probably enough on their own for most people with smaller sums, with larger amounts then many might want to cover more asset classes, vanguard covers developed markets and bonds very well and some coverage of emerging markets. It doesn't cover smaller companies, property, commodities etc so if you want some, of these then separate investments would be required.

Damage

Thank you, I'll look into those alternative asset classes as well. From reading Tim Hale's book (up to page 190 so far) I'm beginning to get an idea of which way I ought to be heading with this. From reading what he says regarding actively-managed funds, and noting the statistics he quotes, I can't understand why anyone would consider doing anything other than take his advice. What motivates people to do otherwise, I wonder? It seems to be an almost guaranteed (relative) failure to do anything but take his advice!

The only thing that I'm a bit unsure about is the bonds element to my eventual portfolio, partly due to what JamesD was saying earlier in this thread. If there is some bond coverage within the Vanguard funds then perhaps that will suffice and I can concentrate any non-Vanguard diversification to equity-related investments. I'm definitely leaning towards at least 80% equities at the moment, and considering my intended length of investment I can't help thinking that I'd be okay beginning with 100%, then perhaps re-evaluating things after a good number of years.