customising pension plan funds

dunstonh

You suggested that spreading around all over the place is a bad idea.

Diversification is good but it needs to be structured. 20x5% isnt structured.

I quite like the idea of the Mr Average fund here: http://monevator.com/asset-allocation-types/

There appears to be no due diligence or info on how they have built that structure. The article is nearly 2 years old and asset allocations typically change with the economic cycle. However, it is in the ballpark for what you would expect for a simple option (albeit without global property with UK property in its place).

if you go down that approach you will need to rebalance. You will also need to fund pick and adjust funds with the economic cycle and you almost certainly end up frustrated with a limited fund choice.

If you are not likely to do that, then stick with multi-asset fund.

danlightbulb

I do have a few multi asset funds to choose from. Some have higher management fees than others (not sure by how much). Been told this is related to how active the funds are managed. I'd assume a more actively managed fund is more likely to outperform?

Now that I have this tool available to use I want to use it. So I can log on as often as is necessary to look at the performance of the different funds and move things around.

Linton

danlightbulb wrote: »

I do have a few multi asset funds to choose from. Some have higher management fees than others (not sure by how much). Been told this is related to how active the funds are managed. I'd assume a more actively managed fund is more likely to outperform?

Now that I have this tool available to use I want to use it. So I can log on as often as is necessary to look at the performance of the different funds and move things around.

In choosing a multi-asset fund I would look at what it invests in. This information is available from www.trustnet.com. Make an initial choice based on that. Charges are a factor as is a history of reasonable performance, or rather a history of poor performance compared to other similar funds is possibly an indicator of something to avoid.

A passively managed fund wont outperform - it will be average. An actively managed fund may behave quite differently, perhaps outperforming in the good times and underperforming in the bad.

A multi-asset fund is designed to work without you "moving things around". You just leave it to do its job. If you do want to move between funds I suggest you dont do it more than once per year when you sell off some of the excess profits you made in one fund to buy more of a fund which has a probably temporary downturn. Dont log in frequently and make minor adjustments - you are likely at best to be wasting your time and at worst decreasing your returns.

However as you are continuing to drip feed money into your pension you are in a sense moving things around in that you are buying more of a fund when its price is low and less when the price is high. This is probably a better way to do things than trying to outguess a multi-asset fund manager.

What you do should depend to some extent on how much money is involved. With a relatively small amount - say <£25K just using one multi-asset fund could well be the best approach. When your total pot is much larger, then it could be worthwhile taking a more detailed interest.

Playing_with_Fire_2

Stop, stop, slow down. Do not do anything with your pension scheme except learn what it offers.

Re: buy low and sell high: http://fivethirtyeight.com/datalab/worried-about-the-stock-market-whatever-you-do-dont-sell/

Nate Silver is a genius statistician and is saying that the practice of timing the market is too difficult to be done repeatedly, including by professionals.

On average, due to the costs of trading, actively managed funds with a higher fee do worse after fees. Trying to beat the index is a zero sum game, some funds will do well and others badly. A high fee is no guarantee of a strong performance.

Do not log in and trade frequently until you have read a bit more. When you have decided on a suitable asset allocation you should be moving money into the areas that have performed worse, not out of it.

Seriously, your current allocation is fine for your age, your funds are doing what they are supposed to be doing. It won't meet your needs or tastes perfectly but it has been chosen because it is a good default for people in your position. Do not move anything around until you have decided on a strategy that will last you for at least a decade. Learn first. You are having normal novice investor thoughts, and they are damaging to your future self.

You are comparing what you could have done in the past with your knowledge of the future. It is a little like asking why I bought these losing lottery numbers rather than the winners. This is not a criticism, many people have been through the same thing. If you want to be actively involved in your pension fund, get a practice trading account somewhere (with no money in it) and see how you do over a year compared to your current funds.

danlightbulb

Thanks for the info again. I won't rush in.

To help me learn I'd like to post about two particular funds.

The one I currently have 70% of my pot in is the Aquila Life Market Advantage. Its asset mix is the following:

Developed soverign debt 15%
Inflation linked debt 15%
High yield debt 12%
Emerging market soverign debt 11%
Investment grade debt 10%
Property 10%
Developed small cap equities 10%
Emerging market equities 7%
Cash 6%
Developed equities 4%

Its 3 year performance was 5.3%.

This isn't as heavy in equities as I first thought it was and it is stated to produce returns in line with a balanced portfolio (defined as 60% equities 40% bonds), with 40% less risk. However it has not delivered these returns as the five year performance is 4.8% against the provided comparator of 8.1%.

Another fund is the DC Aquila 40:60 Global Eq index. It's asset mix is:

UK eq 40%
US eq 36%
Euro eq 11%
Jap eq 6%
Pacific rim eq 4%
Canada eq 2%
Israelli eq 0.18%

Its 3 year performance is 13.5% and 5 year performance is 10.2%. I can see that this is all equities, but is higher on the risk scale (5/7).

Why would I not put 50% of my pot into this fund instead of the one above? It seems to satisfy the equity mix requirement? Then I'd find a safer place for my other 50%.

Linton

The difference between your two options is that the Life Market fund manager decides whether to put money into bonds or equity depending on his view of the state pf the markets, but with an average of 60% equity/40% bonds. At the moment it looks like the manager doesnt like equity and is invested in a high % of bonds.

The Global Equity Index 60:40 means 40% UK, 60% rest of world and is nothing to do with 60/40 balanced funds. The fund is kept in line with these %'s no matter what happens.

I donth think you have told us your age, but if more than say 10-15 years from retirement I personally would go for 100% equity across the whole portfolio. You would have plenty of time to ride the peaks and troughs before you retire.

danlightbulb

Ah I see. So that asset mix may change from quarter to quarter.

So at the moment I'm actually very heavily invested into bonds, way above the typical level expected for someone my age, because of the decisions the fund manager is taking. So I guess my question is this. Do I leave it to the fund manager or do I take control myself? I'm 35 btw.

I think 100% equity would be too risky. But at the moment I feel I'm too heavy in bonds because the fund manager has made that decision.

Hmm interesting this, because I'd assumed initially that my pot wasn't being managed like it was before. But the fact I'm in a balanced fund means it actually is. Its whether or not those decisions are right for me. Wow this is complicated!

AlanP_2

It is as complicated as any new subject when you first start looking into it.

I don't maintain my own car because I think it is complicated. I'm sure if I put the time and effort into reading websites & books, looking at YouTube videos and asking for advice on the appropriate forums I could get to a point where I could do most of the things that were required.

Same for investing. Look & Learn, develop a strategy (asset allocation, "target" dates - to clear assets / liabilities not just your pension - cash, ISAs, non-ISA'd investments, property mortgage etc. as appropriate.

Include your partner, if there is one, as their situation can influence what you do. For example my wife is a HR taxpayer and I am not. Therefore as much of our pension contributions as possible are invested in her name as there is a tax benefit, conversely as much of our cash as possible is in my name as there is a tax advantage.

Then take decisions and act in a way that is in line with your strategy and will help you to get to your objective at the point in time you planned for.

All that takes a bit of time, but as you say you are only 35 so you don't need to rush in and tweak things now when you don't have a clear approach or rationale for the changes you make.

danlightbulb

Thanks.

So how does one come up with their preferred strategy? I can read lots of stuff, ask lots of questions, but at some point I need to translate that learning into actual decisions.


I have been playing about with some numbers.

Starting in 2015 with £40k in my pot and with 2045 as my retirement and assuming I pay in the same as I do now over that period. If I have an average 5% growth per year then I'll end up with a pot of about £375k. If I then switch to safe funds (1% growth) and draw it down at £20k per year it will last me 20 years before the money is all gone.

If however I can grow at 10% per year until retirement, then my pot ends up at £1.2 million when I'm 65. Wow, big difference. I could draw that down at 20k a year at 1% growth and still have over a million left by the time I'm 85 to hand over to the kids.

So what average growth is realistic and how do I invest to get closer to 10% growth than to 5%?

AlanP_2

What I did when I started about 12 months ago was reading on here and on monevator.com and also Tim Hale's book Smarter Investing.

That started to give me the basic understanding of terminology and the range of investment options that were on offer and some of the advantages / disadvantages.

we are both in our mid-50s with grown up children so our strategy wouldn't be applicable to you.

Alongside this we worked out what our targets were in terms of when we would ideally like to give up our current paid employment, pay off our mortgage, how much to save towards children's weddings and helping them to get on housing ladder (if we can) and assumed we would be trying to cover 3 of each over the next 10 years (ouch!).

We worked out what income we would like in retirement by both looking at what we had "banked" already through Defined Benefit schemes and what our expected outgoings would be plus any extras.

Lots of Excel work involved in all this and you need a good understanding of what your current spending situation is and how this might change over the years.

At the end of that we could see what our "shortfall" was and looked into ways of overcoming it, in our case pension contributions in my wife's name at the moment as she is the HR taxpayer plus building cash pot and overpaying mortgage to the extent that it finishes on the date we targeted.

Once you have that high-level approach sorted you can then look at which specific funds etc. to invest in to achieve the Asset Allocation you have set for yourselves.

In our case that is a mix of equities that, when looked at in their entirety, reflect the geographic, sector, company size %'s we set.

We do this across 2 pension pots (an AVC with my wife's employer) and a standalone SIPP / PP. As the AVC scheme offered a more limited range of options than the SIPP we chose from there first and are adding the appropriate funds to the SIPP to achieve the "blend" we want.

Review high-level strategy as life unfolds - payrises, changes to pension legislation, choice of cash deposit locations, mortgage rate & size of loan required (you might move), dependants (last one now at Uni so costs decreasing) and the like.

Review investments once a year to adjust back to ideal allocations either by selling those that have increased the most and buying those that have fallen behind or by adjusting the amount going into each fund over the next 12 monthly period.

We have gone for Index Tracker funds in the main as I can see the logic of the market being a "zero sum" game so getting "market equalling returns" seems logical.

Mix of Vanguard LifeStrategy, L&G Multi-Index and a couple of smaller specialist funds.