Tracker funds and ISAs

Tammer

Hi,

Some useful comments and challenges in the posts above. Not sure I could add much.

One thing not mentioned so far, and worth highlighting, is that having £100k with one financial institution or broker is not fully protected in the event of the firm going bust.

This sort of thing tends to come up a lot when people talk about investing cash with banks, but is actually probably more relevant when talking about equity investments as the protection is lower (I believe).

T

Linton

Tammer wrote: »

Hi,

Some useful comments and challenges in the posts above. Not sure I could add much.

One thing not mentioned so far, and worth highlighting, is that having £100k with one financial institution or broker is not fully protected in the event of the firm going bust.

This sort of thing tends to come up a lot when people talk about investing cash with banks, but is actually probably more relevant when talking about equity investments as the protection is lower (I believe).

T

The protection from intermediaries going bust is actually higher with standard investments than cash. When you put money into a bank the money is owned by the bank and could be used to pay off the bank's debts. The compensation scheme protects £75K of it but any more could be totally lost.

With standard investments the money you put in remains yours. The intermediaries merely have the right to manage your money in the ways you permit. So if they go bust their creditors cant access your money which can be transferred to another intermediary.

So for practical purposes what you risk is a period of disruption whilst things are sorted out. But a complete loss because of a company going bust isnt something that you need be that concerned about.

dunstonh

There are many different methods to invest. Asset allocations will vary depending on analysis and risk measurements and opinion. No one method is the best. There will be periods when each of the methods will have the stronger returns than the others.

So, whilst there is no one best way to invest, there are bad ways to invest. On this forum, we often see new posters with a posting style that indicates they are new to investing and dont really understand it and say they want to put it in a tracker (just like this thread). If they had a extremely high risk profile and can afford the risk and the behaviour that can accept losing half their money without pulling out then 100% global equity fund is a viable option. Nobody could argue with that. There would be individual opinions as to whether people would do that or do it differently (such as different allocations or using different funds but achieving risk profile and diversification using different criteria). That is all fine and part of the different opinions about investing.

In reality though, very few people have the risk profile to go 100% equity investing. New investors in particular who have never gone through a period when the markets dropped 45% are usually more nervous and prone to pulling out when a drop occurs. So, to reduce the volatility and likely level of losses, you introduce fixed interest and bricks & mortar property funds (not property share funds which actually increase the risk).

VLS is a viable method. It has its flaws with its lack of property and very rigid allocations but then you have L&G MI that adds property and is more fluid with allocations and anyone that has analysed L&G MI and VLS will know that one is much better at the lower risk end and the other is much better at the higher risk end. However, both are viable at all risk levels and its that opinion again (some may argue that whilst L&G uses passives, its allocations are managed and that goes against their passive principles - although VLS is also managed as the allocations are selected by Vanguard and that is a management decision). There are also lots of other viable options but obviously cant go through them all. Some people look to replicate the global assets. Some look to adjust the weightings to suit other methods. All are structured and all viable (but subject to opinion)

You could achieve the same risk profile investing 100% in a single sector fund (or maybe two) but that would go beyond opinion and be bad investing. Investing 100% in say a FTSE100 fund is poor diversification and it bad investing. Same with 100% into a S&P500 tracker. Bad quality investing. That is the thing to be avoided.

Finally, amount and method of payment can mean that in some cases, it really doesnt matter where you invest. If you are paying a small regular contribution, then the difference in returns is not going to make any real difference in the value until you get to around £10k. A 5% difference in return on £5000 is just £250. With small values, the key is cheap and simple. Not worrying whether VLS40 or VLS60 OR L&GMI4 etc is more appropriate. Worry about that when the value gets a bit higher.

BananaRepublic

Sam_J12 wrote: »

Please stop spouting this nonsense. You know nothing about the OPs personal finances and what other investments and assets he has.

If a single tracker (S&P 500) fund is good enough for John Bogle and Warren Buffet to recommend I imagine it would be fine for OP.

I see dunstoneh's manner is annoying people again. He could easily say the same thing but in a way that is less offensive.

Investing such a large sum in one tracker fund is not necessarily bad, depending on the fund, but it would be much better to spread across a range of funds in a range of sectors. The OP is best to read investment guides, there are good ones online, in order to understand the essentials including why spreading across multiple funds is advisable, and to understand why anyone who claims to be able to predict future performance is talking out of the wrong end.

There are many sites for investigating historical fund performance, this is a good one:

https://www.youinvest.co.uk/funds

I would recommend that the OP reconsider managed funds, the growth can easily cover the extra costs. However be aware that some managed funds are disguised trackers.

jem16

BananaRepublic wrote: »

I see dunstoneh's manner is annoying people again. He could easily say the same thing but in a way that is less offensive.

I actually found Sam_J12's comments offensive rather than anything dunstonh said.

To say something is pretty awful quality investing in the case of using a single tracker is factual and relevant and certainly worth pointing out to a new investor. What is offensive?

To say someone is spouting rubbish is offensive but you seem to be happy with that.

EnglishMohican

The OP states that he has net £300000 to invest/save. He proposes saving a good portion of this in Santander 123s and other cash accounts (maybe £100000 cash). He is proposing to invest £100000. There appears to be another £100000 that is going somewhere unexplained.
So his equity allocation is maybe 33% of his wealth which many people would say was eminently sensible and maybe even conservative.
He does not need bonds within his £100000 as he has ample cash savings to cover the need for short term financial security.
Ok, I have made some guesses and assumptions and probably some bad maths but I do not believe my errors can be so big that the OP putting £100000 into a world equity tracker can be a anything but a reasonably good idea.

dunstonh

I see dunstoneh's manner is annoying people again. He could easily say the same thing but in a way that is less offensive.

You are a fine one to talk. you joined the forum in November and made some posts in the pension section. In that short time you have managed to wind up and irritate many posters in that section with your attitude.

Anyway, I thought you said you weren't posting any more? That didnt last long.

Investing such a large sum in one tracker fund is not necessarily bad, depending on the fund

Why would changing the fund make any difference? Whether it is a FTSE100 tracker or a Japanese tracker, it still tracks one area.

The OP states that he has net £300000 to invest/save.

Yes. Although as is very often the case, the extra information didnt arrive until post#11. Having £200k in cash and £100k in investments certainly does dilute some risk but still not enough to be sure that its enough (we dont know future plans for the money). Also, we dont know about behaviour risk. That has been asked but the OP has not replied to that yet.

Ok, I have made some guesses and assumptions and probably some bad maths but I do not believe my errors can be so big that the OP putting £100000 into a world equity tracker can be a anything but a reasonably good idea.

How about behaviour risk? Until we know that, we cant be sure. Also, it is one thing to say you will accept it. Its another to actually accept it when it comes along. I have seen many people over the years who have made the right noises and said the right thing in that respect but when it actually happens, they worry about it and some will then go on to make irrational decisions crystallising the loss.

Also, the decision would still limit it to just two asset classes (cash and equities). Why not include property and fixed interest to diversify and dilute it further?

BananaRepublic

dunstonh wrote: »

You are a fine one to talk. you joined the forum in November and made some posts in the pension section. In that short time you have managed to wind up and irritate many posters in that section with your attitude.

Do you have to post lies. I would not have expected that from someone claiming to be an IFA.

dunstonh

BananaRepublic wrote: »

Do you have to post lies. I would not have expected that from someone claiming to be an IFA.

How are they lies? The posts and responses from others in the pension forum are available for all to see. However, it is not fair for you to drag a thread belonging to someone else off-topic like this to pursue your personal agenda. Either help the OP or be quiet and have your moan on your own thread.

newlease

TheTracker wrote: »

The BH 3 fund portfolio is total domestic equity, total international equity, total world bonds. Many, particularly non-US simplify this as total world equity (VWRL) and total world bond.

I have an intellectual dispute with dunstonh assigning risk levels to equity:bond ratios when the equity portion is extremely diversified with total market trackers. I simply don't believe an x:y portfolio that is total market on both sides is nearly as risky as the standard x:y portfolio of hodgepodge funds that the average Joe, IFA advised or not, holds. You can see this on the 2015 return thread where many pundits have double digits returns whereas a pure passive play is single digits, volatility naturally must be higher on average. By way of example, I'd say a 100% total world tracker is less risky than an 80% FTSE100 tracker with 20% global bond tracker. But that debates been had, no need to rehash.

I would not disagree with any of this. If equity is sufficiently diversified in region/sector then one tracker could suffice. What I have usually seen in the 3 portfolio structure is a good main tracker (ideally global developed) supplemented with a more risky one like emerging and counterbalanced with bond.

The whole point to bonds should be to maintain the minimum low volatility base as required by the personal situation/horizon.

dunstonh wrote: »

VLS is a viable method. It has its flaws with its lack of property and very rigid allocations but then you have L&G MI that adds property and is more fluid with allocations and anyone that has analysed L&G MI and VLS will know that one is much better at the lower risk end and the other is much better at the higher risk end. However, both are viable at all risk levels and its that opinion again (some may argue that whilst L&G uses passives, its allocations are managed and that goes against their passive principles - although VLS is also managed as the allocations are selected by Vanguard and that is a management decision). There are also lots of other viable options but obviously cant go through them all. Some people look to replicate the global assets. Some look to adjust the weightings to suit other methods. All are structured and all viable (but subject to opinion)

You could achieve the same risk profile investing 100% in a single sector fund (or maybe two) but that would go beyond opinion and be bad investing. Investing 100% in say a FTSE100 fund is poor diversification and it bad investing. Same with 100% into a S&P500 tracker. Bad quality investing. That is the thing to be avoided.

I do think you are overplaying property but more importantly I don't follow how "VLS is a viable method" (I agree with this) while a diversified global tracker for equity is not enough. Isn't the equity composition in VLS very similar to a diversified world tracker?