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Should we Invest in only one fund?
Comments
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Correct because your funds are ring fenced in a separate account. You could only lose your money if there is serious fraud - like when Bernard Madoff was trousering clients money instead of buying the shares. But Madoff effectively operated alone, which enabled him to cover it up long enough to fleece everybody. The likes of Vanguard couldn't cover it up because too many people would know about it.My understanding is that If Vanguard go bankrupt you do not lose your money.
Is that correct?“It is difficult to get a man to understand something, when his salary depends on his not understanding it.” --Upton Sinclair0 -
grey_gym_sock wrote: »you can if you're the currency issuer, as the UK is. government debt is never supposed to be paid off. it's essential for the economy to function. and it has no real cost.
By that logic we don't need any industry, just a printing press.
Problem is when you have got nothing to sell that people want to buy, (whether that be goods and services or bonds at negative real interest rates), this printed money falls in value. Helped along by hedge funds betting against it, and being outside of the EU not having them for support.
Might help the Government default on its debts through inflation. But it doesn't help the investor holding Sterling cash. Thats why I wouldn't necessarily consider Sterling Cash safer than a world tracker fund.“It is difficult to get a man to understand something, when his salary depends on his not understanding it.” --Upton Sinclair0 -
If you decide you are going to take 4% of your original amount through good times and bad (e.g. an annual amount of £4000 because your start point was £100,000) then that £4000 will eat a relatively larger piece of your capital if markets are at a temporary low (e.g. if the £100k became £70k for a while, then £4k is almost 6% of that). The last thing you want to do in a market decline is draw out a larger proportion of your capital than normal.One of the things that concerns me about that is that in the 30 year period there will mostly likely be years when there will be losses. So do you still drawdown the 4% when the share price has dropped, or do you draw out more that 4% in years when there are large gains? Not sure that would be as straightforward as it sounds.
Whether the markets give total of returns over six years of +25% then +10% then +2%, then -20%, -3%, +10%... or those returns happen in a different order, you would get mathematically the same result, as long as you didn't touch the money at all. That's because 1.25 x 1.10 x 1.02 x 0.8 x 0.97 x 1.10 is exactly the same as 0.8 x 0.97 x 1.02 x 1.10 x 1.10 x 1.25. However, if you are taking money out along the way, you run into what they call 'sequence of returns risk' whereby pulling a chunk of cash out at low values (even if it's less cash than you'd prefer to be able to pull out) means you might not even make it through to the latter part of the sequence to have a decent amount of capital remaining on which to make the good upwards movements.
There are some decent posts around sequence of returns risk and some of the modelling tools to see how 'survivable' your proposed level of withdrawals might be, by poster jamesd on the pensions and retirement board. Planning tools from the Financial Independence / Retire Early movement (e.g. cFIREsim) can help you simulate potential events.
But even without getting too technical about it, the issue that you have is that if you agree that pulling out a fixed amount of your money every month even if the fund you're pulling it from is looking really low is probably a bad thing... then you realise that it might be more appropriate to take a variable amount of income and less in the 'bad times'.
Changing from "4% of my original value or current value, whichever is higher" to "4% of my original value or current value, whichever is lower" is a safer way to do it. Or just 4% of current value, year in year out is still better than saying you are going to belligerently take 4% of £100k if there is only actually £70k in the account. But on a practical level it can be disconcerting to be taking £333 a month one year and then only be allowed £250 a month the next year when your shopping bills haven't changed.
So a relatively safer way to do it is to have a large holding account with a couple of years income in it at the best interest rates you can get, and then draw your preferred fixed level of income out of the holding account while only drawing a variable level of income out of the investment funds into that holding account. In the 'lean years' the holding account will only be getting £250 a month into it while paying out your £333 to your current account, but it can sustain that for a while if the buffer is nice and big. Then in the better years, the holding account will naturally get topped up because you can take more money out of the investments than you need for the spending.
If you are drawing fixed amounts and don't mind manually selling capital to get income (rather than accepting the pretty low level of natural income you get in world trackers) then it is best to focus on total return and not just the yield. Investment trusts or other funds which are actively managed to achieve sustainable yield and/ or low volatility, rather than just taking the rollercoaster of the index, can be perfectly useful. You might expect 'equity income' funds or ITs to outperform an overall index in the long run anyway, as they are not so linked to largecap stocks and particular industries. But that is a whole other debate.
With a bank account the FSCS cover is very important because the money you put in the account becomes the property of the bank to use in their own banking business as they see fit, and they simply owe you the money back. If they have some business problems and make losses they might not be able to afford the debt to you, and without an industry-sponsored protection scheme you would be up the creek without the paddle on what you'd hoped was a risk-free scheme.I understand that the FSCS cover is only £50k for each fund house so I am nervous about putting over £50k into Vanguard or any other fund house.
Investments are different and if you put your money in a fund via a platform you are not giving the platform your money to do what they like with, they hold it separate from their own assets. And likewise when the platform arranges for the money to be invested with Vanguard, it's not Vanguard's money, the money belongs to the fund (in which you are a shareholder) and is invested into companies on behalf of you and the other shareholders. If Vanguard go bust because they can't pay the rent or salaries, someone else will take on the management of the fund's pool of assets which are fully segregated from the Vanguard management company's businsess operations. It is different from a bank account where the bank going bust might spend your money and not give it you back.
Of course, the value of the fund can go up and down with the performance of the underlying companies it buys, so you are taking investment risk and might not get back what you invest (but that sort of thing is not covered by FSCS because taking risk to get return is the whole reason you wanted to invest in the first place). So really the FSCS £50k only has a useful purpose in the case of massive fraud or negligence.
It is fair to say that a great many people will have an investment fund(s) from a single fund manager valued at over £50k as part of their retirement planning, and not worry too much about the risk of massive fraud only being partially covered - while relatively fewer cautious types would have cash balances over £85k with one institution. As economic says, if you tried to keep it to £30k now you would find yourself at £50k again sooner or later (e.g. 5% compound growth for a decade gets you from £30k to £49k).0 -
That was my only concern about putting all my eggs in one basket. Just wondering - would an IFA having any concerns or advise clients against investing substantially more than £50k in any one fund house? If not then I'd probably agree that I am being over cautious.Glen_Clark wrote: »Correct because your funds are ring fenced in a separate account. You could only lose your money if there is serious fraud
On the point about whether a diversified list of income generating Investment Trusts would likely provide a higher total return than say a VLS60 over a 20 year period, I'm interested to know what others think?0 -
That's what I thought. Thanks for confirming it. :Tbowlhead99 wrote: »With a bank account the FSCS cover is very important because the money you put in the account becomes the property of the bank to use in their own banking business as they see fit, and they simply owe you the money back. If they have some business problems and make losses they might not be able to afford the debt to you, and without an industry-sponsored protection scheme you would be up the creek without the paddle on what you'd hoped was a risk-free scheme.
Investments are different and if you put your money in a fund via a platform you are not giving the platform your money to do what they like with, they hold it separate from their own assets. And likewise when the platform arranges for the money to be invested with Vanguard, it's not Vanguard's money, the money belongs to the fund (in which you are a shareholder) and is invested into companies on behalf of you and the other shareholders. If Vanguard go bust because they can't pay the rent or salaries, someone else will take on the management of the fund's pool of assets which are fully segregated from the Vanguard management company's businsess operations. It is different from a bank account where the bank going bust might spend your money and not give it you back.
Of course, the value of the fund can go up and down with the performance of the underlying companies it buys, so you are taking investment risk and might not get back what you invest (but that sort of thing is not covered by FSCS because taking risk to get return is the whole reason you wanted to invest in the first place). So really the FSCS £50k only has a useful purpose in the case of massive fraud or negligence.0 -
I've got 8 funds in my portfolio.
DIY after a big IFA cocked up for me.
One fund is about 40% of the portfolio - Old Mutual UK Mid Cap.
I never see it mentioned in these threads and always wonder why??
Does well for me.
Seems like a gutsy bet with Brexit round the corner, let alone with it being 40%. If Brexit causes the UK economy to falter, this would crater. So that's probably why
Irrespective of your views on Brexit, it is a high risk option and with 40% in it, that is an incredibly high risk position.0 -
Thanks Bowlhead, that has given me reassurance as regards the FSCS limit. The capital drawdown method sounds a bit complicated so I think I might still go down the route of 50% of my portfolio in a VLS 40 and 50% in ITs for income. For the ITs I'm thinking of the likes of City of London, Temple Bar, Murray International and City Merchants High Yield to start with. Is such an IT portfolio classed as high risk because mostly equity-based and some high yield bonds?bowlhead99 wrote: »If you decide you are going to take 4% of your original amount through good times and bad (e.g. an annual amount of £4000 because your start point was £100,000) then that £4000 will eat a relatively larger piece of your capital if markets are at a temporary low (e.g. if the £100k became £70k for a while, then £4k is almost 6% of that). The last thing you want to do in a market decline is draw out a larger proportion of your capital than normal.
Whether the markets give total of returns over six years of +25% then +10% then +2%, then -20%, -3%, +10%... or those returns happen in a different order, you would get mathematically the same result, as long as you didn't touch the money at all. That's because 1.25 x 1.10 x 1.02 x 0.8 x 0.97 x 1.10 is exactly the same as 0.8 x 0.97 x 1.02 x 1.10 x 1.10 x 1.25. However, if you are taking money out along the way, you run into what they call 'sequence of returns risk' whereby pulling a chunk of cash out at low values (even if it's less cash than you'd prefer to be able to pull out) means you might not even make it through to the latter part of the sequence to have a decent amount of capital remaining on which to make the good upwards movements.
There are some decent posts around sequence of returns risk and some of the modelling tools to see how 'survivable' your proposed level of withdrawals might be, by poster jamesd on the pensions and retirement board. Planning tools from the Financial Independence / Retire Early movement (e.g. cFIREsim) can help you simulate potential events.
But even without getting too technical about it, the issue that you have is that if you agree that pulling out a fixed amount of your money every month even if the fund you're pulling it from is looking really low is probably a bad thing... then you realise that it might be more appropriate to take a variable amount of income and less in the 'bad times'.
Changing from "4% of my original value or current value, whichever is higher" to "4% of my original value or current value, whichever is lower" is a safer way to do it. Or just 4% of current value, year in year out is still better than saying you are going to belligerently take 4% of £100k if there is only actually £70k in the account. But on a practical level it can be disconcerting to be taking £333 a month one year and then only be allowed £250 a month the next year when your shopping bills haven't changed.
So a relatively safer way to do it is to have a large holding account with a couple of years income in it at the best interest rates you can get, and then draw your preferred fixed level of income out of the holding account while only drawing a variable level of income out of the investment funds into that holding account. In the 'lean years' the holding account will only be getting £250 a month into it while paying out your £333 to your current account, but it can sustain that for a while if the buffer is nice and big. Then in the better years, the holding account will naturally get topped up because you can take more money out of the investments than you need for the spending.
If you are drawing fixed amounts and don't mind manually selling capital to get income (rather than accepting the pretty low level of natural income you get in world trackers) then it is best to focus on total return and not just the yield. Investment trusts or other funds which are actively managed to achieve sustainable yield and/ or low volatility, rather than just taking the rollercoaster of the index, can be perfectly useful. You might expect 'equity income' funds or ITs to outperform an overall index in the long run anyway, as they are not so linked to largecap stocks and particular industries. But that is a whole other debate.
With a bank account the FSCS cover is very important because the money you put in the account becomes the property of the bank to use in their own banking business as they see fit, and they simply owe you the money back. If they have some business problems and make losses they might not be able to afford the debt to you, and without an industry-sponsored protection scheme you would be up the creek without the paddle on what you'd hoped was a risk-free scheme.
Investments are different and if you put your money in a fund via a platform you are not giving the platform your money to do what they like with, they hold it separate from their own assets. And likewise when the platform arranges for the money to be invested with Vanguard, it's not Vanguard's money, the money belongs to the fund (in which you are a shareholder) and is invested into companies on behalf of you and the other shareholders. If Vanguard go bust because they can't pay the rent or salaries, someone else will take on the management of the fund's pool of assets which are fully segregated from the Vanguard management company's businsess operations. It is different from a bank account where the bank going bust might spend your money and not give it you back.
Of course, the value of the fund can go up and down with the performance of the underlying companies it buys, so you are taking investment risk and might not get back what you invest (but that sort of thing is not covered by FSCS because taking risk to get return is the whole reason you wanted to invest in the first place). So really the FSCS £50k only has a useful purpose in the case of massive fraud or negligence.
It is fair to say that a great many people will have an investment fund(s) from a single fund manager valued at over £50k as part of their retirement planning, and not worry too much about the risk of massive fraud only being partially covered - while relatively fewer cautious types would have cash balances over £85k with one institution. As economic says, if you tried to keep it to £30k now you would find yourself at £50k again sooner or later (e.g. 5% compound growth for a decade gets you from £30k to £49k).0 -
Any portfolio that is mostly equity-based and whose non-equity bits are high yield bonds (whose values may be more correlated with equities than other types of bonds) is considered higher risk.Is such an IT portfolio classed as high risk because mostly equity-based and some high yield bonds?
Especially where the investment trusts use borrowing (gearing) to enhance potential returns by 10% or more, that's an 'enhancement' to downside risk too.
As is the potential for the 'discount to NAV' that the trust is currently bought or sold at, to increase, increasing potential losses compared to holding the underlying shares individually.
However, a portfolio should not be viewed in isolation if it is not your entire plan. If that's only half of what you are doing and the other half includes a much greater broad bond component alongside its generalist largecap equity index piece, then you should consider the allocation in the context of an entire cohesive plan, rather than looking at one bit and saying it's maybe too risky and complicated and the other bit and saying it's lacking something or too boring and not complicated enough.
But it all needs to be seen in the context of what sort of risks you want / what range of outcomes you'd be willing to accept, and what you understand about investing (or are capable of understanding).
For example you are slapping together some UK and international investment trusts (because you like the historic yields) with some equity indexes and some bond indexes (because you think you understand them as being straightforward but you want to generate more natural income than they are capable of); you are not using some of the other traditional income generators such as property funds; and you think it could be too complicated to try to control how much income/capital you draw from the assets yourself. There are several ways to skin a cat and different people would be suited to different approaches, getting different outcomes.0 -
I'm in a similar position to original poster, and my plan was to put 50% into a VLS40 and 50% into income generating Investment Trusts (hopefully also with some growth). Ideally I would like to keep things simpler with it all in a VLS40 (or a VLS60), but I like the idea of getting regular income rather than rely totally on drawdown from VLS to supplement my pension.
[FONT="]Taking regular income from Investment Trusts is still drawdown; if you weren’t in drawdown, income would be reinvested. You are still reducing your total return by taking money out of your investments, whether you take the money out by selling units or by taking dividends.[/FONT]0 -
I'm early retired and the idea of relying on regular disposals of something like VLS to provide all of my income gives me the collywobbles. I want a nice retirement without worrying about the price of my one fund and wincing at every piece of bad economic data in the headlines. It might be OK for discretionary spending but the only way I can see it working without another reliable, regular source of income is with a large cash buffer. The accumulation end of investing can be quite simple but the deccumulation end requires a better plan and certainly more than a single non income producing fund. It's a question of using the right tools for the job and resilience will help you sleep well at nightbostonerimus wrote: »How much of your income needs is covered by state pension and other final salary pensions?
Being in Vanguard LS60 you are diversified and paying low fees which is good. Adding an expensive actively managed fund for "income" is not what I would do. I would take a total return approach to income generation and Vanguard LS60 is a good vehicle for that.0
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