SIPP for the risk adverse

Workerbee999

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pip895

I would be tempted to go for a portfolio of active funds that have a good track record of downside protection rather than trackers.

An example might be something like M&G Optimal income for the bond exposure, perhaps Woodford for UK equities and Fundsmith for global equity.

Thrugelmir

Workerbee999 wrote: »

This is where we are not so smart, we have also been overpaying the mortgage a lot as OH is incredibly risk adverse and just wants to be debt free above all else.

Investing should be undertaken with a long term view i.e. 10 years. Overpaying the mortgage provides guaranteed short term benefits. Personally I would prefer the security of being totally debt free. Than speculating on both the future direction of interest rates and markets in the coming months and years. Even if it meant delaying stopping work by a short period.

dunstonh

Can anyone suggest any funds that would be acceptable to someone so risk adverse?

What risks is he averse to?

Remember its not just investment risk. There is shortfall risk and inflation risk as well as behaviour risk.

He would quite happily leave it uninvested and just get the tax relief

Which actually carries more risk than being invested. Investments MAY suffer inflation and shortfall risk. His option WOULD suffer inflation and shortfall risk.

Most stock market crashes recover within 120 days. The extreme ones that tend to come along once in a generation typically recover within 2 years. Look at your timescale. The money could be invested for 40 years. Not using investments but sticking with cash or equivalent could be extremely risky.

Education and understanding sounds like it would be a good idea here. Making such important decisions based on poor information leads to bad outcomes. Your partner needs to understand ALL risks and not be focused on one at the expense of the others.

I thought perhaps Vanguard 20% although I also read that bonds are risky too at the moment.

Depends on which risks you are worried about and the context you are using. When bonds crash, its typically 5% with 10% during extreme periods. A stockmarket crash is 20% with 40% during extreme periods. People have been calling a bond crash for the last 9 years. Typically bonds do not crash that often. They tend to have a slow decline in capital price reflecting the slow increase in interest rates in the cycle. This increases the yield. which continues to be paid. In a rebalancing portfolio, that reduces the risks.

System

Vls20 is safer than 100% bonds, as the volatility of the 20% equities cancels out some of the bond volatility. I have it for my wedding fund. It's bonds are also more gilty than some of the active ones I've seen (which go corporate to try to compensate for their fees), and global reduces the rates risk. I don't think the QE propping up bonds will be unravelled too quickly, or that rates would rise too fast

Thrugelmir

dunstonh wrote: »

They tend to have a slow decline in capital price reflecting the slow increase in interest rates in the cycle. This increases the yield. which continues to be paid. In a rebalancing portfolio, that reduces the risks.

Bonds mature. Not all are perpertual in nature. Maturity could well crystalise a capital loss. Running yield shouldn't be the only consideration if the income is being withdrawn.

bowlhead99

MatthewAinsworth wrote: »

Vls20 is safer than 100% bonds, as the volatility of the 20% equities cancels out some of the bond volatility. I have it for my wedding fund. It's bonds are also more gilty than some of the active ones I've seen (which go corporate to try to compensate for their fees), and global reduces the rates risk. I don't think the QE propping up bonds will be unravelled too quickly, or that rates would rise too fast

One thing to recognise when building pension provision on a self-invested basis (SIPP without advice) and looking for guidance on internet forums is that there will be plenty of well-meaning people on the internet who are only just learning for themselves how investments work and they may be very enthusiastic and passionate about coming forward with ideas which are just forming in their own minds.

For example, this is not the first time in recent days that this poster has referred on the MSE forums to actively managed bond funds which "go more corporate" (rather than investing in government bonds), "to try to make up for their higher fees".

What he implies is that, after coming up with an investment strategy that their investors want, and a fee scale that their investors acknowlege should be paid, the managers then change the investment strategy to take on more risk and eke out higher returns to try to make up for the fact that the fees are higher than if they had just tracked a dumb government bond index with lower returns.

Really, the investors in the fund decide what they are willing to pay for exposure to the strategy the investment manager offers. It is quite likely that investing with a fluid strategic allocation across economic cycles, taking opportunities from all major sub-sectors of the bond market based on a view of yield curves and changing credit risks and micro and macro events, commands a higher fee than investing in a simple bond index. Similarly if there is more money to be made in the corporate bond market over time, compared to the slower low-volatility government bond markets, investors may be willing to pay more to access that sub-sector.

However, that doesn't mean the fund manager of the former fund types has decided to use corporate bonds 'to justify his high fee'. More likely he is charging a high fee for the same reason any of us price our services in the job market: he is being asked to do more work, or add more value, and thinks that someone will be willing to pay him.

Although the VLS20 is a cheap fund to use, I'm not personally a fan of trusting bond allocations to broad bond index funds across the global markets. Your personal needs are unlikely to be in line with the average personal needs of the market participants who drive those global bond markets (banks, insititutional pension funds, insurance companies, governments, multinational corporates etc). With bond markets at relative long term highs at the moment, I would prefer strategic bond funds - such as Optimal Income mentioned above, or their competitors in that space - or to control my own exposures based on a personal plan rather than an index.

None of that is to imply that the natural choice for someone risk averse is always cash or bonds. As Dunstonh points out, there are all sorts of risks to consider over a 25, 30, 40+ year retirement timescale; the two risks of - a) falling short of your objectives because your pot didn't grow enough or deliver sufficient income to cover your withdrawals, or b), inflation eroding the real value of your capital and income more than you can afford - are significant and are most prevalent when using 'risk averse, low return' strategies such as cash and 'safe' bonds.

But another one 'behavioural risk' comes from the fact that when an investment fund goes through inevitable and perfectly natural peaks and troughs of value, the cautious investor cashes it in at the trough because of being scared that it is going to dwindle to nought.

Being diversified is key, though if education is not an option due to a partner's stubbornness or lack of interest, you could consider taking on the somewhat higher risks in your own portfolio and having your partner's assets be lower-volatility ones. It's not a great solution because once money is stuffed into pension and ISA wrappers, if you want to rebalance the allocations across two people from time to time, you have to sell one person's assets, extract from the wrapper and put it back in the other person's wrapper to re-invest in the other asset class. That can be a hassle once you hit retirement and no longer have £40k a year pension allowance each or significant surplus new income to invest.

Thrugelmir

MatthewAinsworth wrote: »

I don't think the QE propping up bonds will be unravelled too quickly, or that rates would rise too fast

The Fed has commenced the long road of unwinding it's balance sheet. The ECB has scaled backed it's asset purchase programme. While the BOE (amongst the supportive measures introduced) now merely maintains the status quo under both Quantitative easing and the Asset Purchase Facility. Interest rates aren't simply controlled by the base rate either. The wind has finally changed direction it seems.

kidmugsy

You could look at the investment trusts that aim first to preserve capital. Two obvious candidates are Personal Assets Trust and Ruffer Investment Company.

You'll find that reading their regular reports and reviews will give you an excellent insight into their strategies, and also a little entertainment.

System

Bowl - you know many complete novices going for financial advice just see "bonds" as "bonds" as the pie charts show and may not fully appreciate the extra correlation that corporate has with equities, they may not realise that the allocation they are taking on is somewhat higher risk (being novices), and they might not appreciate the fact that active funds, for all their talk of skills, are so hindered by fees and timing and mispicking that most active managers lag the index. What hope does a complete novices have of knowing what manager in this murky world will make the best choices?

It's true that an index will always have stuff you don't want on it, but how much is it really worth paying for even if people were good at picking winners? it's the other metrics, like performance and risk that dominate what's suitable I think

Thrug - indeed they are winding it down, slowly, yellen said it'd be like watching paint dry. I'm glad they're doing it now before we get into too much of a printing culture

atush

Sipps and Risk averse dont go well- in general Sipps are for experienced investors who tend to not be risk averse.

Second, you have a DB pension underpining- which would indicate any additional pensions could take a bit more risk on in general- although you intend these to be for a period of less than 10 years to first withdrawal).

So have a cash pot for energencies and first year of retirement (by retirement. So if you need an income of 20K, make it 30-40K cash at least.

Sipps could be used (or ineed personal pensions) for money not needed for -eight-ten years+.