Vanguard Life Strategy v HSBC Global Strategy Dynamic Portfolio v Fundsmith Equity

bowlhead99

oz0707 wrote: »

With all the comments saying small amounts not worth splitting - isn't this wrong?

There's nothing illegal about it of course, but generally on a small amount of money it is not worth the research time, or the effort periodically rebalancing back to your target allocation, or potentially the transaction costs (depending on platorm you used) to build a 'bespoke' portfolio to get the perfect allocation that you have in your head.

Say you are investing £2000 and you decide you are going to split it five ways into five funds.

If they are all just generalist funds investing broadly across the world, then frankly it's likely they will have similar returns, or at least if one is the best one year then another will be the best another year and you might as well just buy and hold one of them and keep it simple.

If they include specialist funds, lets say that one of your picks is some specialist 'smallcap' or 'emerging markets' or 'consumer defensive multinationals' fund in the belief that it will do better in the long term than the average of the other things you hold because your research (which hopefully is better than a scan down a list of popular funds discussed in the media) has led you to believe that. So you get an extra 1% a year, annualised, on that portion of the portfolio. On a £2000 portfolio, your £400 in that fund improves your portfolio returns by 1% of the £400 which is £4.

£4 on the £2000 portfolio is one fifth of a percent. But being an equities-heavy portfolio, your returns for the whole portfolio might be +40% or -40% in a given year. So, a fifth of a percent each year when you are getting big swings is not something to get too excited about - even though the average swing in return from that fund will be a lot more than a fifth of a percent in any one year and will give you a volatile result because of the specialsed rather than generalised nature of that fund. At the end of the day, the extra £4 is not enough to buy you a pint of beer down your local, and in the context of the rest of your life's future earnings or your ending retirement fund, the whole £2000 is probably only a very small piece and the £4 pretty inconsequential (even though we would all prefer to have £4 than not have it).

The point is that the hassle of trying to get the £4 by finding that one fund that can make better returns without exposing you to undue losses (which might be difficult even for someone with experience) can - at that level of investing - be a waste of effort for something inconsequenial. If you are the OP who is a complete novice to investing and is just setting up their first ever investment, you don't really know where to go looking to build yourself a bespoke and specialist portfolio other than some of the big brand names you've heard discussed, and so a generalist 'off the shelf, mixed investment' is a good thing to get, until you have tens of thousands more to play with.

The other thing about investing at low levels is that it can be impractical. In this case the OP has £2-3000 and as most funds will allow a lump sum of £500 or £1000 to start you off, they don't have a problem buying four or five funds, or allocating as little as 25% to one of the holdings. But if they wanted to allocate 10% to a fund, they may be below the minimum investment for that fund. Or say they were investing monthly at £200pm and had done lots of research which led them to decide they should have 10% of their money allocated to one particular fund. £20pm is less than most funds will accept, so unless they are going to jump through hoops and do lots of extra admin rotating their purchases each month, they may not be able to build exactly what they want.

So that's another reason why it is better to save 'building portfolios' until you have more money where you'll have freedom to invest in whatever you like, the transaction costs will be small as a portion of overall value, and the time and effort in researching and monitoring and maintaining ther portfolio at your preferred proportions will be worth it in terms of the extra absolute pounds of total returns you hope to make, compared to just buying one fund off the shelf.

As such, no wonder people get used to saying "forget splitting your money, just get one fund off the shelf that has a strategy of doing what you would like it to do, and has a track record of showing it can do that".

The amount may seem small to some but this isn't important. 100k, 10k or 1k it's all relative.

At 100k, investing all the money into a fund which has a track record of going up or down by 30% in a year is likely to produce a return (either a gain or a loss) that over a few years could dwarf whatever figure the government says is the average household's annual income. It is pretty important to ensure you are investing well or at least not investing badly.

At 1k, those same returns are the same size relative to the £1000 invested, but they are not lifechanging; they might amount to a couple of days pay in a job you are going to get at some point in the future. It is harder to screw up and any work you do to eke out better returns will be less noticeable because the incremental return is being calculated on a small base. There is of course a phrase 'look after the pennies and the pounds will look after themselves', so invest them soundly - you can do that in a cheap fund which invests broadly and doesn't require any monitoring or manual intervention. When you are investing such that your returns can be measured in pound coins or fivers you simply don't need to pay as much attention as when you are investing and getting back (or losing) hundred or thousand pound notes.

It may even help to educate the investor how different funds perform in different market conditions?!

This is true, though if the investor has an appetite for education they can of course simply look back at the charts to see what they would have got in their bespoke portfolio rather than actually go to the trouble of constructing it and holding the components for themselves.

Where the amounts are small, the "if only I had done this complicated plan I would have an extra x%" will not be a large number of x. You can save the effort and forgo the potential gain from being right and avoid the risk of the potential loss from being long. For bigger amounts, sure, do the complicated plan and put your money where your mouth is.

There is an argument to say, make your mistakes when you have smaller amounts of money at work, and that we learn from our mistakes, so why not try to jump in at the deep end with a complex bespoke portfolio while we are young and the numbers are small. But you can make mistakes with even smaller amounts if the amounts are zero and you do it virtually, and you can learn about portfolio allocation from a book rather than having to risk real money.

Bottom line, if you intend to later be investing much larger amounts of money than £2000 (as many of us will in retirement), there is no harm in 'practicing' with the £2000 and making it as complicated as you like with as many funds as you want subject to the minimum investment thresholds from the product provider and their fee structure. However if you are completely new to investing and a few days from making your first ever ISA investment for a low value before a year end deadline there is no point making it 'as complicated as you like with as many funds as you want' because it is not really worth the time and effort constructing a multi-fund portfolio, you are as likely to get it wrong as get it right, under the time pressure. That said, if you have 3 'favourite' funds and you don't know which is best or why, and they are not all super specialist funds... the low values at stake will mean you are not making a major mistake by just giving up on further research and buying all three.

needhouseadvice

Thanks for all the comprehensive replies. You've all been really helpful. I think I'm veering towards splitting it between 2 or 3 funds.

Was thinking of opening my ISA with Cavendish Online but when I clicked on the funds they all had a monthly minimum - I thought you could just put in a one-off payment?

Also would it be better to wait until Brexit next year in case there's a dip and I can get more for my money?

firestone

needhouseadvice wrote: »

Thanks for all the comprehensive replies. You've all been really helpful. I think I'm veering towards splitting it between 2 or 3 funds.

Was thinking of opening my ISA with Cavendish Online but when I clicked on the funds they all had a monthly minimum - I thought you could just put in a one-off payment?

Also would it be better to wait until Brexit next year in case there's a dip and I can get more for my money?

You can put in a one off payment - the monthly minimum is for setting up a direct debit.As for waiting my answer is why wait as the last few months have proved any news may cause a down turn and for all you know Brexit may cause shares to rise

needhouseadvice

firestone wrote: »

You can put in a one off payment - the monthly minimum is for setting up a direct debit.As for waiting my answer is why wait as the last few months have proved any news may cause a down turn and for all you know Brexit may cause shares to rise

Thanks, Firestone. OK, better get a move on and set one up!

MM2002

Interesting reading! I!!!8217;m in pretty much the same predicament.

I!!!8217;ve recently decided on using Vanguard, and put 40k (both the wife and my allowance) currently sitting in the vanguard cash isa.(0%!)
It is inheritance that I!!!8217;m not looking to need to touch for many years hopefully(>10 yrs)
It took a lot of homework for me to decide on vanguard, but after a lot of consideration and realising April 6th is looming got it in before the deadline as I may invest more next year.

I now need to decide which product to use.
As it!!!8217;s long term, I!!!8217;m thinking medium/high risk and wondered if splitting it 50/50 between LS60 and LS80 or even LS80&100

Also next year I may put
Another 15-20k into an S&S ISA.

Would it save future costs to stick with vanguard, or could it be safer to use another provider?

One last Q, is there normally a lot of movement on the days immediately after April 6th?

bowlhead99

MM2002 wrote: »

One last Q, is there normally a lot of movement on the days immediately after April 6th?

No, not really. There may of course be lots of movements (global trade wars and interest rate changes and all the corporate stuff that's always going on) but not really a 'new tax season' effect.

You are talking about investing in global funds and the UK is pretty unique in having a 5/6 April tax year end/start. Those dates are meaningless to most people around the world buying shares in Microsoft or Samsung or Exxon or whatever. And even within the UK, the vast majority of shares are held by big institutions rather than individuals. Big pension funds do not pay tax on their interest or dividends, and corporations do not on average have early April financial year ends, so the tax planning effects for individuals doesn't have as much effect as you would think on UK markets let alone the broader global markets in which you're proposing to invest via Vanguard Lifestrategy.

In the UK, some individuals will be looking to sell up shares just before 5 April to take money out of their pensions and use their income allowances up, or make use of a capital gains exemption before the next year rolls around; others want to buy just before 5 April to use up their pension or ISA contribution allowances; others will want to hold off on making purchases until they get their next year's ISA allowance on 6 April ; others will want to hold off on doing sales until they can get new capital gains annual exemptions on 6 April. And so on and so on.

So even though there may be a flurry of activity from individual retail investors just before or after tax year end, much of it all cancels out because the activity isn't all in the same direction.

firestone

firestone wrote: »

You can put in a one off payment - the monthly minimum is for setting up a direct debit.As for waiting my answer is why wait as the last few months have proved any news may cause a down turn and for all you know Brexit may cause shares to rise

Maybe don't check for 3 years after investing if still worried or put in the lump & then add a regular plan to average it out

MM2002

would You say splitting the 40k between vanguard ls60&80 is a good move for risk/reward strategy for 5-10 year investment? I realise everyone!!!8217;s situation is different, just interested in the views of the more experienced on here

eskbanker

MM2002 wrote: »

would You say splitting the 40k between vanguard ls60&80 is a good move for risk/reward strategy for 5-10 year investment? I realise everyone!!!8217;s situation is different, just interested in the views of the more experienced on here

You're far from alone in suggesting a split between VLS60 and 80 but to be honest I'm curious why so many feel that they've modelled their risk tolerance to the level of granularity that says that neither the 60 nor the 80 is close enough to what they believe they need! What's your rationale for suggesting that?

TARDIS

MM2002 wrote: »

would You say splitting the 40k between vanguard ls60&80 is a good move for risk/reward strategy for 5-10 year investment? I realise everyone!!!8217;s situation is different, just interested in the views of the more experienced on here

The more I read about investing the more I appreciate the effect of emotions on success.
If you feel more comfortable splitting between VLS 60 & 80 then go for it.
For some that would be too volatile for 5-10 years and others would go 100% equities whatever the timescale. If you wait for consensus on this site you'll never start investing