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Minimising ISA S&S risk

edited 30 November -1 at 1:00AM in Savings & Investments
12 replies 1.1K views
Elika0215Elika0215 Forumite
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edited 30 November -1 at 1:00AM in Savings & Investments
After loads of research (including this site - my sincere thanks to all who have helped) I have now got to a position where I've calculated my emergency cash pot for the next year.

As my mortgage is lower (1.94% fixed) than a fixed 1 year savings rate, I've placed enough for the next few years in a 1 year fixed rate account so I can decide what to do from there. This years pension contributions and 5% current (regular savings accounts) have been maxed out too.

I've opened a Vanguard S&S Isa which I intend to keep for 5 - 6 years on their Lifestrategy 20/80. However, I noticed that it's weighted toward UK markets - so decided to invest a small lump sum and will then use pound-cost averaging over the next 18 months at least.

What I'd now like to do is open up another S&S Isa (for my partner who doesn't have one) with a global ex-UK multi-asset provider in case Brexit causes UK market to decline sharply. I know this could also happen on global markets by the way.

So,

1) Does that seem like a sensible low-risk (I know it's not risk-free) investment portfolio? I don't intend to make a fortune but am aiming for a return marginally above inflation.

2) Ideally, I'd like to invest it with a provider in a passive fund where I can take a step back and let them do their thing without me having to be active in decision making. The less I'm involved, the better basically! With all that in mind, can anyone provide a good place to start with the global multi-asset fund based on your knowledge and experience (I won't take it as advice - merely asking to share your thoughts).

Again, thank you so much.
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  • edited 28 February 2019 at 1:55PM
    AlanP_2AlanP_2 Forumite
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    edited 28 February 2019 at 1:55PM
  • edited 28 February 2019 at 3:00PM
    lpgmlpgm Forumite
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    edited 28 February 2019 at 3:00PM
    Elika0215 wrote: »
    I've opened a Vanguard S&S Isa which I intend to keep for 5 - 6 years on their Lifestrategy 20/80. However, I noticed that it's weighted toward UK markets - so decided to invest a small lump sum and will then use pound-cost averaging over the next 18 months at least.

    There's a lot to unpack here.

    1. Up to six years might not be long enough to undo any fall between now and then.

    2. 20/80 is, obviously, four-fifths bonds. You'll need to be careful to not upset the balance.

    3. As you say, LifeStrategy has a high allocation to UK *markets* - but these companies do business all over the world, and might be unaffected by Brexit.

    4. It's not really clear why you need, or want, to drip feed in for 18 months.
  • Elika0215Elika0215 Forumite
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    lpgm wrote: »
    There's a lot to unpack here.

    1. Up to six years might not be long enough to undo any fall between now and then.

    2. 20/80 is, obviously, four-fifths bonds. You'll need to be careful to not upset the balance.

    3. As you say, LifeStrategy has a high allocation to UK *markets* - but these companies do business all over the world, and might be unaffected by Brexit.

    4. It's not really clear why you need, or want, to drip feed in.

    Thank you - and sorry for the long post. I just wanted to see if anyone thinks that the whole approach is a terrible idea because of some glaring oversight.

    1) If it transpired in 6 years time that the fund is not performing well, then I hope to be in a position to hold for another 5 years. If I need the money, then I will take the hit. I'd rather this than the safety of a bank where, due to inflation, my money is guaranteed to make a loss.

    2) I chose the 20/80 as the most conservative option. I know bonds can lose value too but they're not as volatile as equities(are they?). I thought Vanguard would ensure that the balance of bonds/equities remains consistent. Have I misunderstood?

    3) Ah, good point! It may give me a little peace of mind (purely a placebo-effect perhaps) if I had defined mainly UK/Global investments.

    4) I'm aiming for low-risk and thought by drip-feeding, I could minimise any losses albeit at the expense of a higher return if the markets do well.
    AlanP wrote: »

    Thank you. I'll have a look at these this afternoon.
  • bowlhead99bowlhead99 Forumite
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    Elika0215 wrote: »
    After loads of research (including this site - my sincere thanks to all who have helped) I have now got to a position where I've calculated my emergency cash pot for the next year.

    As my mortgage is lower (1.94% fixed) than a fixed 1 year savings rate, I've placed enough for the next few years in a 1 year fixed rate account so I can decide what to do from there. This years pension contributions and 5% current (regular savings accounts) have been maxed out too.
    Ok. All seems sensible, you will not be investing above your means if you have a good emergency fund and maxed out regular savers and several years money in a one year account etc etc.

    When you say you have 'maxed out' pension contributions, is that properly maxing them out against the annual allowance (ie if you are in work, contributing your entire annual salary or £40k whichever is smaller)? Or do you just mean putting in the maximum which your employer will match with their contributions? Or perhaps if you don't have any earned income, your max contribution limit is £3600 gross.
    I've opened a Vanguard S&S Isa which I intend to keep for 5 - 6 years on their Lifestrategy 20/80. However, I noticed that it's weighted toward UK markets - so decided to invest a small lump sum and will then use pound-cost averaging over the next 18 months at least.
    A few points here.

    You mention it is weighted towards UK markets. That depends on perspective. Three quarters of all the equities within the lifestrategy products (whether 20% equity, 80% equity, 100% equity etc) are listed on foreign stock markets. Of the remaining quarter of the equities which are listed on the London market, the money is allocated according to the weighting of the FTSE index, meaning over a third of that money is invested in just the biggest ten companies such as HSBC, Shell, BP, Glaxo, Diageo, Rio Tinto etc which are global giants, which have the vast majority of their income and assets overseas, earning most of the profits in foreign currencies.

    So, the shares owned by the lifestrategy fund are not massively weighted to UK businesses, far from it. Most of your equity allocation will not be in UK business.

    If you are thinking this is too heavily weighted to the UK (even though it's not really allocated more to the UK than the typical way a UK investor allocates their portfolio) - how does it compare with how your pension is allocated? You mention maxing out your pension - are you deliberately self-selecting foreign assets in your pension to avoid UK equities and bonds? Or are you doing like most people, and just using a normal broad mixed asset fund like the standard workplace pensions would give you as a default choice? If you're not doing anything special to avoid the UK in your pension, why try to avoid it in your ISA?

    Secondly, you refer to Lifestrategy "20/80". There is no product called "20/80". There is a Lifestrategy 20% Equity fund or a Lifestrategy 80% Equity fund. Do you mean the first one, which has only 20% equity and a very high bond content? Or do you mean the second one, with 80% equity and not much in the way of bonds?

    The reason for asking is, you say "does this sound like a sensible low risk portfolio?". If it's 80% equity (mostly foreign equities), the portfolio will have loss potential of 40% or more in a one year period, and such portfolios are not at all low risk.

    But if you're are only talking about 'the portfolio' being a small lump sum in your ISA and another lump in your partner's ISA, while you both have a massive amount of cash in fixed and regular accounts elsewhere, it may not be too high risk overall when you consider your 'portfolio' of total wealth being cash and property and pensions and these small ISAs.

    Thirdly, you mention the ISA is something you "intend to keep for 5 - 6 years", but you are going to be drip feeding into it for "over the next 18 months at least". So although the small lump sum would be put to work for 5-6 years, the last of the money might only be deployed for 4 years.

    When you are investing you get up years and down years and flat years and you never know what order they'll happen in. An economic cycle of boom and bust might be eight to ten years, containing a major crash. You are proposing to buy gradually and then perhaps hold it for another 4 to 5 years. As that period is only half an economic cycle, you can't really expect to see 'long term' investing returns. What if you get all the down years and flat years squashed into your short investment period, and then can't afford to stick around for the up years?

    Obviously this is more of a risk if your ISA is an 80% equities product than a 20% equities product, because the latter is not going to have as much volatility - it shouldn't lose half its value in a year. However, bond-heavy products can still have downswings and may offer low returns for extended periods.
    What I'd now like to do is open up another S&S Isa (for my partner who doesn't have one) with a global ex-UK multi-asset provider in case Brexit causes UK market to decline sharply. I know this could also happen on global markets by the way.
    Having a small lump sum in a Vanguard fund which only has a quarter of its assets in the UK FTSE all share does not seem to me like it needs to be countered by having a fully ex-UK fund on your partner's name. Also, how does your partner feel about putting lots of money into foreign markets?

    Remember, when the Brexit referendum result was announced, the value of foreign investments to UK investors soared because a dollar that had previously only been worth 60-70p was now worth closer to 80p. If Brexit doesn't happen, or is successfully delayed, or is milder than some fear, the pound will strengthen (as has been seen in recent days) causing the value of $x of foreign investments to be worth fewer pounds, even if the dollar value of shares on foreign stock markets are flat or go up

    1) Does that seem like a sensible low-risk (I know it's not risk-free) investment portfolio? I don't intend to make a fortune but am aiming for a return marginally above inflation.
    Not really clear from information given. :)
  • LintonLinton Forumite
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    Some points.....

    The 20% fund would only have 20% X 23%=4.6% in UK equity and so any instability in UK share prices arising from BREXIT would only have a pretty small effect on the value of the fund as a whole.


    Perhaps more of a concern is the 80% in low risk bonds. At the moment low risk bond prices are very high (and hence interest rates are low). It is therefore quite possible that the fund will perform poorly until interest rates return to pre-2008 crash levels. In this situation having 80% in bonds is a risk. You could be safer with a rather higher % equity as that spreads the risks



    So if you really are looking at a 5-6 year time frame I think you would be better advised to keep your money in cash, perhaps in a 5 year fixed term account.


    More generally, if you are to invest as opposed to save you need to be taking the long view, say 10 years as a minimum or preferably longer. BREXIT will come and go. At the moment in my view China and Trump are much more significant to equity investors than BREXIT. In the future there will be other, currently unforeseen, events that will cause as much or more worry. You cannot avoid this. The way to minimise the effects is to diversify by investing in as wide a range of underlying assets as possible.
  • SystemSystem Forumite
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    Elika0215 wrote: »
    I've opened a Vanguard S&S Isa which I intend to keep for 5 - 6 years on their Lifestrategy 20/80. However, I noticed that it's weighted toward UK markets -

    You can ignore the UK weighting. It is mostly invested in UK companies that make their money globally such as BP, Shell etc. You'll find that doing a comparison of the value of the LS funds compared to Vanguards Global funds that they track pretty much identically with a fraction of a percentage difference.

    The other thing to consider is that the value of the pound will have an impact. The stronger the pound the less your non-UK portions of your fund are worth in GBP.
  • Elika0215Elika0215 Forumite
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    Thanks. Every time I think I've cracked it - someone throws a spanner in the works!! :D I'm only kidding. This is exactly what I was hoping to achieve by posting here.
    bowlhead99 wrote: »
    ....

    The pension is maxed out at £2880 + 20% due to being unemployed. My partner works and still has plenty of allowance left (in the region of £15000) but my concern was it being locked away if we needed to access it in its entirety at 55 (in 6 years).

    Thanks for your insight in to the Lifestrategy investments. I just saw a large allocation in UK and well, you know the rest. That's good to know.

    It's the Lifestrategy 20% equity and 80% bonds. I took this as it is pitched for those who want a "cautious" approach to investments.

    Re the ISA S&S's - yes, it's only a small amount representing about 8% of our cash in current and savings accounts. In all honesty, I was considering to increasing it to 15%. We also have a (modest) property with a low mortgage which should be paid off in 9 years. I am pretty cautious but am so conscious of the effect of inflation on savings and current accounts.

    Regarding my partner - I won't do anything without full consent. In fact, they'd need to complete the relevant applications, I'm just researching as much as possible. Instead of explaining it, I may just print out this thread :)


    Linton wrote: »
    Some points.....

    The 20% fund would only have 20% X 23%=4.6% in UK equity and so any instability in UK share prices arising from BREXIT would only have a pretty small effect on the value of the fund as a whole.


    Perhaps more of a concern is the 80% in low risk bonds. At the moment low risk bond prices are very high (and hence interest rates are low). It is therefore quite possible that the fund will perform poorly until interest rates return to pre-2008 crash levels. In this situation having 80% in bonds is a risk. You could be safer with a rather higher % equity as that spreads the risks



    So if you really are looking at a 5-6 year time frame I think you would be better advised to keep your money in cash, perhaps in a 5 year fixed term account.


    More generally, if you are to invest as opposed to save you need to be taking the long view, say 10 years as a minimum or preferably longer. BREXIT will come and go. At the moment in my view China and Trump are much more significant to equity investors than BREXIT. In the future there will be other, currently unforeseen, events that will cause as much or more worry. You cannot avoid this. The way to minimise the effects is to diversify by investing in as wide a range of underlying assets as possible.

    OK, that's contradictory to what I thought. I knew bonds can loose value but from what I looked at (albeit from an amateurs perspective) thought they were a safer investment for people, like me, that want to go for a conservative approach.

    As for the 5-6 year term - it seems like it's too long to keep as cash without definitely loosing out due to inflation, but not long enough for it to benefit from long-term steady growth. :mad: @ myself for being the wrong age!

    Again, thanks.
  • lpgmlpgm Forumite
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    Elika0215 wrote: »
    I thought Vanguard would ensure that the balance of bonds/equities remains consistent.

    They do. But *you* need to be careful if you start to buy other funds and potentially upset the overall mix as a result. But I guess you might be questioning whether or not to buy another fund now you've seen the other replies.
  • LintonLinton Forumite
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    Elika0215 wrote: »
    Thanks. Every time I think I've cracked it - someone throws a spanner in the works!! :D I'm only kidding. This is exactly what I was hoping to achieve by posting here.



    The pension is maxed out at £2880 + 20% due to being unemployed. My partner works and still has plenty of allowance left (in the region of £15000) but my concern was it being locked away if we needed to access it in its entirety at 55 (in 6 years).

    Thanks for your insight in to the Lifestrategy investments. I just saw a large allocation in UK and well, you know the rest. That's good to know.

    It's the Lifestrategy 20% equity and 80% bonds. I took this as it is pitched for those who want a "cautious" approach to investments.

    Re the ISA S&S's - yes, it's only a small amount representing about 8% of our cash in current and savings accounts. In all honesty, I was considering to increasing it to 15%. We also have a (modest) property with a low mortgage which should be paid off in 9 years. I am pretty cautious but am so conscious of the effect of inflation on savings and current accounts.

    Regarding my partner - I won't do anything without full consent. In fact, they'd need to complete the relevant applications, I'm just researching as much as possible. Instead of explaining it, I may just print out this thread :)





    OK, that's contradictory to what I thought. I knew bonds can loose value but from what I looked at (albeit from an amateurs perspective) thought they were a safer investment for people, like me, that want to go for a conservative approach.

    As for the 5-6 year term - it seems like it's too long to keep as cash without definitely loosing out due to inflation, but not long enough for it to benefit from long-term steady growth. :mad: @ myself for being the wrong age!

    Again, thanks.


    Since the great crash safe bonds have lost much of their traditional benefit. Their returns are poor and their capital value less stable than historically. So cash is looking rather more useful, at least if you can put it in a higher rate bank deposit account.



    You are right, from 5 to perhaps 10 years is a difficult time frame. Perhaps you can handle it by splitting your pot and have say 10% in a global 100% equity tracker and the rest in a 5-year deposit account at say 2.5%. You wont lose money even if the equity disappears completely, which is impossible barring end of the world scenarios.



    Other than in an emergency is 5-6 years the real timescale? Do you need the cash then? If not get a much longer time frame based on your real need in your mind and invest appropriately for that.
  • Elika0215Elika0215 Forumite
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    @lpgm - yes, I am reconsidering it. In this case, I'm delighted that I may have been wrong before committing!

    @Linton - It is in case of an emergency. Ultimately, I want to have the option to access it in 6 years time.

    I may have dismissed pension contributions too quickly as I didn't consider that I could withdraw 25% of it without penalty at 55. So if there was an emergency my partner would have access to around £25,000 in 6 years time. In fact, couldn't 100% be withdrawn at 55? I need to check on the penalties for this. Just thinking of a worst case scenario...
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