How to decide asset allocation?

Mike_FS

I understand a key factor affecting an asset allocation would be risk appetite which would mostly determine the asset split between equities and bonds/cash.

What are the decision factors affecting the split within equities itself though? E.g. FTSE 100 vs FTSE 250, or FTSE all share vs S&P500 etc. Say my goal is for a savings pot over 10 years to outperform inflation and the best bank cash rates (which at the moment seem to be 5 year fixed rates of about 2.7%), I'm happy to do it via one or more tracker funds (I'm not trying to outperform any particular stock market index), but how to choose the (mix of) trackers.

Lokolo

It's down to personal preference.

You could copy some other funds allocation (Vanguard Lifestrategy 100 could be a good start), you could make up your own.

DiggerUK

Lokolo wrote:

It's down to personal preference.....

Lokolo, I thought you had died, nice to see you.
You always used to advise posters to put all their money in to gold, what happened ..._

dunstonh

What are the decision factors affecting the split within equities itself though? E.g. FTSE 100 vs FTSE 250, or FTSE all share vs S&P500 etc.

Depends on your chosen investment strategy. Asset weighting models either tend to be researched and based on a target volatility range and economic data and assumptions or complete random allocations. The latter having no real structure and if you plan to use those then you may be better suited with a multi-asset fund.

I'm happy to do it via one or more tracker funds (I'm not trying to outperform any particular stock market index), but how to choose the (mix of) trackers.

If you use a fund for each major sector then you are looking around 8-15 funds. A global tracker will eliminate some of those if you go down that route but you still need multiple funds. Then you need to rebalacne them ideally on an annual basis. Alternatively, get a multi-asset fund.

Mike_FS

Lokolo wrote: »

You could copy some other funds allocation (Vanguard Lifestrategy 100 could be a good start), you could make up your own.

dunstonh wrote: »

If you use a fund for each major sector then you are looking around 8-15 funds. A global tracker will eliminate some of those if you go down that route but you still need multiple funds. Then you need to rebalacne them ideally on an annual basis. Alternatively, get a multi-asset fund.

That does sounds like a reasonable strategy. I can see for example that Vanguard Lifestrategy 100% Equity is invested in 45% US Equities, 22% UK Equities, 8% Eurozone, 6% Japan etc. It does this by holding various other Vanguard funds e.g.Vanguard US Equity Index, Vandguard FTSE UK All Share Index etc. Vanguard S&P500 ETF, etc. So I could spend an hour or two putting together my own portfolio of trackers based on the same percentage split, and rebalance (compare my split to the Vanguard one again in 12 months time).

badger09

Mike_FS wrote: »

That does sounds like a reasonable strategy. I can see for example that Vanguard Lifestrategy 100% Equity is invested in 45% US Equities, 22% UK Equities, 8% Eurozone, 6% Japan etc. It does this by holding various other Vanguard funds e.g.Vanguard US Equity Index, Vandguard FTSE UK All Share Index etc. Vanguard S&P500 ETF, etc. So I could spend an hour or two putting together my own portfolio of trackers based on the same percentage split, and rebalance (compare my split to the Vanguard one again in 12 months time).

You could do that, but if you are basically going to replicate Vanguard Lifestrategy 100% fund of funds and have to rebalance, why would you bother? Why not just buy the VLS:cool:

talexuser

Add up all the costs of the various trackers in their allocation and the sell/buy costs of rebalancing and compare with the cost of lifestrategy.

Mike_FS

badger09 wrote: »

You could do that, but if you are basically going to replicate Vanguard Lifestrategy 100% fund of funds and have to rebalance, why would you bother? Why not just buy the VLS:cool:

Because Lifestrategy has a charge of 0.22% and some of the underlying funds a charge of less than 0.1%. So with a sufficiently large portfolio, and depending on your dealing charges for the annual rebalance, it could be cheaper to replicate the portfolio yourself?

shinytop

You can get cheaper multi-asset funds than VLS. Some of the component funds might be more than 0.1%. You might find you're saving small amounts only. I'd rather trust/pay the fund managers but that's just me.

Mike_FS

shinytop wrote: »

You can get cheaper multi-asset funds than VLS. Some of the component funds might be more than 0.1%. You might find you're saving small amounts only. I'd rather trust/pay the fund managers but that's just me.

I'm sure it's not just you, and it's perfectly reasonable.

Say you have 100K invested in VLS then at 0.22% you are paying the fund manager £220 per year. If you identify the 6 main underlying funds and they average 0.1% or less charge then you could save £120 per year by investing in them directly. However for the annual rebalance you might trade 6 times - sell out of 3 and buy into 3, so have trading costs, say they are £60 then you have only saved £60 p.a. (though there are plenty of tips on the rest of the MSE site which save less).

Of course if you have £500K invested then the savings from investing directly would be much more significant.

shinytop

Yup my thoughts too. As well as the time taken, there's also the potential downside (for me at least!) of doing something wrong/forgetting to do something. And the multi-asset funds will be re-balanced a lot more frequently than I would do it.