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How to construct my investment portfolio?

I am starting my graduate job this week and plan on pound-cost averaging a regular amount of money every month into an investment portfolio (as well as maximising my LISA, but this is unrelated).

My current plan is to place 75% of the money into passive funds, and 25% into active funds.
So far, the best option for passive funds appears to be Vanguard, based on how cheap their funds are. My only issue comes with deciding how to split across the regions - small cap and emerging markets would most likely give me higher returns in the long run, but how do I decide which specific ones to choose (e.g. Emerging Markets UCITS vs Pacific ex-Japan), and how do I figure out what weighting to give each fund in the portfolio?

Secondly, with regards to the active funds, would you recommend Vanguard's active funds? Or am I better served choosing another platform and paying more for their passive fund usage so that I have a larger range of active funds available to me?

Side note - I'm planning on using a cash LISA rather than stocks and shares, as I plan on buying my first house within the next three years. If you think this is a bad idea, please say.

Thanks!
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Comments

  • Voyager2002
    Voyager2002 Posts: 15,895 Forumite
    Part of the Furniture 10,000 Posts Name Dropper Combo Breaker
    Your choice of a cash LISA is very sensible, given your time frame.

    In terms of your investment portfolio, you are going for a high degree of diversification so the details don't really matter.

    While Vanguard is very popular on this board, you might find that the HSBC GIF series offer you a slightly better deal.

    For the actively-managed part of your portfolio, do consider Investment Trusts as well as funds. Once you have decided that you want active management for a particular region of the world (and you might also consider funds in particular sectors of the economy, such as Healthcare or Clean Energy), look at the information about each Fund/IT that is available on sites like Trustnet and Morningstar. Personally I pay a lot of attention to what are called Modern Portfolio Statistics, but you must make your own choices.
  • Your choice of a cash LISA is very sensible, given your time frame.

    In terms of your investment portfolio, you are going for a high degree of diversification so the details don't really matter.

    While Vanguard is very popular on this board, you might find that the HSBC GIF series offer you a slightly better deal.

    For the actively-managed part of your portfolio, do consider Investment Trusts as well as funds. Once you have decided that you want active management for a particular region of the world (and you might also consider funds in particular sectors of the economy, such as Healthcare or Clean Energy), look at the information about each Fund/IT that is available on sites like Trustnet and Morningstar. Personally I pay a lot of attention to what are called Modern Portfolio Statistics, but you must make your own choices.
    Even if the details don't matter I have no idea where to even start from - I'd imagine the logical process would be to determine which funds I want and then allocate weightings to each, but aside from the global all cap index and s&p 500 I can't choose which funds I'd like, nor do I know what weighting I'd give.

    HSBC GIF looks interesting and I'll read into it more, thanks!

    Investment trusts look good, but if I use Vanguard I can't use a trust can I, as I'm only allowed to use one ISA platform per year? Or have I gotten that wrong?

  • barnstar2077
    barnstar2077 Posts: 1,581 Forumite
    Eighth Anniversary 1,000 Posts Name Dropper Photogenic
    edited 31 August 2020 pm31 7:42PM
    I too tried to construct the perfect potfolio, perfectly weighted according to region.  Then I got stressed and decided I didn't really know what I was doing and dropped everything into lifestrategy 100 instead.  I won't be maximising profits, but I figure Vanguards potential for getting it completely wrong is a lot smaller than mine! 
    Think first of your goal, then make it happen!
  • Albermarle
    Albermarle Posts: 26,039 Forumite
    10,000 Posts Sixth Anniversary Name Dropper
    Investment trusts look good, but if I use Vanguard I can't use a trust can I, as I'm only allowed to use one ISA platform per year? Or have I gotten that wrong?

    You can only add new money to one S&S ISA per year . You can open more than one and transfer another ISA in as that is not new money. You do not have to open a Vanguard ISA to hold Vanguard funds. Many other platforms offer them and also have a vast range of non Vanguard investments available .

    As you are starting a job, then you will also be starting a pension . For retirement savings , pension beats ISA due to the beneficial tax treatment, although you will not be able to access any money until you are about 60. Even then you should at least consider making a decent % contribution to your pension ( above the minimum) and also think about which investments within the pension.

    The above comments do not apply if you are lucky enough to be starting a job with a final salary type pension , although these are mainly confined to the public sector nowadays.

  • HarryGray
    HarryGray Posts: 179 Forumite
    Third Anniversary 100 Posts Name Dropper
    edited 1 September 2020 am30 8:51AM
    It isn't too hard to match the geographical split of the worlds market cap using tracker funds. You can use iShares who have indexes for pretty much any of the main regions. You can look at the MSCI index below:
    https://www.msci.com/documents/10199/f7349d88-8c6f-46dc-bf0d-f2e02e1f5be5
    However, this implies that the UK has only 4% global market cap. You should increase this to reduce currency risk. 
    The 'ideal' geographical split would take into account both market cap and country GDP. This would look something like the following:

    North America: 50%
    UK: 15%
    Emerging Markets: 12.5%
    Europe ex-UK: 10%
    Asia Pacific ex-Japan: 7.5%
    Japan: 5%

    This would be a 100% equity allocation and would normally produce net of fees returns of circa 7% per annum.

    Like Barnstar said above, Vanguard LifeStrategy 100 may be fine for your needs. Although this has a heavy home bias, which as I explained earlier is not necessarily a bad thing as it reduces currency risk. 
  • AnotherJoe
    AnotherJoe Posts: 19,622 Forumite
    10,000 Posts Fifth Anniversary Name Dropper Photogenic
    I think the time has passed for geographic splits,  because of globalisation. 
    Better to do sector splits if you believe in diversification.
    Geography maybe still works for smaller companies but even there its so much easier to be global these days that any company counted as "small" is still likely to be global in nature.
  • dakofsta said:
    Investment trusts look good, but if I use Vanguard I can't use a trust can I, as I'm only allowed to use one ISA platform per year? Or have I gotten that wrong?

    That is correct (presuming that if you use Vanguard as a platform it only invests in Vanguard products: not something I have checked). Probably the cheapest way to invest in a global tracker is a Vanguard product on the Vanguard platform, but that is not everyone's choice: 'home bias' has been mentioned above but for many it is a disadvantage, and if you want a relatively low UK allocation then you are likely to need something other than Vanguard, such as the HBC gif. In order to invest in this you would need a platform other than Vanguard, and you could then buy ITs or other Funds.

    Or of course you could open a Vanguard ISA one year and a different ISA the following year, although then you might end up paying over the odds in platform fees.

  • Albermarle
    Albermarle Posts: 26,039 Forumite
    10,000 Posts Sixth Anniversary Name Dropper
    That is correct (presuming that if you use Vanguard as a platform it only invests in Vanguard products: not something I have checked
    Yes only Vanguard products on their platform
    home bias' has been mentioned above but for many it is a disadvantage, and if you want a relatively low UK allocation then you are likely to need something other than Vanguard, such as the HBC gif. 
    If you just use index trackers then there will only be a home bias if you construct one . It is the Vanguard multi asset funds that have an approx. 25% home bias . Less than many traditional pension funds/portfolios but too much for some people.

  • dakofsta said:
    Even if the details don't matter I have no idea where to even start from - I'd imagine the logical process would be to determine which funds I want and then allocate weightings to each, but aside from the global all cap index and s&p 500 I can't choose which funds I'd like, nor do I know what weighting I'd give.
    I strongly suggest NOT starting by choosing funds: you could easily end up with several funds you like that invest in the same sector. Rather, begin by deciding which geographic regions and which sectors of the economy you want as investments, and then decide which of these you want to cover with a 'tracker' and which with active management.

    Then, you may find that a global tracker gives you adequate coverage of all the sectors for which you have chosen passive management, or if not it is likely to be easy to find a few trackers to do the job. It does not matter if there is some overlap.

    For active management, choose ONE fund/IT for each sector or region.

    It is unlikely to be worth allocating weightings.

  • Thank you all so much for your advice, this has been so helpful!
    I think for now, the best option is to use either Vanguard LifeStrategy 100% equity fund or the FTSE Global All Cap for my 75% passive split as they give me coverage of many sectors (and if I can't decide on a weighting split myself, it makes sense to use a pre-determined one instead), and putting the other 25% into either the active global equity fund or global momentum factor fund. I think the simplicity of these funds would be good for the meantime, and I can do some reading over the next few months to see if I have a better idea of how I want to split my investments
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