S&P 500 - sensible or silly?

FloraandFauna

Hi, there - I'd be grateful for some views on whether starting to invest a bit in a S&P 500 fund is a good idea right now?

(You'll be able to tell from the following that I'm new to all this...)

I'm 48, planning to retire at 60. At that point I'll have a deferred DB pension of £6,336 (with additional lump sum of £19,000), a predicted DB pension of £8,000 (that I'm currently paying in to), and with a few more years of NI, will have the full £9,000 SP at 67. Having spaffed all my worldly savings on a deposit for a house, I'm starting from scratch to build up savings that will mimic the SP between the years of 60 and 67. 

I currently have £3,000 in a Vanguard SIPP LS100, and £1,000 in a Vanguard ISA LS100. I'm putting £400 a month into the SIPP (£500 with HMRC contribution), and £50 a month into the ISA. My (appalling) maths tells me that this should provide enough in 12 years' time for me to spend between £9,000 and £10,000 a year for 7 years (based on 2% growth, and spending the lot with a margin for error, not as a %age withdrawal).

Only I've read on here that at 25%, Vanguard LS funds are thought to be a bit over-heavy on UK investments. And so I'm wondering if I should amend that slightly by also investing a smaller amount in the Vanguard S&P 500 tracker. It seems a good idea... as I'm not optimistic about the UK outperforming Brexit/Covid in the next 5-10 years, but I am slightly optimistic that neither a Biden or Trump win would seriously crimp the US markets. 

But then I looked at some performance graphs for the S&P 500 over the last 20-30 years, and this last year's performance has made me skittery again - it's shot up so much in such a short period of time that I'm now wondering if this would be precisely the worst moment in history to buy in.

Any comments, views, observations would be really welcome - I don't know enough to know if I'm obviously way out of my depth and should just stick with the one tracker fund.

ColdIron

Bear in mind that as well as increasing your US allocation and decreasing your UK, you will also be diluting Europe, Japan, Emerging Markets, Asia Pacific etc

If the UK allocation is a serious concern to you, with only small sums invested so far then instead of buying something you are unhappy with and trying to bend it into shape maybe you would be better to find something that you are more comfortable with to begin with?

steampowered

If you are concerned that the Vanguard Lifestrategy Funds are overweight the UK (they have a 25% UK allocation), the simplest way of fixing that is to move all of your money into a global fund which does not have this feature. Vanguard offers several options which achieve that. For example, Vanguard FTSE All-World UCITS ETF.

An S&P 500 tracker is a fine investment, but as others have said you would then be underweight emerging markets.

You could fix that by buying an emerging markets passive fund though, that just achieves the same outcome as if you had purchased one globally diversified passive fund to begin with

Personally, I wouldn't lose sleep over the 25% UK allocation. 

FloraandFauna

Good point, both, thank you! Yes, it would dilute the other regions a little. 

It's not really a serious concern, and I'm not knowledgeable enough to go chasing exact percentages either. I'm not unhappy with the existing LS100 - am willing to take a punt on the UK element over the next 10 years. But I would ALSO like to take a punt on the US in case the UK is dismal (accepting both might bomb at the same time), and the US feels* to me like less of a risk than other regions.

* I know, I know

But having got that far in my thinking, I was wondering if now was a stupid time to make that move, given the gains it's made in the last year?

FloraandFauna

Having said I wasn't chasing percentages, I've just realised I haven't thought about that at all. In that, I'm planning to keep the bulk of my payments going into the LS100, and then putting maybe another £50 a month into S&P. Which is about, er, 10% of monthly total, so only diluting the rest by about (help me!), er, a really small amount.

Sigh. 

coyrls

I think you either have a single multi-asset fund or do the asset allocation yourself.  If you do the asset allocation yourself, you need an asset allocation model.  What you shouldn't do is hold a multi-asset fund and then decide that you can tweak that fund's asset allocations by holding side investments.  If you don't trust the multi-asset fund manager's asset allocations, why are you holding the fund in the first place?

ColdIron

Sounds like you are re rationalising but the outcome would be the same (dilution of all but the US) and the sensible solution remains to start with what you really want. Or as the Irish say when asked for directions: Well I wouldn't start from here

Opinion varies on the VLS UK allocation. There is logic in overweighting the currency that you earn your wages and spend your money in. Also a large proportion of the UK allocation are companies such as HSBC, Shell, BP, GSK, Unilever etc which are global and do most of their business abroad, they are not very representative of the UK economy. Others think the UK is going to hell in a hand-basket. There is no right answer. Only you can decide what is right for you

There is also the matter of how much to allocate to the US to make a meaningful difference. Ponder over this. The UK represents about 5% of global markets. According to Trustnet the UK is about 24% of VLS100. If you wanted to cut the UK allocation in half to 12% (still more than double that 5%) you would need to go 50/50 VLS 100 and S&P 500. That's a seriously bent portfolio and you still have to solve the Europe, EM etc conundrum

verybigchris

 I'm starting from scratch to build up savings that will mimic the SP between the years of 60 and 67. 

...
I'm putting £400 a month into the SIPP (£500 with HMRC contribution), and £50 a month into the ISA.

ISA or LISA?

If you're saving this money for when your 60, then using a LISA instead would give you an extra 25% on top.

Albermarle

25% home bias is not massive . Many pension funds have 40% and more , although this is partly historical/traditional.
On the other hand many posters on here and take the global view that 5% for UK is enough . 
The performance of the UK stock market has been relatively poor in recent years and especially this year. Covid hit it hard and it has only partly recovered , whereas as you have seen the massive US market has powered ahead ( mainly due to Apple, google, Amazon etc ) Will this trend continue? will UK make a comeback ? Nobody knows........

FloraandFauna

Ok, ok, ok! You're all right - guilty as charged of woolly thinking! 

(too old to start a LISA, but nice thought)

Have to nip out now to drive food around for those who can't themselves - will think about these points and try to work out why I'm being woolly, which might help inform my decisions...

Albermarle

FloraandFauna said:

Ok, ok, ok! You're all right - guilty as charged of woolly thinking! 

(too old to start a LISA, but nice thought)

Have to nip out now to drive food around for those who can't themselves - will think about these points and try to work out why I'm being woolly, which might help inform my decisions...

I would not say it is woolly thinking . You have thought about the situation and at least you are aware of some of the issues that need thinking about . So you are already well ahead of 90% of the population.
Maybe the final step is to realise there is no absolute right or wrong answer as we can not predict the future . We will only know if we are right and wrong with hindsight . For most people the answer is some kind of middle way which is why the popular Vanguard LS funds opt for 25% UK although I think they are considering reducing this a bit , especially as their competitors tend to have a much lower UK weighting .