My future S&S LISA plan and help on portfolio

monkebrain

Hello!

I have decided to open an S&S LISA (I have a cash one already and plan to open this new one in April) and want to invest that money in hopes for it to grow for my first house and potentially retirement.  I only started looking at investing recently (past 3ish months so I'm still a newbie) and just would love some advice on my upcoming portfolio and answer some questions.

My current plan is: I am going to be investing a lump of £4000 each April to cap the LISA out and use that to invest.  I want to keep this LISA indefinitely, but I wish to use it to buy my first house (time frame about 7-10+ years).  

My plan portfolio:

• HSBC FTSE All-World Index Fund Acc C (80%)

• UK Gilt UCITS ETF (20%)

It is extremely simple because I don't want to overcomplicate it and I don't want to actively manage it, maybe once/twice a year to rebalance, etc.  The split is quite risky I believe, but I am willing to have more in equity.  I wish to keep the yearly costs to a minimum if I can.

My broker:
I have been deciding between HL and AJ Bell for my LISA.  Currently, I am leaning towards AJ Bell because they offer 0.2% fewer platform fees compared to HL and they offer the ability to transfer my current cash LISA into them (this is only if I, for whatever reason, am unable to put £4000 into the account).

Questions:
Portfolio
1) Do you think I need to have a property fund in here? 
I read example portfolios on Monevator and some have percentages inside the property class.  

2) Another question is about the HSBC all-world fund.  Is this fund sufficient to cover the emerging markets in the world?  Or would I need to look into another fund to have alongside this one?

3) With the announcement of lockdown "ending" soon (earliest April), do you think adding a domestic fund (UK) would be okay as I believe the HSBC fund mainly covers the US?

Other
4) Since I will be capping the LISA at £4000 per year, and receiving £1000 from the government, can I use this "extra" £1000 to invest too, or do I have to leave it?

5) Extremely stupid question here:  when the time comes for me to buy a house, would I sell my funds and then use that money for the deposit? (This is a dumb question, but would love to be 100% on all this )


Thank you for reading all of this 

Alexland

An 80/20 mix is a bit adventurous for what might only be a 7 year medium term investment. As you say an All World tracker has a lot of US (at least not as much as a World tracker) and the US is looking comparatively expensive at the moment so you might want to consider some UK home bias perhaps just using a multi asset fund such as the Vanguard LifeStrategy series?

Most people would not consider it essential to add property but you may choose to. If you run a multi fund portfolio you could rebalance by carefully directing new contributions each year to reduce the AJ Bell £1.50 fund trade costs. To start with you probably wouldn't want to hold an ETF as the trade cost is £9.95 but you can setup a scheduled trade in advance for £1.50 then cancel it after the first monthly run. Once the account gets big enough you might want to hold ETF(s) for the capped platform charges.

The 25% bonus gets added to the account as cash a month or two after each contribution and you can then invest it (more £1.50s). When you want your solicitor to do a penalty free withdrawal for the qualifying property purchase then yes you will need to sell the investments in advance to make enough cash available in the account. If you are over 40 when the purchase happens you might want to ask the solicitor to do a partial withdrawal to keep the account open with a small balance for further contributions until age 50 for age 60+. Finally remember to leave enough uninvested cash in the account to pay the 0.25% ongoing charge (with an allowance for growth) until you can next contribute.

monkebrain

Alexland said:

An 80/20 mix is a bit adventurous for what might only be a 7 year medium term investment. As you say an All World tracker has a lot of US (at least not as much as a World tracker) and the US is looking comparatively expensive at the moment so you might want to consider some UK home bias perhaps just using a multi asset fund such as the Vanguard LifeStrategy series?

Most people would not consider it essential to add property but you may choose to. If you run a multi fund portfolio you could rebalance by carefully directing new contributions each year to reduce the AJ Bell £1.50 fund trade costs. To start with you probably wouldn't want to hold an ETF as the trade cost is £9.95 but you can setup a scheduled trade in advance for £1.50 then cancel it after the first monthly run. Once the account gets big enough you might want to hold ETF(s) for the capped platform charges.

The 25% bonus gets added to the account as cash a month or two after each contribution and you can then invest it (more £1.50s). When you want your solicitor to do a penalty free withdrawal for the qualifying property purchase then yes you will need to sell the investments in advance to make enough cash available in the account. If you are over 40 when the purchase happens you might want to ask the solicitor to do a partial withdrawal to keep the account open with a small balance for further contributions until age 50 for age 60+. Finally remember to leave enough uninvested cash in the account to pay the 0.25% ongoing charge (with an allowance for growth) until you can next contribute.

Thanks for the reply!

The original example portfolio I was looking at was the Core-4, the 60:40 split between equity and bonds.  Are you saying to add the Vanguard Lifestrategy instead of the HSBC or having both?  Are emerging markets something I should bother to consider or stick to the more developed counties?

I did some research and found that bonds might not be the best thing currently, so I reduced it to 20%.  I thought having higher equity to bond ratio might result in slightly better returns come the time I want to buy a house because of bonds not being so hot.

I do only plan to rebalance once a year ideally unless something interesting happens.

Sorry, but what do you mean by this line: "setup a scheduled trade in advance for £1.50 then cancel it after the first monthly run".  

Thank you for the information about the property purchase and keep cash to pay for the ongoing charges, I almost forgot about it

Alexland

monkebrain said:

The original example portfolio I was looking at was the Core-4, the 60:40 split between equity and bonds.  Are you saying to add the Vanguard Lifestrategy instead of the HSBC or having both?  Are emerging markets something I should bother to consider or stick to the more developed counties?

All-World is about 90% developed markets (World) and 10% emerging markets. Vanguard LifeStrategy is an all in one multi asset fund series for which the equities allocation is around 25% UK, 10% Emerging Markets so only 65% World ex-UK which reduces the US exposure to around 45%.(compared to around 55% in All-World or 65% in World). VLS100 is entirely equities, VLS80 has around 20% bonds including gilts and VLS60 has around 40% bonds. The cost is slightly higher at 0.22% but then there would be less £1.50 trade fees than maintaining a multi fund portfolio on AJ Bell.

monkebrain said:

I did some research and found that bonds might not be the best thing currently, so I reduced it to 20%.  I thought having higher equity to bond ratio might result in slightly better returns come the time I want to buy a house because of bonds not being so hot.

Yes bonds are not looking very attractive at the moment but then they do dampen volatility in the portfolio so by increasing to 80% equities you could see reductions of up to around 40% on market crashes. That's fine if you have plenty of time to recover but even 7 years is fairly short in the world of investing sometimes less than one complete market cycle.

monkebrain said:

I do only plan to rebalance once a year ideally unless something interesting happens.

The most efficient way to rebalance is with new contributions by adding less to the asset that has done best and more to the asset that has done worse such that at the end of making the contributions you are back to your desired allocation. That works nicely when the new contributions are still a high proportion of the overall account value. After enough years the new contributions don't make enough of a difference to cover the movements seen from the market.

monkebrain said:

Sorry, but what do you mean by this line: "setup a scheduled trade in advance for £1.50 then cancel it after the first monthly run". 

Well on AJ Bell buying and selling funds costs £1.50 and buying and selling ETFs, ITs or individual shares costs £9.95 however there is a way to avoid paying £9.95 to purchase which is to setup a regular £1.50 per month investment plan (see below link) which runs once a month (investing from the account cash balance) and can be cancelled after the first execution. It's a bit fiddly but worth it when the account gets big enough (circa £20k+) to benefit from the £3.50 per month ongoing capped fee for holding ETFs etc. Also ensure you buy accumulating investment(s) if you want to avoid further trade fees reinvesting dividends.

https://www.youinvest.co.uk/our-services/regular-investments

monkebrain said:

Thank you for the information about the property purchase and keep cash to pay for the ongoing charges, I almost forgot about it

You can ask AJ Bell to pay the ongoing charge from a normal dealing account cash balance but there's no real benefit as you get the same LISA bonus either way based on the contribution amount.

monkebrain

Okay, I understand a lot more now! 

I think my plan of action will be to have a 60-70 split on the equity and remainder for a bond for this 7-10 year LISA.  After buying a house, I think I will be heavier on the equity side unless bonds recover (10+ years/retirement).

You say having 80% in equity may result in a reduction of up to 40% if the market crashes, how do you calculate the percentages so I can apply them in the future.

Thanks for the information!

Alexland

monkebrain said:

You say having 80% in equity may result in a reduction of up to 40% if the market crashes, how do you calculate the percentages so I can apply them in the future.

If you start with the observation that stock markets occasionally crash by more than 50% then by reducing your exposure to 80% equities you would only expect that portion to drop by more than 40%. There are more frequent smaller crashes and corrections.
Traditionally bonds would be inversely correlated so would go up during an equities crash (although higher yield bonds tend to behave more like equities) so the 20% might increase by a few percent to limit the overall impact on the portfolio.
Of course there is no standard crash (even bond markets can crash very slowly) so it's just to get a feel of the magnitude downside you might see and for most long term investors it doesn't matter as they have plenty of years ahead to benefit from the recovery.