Critique our updated 2023 retirement investment portfolio

Linton

As said in another thread I am very uncomfortable with 60% US, never mind 70%.  Whether one thinks the US will perform well in the next 10 tears is irrelevent as no-one knows.  From history it may or may not, one cannot say more than that.  Similarly with EM and Asia/Pacific. Better in my view to diversify more widely.

A related point - this is a portfolio for retirement.  At some point you will need to adjust your asset allocations to match your income strategy.  I you havent stated a retirement date stated so it would be sensible to fix it at least for investment planning purposes..  Given your age and your wife's retirement presumably it cannot be very far in the future.  100% equity may be too high at this stage of your life.

GazzaBloom

dunstonh said:

Big US overweights aren't for me personally. 

Would people be as keen to overweight the US if it had been the worst performing stock market for the last 10 years rather than the best?

1 - Ignoring other influences, rising Sterling and falling dollar will create a loss for UK investors in US funds that are not currency hedged.  So, you need a lot of extra growth to show profit.
2 - Historically, global equity and US equity take it in turns in cycles more often than not.    The last cycle US equity was the clear winner.   The cycle before, US equity failed to show any gains over 10 years, yet global equity did.   The next cycle is expected to favour global equity.   The future is always unknown  and variable but growth stocks are not expected to recover in the short term and may continue to fall.   US is heavy in growth stocks compared to value stocks.    We won't know without hindsight but that cycle could already have started.  US equity has been amongst the worst performing areas, for UK investors, since October.

Going too heavy in any one area brings additional risk.   Do not rely on recent past performance to decide that the US is the best place and do not rely on data and research aimed at US consumers who do not need to concern themselves with currency fluctuations.

Yes, currency is an extra factor, GBP was $1.53 in 1983 and is now $1.23 and has wobbled up and down in between. 

In the lost decade the pound rose strongly between 2001-2007, this was before many of the popular US S&P500 funds for UK investors such as VUSA existed so finding data on how they would have performed in that backdrop is hard to find but 6 years swimming against a tide of currency losses is an extra drag for a long period of time.

But...general index fund investing wisdom does seem to suggest holding a global weighted tracker and either hedge or don't hedge for currency and stick with it but I reckon a lot of that wisdom is either US grown or borne in the QE easy money period. 

A good point for consideration - thank you.

How do you deal with currency risk? hedge or limit international asset exposure?

GazzaBloom

Linton said:

As said in another thread I am very uncomfortable with 60% US, never mind 70%.  Whether one thinks the US will perform well in the next 10 tears is irrelevent as no-one knows.  From history it may or may not, one cannot say more than that.  Similarly with EM and Asia/Pacific. Better in my view to diversify more widely.

A related point - this is a portfolio for retirement.  At some point you will need to adjust your asset allocations to match your income strategy.  I you havent stated a retirement date stated so it would be sensible to fix it at least for investment planning purposes..  Given your age and your wife's retirement presumably it cannot be very far in the future.  100% equity may be too high at this stage of your life.

100% equity may be too high, but it's where I am most comfortable, even with the volatility. Ahead of retirement will see a generous cash buffer being established and also perhaps a dalliance with some bonds starting low then maybe increasing as the values of total portfolio grows and time rolls on and needs change. 

It's easy to be 100% stocks when I am contributing regularly with generous amounts, I expect that feeling to change when I am no longer earning 

dunstonh

But...general index fund investing wisdom does seem to suggest holding a global weighted tracker and either hedge or don't hedge for currency and stick with it but I reckon a lot of that wisdom is either US grown or borne in the QE easy money period. 

Most tracker research and comments originate from the US aimed at US investors.  So, currency doesn't come into play.

How do you deal with currency risk? hedge or limit international asset exposure?

Normally I don't.  Its good for UK investors when Sterling falls.  So, you don't hedge.  Its in the period it recovers upwards that it is useful.  Typically, only worth it on the US equity side as the ratio most hold in the US is higher than any other country.      Currency hedged funds were not available to consumers the last time it would have been useful.  They are now though.  So, I am splitting my US allocation between non-hedge and hedged. 

There is a theory that closely linked developed countries will increasingly get closer to currency parity over the very long term with the US being the one they are likely to gravitate towards.

GeoffTF

For what it is worth, Vanguard research suggests that you should hedge bonds but not equities. Hedging costs money, so some packaged funds use sterling denominated bonds to avoid those costs.

GazzaBloom

GeoffTF said:

For what it is worth, Vanguard research suggests that you should hedge bonds but not equities. Hedging costs money, so some packaged funds use sterling denominated bonds to avoid those costs.

Interesting and thanks, I will be reading up on bonds

noclaf

Linton said:

As said in another thread I am very uncomfortable with 60% US, never mind 70%.  Whether one thinks the US will perform well in the next 10 tears is irrelevent as no-one knows.  From history it may or may not, one cannot say more than that.  Similarly with EM and Asia/Pacific. Better in my view to diversify more widely.

Whilst I fully agree on this point, the challenge (at least for myself) is determining the revised portfolio allocations e.g: if US Equities is lowered from 60%-70% to 40-45% what is it replaced with? I could for example increase my UK Equities allocation but I think for true diversification need more granular and broad coverage and I'm not sure that can be achieved in a 100% passive portfolio.

I mainly use passive global equity trackers so no thinking or tinkering involved with determining allocations, nice and easy.... however it's crossed my mind a few times that my diversification could be better e.g: Small caps for LATAM/APAC/EM is under-represented across my portfolio, would likely be best served by active funds but then have to consider risk tolerance, determine allocations and especially consider charges. My Fidelity SIPP costs me a smidge above 0.2% 'All-in' based on my chosen ETF fund fees, platform fees and divi reinvestment fees as a proportion of the total SIPP value. If I start using OEIC funds the overall costs would increase a fair bit (as only ETF's have capped platform charges) but my other platforms such as work pension dont have the same range of funds as Fidelity so leaves me in a tricky spot.

NedS

JohnWinder said:

Agreed on bonds, but I would have far easier access to bond funds rather than individual bonds within pension wrappers

Individual bonds and funds are tricky enough, and your tax is beyond me but do individual bonds need to be in a lower tax wrapper?  Currently yields are very low on inflation protected bonds so there wouldn't be much tax. If there's a CGT exemption for the first £12k/year in capital gains, you'd need a lot of linkers maturing each year to exceed that; approximately £10k worth which will mature in 10 years of 8%/year inflation.

Government bonds (gilts and linkers) are exempt from CGT as there is in theory no capital gain. The bond sells at face value initially, and that face value is returned to the holder upon maturity. If you purchase a gilt or linker at less than par value then any gain you make by holding it to maturity is tax free. Coupon payments, however, are taxable as interest but many gilts have very low coupons (e.g, 0.125% or 0.25%) making them attractive to hold outside of tax wrappers for those who would otherwise be paying higher rates of tax where most of the gain comes from a tax free capital gain through the yield to maturity.

masonic

noclaf said:

Linton said:

As said in another thread I am very uncomfortable with 60% US, never mind 70%.  Whether one thinks the US will perform well in the next 10 tears is irrelevent as no-one knows.  From history it may or may not, one cannot say more than that.  Similarly with EM and Asia/Pacific. Better in my view to diversify more widely.

Whilst I fully agree on this point, the challenge (at least for myself) is determining the revised portfolio allocations e.g: if US Equities is lowered from 60%-70% to 40-45% what is it replaced with? I could for example increase my UK Equities allocation but I think for true diversification need more granular and broad coverage and I'm not sure that can be achieved in a 100% passive portfolio.

I mainly use passive global equity trackers so no thinking or tinkering involved with determining allocations, nice and easy.... however it's crossed my mind a few times that my diversification could be better e.g: Small caps for LATAM/APAC/EM is under-represented across my portfolio, would likely be best served by active funds but then have to consider risk tolerance, determine allocations and especially consider charges. My Fidelity SIPP costs me a smidge above 0.2% 'All-in' based on my chosen ETF fund fees, platform fees and divi reinvestment fees as a proportion of the total SIPP value. If I start using OEIC funds the overall costs would increase a fair bit (as only ETF's have capped platform charges) but my other platforms such as work pension dont have the same range of funds as Fidelity so leaves me in a tricky spot.

It's a shame that there isn't (as far as I'm aware) any ETF tracking EAFE or a global index ex-USA, as there is in the US itself. Regional trackers could be used to balance the geographic allocations in the way that you want. Depending on your reasons for reducing the US, the excess could be allocated to other assets. Tactical asset allocation often involves allocating to defensive assets or undervalued equity markets. If diversification is the driver, then markets with a complementary style bias (growth vs value), or different sector weightings could help you achieve a better blend of underlying holdings. Some UK bias could therefore complement the growth and tech focused S&P500 exposure that remains.

wmb194

NedS said:

JohnWinder said:

Agreed on bonds, but I would have far easier access to bond funds rather than individual bonds within pension wrappers

Individual bonds and funds are tricky enough, and your tax is beyond me but do individual bonds need to be in a lower tax wrapper?  Currently yields are very low on inflation protected bonds so there wouldn't be much tax. If there's a CGT exemption for the first £12k/year in capital gains, you'd need a lot of linkers maturing each year to exceed that; approximately £10k worth which will mature in 10 years of 8%/year inflation.

Government bonds (gilts and linkers) are exempt from CGT as there is in theory no capital gain. The bond sells at face value initially, and that face value is returned to the holder upon maturity. If you purchase a gilt or linker at less than par value then any gain you make by holding it to maturity is tax free. Coupon payments, however, are taxable as interest but many gilts have very low coupons (e.g, 0.125% or 0.25%) making them attractive to hold outside of tax wrappers for those who would otherwise be paying higher rates of tax where most of the gain comes from a tax free capital gain through the yield to maturity.

They used to be treated in the same way as other financial assets for CGT but in one of Lamont's(?) budgets they were made exempt as HMRC had been finding that people had been using them in a very low risk way to manufacture allowable capital losses which concomitantly led to a loss of tax revenue.