S&P 500 or U.S. Equity Index in addition to LF60%

smulx

I have £60,000 in easy access at the moment and was considering splitting it 50/50 between Vanguard's LifeStrategy 60% and either the S&P 500 or U.S. Equity Index. I'm leaning towards the S&P option. I've done some research myself and so far I think it might be a good choice for me. Before I go ahead though, I just wondered whether anyone with a bit more experience than me had any thoughts or input? Anyone have any reason to believe investing in US business might not be a good call at the moment? I figured the 50/50 split gives a good balance between medium to high risk, and the US funds have consistently outperformed the FTSE based options. I know things are a bit uncertain in the near future with interest rates impacting growth, but I'm okay with that.

Apologies for the very generic query. Just wanted to check whether anyone had any input on factors I may have overlooked. Thanks in advance. 

GeoffTF

US equities have become very expensive. You make money by buying cheap and selling expensive, not the other way around. US are about half the global market, without over-weighting them. That is already a big concentration of risk. Putting 100% in VLS60 or VLS80 would make more sense.

dunstonh

 I'm leaning towards the S&P option. 

Why?   Your selection of funds doesn't seem logical and going to heavy into US equity unhedged when the dollar is high seems a strange decision.

 Anyone have any reason to believe investing in US business might not be a good call at the moment?

You are not just investing in certain US businesses but also hoping the dollar remains high and doesn't fall.

I figured the 50/50 split gives a good balance between medium to high risk, and the US funds have consistently outperformed the FTSE based options. 

Your understanding of past performance is wrong.  It was certainly the place to be for UK investors in the last cycle.  Falling sterling, rising dollar  and tech being the primary driver all saw the US being the ideal place for UK investors.

However, since the markets switched to value from growth, it hasn't been.     How long that cycle lasts is anyone's guess but if you look historically, you tend to find US equity is once every other cycle and not consistent as you think.

Indeed, FTSE250 has spent most of the last 25 years ahead of S&P500, for UK investors.  And the 10 years from 2000 to 2009 saw S&P500 give a negative return of -20.05%  vs -2.64% for FTSE 100,  +9.68% for FTSE all share and +59.70% for FTSE 250.

I suspect you are not taking into account currency fluctuations and relying on US data.

bostonerimus

K.I.S.S.

Just use VLS60, or maybe VLS80 if you want a higher proportion of equities. Vanguard have done the leg work to build a portfolio. They have overweighted the UK, but that's probably ok if you live in the UK. Spend your time budgeting and planning how you will manage your investments in bad as well as good times rather than tweaking asset allocations.

Linton

2 problems I see with your proposals

1) I think it is a mistake to try to guess the future, better to focus on maximum diversification.  For extended periods in the past the US has performed relatively poorly.  If you had invested broadly in the US in early 2000  you would not have overtaken the FTSE All Share until around 2016.  This was due to the US taking much longer to recover from the .com boom followed by the crash of 2000/2001  before it was hit again by the 2008 crash.  

2) The shares held in an S&P  500 tracker will match very closely those US shares held in VLS60.  So you are not adding anything new.  It could be argued that you are adding extra risk since the US is very dependent on a relatively small number of large tech companies which will be very well covered by both funds.. About 20% of the S&P500 is represented by just Apple, Microsoft, Google, Amazon and Nvidia. If you are going to add anything at all to your VLS60 I think you would be better advised to choose something not well represented there.  Possibilities include small companies and Asia. 

However it may well be better to simply stay with VLS60 until you have more experience. 

NoviceInvestor1

This makes no sense to me - if you are cautious enough to want LS60 (instead of LS 80 or LS100) why would you bet the rest of your pot on a single countries stock market? 

smulx

Thanks for the input everyone, I appreciate it. 

My thought process was that the LS60% would give me a safer aspect to the portfolio, but the S&P is an aspect of that fund that has been performing quite well, so I thought adding more weight to that individual aspect might be a good idea. I hadn't considered the currency conversion aspect of it though, meaning as the pound gets stronger against the dollar, any gains in the invested amount are eroded. I think I was suckered in by the growth of S&P over the past 10 years, but as I'm new to this, thought it might be best to get some input here, which I'm glad I did. I'll stick with LS60%, or possibly LS80%.

smulx

dunstonh said:

I figured the 50/50 split gives a good balance between medium to high risk, and the US funds have consistently outperformed the FTSE based options. 

Your understanding of past performance is wrong.  It was certainly the place to be for UK investors in the last cycle.  Falling sterling, rising dollar  and tech being the primary driver all saw the US being the ideal place for UK investors.

However, since the markets switched to value from growth, it hasn't been.     How long that cycle lasts is anyone's guess but if you look historically, you tend to find US equity is once every other cycle and not consistent as you think.

Thanks, your explanation was very helpful. Can you recommend any resources to learn more about this stuff, like the cycles that markets typically follow?

bostonerimus

smulx said:

Thanks for the input everyone, I appreciate it. 

My thought process was that the LS60% would give me a safer aspect to the portfolio, but the S&P is an aspect of that fund that has been performing quite well, so I thought adding more weight to that individual aspect might be a good idea. I hadn't considered the currency conversion aspect of it though, meaning as the pound gets stronger against the dollar, any gains in the invested amount are eroded. I think I was suckered in by the growth of S&P over the past 10 years, but as I'm new to this, thought it might be best to get some input here, which I'm glad I did. I'll stick with LS60%, or possibly LS80%.

People can get into a lot of trouble by over thinking things. It's easy to fall into the belief that there is some optimal solution that you can work out, that simply isn't the case...well maybe with hindsight we could work it out, but that's not very useful to us because no one has a time machine or clairvoyance. So there are a myriad of perfectly ok ways to meet your financial goals and over 35 years of investing I've decided that it's best to keep things simple and only worry about the things that you can personally control. So keep investing costs down, that's a guaranteed saving, work on your budget so you can control and understand your spending, get yourself a appropriate asset allocation (VLSxx will give you that) and use all the tax advantages that you can. Crucially, don't compare your portfolio to the league tables of funds published each year. You'll always lag the top performers, but you will also beat the worst funds and don't be tempted by the advertising and proclamations of performance. If you've set things up sensibly you will be just fine.

Albermarle

To digress a little.

I have £60,000 in easy access at the moment and was considering splitting it 50/50 between Vanguard's LifeStrategy 60% and either the S&P 500 or U.S. Equity Index

Interesting to know what sparked off the decision to invest this money. Hopefully you keep some easy access savings for emergencies etc.
Also you do not mention how you will invest the money. It is usually better to do it in a tax sheltered environment, like in a Stocks and Shares ISA ( max £20K per tax year), or in a DC pension if you have one ( with an employer maybe?)

aroominyork

dunstonh said:

 I'm leaning towards the S&P option. 

Your selection of funds doesn't seem logical and going to heavy into US equity unhedged when the dollar is high seems a strange decision.

I’ve been thinking about USD hedging (I dipped my toe in last month by swapping some US equities for hedged; did more reading, gauged the temperature and switched back yesterday). There are two reasons for hedging: tactical and strategic. Tactical is thinking USD is overpriced against Sterling. If you surveyed people on the forum about a fair value rate my guess is the average would hover around $1.40, but plenty of people would think in recent years it has gravitated lower. If you are experienced at managing money and making passion-free tactical moves, buying some hedged USD might be an idea. For those of us less skilled/impassionate, would we know when to sell and revert to unhedged? 

I think the better case for tactical is strategic. If the US economy strengthens you would expect to see its index rise and currency strengthen, leading to a double gain for Sterling investors. If its economy weakens you would be hit with the reverse double whammy. So hedging takes one of those variables out of the picture and might be a sensible option as you approach retirement and want to dial down risk, especially if, to paraphrase Terry Smith, you can not overpay and then do nothing.

Like so many investment choices hedging a strong dollar sounds good in theory, but for the amateur DIYer it might be best to stick to the tried and trusted route.