First Time DIY Portfolio

RichardS

Thanks @Pat38493 yes that VAGS fund is hedged

dunstonh

You may have detected there’s a bit of Vanguard feeling around here. It’s just a trans-Atlantic thing, nothing personal and not much to do with Vanguard.

Vanguard is a very good company.  I have a couple of Vanguard funds in my portfolio.   However, Vanguard is a brand that is a bit like Apple or SJP where you get fanboys that think Vanguard is best for everything and nothing else is close.

I'm glad you are focussing on costs. The OP has a refreshingly simple portfolio and they should implement it as inexpensively as possible. They don't need to complicate things.

The focus should always be suitability first and then costs.   Not the other way around.

My latest Draft Portfolio in InvestEngine now consists of two funds:

Vanguard FTSE All-World (VWRP) 60%
Vanguard Global Aggregate Bonds (VAGS) 40%

It is simple but what if global bonds do follow what happened in the UK?   You have put the defensive side of your portfolio all into one type.   Many people are utilsing Short Term Money Market funds (of which Royal London is considered the leader by most)

BTW I looked at my pension allocation I currently pay my FA £3k a year in fees to manage and it looked to me like it’s around 60% equities, 20% bonds and 20% other stuff.  

That 20% other stuff could be telling.   You look as if you are dumping that other stuff to put it all in global bonds.
For reference, Vanguard, in their own 60% equities fund have 17 funds in the portfolio.   Do you really know better than Vanguard? 

RichardS

Thanks @dunstonh - no I definitely don’t know better!  But I am trying to learn. Yes, I was interested in that 20% and need to do a bit more research and learning I think. Thanks again for the advice. 

Linton

ISTM that hedging foreign safe bonds is counter productive for a UK investor....

The currency risk that matters is the UK vs the rest of the world.  To a first level of approximation you can regard the ROW, particularly the $, as stable with the £ being volatile since much of world trade in commodities and raw materials is based on $s.

When UK inflation is rising more than elsewhere the value of the £ will be low and prices of much of what you buy will be high.  With hedging you are adding to your woes by getting paid in £ at a poor old exchange rate when you could be getting paid in high valued  $s which can be converted to more £s at the current exchange rate. 

Of course if the value of the £ was unusually high the situation would be reversed.  But at least you would have the advantage that inflation would be lower than otherwise.

So my conclusion is that if you want the full benefits of safe bonds you are best off keeping to the UK or not hedging any of the relatively small number of safe foreign bonds you do wish to buy.

RichardS

Thanks @Linton - looking at InvestEngine I can see

L&G UK Gilt 0-5 Year

Invesco UK Gilts

presumably these are options you would consider as an alternative to the global one?

JohnWinder

When UK inflation is rising more than elsewhere the value of the £ will be low and prices of much of what you buy will be high. 

I don’t come close to understanding the complexity of currency movements, but don’t the central banks deal with inflation by raising their interest rates? If so, there’s some flow on in interest rate rises to longer duration bonds; bond yields rise. As a result investors outside UK send money to UK to buy the better yielding bonds. Sending money to the UK for that purpose means buying pounds which pushes up the value of the pound. I’m sure we’ve been seeing this with the yen weakness as Japanese investors pour money into something paying more than their 0%/year yielding bonds. Be careful of simplistic propositions like that, but be even more careful when they seem contrary to another plausible explanation. Any experts here?

Linton

RichardS said:

Thanks @Linton - looking at InvestEngine I can see

L&G UK Gilt 0-5 Year

Invesco UK Gilts

presumably these are options you would consider as an alternative to the global one?

Tio be honest I think you are over-thinking your problem.  You really have the choice of choosing something simple, taking professional advice, or working out a bespoke portfolio that specifically tries to meet your particular requirements. Deciding precisely which bond fund, assuming you need a bond fund at all, comes under "bespoke portfolio".

 - With your current experience I would suggest that devising your own bespoke portfolio is not the right way forward.  The process would not start with fixing an asset allocation and a platform but rather from a clear definition of your requirements ideally with dates and £ amounts.

 - I must confess to not having read this thread  in great detail but I dont think you have said how much money you are investing beyond it not being your £200K pension money. If your pot is significantly more than say £75K then professional advice may be appropriate.

 -  I will assume your timescales for spending most or all of the portfolio are longer than 5-10 years.  Otherwise you may well be better off simply using a high return savings account or a safe bond equivalent.

 - If you have less than £75K and are mainly thinking long term, I suggest you go immediately for an off the shelf approx 60/40 multi-asset mainstream fund rather than spending weeks deciding what to do.  Barring end of the world scenarios it wont be a disastrous choice.  .  After a small number of years you may be in a better position  to re-assess your strategy. 

The list of funds would naturally include HSBC Global Strategy Balanced Portfolio and Vanguard Life Strategy 60.  I prefer the HSBC fund for technical reasons but it will make little difference in £ terms which one you choose. 

You could reasonably even consider something slightly more cautious.

RichardS

Just looked up my current pension allocations

North American Equity 26.29%
International Bonds 17.6%
UK Equity 15.4%
Europe (Non UK) Equity 11.59%
Emerging Market Equity 7.03%
Cash 5.37%
Japan Equity 5.02%
UK Government Bonds 3.45%
UK Corporate Bonds 1.87%
UK Property 1.67%
Global Index Linked Bonds (sterling hedged) 1.41%
Other 3.28%

So as far as I can see that is:

Equity 65.3%
Bonds 24.3%
Other 10.4%

It’s doing my head in thinking about whether this discretionary managed approach is worth the £3k charges. I can’t help thinking it isn’t. 

Bostonerimus1

RichardS said:

Thanks @dunstonh - no I definitely don’t know better!  But I am trying to learn. Yes, I was interested in that 20% and need to do a bit more research and learning I think. Thanks again for the advice. 

As you can see there is a healthy debate and different philosophies to investing, but I think we can all agree that having a plan is important and you've succeeded in that already. There is no one best solution, there are many, many possible solutions and plans and part of the difficulty is focussing down onto the plan you will adopt. Your portfolio is similar to the 3 and 4 fund "lazy" portfolios developed by "Bogleheads" who are the Vanguard Fanboys/girls mentioned above. It's important to understand that the simple and inexpensive approach to investing that they advocate can now be implemented on/with any number of platforms and funds; Vanguard was set up in the 1970s to sell low cost index funds and it's something that has been copied by everyone. You might enjoy reading the Bogleheads wiki; it is US biased, but here is a page written for the UK investor.

https://www.bogleheads.org/wiki/Investing_from_the_UK

and here's something on simple portfolios

https://www.bogleheads.org/wiki/Simple_non-US_portfolios

Don't take these as gospel - as with most things be a little skeptical and ask yourself if it makes sense. As I said this is only one approach to investing, it's the one I have used for many years because I'm a Yorkshireman and careful with money and don't like spending money on fees when I can avoid it.

Linton

JohnWinder said:

When UK inflation is rising more than elsewhere the value of the £ will be low and prices of much of what you buy will be high. 

I don’t come close to understanding the complexity of currency movements, but don’t the central banks deal with inflation by raising their interest rates? If so, there’s some flow on in interest rate rises to longer duration bonds; bond yields rise. As a result investors outside UK send money to UK to buy the better yielding bonds. Sending money to the UK for that purpose means buying pounds which pushes up the value of the pound. I’m sure we’ve been seeing this with the yen weakness as Japanese investors pour money into something paying more than their 0%/year yielding bonds. Be careful of simplistic propositions like that, but be even more careful when they seem contrary to another plausible explanation. Any experts here?

The exact interplay over the long term of currency exchange rates, interest rates, and inflation would no doubt be an interesting and informative discussion but I dont think it matters for my argument. That being that hedging foreign safe bonds accentuates problems for UK investors ratrher than reducing them. 

I have not specified any mechanism but merely outlined a situation that has happpened in the past and could easily happen again whereby inflation is rising and the value of the £ is low.   For example a major cause of inflation in the UK linked to low exchange rates is the price of oil affecting individuals directly and indirectly through transport costs.  This may be less of an issue in the US.