Investment Planning

7685

(moved from another board to here..)

I hope this is the right place to ask for thoughts on how to plan my investments. I am trying to have a diverse asset allocation while keeping it simple (eg hold 2 funds) but at the same time not putting all my eggs in 1 (to 2) basket, but I feel I am going in circles.

Background information:

1. Time frame: 10 years to invest

£ xxx total amount to invest as follows:

- £xxx a S&S ISA HSBC All World fund

- £xxx Cash ISA to S&S ISA

- £xxx (non ISA)

2. Risk - moderate

3. Goal - £xxx net income per year (minimum) for 40 years (also need to replenish the cash ladder).

In addition, no pension. There is a 5 year cash ladder set aside.

How to allocate the asset to have a better chance of getting the minimum net income and also preserve the capital, growth and income?

My current thinking is only withdrawing income / dividends from the ISA as the last resort so the investment can grow ? and not invest in high risks funds.

I was thinking of keeping my current fund (see below) and adding a multi-asset fund (80% equities / 20% bonds). From what I have read, this is deemed too high-risk due to my time horizon and the need to be realistic with the current economic climate, it would be great to hear others' thoughts

Or I can use the bulk of my money to buy some Gilts for guarantee income? (I prefer gilts to annuity as I can access the money if I really need to)

masonic

You say you have a 10 year horizon, but presumably you won't be needing all of the money in 10 years, so most of it will be invested a lot longer than that, in which case a higher proportion in equities is appropriate.

Adding £90k of a multi-asset fund with 20% bonds is not going to move the needle in a crash, so you'd either need a lower risk variant, or to replace your current fund if you wanted to reduce risk meaningfully. So your other option may be better…

If you are looking for an alternative to an annuity for a stable income floor, then gilts are a viable option. You may wish to use index linked gilts though to mitigate inflation risk. This is best done through a ladder given the coupon paid is generally low, so you'd need to consume some of the capital gain and index linking. See, for example, lategenxer.streamlit.app/Gilt_Ladder

7685

My 5 year cash ladder will need replenishing, hence, I was looking for a £xxx,000 index linked guarantee income after year 3. (it should be after year 1 but I am not sure whether it will have sufficient time to grow even if I opt for a higher risk fund there is even less guarantee). My goal is still £xxx,000 net income per year.

Option 1:

• Split the current £xxx a S&S ISA HSBC All World fund into a S&S ISA HSBC All World fund and add a HSBC Global Strategy Portfolios (UK) Adventurous Portfolio but some I am guessing overlap. Due to Mags 7 in the S&S ISA HSBC All World fund I am looking to change it not sure what fund will be suitable due to the overlapping with the Adventurous fund? 2 funds that are diversified with no Mags & and low / no home bias (OEIC fund).
• Use £xxx (non ISA) to buy index linked gilts? even if the index linked gilts provides a lower yield compared to conventional bonds. It this a better choice as it is index linked and if I hold it to maturity I will get the principal etc back? and I need to work out how to use the gilt ladder calculator
• use £xxx Cash ISA to invest in a defensive funds (Consumer staples, healthcare, and utilities)

or

Option 2:

• Use £xxx (non ISA) to buy index linked gilts? even if the index linked gilts provides a lower yield compared to conventional bonds. it is a better choice as it is index linked and if I hold it to maturity I will get the principal etc back? and I need to work out how to use the gilt ladder calculator
• use £xxx Cash ISA + £xxx S&S ISA (total : £xxx)
  £xxx,000 S&S ISA to invest in a defensive funds (Consumer staples, healthcare, and utilities) Legal & General (L&G) Global Infrastructure Index Fund but has a high (OCF) of 0.30%
  £xxx S&S ISA another index tracker fund
• £ xxx Precious metal index tracker fund ?

any other suggestions welcome

masonic

£275k would give you around 11-12 years of index linked income at £25k in today's money at which point the money would run out. This is a high withdrawal rate, hence the relatively short rundown period (you'd only be given an index linked income of something like £11k if you bought an annuity with this cash). For a 40 year retirement you'd need around £710k for a DIY annuity using ILG (vs £620k for an inflation-linked annuity, which would run out when you died - could be more or less than 40 years).

But if you would use your growing equities and extend your ladder in the good years and fall back on the ILG in the bad years they would last a lot longer than 12 years. This would be a sort of hybrid rolling and collapsing ladder. The outcome would be similar with conventional gilts if you were looking to see your income rise with inflation, except that if inflation were higher then expected, you'd run out of money sooner.

I would avoid investing selectively in companies in "defensive" sectors, as you'll find they don't behave as you might expect in a broad market crash. If you want to reduce US exposure cheaply, then there is a world ex-US ETF (XMWX), or you could use the L&G Multi-index series of funds, which have a pronounced US underweight.

Some (small) exposure to gold could be considered. It is looking very overvalued by historical standards, but the recent crash means this is not quite as extreme as it was at the peak. A broader commodities ETF has proven to be a good diversifier for the recent Iran situation, and also performed during the 2022 inflation spike, so this may be worth considering as a more diversified alternative. I've been holding CMFP in my portfolio for a while, gradually building it to around 10%. It has some exposure to gold, but if gold ever becomes cheap, I'd potentially add a dedicated gold ETF (only about 5%). But I think this only makes sense while holding a decent basket of equities - if you go very low risk, then the investment case for commodities/precious metals looks questionable. Their main purpose in a portfolio is negative correlation with other volatile assets (equities).

HedgehogRulez

just as an aside, asking the obvious questions: how old are you and how did you end up with no pension?!

7685

'You say you have a 10 year horizon, but presumably you won't be needing all of the money in 10 years, so most of it will be invested a lot longer than that, in which case a higher proportion in equities is appropriate.'

Yes, I am still looking for paid work and plan to let the investment grow and take some risks.

I see that buying £275k of index linked income will give an income of £25k in today's money would run out sooner than I would like. So I will keep the inflation-linked annuity in mind as I can get the same income for less money (£620k) and lasts till my last day or so.

For my needs will an index linked gilts would be better than the conventional or bond tracker? I am asking as I have been trying to understand the gilt ladder and some posters had mentioned that it is not straight forward to order it over the phone / online, I am trying to get an options so that I do not make the wrong purchase / investment and thinking 'tracker' as more straight forward.

Great to know about the 'defensive funds' as I was reading about getting a balanced portfolio and how defensive stocks will help to protect the investments but not sure how it will provide the income I need so I will leave it for now.

PLAN

• Add the £xxx,000 Cash ISA to the current £xxx S&S ISA (total £xxx)
  
  - 40 % HSBC All World ACC (5 / high risk )
  - 30% HSBC Global Strategy Portfolios (UK) Adventurous Portfolio ACC (5 / high risk)
  - 30% L&G Multi-index series of funds ACC, (risk managed) None of the L&G seem to have a benchmark with the OGC is 0.3% (this is still better than my ex IFA and platform charge) I will check out all the different funds maybe Index 4 as it a middle selection - I hope this will balance out the US Mags 7 (All World fund as I need a growth fund.

AND

• £xxx (non ISA) to buy index linked gilts (if I do not have any other income than I should have some PSA to use up so less tax)

This maybe the first thing to invest in so I will either use some cash / from the S&S ISA to buy the CMFP (ETF) aim for 5% or less of my total portfolio.

These will provide capital preservation, income and growth?

As I am new to investing and will have to report my tax so will investing in OEIC (ACC) or INC be a better choice (as I may need to withdraw for income.) I am thinking to use ACC and if i need an income I can sell some dividends?) Maybe it does not matter whether it is ACC / INC as most of my funds are inside the wrapper so may be ETFs will be ok, too. As ETFs has more choices and cheaper

masonic

The problem with a bond fund is that it will never mature, so at some point you will need to sell units and this will involve selling bonds within the fund at the current market price for a gain or loss. Look at the performance of various bond funds in the early 2020s, when interest rates rose sharply, to see the problem. With individual gilt holdings, you lock in a return at the point of purchase (assuming you hold to maturity) and they always mature at a fixed price (with inflation linking in the case of ILG).

For anything you will be holding in a S&S ISA, there is no tax reporting required, so the choice of ACC vs INC is less important. Some prefer INC to allow them to take the income or rebalance the portfolio using dividends, while others prefer ACC so that they don't need to manage the cash balance themselves and just need to sell what they need when drawing down. Outside the S&S ISA, it is best to hold the most tax efficient holdings, which would be the index linked gilts. The capital gain on ILG is tax exempt and doesn't need to be reported, so it would just be the interest to report if it exceeds your PSA.

One comment with the L&G Multi-index funds, while you might be drawn to the balanced Index 4, because the purpose is really to dilute the US by boosting UK, European, Asian equities etc, the higher risk variants will be more effective for this as the lower risk ones hold a lot of bonds (which you could pick up more cheaply elsewhere). You will probably find you get a more substantial reduction in Mag 7 concentration along with better value for money by switching to the higher risk L&G Multi-index (e.g. 7) and lower risk HSBC Global Strategy (e.g. Balanced). But this does depend on how much of a reduction you are looking for.

Linton

My strategy. Is to split the portfolio according to liabilities. For example near to cash to cover any money needed in the next 5 years. Fairly safe investments to cover the following 5-7 years, and 100% equity for the rest. Working in this way ensures your investments are structured for your needs rather than choosing arbitrary allocations depending on whether you are a 100% equity hero or a 40% wimp.

Trying to get one simple portfolio to satisfactorily meet very different needs is too difficult in my view.

badger09

@7685

With that sort of money at stake and your admitted lack of investing experience, I would seriously consider consulting an IFA.

7685

https://forums.moneysavingexpert.com/discussion/comment/81952060#Comment_81952060

I had thought about using an IFA however, with the income I need it, I do not believe it will cover the IFA and their platforms fees. Also, it will be high risk / equities. Also, if I do part ways with them I will not be able to take the portfolio with me so have to start over. I will be interested to hear others' experiences.

Bold text is the edited text.

7685

@ Masonic, @ Linton

My original thinking was to have (1 or 2) 100% equities fund (index tracker) and as I need to reduce Mags 7 exposure so I had added the L&G fund. I am glad @Linton has kindly reminded me there is no perfect mix, so I have decided to stick with these funds. Otherwise, my circle will start and will have lost even more time in the market. 

My plan is 

Bucket        Purpose        Time Horizon       Fund Choice Asset Class

Bucket 0    Immediate Cash    0–5years of income    Cash / may buy ILG with year 3 -5 money

Bucket 1    Preservation/Income    0–10 years of income    Bonds / Balanced Funds 
- use £275,000 to buy ILG From 1/2031 to mature yearly, and buy shorter dated bond as less risk?  Any income not needed if I have ISA allowance then it will be use for S&S ISA, if not back to ILG? All depends on my needs at the time.

Bucket 2    Long-term Growth   0 - 10+ years    100% Equities
- 30% HSBC All World Index Funds  / GB00BMJJJF9s
- 20% L&G Multi-index 7 ACC / GB00B9LF0M88

Bucket 3    Income and Capital Preserved    years of income    Bonds / Balanced Funds
- 50% HSBC Global Strategy Balanced    GB00B76WP695 

I am not sure I will achieve £20,000 per year in today's value (previously I was aiming for £25,000 ) Even with this lower income requirement. As the internet says I may need to sell some units to get the £20,000 I need? If I don't want to sell any units then my options are either take more risks or reduce desired amount of income or add more cash or find another income .. (I think best not raise the risk level as I have the money now so the up and down seem ok but when I am older and have less options.