Feedback on my plan please

EverythingCounts

https://forums.moneysavingexpert.com/discussion/comment/82123540#Comment_82123540

Do you mean to ensure I get growth on that money?

If I have a lump sum in gilts and it’s earning 4.5% a year, is that not keeping inline with inflation? I appreciate it won’t have grown in that time but the amount should keep up with inflation, assuming inflation isn’t more than 4.5% or am I missing something?

My thinking is if I have say £30000 and it goes into bonds for 2 years at 4.5%, at maturity it’s worth about £32,700. I then put that £32,700 into bonds again, wouldn’t that mean it keeps up with inflation even if the amount is not growing?

gm0

OP wrote:

>Which brings me to your point about index trackers. I have also been thinking a lot about how I can invest in >global trackers and lower the risk if there is a big correction relating to AI and the Mag 7. I’m not sure if you >can lower the risk by using a global tracker, then put some in an emerging markets or small cap fund. Or will >they all take the same hit?

The contemporary perceived issue (this is a disputed matter) with market cap weighted global trackers is indeed the rise of US tech and the Mag7 etc. Concentration risk in a handful of mega stocks. The top 20 and % of fund on any fact sheet will demonstrate this handily.

In past resets. In the "moment". A global economic crisis tends to swamp all boats - at least for a while.
So hiding in emerging markets. Or UK LSE FTSE AllShare TR may impact the correction depth and its overswing vs long term trend line but it won't save you from a correction. Income during correction slump and recovery needs to be workable in the overall asset plan. Something you have already (amply) addressed with bond ladder and buffer cash like investments. Rationale being the UK and other markets will very likely oversell when wall street craters in a flight to safety.

My own take on this is that I am prepared to take some risk of underperformance (at some times in the cycle) and perhaps cumulatively and a slightly higher cost (fund fees) in return for a smoother ride - a lowered volatility. If the tradeoff of improved volatility per unit of possible lost potential return is plausible. We cannot know a priori which regions will overperform next or for how long. But a portfolio can easily be backtested to past dips with and without extra funds.

This is fundamentally based on the argument that the requirement of a pension is "adequate" income (capital + return sufficient) broadly safely not "highest potential estate on death at maximum risk" with a high risk of failure. And that ability to stay the course is somewhat a function of a reasoned portfolio and one which broadly follows the market but is not needlessly more volatile still. Perhaps a tad less. Personal psychology impacts what you need in place by way of argument for portfolio to be and remain confident.

All this discussion being about the growth assets (equities mostly) component. Sequence risk buffering being a topic for the non-volatile cash like assets.

I settled on two approaches based on my research and timing

1) First extend the range of investments e.g. Use of Emerging markets and Small cap.

Other options to be aware of as additional asset classes are metals primarily gold (Golden butterfly portfolios, Permanent portfolio and related ideas illustrate the concept). Property/REIT. Commodities. I did not do any of these for different reasons. I don't generally invest in things I don't understand. And I don't understand commodity cycles and the way the investible funds connect in. I have a home so don't want more residential property as an investment. And I don't understand commercial property. Gold has a real valuable purpose in a specific rare circumstances and is one historic approach to that specific risk. The rest of the time it is very arguable based on start point and timescale whether it is worthwhile. I decided not to. And to carry the apparent risk it hedges.

The market has evolved since i did my setup. Vanguard have launched an ex US, Small Cap, and a WorldALL (VALL) etf which once well established, scaled, and proven to track accurately (which is likely) - will be a cost effective option on many platforms alongside existing Vanguard developed world equities, iShares alternatives etc.

This extend and diversify adding extra things approach doesn't break the hold "passive" whole of market return religion. It just extends the diversification of the list of equities held (subject to specific fund choices and any overlaps). One can argue at the margins about how much em or small represents par. But there is nothing magic about the definition of World Developed equities - it's just a list by market cap with a start and an end. Funds are then an imperfect (sampled) version of that.

2) Mild tilt away from US. Using exUS. And exUK and UK funds and specific geo funds to add to the mix making an active bet that this century is more about Asia. Adding more UK than market weight can be helpful around currency risks on sterling FX. Or adding more europe ex UK can be helpful if you think the EU will prosper (relatively) more than than the UK within this block. This is straightforwardly an active posture. Adding £££ to VERX of VAPX (europe ex uk, asia ex japan) as example. Is £££ not added to Mag7 but still £ equities invested.

I made some of these bets. And for clarity it would have mostly been better to have stayed global and more US centric so far (a short run approaching 4 years). But then the event this was designed to help with over 10-20 years has yet to happen. So we shall see - later.

Aside - one specific geography bet I made while boosting Asia (mostly via VAPX) was a small punt on IKOR (Korea) within Asia which has turned out to be my best fund and not by a small amount at times. Honestly while it fitted my global perspective. In hindsight I knew far too little about the Korean market. The investing culture and leverage funds and what drives it. And I could not of course predict events which fed through to chip makers and tech companies in that market. It has it's own volatility dynamic.

3) I also decided that I would not go all in on my investing portfolio on a single "approach". This meant I needed to examine other options than world/developed passive indexing (and my extensions and tilts).

This leads to screening active multi-asset funds - the life company vanilla sort. And the wealth preservation trusts, the dedicated income in retirement active offers and such like. The argument I made here was that as a "novice" and consumer investor. I "don't know what I don't know". And through bad luck, timing, poor judgement - an all in bet going wrong has a higher impact (on us) if it proves ill judged - than a more "hedged" bet across two or more approaches. Risk impact scale. Not risk probability.

As forum regulars know from historic threads and arguments. I have routinely applied this philosophy at all levels of the stack in my investment statement. Controlling and hedging what you can. Even if "in theory" some (reputationally) is believed to make little or no difference. I don't know that with 100% confidence so I don't go all in on any one thing. "The eggs in basket argument"

Platforms (more than one)
ETFs alongside funds
UKFRS reporting only for ETF (mostly platform enforced - nothing exotic by way of legal jurisdiction)
Currency base (more than one)
Fund manager (more than one) - Vanguard, iShares etc.

The main downside to my approach is complexity. The multiple philosophy approach needs checking (trustnet, morningstar) for individual stock/market fund overlaps. The multiple philosophy approach may well be subject to "mean reversion" for overall portfolio (towards market return). But the different parts may have different sensitivities to particular combinations of future events if the investing approaches have some genuine asset allocation diversity. As said further up. The objective as I see it. Is "adequate" return for income - with an acceptable journey and risk around depletion. I accept by holding a diversity of things. That I may trip over some unexpected unknown. But the impact of it will be reduced - relative to the all in approach.

The axiom of the whole thing is. Don't screw up. Avoid bad DIY outcome in asset allocation. Know what you don't know. Act rationally (cautiously) on the things you can control. And accept the risk of the things you cannot. Timing of correction, regulatory change, central bank actions, war etc.

EverythingCounts

@gm0 Thank you for the in-depth response, very interesting reading.

It seems you have been incredibly proactive and given it a lot of thought.

I’ve kept my portfolio relatively simple as I don’t feel I understand the equities/market side of things well enough, I’m continuing to learn as much as I can to gain more confidence as I go.

I read something recently about the Korean market which related to it getting a little out of control, I can’t remember the exact details but think it suggested they needed to reign some of the traders in as they were going too far with risk, something like that.

I will read through your post again to try and digest it as there is a lot of information.