Investing advice and guidance - rebalancing

Seraphi · 19 June 2019 at 2:31AM

Long time lurker, first time poster.

Firstly thank you to all the people who provide advice on these forums - the posts really are helpful. I'm sure there are lots of people like me who read and benefit from them.

Secondly apologies for the long post but I'm aware that people tend to value lots of contextual information.

Children's S&S ISA

I have a child and I've created an S&S ISA for them. Completely new to investing and decided to brave the DIY route. I've invested a four-figure sum, which I will not be topping up and I'm aware that they get full control at 18 years old. I've got a good 10+ years till that point.

I've taken a very high risk strategy (with the assumption that I have enough time to rectify losses) and have 100% equities but only in two managed funds - Lindsell Train Global Equity & Standard Life Investments Global Smaller Companies. I felt that these two provided some diversity with the risky strategy - the single biggest underlying holding is 4.3%. US equities make the bulk at 37% followed by the UK at 20%. I'm not really comfortable with the UK weighting due to Brexit uncertainty, but Lindsell Train is performing well so I'm putting up with it. I also at this point didn't see value in buying passive funds as I can take risks at this stage, or buying seven or eight different managed funds which likely end up duplicating parts of each other.

I'm doing fine - up 8% since I started in December.

I know that I should evaluate once a year and 'rebalance' the portfolio asset allocation. Given that I have 100% equities - what would or should 'rebalancing' look like? Should I be looking at the geographical spread of the holdings and making sure they aren't overweight? What should be the benchmark, the percentages when I started or just percentages that I feel comfortable with?

FWIW - The plan is to gradually switch from equities to bonds towards the time that they gain control. I had in my head 10% of the portfolio per year in the last 8 years to a 20% equities/80% bonds by the time they are 18. Also to gradually switch the equites from managed to passive funds during the last 5 years.

I have another child on the way, and I thought that I should probably crowdsource advice before doing the same again for them - especially if I'm told I'm doing something incredibly silly right now.

Personal S&S ISA

I recently had an illness which meant I got a small payout from my insurer. I'm lucky in that I'm fine now, can still work and enjoy my life - but I have this unexpected sum of money. Financially I'm okay. I don't have any credit card debt. I have a workplace pension. My mortgage is affordable if the rates go up 2% tomorrow. I have 3 months salary covered.

I'm investing it for the child(ren) again, but in a S&S ISA in my name to gift to them, or not, for a future house deposit etc. However, I am aware that I may need a portion of it (probably about 25%) sooner than 10 years if my illness come back and there are for example extra child-minding costs that need covering.

With this in mind I've gone for an allocation of 50% equity, 30% bonds, 20% mixed assets. The single biggest underlying holding is 3.9%, Regionally US is 30% of holdings (US equities 15%, US Bonds 15%), UK is 20% (equities 10%). If it matters the funds are: Architas MA Passive Reserve, Fundsmith Equity, Lindsell Train Global Equity, Stewart Investors Asia Pacific Leaders, Stewart Investors Global Emerging Markets Sustainability, Templeton Global Total Return Bond, Threadneedle Dollar Bond.

I'm a few months in and currently have a gain of 6.5%. I'm going to look again after a year. My question here is again about rebalancing - I'll keep the same proportions in terms of asset allocation, but do I need to take geography into consideration as much as I do for the children's ISA?

If there is anything that strike people as odd or unwise with the allocation here, I'm quite happy to take criticism/advice.

Thanks in advance.

ewaste · 19 June 2019 at 4:55AM

Welcome to the forum.

For the Junior S&S ISA I'd almost suggest a target retirement fund would make managament easier for your stated goals of reducing volatility toward their 18th Birthday. Although that may well derisk too much too quickly given the timescale, just a though off the top of my head which I'm sure someone will be along to out right.

Me pesonally I'd leave it in something simple like Vanguard Global All Cap which is basically large and small companies and globally diversified, maybe with a global bond fund as well to rebalance across into. It also sounds like you might be using Hargreaves Lansdown which if that's the case have pretty high platform charges to eat into returns over the long term.

As for your own S&S ISA the first thing that jumps out to me is some of the charges on the funds which on a de-risked holding seems like it could be a decent chunk of any returns over inflation (Again compounded if using Hargreaves Lansdown). The funds seem like a bit of a shopping basket that's been selected, I don't know enough about each to suggest if it's a cohesive portfoio or not given your long term objectives.

What platform or platforms are your using? Why the preference for active funds over index tracking funds? Essentially I'm looking at charges percentages for the platform and funds combined might be toward the higher end.

Seraphi · 19 June 2019 at 7:44AM

ewaste wrote: »

Welcome to the forum.

For the Junior S&S ISA I'd almost suggest a target retirement fund would make managament easier for your stated goals of reducing volatility toward their 18th Birthday. Although that may well derisk too much too quickly given the timescale, just a though off the top of my head which I'm sure someone will be along to out right.

Me pesonally I'd leave it in something simple like Vanguard Global All Cap which is basically large and small companies and globally diversified, maybe with a global bond fund as well to rebalance across into. It also sounds like you might be using Hargreaves Lansdown which if that's the case have pretty high platform charges to eat into returns over the long term.

As for your own S&S ISA the first thing that jumps out to me is some of the charges on the funds which on a de-risked holding seems like it could be a decent chunk of any returns over inflation (Again compounded if using Hargreaves Lansdown). The funds seem like a bit of a shopping basket that's been selected, I don't know enough about each to suggest if it's a cohesive portfoio or not given your long term objectives.

What platform or platforms are your using? Why the preference for active funds over index tracking funds? Essentially I'm looking at charges percentages for the platform and funds combined might be toward the higher end.

Thanks for the reply.

I'm using Bestinvest (0.4%) for the Junior ISA and Cavendish/Fidelity (0.25%) for my own as the platforms. Bestinvest seemed a good choice at the time due the advice they provide, though I'm aware after reading around some more that using them was an error - which is why Cavendish was used later on. I am planning on moving the Bestinvest ISA at the time of rebalancing, I assumed that that was a good time to do it. Account closure is free but it's not clear to me if stock transfers are charged when I looked at a key facts sheet.

So for my own ISA - the weighted average fee is 0.78%. I had a rule that I was not going to choose a fund that has an OCF greater than 1%, and ideally no OCF plus transaction costs at greater than 1% (I broke the latter rule with Stewart Investors Asia Pacific Leaders Fund which has an OCF off 0.88 and transaction costs of 0.13% but only just).

In fairness I did play around with different funds to see the asset mix and geographical exposure before deciding on what to buy. I wanted global exposure, not much duplication of holdings and - although I appreciate that past performance isn't a predictor of future - a decent track record.

Maybe I came to the wrong conclusion, but I found that it was hard to avoid the US being the most heavily weighted geographical area, and if I wanted to jump on the Fundsmith and Linsdell Trains (pardon the pun) then UK exposure was necessary also.

billy2shots · 19 June 2019 at 7:57AM

First off I think you are over complicating things slightly. A few too many funds in my experience and your fees must be pretty high.
Fundsmith and LT have rocketed in past years. Past being the operative word. Past performance is no indicator of future success.

Whilst 8% seems decent, just for comparison my passive tracker has returned me over 13% since January and costs me 0.15 in ongoing fees.

If you haven’t, look on you tube at Lars Krojier. He did a series of short vids about the merits of passive investment. He also wrote a book which goes into greater depth.

I’m not saying you should go passive, just make sure you really understand your decision to hold so many costly active funds.

Linton · 19 June 2019 at 8:24AM

billy2shots wrote: »

First off I think you are over complicating things slightly. A few too many funds in my experience and your fees must be pretty high.
Fundsmith and LT have rocketed in past years. Past being the operative word. Past performance is no indicator of future success.

Whilst 8% seems decent, just for comparison my passive tracker has returned me over 13% since January and costs me 0.15 in ongoing fees.

If you haven’t, look on you tube at Lars Krojier. He did a series of short vids about the merits of passive investment. He also wrote a book which goes into greater depth.

I’m not saying you should go passive, just make sure you really understand your decision to hold so many costly active funds.

I agree the OPs second portfolio is far too complex for a small pot. Just one or two funds is fine. With too many funds when you rebalance you are messing about with very small amounts in £ terms.

The comparison with a portfolio starting in January does not mean anything as there was a 10% fall in world markets during December. A few days difference would give very different results.

MaxiRobriguez · 19 June 2019 at 10:00AM

Still a decent time to buy and 8% not to be sniffed at in six months (although fnar fnar my two purchases in January are up 16% and 18%).

Op is a little bit keen on recent/past performances though. He's unlikely to see 8% growth to end of year and probably needs to realise a growth rate nearer 5% or below is more likely in the current environment. Important to accept, so you don't start changing your strategy because it's not meeting growth levels which weren't going to happen anyway.

Seraphi · 19 June 2019 at 10:46AM

billy2shots wrote: »

First off I think you are over complicating things slightly. A few too many funds in my experience and your fees must be pretty high.
Fundsmith and LT have rocketed in past years. Past being the operative word. Past performance is no indicator of future success.

Whilst 8% seems decent, just for comparison my passive tracker has returned me over 13% since January and costs me 0.15 in ongoing fees.

If you haven’t, look on you tube at Lars Krojier. He did a series of short vids about the merits of passive investment. He also wrote a book which goes into greater depth.

I’m not saying you should go passive, just make sure you really understand your decision to hold so many costly active funds.

Linton wrote: »

I agree the OPs second portfolio is far too complex for a small pot. Just one or two funds is fine. With too many funds when you rebalance you are messing about with very small amounts in £ terms.

The comparison with a portfolio starting in January does not mean anything as there was a 10% fall in world markets during December. A few days difference would give very different results.

Thanks for your advice guys

Billy2shots - I'm aware in the long term passive really do need to enter the mix. As an aside - how does one decide which tracker to use. I mean compare a HSBC FTSE 250 Index to a Vanguard FTSE 250 Index fund - are the essentially the same andI should go for one with the lower charges?

Linton - So I shouldn't be looking to diversify as much with a five-figure sum in my ISA - and essentially do what I'm doing with the junior ISA - at what point do I think about increasing the diversity of funds?

Seraphi · 19 June 2019 at 10:50AM

MaxiRobriguez wrote: »

Still a decent time to buy and 8% not to be sniffed at in six months (although fnar fnar my two purchases in January are up 16% and 18%).

Op is a little bit keen on recent/past performances though. He's unlikely to see 8% growth to end of year and probably needs to realise a growth rate nearer 5% or below is more likely in the current environment. Important to accept, so you don't start changing your strategy because it's not meeting growth levels which weren't going to happen anyway.

My target is 6-7% pa on average. My thinking is that with charges included over a 15 year period I'd end up doubling my initial deposits and stay ahead of inflation. If that's an unreasonable target - or if indeed it's too conservative I'd happily reassess...

billy2shots · 19 June 2019 at 11:03AM

It’s so difficult to have return targets as there are so many variables including risk tolerance (how your cash is invested) current pot value, investing timescale and where we are in the current market cycle.

All things considered, I think 7% average return over the next 15 years given sensible investing is probably at the higher end of doable.
The trouble is that nobody ever knows when the next big drop will come and how long or deep it will be. You could happily invest for 15 years doubling your money and then the day you want to access it, it drops 50%.

All we can do is invest in things and to a risk level that we are comfortable with balancing investments and risk tolerance as time goes on.

I hold a couple on vanguard funds and opted for the HSBC 250 so I must have based that decision on cost.

DairyQueen · 19 June 2019 at 5:05PM

The children' investments.

This resonates with me. I invest similarly with the savings I make on behalf of my two nephews.

I was 100% equities until I recently de-risked down to 60/40 for nephew number 1 (now age 14).

I understand the choice of active management for the small caps. I believe this is one area where a good manager can add real value and the addition of small caps adds diversification to a core fund.

I also believe that you only need one (core, highly diversified, global) fund in order to diversify across a decent spectrum of global markets and companies. However, your choice of LT as this core fund is perplexing.

LT's strategy is to focus on a concentration of large caps. It only holds around 50 shares. All of these are global players and those listed in the UK have benefited from the weak pound. Large caps have performed especially well in recent years. Thus LT's sterling performance (no pun intended). Fundsmith operates a similar strategy.

Brexit may dominate our political lives but it's a pimple on the backside of global market performance - assuming that you have sufficient exposure to the global market.

IMHO you are not sufficiently diversified and Brexit should not be a consideration in your strategy. You have small caps plus some large caps. You are missing the middle bulk.

I add my voice to those who suggest that you pick a different core fund: a highly diversified, low-charge, global tracker would save you the job of rebalancing. The usual culprits: Vanguard, Blackrock, HSBC, L&G, etc. all provide a good selection. Check the regional weightings and pick whichever 100% equity fund fits your regional preference, or which tracks your favoured global index.

I have just switched from VLS 100 to VLS 60 (older child) and from VLS 100 to Vanguard Global All Cap (younger child). I will keep an open mind about de-risking child 2's investment. Having said that, if the markets crunch concurrent with each child's 18th then I have a back-up plan.

These ISAs are held in my father's name as he wasn't using his ISA allowance. If he dies they will transfer to my mother. If she dies then the children's father and I will inherit anyway. IHT isn't an issue.

So, if we are in the midst of a stock market downer on those key birthdays the investments won't be accessed. The children will have to wait until the market recovers. Better a decent sum at, hopefully, 20-something than a much-reduced sum at age 18.

Thrugelmir · 19 June 2019 at 5:21PM

Seraphi wrote: »

I'm doing fine - up 8% since I started in December.

Investments returns need to be measured over the longer term. In a bull market difficult not to watch asset prices (as in collective funds) go up across the board. Real challenge is when markets become more volatile, or simply stagnate. Then far more of a challenge to deliver consistent overall increase in the value of the portfolio.

My target is 6-7% pa on average. My thinking is that with charges included over a 15 year period I'd end up doubling my initial deposits and stay ahead of inflation. If that's an unreasonable target - or if indeed it's too conservative I'd happily reassess...

When you say target? Where do you expect to find investments that are going to deliver this level of return year in year out. Professional fund management teams spend their entire working days analysing company accounts , following on-line news events, talking with company management etc.

Better to focus on saving as much as you change. Then realigning your objectives as time unfolds.

Investing advice and guidance - rebalancing

Comments

Categories

Get our FREE Weekly email full of deals & guides - and it’s spam-free