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Diversification

Including Financial Independence and Retiring Early (FIRE)
NearlyThere
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Diversification

#364501

Postby NearlyThere » December 9th, 2020, 4:54 pm

In a previous post it was pointed out to me that my holding of a single company stock was a risk to my aspiration of early retirement.

It's 10,000 ish shares in a pharma company. My original plan was to continue to enjoy the ~5% dividend as I sold down the holding over the next ~12 years till my state pension kicks in. (and reducing / delaying any DC drawdown)

Now I'm thinking I should diversify this holding ASAP and am wondering what would be the best approach?

I'm thinking:

Gift half the shares to Mrs NT
Each of us transfer £20k worth to two S&S ISA's in this year and next, then diversify into some sort of index tracker inside the ISA.

Repeat in following tax years until all original holding gone.

What / how many issues have I missed with that plan?

Thanks for any words of wisdom!

monabri
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Re: Diversification

#364530

Postby monabri » December 9th, 2020, 6:05 pm

Just a note to say to consider any possible "time" element between selling shares in a Non _ISA and receiving cleared cash that can be transferred into an ISA. It may be a case of selling shares, waiting for the cash to clear (2 days) and then transferring out to your linked bank account (2 days)before paying it into your ISA. You might wish to phase the ISA transfer (£40k in total) over several sells.

stevensfo
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Re: Diversification

#364544

Postby stevensfo » December 9th, 2020, 6:41 pm

I would agree with getting it into ISAs asap. It will make life MUCH easier in years to come and not use up your tax allowance.

Yes, of course you need to diversify, probably looking at ex-UK as well. There are plenty of Investment trusts and ETFs that are giving good yields.

Steve

tjh290633
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Re: Diversification

#364580

Postby tjh290633 » December 9th, 2020, 10:05 pm

NearlyThere wrote:Gift half the shares to Mrs NT
Each of us transfer £20k worth to two S&S ISA's in this year and next, then diversify into some sort of index tracker inside the ISA.

Repeat in following tax years until all original holding gone.

My suggestion would be to choose a selection of Investment Trusts, rather than a tracker.

Take Witan, for example. I bought some for my granddaughter in 2001, on 21st December when the price was 380p. There was a 5 for 1 split in May 2019, and the current price is 215p, equivalent to 1075p or 2.83 times the original price. The FTSE100 index stood at about 5200 at the end of 2001, currently 6575, or 1.26 times the original value. Had you gone for a tracker, you would have foregone a considerable sum. The differential is 2.25 times.

That's just an example, but you could look at other global ITs, like F&C or Alliance, to get the comparison.

TJH

JohnW
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Re: Diversification

#364630

Postby JohnW » December 10th, 2020, 5:01 am

tjh290633 wrote: a selection of Investment Trusts, rather than a tracker.

Take Witan, for example.

Now the problem with anecdotes is.....there's always another anecdote:
'Neil Woodford investors take hefty loss as payouts begin'
https://www.theguardian.com/business/20 ... ss-payouts
But, in the absence of a systematic comparison which attempts to reduce bias, they're all we've got.

Bubblesofearth
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Re: Diversification

#364645

Postby Bubblesofearth » December 10th, 2020, 7:42 am

tjh290633 wrote:My suggestion would be to choose a selection of Investment Trusts, rather than a tracker.

Take Witan, for example. I bought some for my granddaughter in 2001, on 21st December when the price was 380p. There was a 5 for 1 split in May 2019, and the current price is 215p, equivalent to 1075p or 2.83 times the original price. The FTSE100 index stood at about 5200 at the end of 2001, currently 6575, or 1.26 times the original value. Had you gone for a tracker, you would have foregone a considerable sum. The differential is 2.25 times.

That's just an example, but you could look at other global ITs, like F&C or Alliance, to get the comparison.

TJH



Why are you comparing an IT that has less than 20% in the UK with a FTSE 100 tracker?

BoE

Dod101
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Re: Diversification

#364651

Postby Dod101 » December 10th, 2020, 7:56 am

NearlyThere wrote:I'm thinking:

Gift half the shares to Mrs NT
Each of us transfer £20k worth to two S&S ISA's in this year and next, then diversify into some sort of index tracker inside the ISA.

Repeat in following tax years until all original holding gone.

What / how many issues have I missed with that plan?


When you transfer the £20,000 each year into the ISAs you will incur CGT because of course you have to sell outside of the ISA, put the cash raised into the ISA and buy in the ISA. Why not carry out the diversification at that point? So if I were you I would decide my diversification tactics before you do anything, then sell outside of the ISA, transfer the funds into the ISA and buy the new tracker or whatever inside the ISA. Otherwise you will have two lots of fees, well four actually if you count those for your wife as well as yours.

Dod

ReallyVeryFoolish
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Re: Diversification

#364660

Postby ReallyVeryFoolish » December 10th, 2020, 8:33 am

Dod101 wrote:
NearlyThere wrote:I'm thinking:

Gift half the shares to Mrs NT
Each of us transfer £20k worth to two S&S ISA's in this year and next, then diversify into some sort of index tracker inside the ISA.

Repeat in following tax years until all original holding gone.

What / how many issues have I missed with that plan?


When you transfer the £20,000 each year into the ISAs you will incur CGT because of course you have to sell outside of the ISA, put the cash raised into the ISA and buy in the ISA. Why not carry out the diversification at that point? So if I were you I would decide my diversification tactics before you do anything, then sell outside of the ISA, transfer the funds into the ISA and buy the new tracker or whatever inside the ISA. Otherwise you will have two lots of fees, well four actually if you count those for your wife as well as yours.

Dod

Just to point out that often when bed and ISA transactions are made within a retail platform, one side of the transaction is often free of dealing cost. That consideration might be worth taking on board if there's several bed and ISA transactions to make.

RVF

dealtn
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Re: Diversification

#364688

Postby dealtn » December 10th, 2020, 10:06 am

NearlyThere wrote:In a previous post it was pointed out to me that my holding of a single company stock was a risk to my aspiration of early retirement.

It's 10,000 ish shares in a pharma company. My original plan was to continue to enjoy the ~5% dividend as I sold down the holding over the next ~12 years till my state pension kicks in. (and reducing / delaying any DC drawdown)

Now I'm thinking I should diversify this holding ASAP and am wondering what would be the best approach?



The "risk" is what happens to the value of the shares, and could occur at any time. Is it hedgeable either through a market instrument or a spreadbetting platform?

NearlyThere
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Re: Diversification

#364728

Postby NearlyThere » December 10th, 2020, 11:21 am

Dod101 wrote:
When you transfer the £20,000 each year into the ISAs you will incur CGT because of course you have to sell outside of the ISA, put the cash raised into the ISA and buy in the ISA. Why not carry out the diversification at that point? So if I were you I would decide my diversification tactics before you do anything, then sell outside of the ISA, transfer the funds into the ISA and buy the new tracker or whatever inside the ISA. Otherwise you will have two lots of fees, well four actually if you count those for your wife as well as yours.

Dod


I don't think there will be CGT payable as gains in share value are not significant. I get the point on multiple fees, I am looking into "bed & ISA" approach

NearlyThere
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Re: Diversification

#364731

Postby NearlyThere » December 10th, 2020, 11:23 am

dealtn wrote:
The "risk" is what happens to the value of the shares, and could occur at any time. Is it hedgeable either through a market instrument or a spreadbetting platform?


I'm sorry, I don't understand that.

dealtn
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Re: Diversification

#364736

Postby dealtn » December 10th, 2020, 11:32 am

NearlyThere wrote:
dealtn wrote:
The "risk" is what happens to the value of the shares, and could occur at any time. Is it hedgeable either through a market instrument or a spreadbetting platform?


I'm sorry, I don't understand that.


You don't name the company so I don't know the answer.

Say you owned 10,000 shares in GSK. You make money if they go up in price, and lose money if they fall in price. As it is a significant size within your wealth you are at risk if it is the latter. You could sell your shares, but this might incur costs, take time, create tax implications etc. so your risk might fall only slowly, over time, and with costs. Your risk remains during this period.

As an alternative you can "buy" a hedge which is an opposite position with low cost and immediate, where you make money if GSK shares fall in price, which offsets your underlying long position. With a hedge in place this buys you time to deal with above mentioned issues. Such hedges don't exist for every (pharma) company, but do for many of the largest, either as market instruments or as spreadbets with providers.

NearlyThere
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Re: Diversification

#364750

Postby NearlyThere » December 10th, 2020, 11:51 am

dealtn wrote:
You don't name the company so I don't know the answer.

Say you owned 10,000 shares in GSK. You make money if they go up in price, and lose money if they fall in price. As it is a significant size within your wealth you are at risk if it is the latter. You could sell your shares, but this might incur costs, take time, create tax implications etc. so your risk might fall only slowly, over time, and with costs. Your risk remains during this period.

As an alternative you can "buy" a hedge which is an opposite position with low cost and immediate, where you make money if GSK shares fall in price, which offsets your underlying long position. With a hedge in place this buys you time to deal with above mentioned issues. Such hedges don't exist for every (pharma) company, but do for many of the largest, either as market instruments or as spreadbets with providers.


It is GSK shares. I just googled spreadbetting and now have a headache :?

EthicsGradient
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Re: Diversification

#364761

Postby EthicsGradient » December 10th, 2020, 12:40 pm

NearlyThere wrote:
Dod101 wrote:
When you transfer the £20,000 each year into the ISAs you will incur CGT because of course you have to sell outside of the ISA, put the cash raised into the ISA and buy in the ISA. Why not carry out the diversification at that point? So if I were you I would decide my diversification tactics before you do anything, then sell outside of the ISA, transfer the funds into the ISA and buy the new tracker or whatever inside the ISA. Otherwise you will have two lots of fees, well four actually if you count those for your wife as well as yours.

Dod


I don't think there will be CGT payable as gains in share value are not significant. I get the point on multiple fees, I am looking into "bed & ISA" approach

If your plan is to diversify sooner rather than later, I'd think you'd save just by selling outside the ISA, contributing the cash to it, and buying the replacement fund/IT/ETF/whatever inside. That would be one charge for selling, and one for buying; doing it with Bed & ISA would be one at that time, but later followed by a sale charge, and a purchase charge. But if you don't want to replace the pharma shares in this tax year, then Bed & ISA would be the route to go.

chris
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Re: Diversification

#364773

Postby chris » December 10th, 2020, 1:08 pm

It is GSK shares. I just googled spreadbetting and now have a headache :?


It really depends on how worried you are about diversification and that your GSK shares will plummet.

If you are going to need the money soon and really need what they are worth now, then I would investigate spread betting further. However, if you do not want the money in the near future and whilst the concentration in one share is bad, you plan to gradually diversify, then maybe you shouldn't bother so much about spread betting.

The bottom line with the hedging side of things is that if done properly, the value of your holding will not vary from the point at which you start the spread betting. If share price goes down, you will make money on the spread bet and lose money on the value of the shares. If the shares go up, you will make money on the value of the shares but lose it on the spread bet. The only issue here is that you will have to cover the loss on the spread bet with cash and so may have to sell some of the shares to cover it. Over all, you will be slightly worse of as there will be a cost to put this in place, but if the shares were to tank, your current position would be protected.

I think that if I was in your position and was looking long-term, I would take a risk and gradually diversify. However, if it was a different share or my timescale was shorter, then I think I would go for it. It depends on a variety of things, including the capital gain tied up in the shares (which dictates the timescale over which this can be done).

Chris

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Re: Diversification

#364839

Postby Joe45 » December 10th, 2020, 4:16 pm

NearlyThere wrote:
Dod101 wrote:
When you transfer the £20,000 each year into the ISAs you will incur CGT because of course you have to sell outside of the ISA, put the cash raised into the ISA and buy in the ISA. Why not carry out the diversification at that point? So if I were you I would decide my diversification tactics before you do anything, then sell outside of the ISA, transfer the funds into the ISA and buy the new tracker or whatever inside the ISA. Otherwise you will have two lots of fees, well four actually if you count those for your wife as well as yours.

Dod


I don't think there will be CGT payable as gains in share value are not significant. I get the point on multiple fees, I am looking into "bed & ISA" approach

If CGT isn’t an issue why not gift enough shares to your spouse now such that you can then both sell making a gain within your annual CGT allowance of £12,300 each? Use the proceeds to buy an alternative investment to diversify your portfolio. Assuming you’ve used this year’s ISA allowance you could hold back £20k in cash and await the next tax year when you can make use of the next ISA allowance.

You can “transfer” shares for tax purposes by simply declaring that you hold them on trust for your spouse.

tjh290633
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Re: Diversification

#364848

Postby tjh290633 » December 10th, 2020, 4:30 pm

Bubblesofearth wrote:Why are you comparing an IT that has less than 20% in the UK with a FTSE 100 tracker?

BoE

To illustrate that trackers can only follow the market. Also that there are better investments available.

TJH

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Re: Diversification

#364874

Postby Bubblesofearth » December 10th, 2020, 5:37 pm

tjh290633 wrote:
To illustrate that trackers can only follow the market. Also that there are better investments available.

TJH


Your illustration shows that an IT with a Global spread would have beaten a FTSE 100 tracker so you were comparing apples and oranges. It does not demonstrate IT's are better investment vehicles than trackers.

If you want to make a more realistic comparison then you need to select a more realistic benchmark. Maybe a Global tracker? The FTSE has been a pretty poor cousin to most major markets over the past 20 years.

You also need to make sure dividend income is excluded or reinvested for both vehicles.

Making IT vs tracker comparisons is a worthwhile exercise but some care needs to go into selection criteria.

BoE

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Re: Diversification

#364901

Postby hiriskpaul » December 10th, 2020, 7:41 pm

Bubblesofearth wrote:
tjh290633 wrote:
To illustrate that trackers can only follow the market. Also that there are better investments available.

TJH


Your illustration shows that an IT with a Global spread would have beaten a FTSE 100 tracker so you were comparing apples and oranges. It does not demonstrate IT's are better investment vehicles than trackers.

If you want to make a more realistic comparison then you need to select a more realistic benchmark. Maybe a Global tracker? The FTSE has been a pretty poor cousin to most major markets over the past 20 years.

Quite.
You also need to make sure dividend income is excluded or reinvested for both vehicles.

I would say included, otherwise we are back to apples and oranges again.

GBP TR for Witan 19 years to 30/11/2020 327%
GBP TR for MSCI World Index 19 years to 30/11/2020 342%

Even that is not comparing like with like as Witan runs a geared portfolio and the index is not geared, so Witan carries more risk than the market.

There are huge variations in performance between different funds over long periods as well, for example the Scottish IT TR over that period was 202%. Some did better, F&C managed 407%. Virtually all actively managed funds go through prolonged periods of underperformance and anyone picking just one fund runs the risk of getting in at the wrong moment. Fund manager risk can of course be mitigated by diversifying across fund managers, just as unsystematic risk can be mitigated by diversifying across companies.

Anyone needing to draw down heavily from an investment for several years before a pension becomes available should carefully consider the risks they are taking and whether all in equity investments are sensible. Especially those that use gearing.

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Re: Diversification

#364902

Postby JohnB » December 10th, 2020, 7:55 pm

The O/P should gift half the shares to Mrs NT. Each of you then can liquidate as much pharma holding as they can without paying CGT (£12300 allowance on the gains). If this means the sale is less than 4*allowance (£49200) they won't even need to mention it on their tax return. They can each put £20k into an ISA, and £2880 into a SIPP to get the tax relief (more if working). The gain is assessed against when you acquired the asset, not when you transferred it, but at least you get 2 allowances. See https://www.gov.uk/capital-gains-tax/gifts

Gawd knows why people mention active funds when the O/P has decided on trackers.
Last edited by JohnB on December 10th, 2020, 8:01 pm, edited 1 time in total.


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