The Lemon Fool

My HYP, like many peoples, is currently down in capital value by about 15% from April 2019 and dividends are slashed. I am not massively keen on adding to the HYP as I see little positive news for the typical HYP shares.

I was pondering where I would invest a lump sum of £100,000 for 5 years for capital growth? No immediate income is required and it can be left untouched for 5 years, possibly more.

My first thoughts are:
Vanguard LifeStrategy 80%
World Tracker e.g. VWRL
S&P500 tracker
Vanguard Targeted Retirement Pension fund for 2030 (this fund moves progressively into bonds)
Government bonds
FTSE100 tracker
ITs Basket of Seven or ITs Basket of Eight: as both of these offer income and growth
HYP shares

Or a combination of the above.

Which has the best for potential growth? Any suggestions?

veeCodger1 wrote:Which has the best for potential growth?

It seems more complicated than that. Would you really make a choice without considering the risks involved?
Someone could reasonably suggest Apple or Afterpay, but would you settle for just one of those?
How 'possibly more' than 5 years could it be left? Because 5 years is a bit marginal for taking a lot of risk with equities; they can do bad things to your capital over 5 years which wouldn't be as surprising as if it occurred after 10 years.

JohnW wrote:

veeCodger1 wrote:Which has the best for potential growth?

It seems more complicated than that. Would you really make a choice without considering the risks involved?
Someone could reasonably suggest Apple or Afterpay, but would you settle for just one of those?
How 'possibly more' than 5 years could it be left? Because 5 years is a bit marginal for taking a lot of risk with equities; they can do bad things to your capital over 5 years which wouldn't be as surprising as if it occurred after 10 years.

Exactly. To ask for growth, without giving the level of risk that one is willing to take is only giving half of the equation, which means no-one can offer much in the way of meaningful input.

regards, dspp

JohnW wrote:

veeCodger1 wrote:Which has the best for potential growth?

It seems more complicated than that. Would you really make a choice without considering the risks involved?
Someone could reasonably suggest Apple or Afterpay, but would you settle for just one of those?
How 'possibly more' than 5 years could it be left? Because 5 years is a bit marginal for taking a lot of risk with equities; they can do bad things to your capital over 5 years which wouldn't be as surprising as if it occurred after 10 years.

How 'possibly more' than 5 years could it be left?

The initial sum could be left for between 5 and 10 years. I would favour funds or 'groups of shares' e.g. tracker or managed fund, as I understand this
spreads the risk.

dspp wrote:

JohnW wrote:

veeCodger1 wrote:Which has the best for potential growth?

It seems more complicated than that. Would you really make a choice without considering the risks involved?
Someone could reasonably suggest Apple or Afterpay, but would you settle for just one of those?
How 'possibly more' than 5 years could it be left? Because 5 years is a bit marginal for taking a lot of risk with equities; they can do bad things to your capital over 5 years which wouldn't be as surprising as if it occurred after 10 years.

Exactly. To ask for growth, without giving the level of risk that one is willing to take is only giving half of the equation, which means no-one can offer much in the way of meaningful input.

regards, dspp

"...without giving the level of risk..."

I do not fully understand the 'level of risk'. The intent is to have more money after 5 years than what I start with. My understanding is that the level of risk is dependent on many factors e.g. in the last 6 months government bonds (low risk) will have beaten many managed funds (CTY.L).

Of course, no one can accurately predict the future economy but given what we currently know, I am questioning where to place this £100k.

veeCodger1 wrote:I do not fully understand the 'level of risk'. The intent is to have more money after 5 years than what I start with.

That may be your intent, but how comfortable are you with losing any of it, and indeed how much of it? That will have a bearing on what others might recommend and expose you to.

veeCodger1 wrote:

dspp wrote:

JohnW wrote:It seems more complicated than that. Would you really make a choice without considering the risks involved?
Someone could reasonably suggest Apple or Afterpay, but would you settle for just one of those?
How 'possibly more' than 5 years could it be left? Because 5 years is a bit marginal for taking a lot of risk with equities; they can do bad things to your capital over 5 years which wouldn't be as surprising as if it occurred after 10 years.

Exactly. To ask for growth, without giving the level of risk that one is willing to take is only giving half of the equation, which means no-one can offer much in the way of meaningful input.

regards, dspp

"...without giving the level of risk..."

I do not fully understand the 'level of risk'. The intent is to have more money after 5 years than what I start with. My understanding is that the level of risk is dependent on many factors e.g. in the last 6 months government bonds (low risk) will have beaten many managed funds (CTY.L).

Of course, no one can accurately predict the future economy but given what we currently know, I am questioning where to place this £100k.

There is a concept known as the efficient frontier which is part of portfolio theory. For any given level of risk that you are prepared to take you can construct many different sets of investments (i.e. portfolios). Some of these will add risk without adding corresponding reward, and those are sub-optimal. If we graph them they fall below the line. There is nothing above the line that forms the efficient frontier because we cannot find an investment that will improve a portfolio with the corresponding level of risk.

Here is a image of this. This image is labelled as allowing "Labelled for non-commercial reuse with modification" which is why I have used it, and I have updated it to give the source inside the image (https://www.engineeryourfinances.com/mo ... io-theory/).



In general terms the portfolios down in the bottom left tend to be more bond-heavy and the portfolios in the top right tend to be more equity heavy, or to involve other asset classes or strategies. Most investors are of course well into sub-optimal portfolio territory (ever bought a car ?).

An important feature to note is that in most 'real' graphs of these efficient frontiers, such as this one (https://ikeikokwu.com/2012/04/09/the-ef ... -frontier/) which I cannot post for copyright reasons the efficient frontier curves back on itself at the bottom left. What that ordinarily indicates is that a 100% bonds portfolio is worse than a portfolio that mixes some bonds and some equity. Therefore investing in pure bonds may not be the best solution.

One can go further and point out that at the moment it is possible to buy a pure bond portfolio that would guarantue value destruction, i.e. things like negative yielding German bonds (https://www.reuters.com/article/us-germ ... SKBN1WX0JN).

Anyway, to go back to the original point, you need to be clear about the level of risk you are prepared to accept before anyone can properly attempt to answer what might constitute an ideal (optimum) portfolio for you that would be at the efficient frontier.

regards, dspp

if you are after growth why do you have so many vanguard trackers wouldn't a couple of actives do the job for you instead?

NoBidNoOffer wrote:if you are after growth why do you have so many vanguard trackers wouldn't a couple of actives do the job for you instead?

I think it's because no reader can know as well as the writer how comfortable he is about trading off growth for risk.
If he's very risk averse a savings account paying more than zero interest will meet his stated objective; of all his choices it perhaps has the most certain potential for growth. But of course the others will probably grow more, and a savings account growth would be negative in inflation adjusted terms most likely.
With that in mind, I'd suggest any of his choices would be suitable, some more risky than others and some with a bit of uncompensated risk. There's a view that the broader the diversification the less risk without reducing return, which would put a global tracker ahead of a SP500 tracker and the last three on the list.
I can see the benefit of the target date fund.
A real life efficient frontier graph is tempting to look at, but remember: stock and bond returns vary from year to year, so a graph reflecting the last ten years of returns (and their variation) which shows where the sweet point was for balancing risk and return might be shaped very differently when charting the returns for the next ten years.

veeCodger1 wrote:best for potential growth?

Your very conservative suggestions are surely worst for potential growth! Obviously better would be, for example, an investment managed with some conviction, like SMT, that has now done most of the work of dragging the capital value of my SIPP up to above where it was six months ago.

Better still, identify an individual share that's going to grow. Or one that's been severely hammered by lockdown but will recover. No crystal ball? That's why growth tends to go with risk!

Talking of which, the very best prospect for growth would of course be to invest it in a startup we've never heard of but that's on track to become a next generation Google or Amazon. Sadly you're most unlikely to find that in Blighty.

JohnW wrote:

NoBidNoOffer wrote:if you are after growth why do you have so many vanguard trackers wouldn't a couple of actives do the job for you instead?

I think it's because no reader can know as well as the writer how comfortable he is about trading off growth for risk.
If he's very risk averse a savings account paying more than zero interest will meet his stated objective; of all his choices it perhaps has the most certain potential for growth. But of course the others will probably grow more, and a savings account growth would be negative in inflation adjusted terms most likely.
With that in mind, I'd suggest any of his choices would be suitable, some more risky than others and some with a bit of uncompensated risk. There's a view that the broader the diversification the less risk without reducing return, which would put a global tracker ahead of a SP500 tracker and the last three on the list.
I can see the benefit of the target date fund.
A real life efficient frontier graph is tempting to look at, but remember: stock and bond returns vary from year to year, so a graph reflecting the last ten years of returns (and their variation) which shows where the sweet point was for balancing risk and return might be shaped very differently when charting the returns for the next ten years.

Nonetheless if the original poster is minded towards a higher level of risk then the Vanguard LifeStrategy 80% might be appropriate, whereas if they are minded towards lower risk then the Vanguard Targeted Retirement Pension fund for 2030 might be more appropriate - without looking into the details I suspect it will be quite bond-heavy even at the outset given the 10yr horizon.

Some of the others appear to me to be different wrappings on much the same contents, without necessarily adding any extra value, but greater costs and/or risks.

regards, dspp

veeCodger1 wrote:I was pondering where I would invest a lump sum of £100,000 for 5 years for capital growth? No immediate income is required and it can be left untouched for 5 years, possibly more.

Which has the best for potential growth? Any suggestions?

There is a major unstated part of the question that makes this very difficult to answer.

Is the requirement:
a) invest sum for 5 years, then access it all for a major purchase (house move etc)?
b) invest + leave untouched for 5 years, then start taking an income?

If it is a), then equities are probably too risky over a 5 year horizon. Non trivial risk of capital loss when you want to access the money.

If b), then what you would need to do is to de-risk the portfolio by holding a cash reserve to cover a couple of years income. The remainder can be invested, and if the market is down in 5 years time, you just start consuming to cash reserve to allow the remainder of the portfolio to recover.

If you wanted to take £5k/year income, growing with inflation, starting in about 5 years time, then £10k cash reserve + £90k in a diversified equity portfolio is looking more reasonable. £30k in a 15 stock HYP, £30k in say 5 global income ITs, and £30k in say 5 global growth ITs might be a suitable starting point for consideration.

TUK020 wrote:If you wanted to take £5k/year income, growing with inflation, starting in about 5 years time, then £10k cash reserve + £90k in a diversified equity portfolio is looking more reasonable. £30k in a 15 stock HYP, £30k in say 5 global income ITs, and £30k in say 5 global growth ITs might be a suitable starting point for consideration.

The OP has already specifically said "I am not massively keen on adding to the HYP as I see little positive news for the typical HYP shares." so I don't think your response would work for him.

dealtn wrote:

TUK020 wrote:If you wanted to take £5k/year income, growing with inflation, starting in about 5 years time, then £10k cash reserve + £90k in a diversified equity portfolio is looking more reasonable. £30k in a 15 stock HYP, £30k in say 5 global income ITs, and £30k in say 5 global growth ITs might be a suitable starting point for consideration.

The OP has already specifically said "I am not massively keen on adding to the HYP as I see little positive news for the typical HYP shares." so I don't think your response would work for him.

good point, then the IT part of the suggestion stands

TUK020 wrote:Is the requirement:
a) invest sum for 5 years, then access it all for a major purchase (house move etc)?
b) invest + leave untouched for 5 years, then start taking an income?

If it is a), then equities are probably too risky over a 5 year horizon. Non trivial risk of capital loss when you want to access the money.

If b), then what you would need to do is to de-risk the portfolio by holding a cash reserve to cover a couple of years income. The remainder can be invested, and if the market is down in 5 years time, you just start consuming to cash reserve to allow the remainder of the portfolio to recover.

It strikes me that, if the answer is (b), then the five years could usefully be spent accumulating dividends in order to build up the cash reserve, assuming that it does not already exist. What is not needed for that purpose can be reinvested to boost the anticipated income.

TJH

If you've got the cajones for it then perhaps a farm bet on the tech industry e.g. 50% in Polar Capital Technology, 50% in Allianz Technology Trust.

If not then a simple, cheap world tracker like VWRl or HMWO. Personally I think active funds in the present climate have no better forward vision than enthusiastic amateurs do so I'd not been on keen on paying the premium over a tracker

80/20 stock fund/gold, non rebalanced (just let it ride), but reserving the optionality to 'rebalance' (revise) if deemed appropriate. Sequence of returns risk is greater in earlier years (such as stocks diving in the first few years after having bought in).

Either stocks do well and the gold allocation becomes increasing lighter as a percentage of the whole, or that 'insurance' pays off, maybe stocks lose 33%, gold gains 33% and a 80/20 initial would have the available gold being able to expand the number of stocks shares being held whilst the portfolio value might be down -20% instead of -33%. For the former, the cost of that early years insurance tends to dilute down over time, perhaps inducing a 0.5%/year lower reward as per this example Or under other circumstances it could look like this outcome.

1nvest wrote:80/20 stock fund/gold, non rebalanced (just let it ride), but reserving the optionality to 'rebalance' (revise) if deemed appropriate. Sequence of returns risk is greater in earlier years (such as stocks diving in the first few years after having bought in).

Either stocks do well and the gold allocation becomes increasing lighter as a percentage of the whole, or that 'insurance' pays off, maybe stocks lose 33%, gold gains 33% and a 80/20 initial would have the available gold being able to expand the number of stocks shares being held whilst the portfolio value might be down -20% instead of -33%. For the former, the cost of that early years insurance tends to dilute down over time, perhaps inducing a 0.5%/year lower reward

Using a yearly review approach, and if the value of held gold had risen to being greater than 50% of the total portfolio value at that review date, then selling the gold to buy more stock shares ...



indicates a 0.25% average lagging of just pure 100% all-in from the offset (buy and hold (B/H)).

There were only four start years between 1972 - 2018 inclusive (measured to end of 2019) where such a 'rebalance' event occurred.

80/20 B/H
Mean 10.1% 10.3%
Median 9.9% 10.2%
Stdev 1.6% 2.0%
Min 7.6% 6.1%
Max 14.5% 14.9%

veeCodger1 wrote:Vanguard LifeStrategy 80%
World Tracker e.g. VWRL

Vanguard Targeted Retirement Pension fund for 2030 (this fund moves progressively into bonds)

FTSE100 tracker

Last time I looked, targeted retirement essentially moved you between different LifeStrategy produts to achieve the increasing bond count. You might as well do that under your own control?

I'd rather not have the UK bias of Lifestrategy, so if you feel you want an 80/20 portfolio, I'd buy 80% VWRL and 20% bonds.

I'd prefer VWRL to a FTSE 100 tracker - for a 5+ year horizon, the FTSE feels a bit ex growth, although the numerous oil stocks etc might recover somewhat.

Has no-one mentioned Fundsmith or LT Global as options for capital growth over a 5+ year time horizon?

Thank you for your feedback. Having read the comments, I have decided to invest the money equally in the following 7 areas:
Baillie Gifford US Growth Trust
Fundsmith
iShares Edge IV World Momentum Factor UCITS
Blue Whale Growth
Lindsell Train UK Equity
S&P 500 Index
FTSE All-World UCITS ETF (USD) Distributing – GBP

Historically, a simple “total return” approach e.g. World Tracker VWRL or SP500 tracker, with annual drawdown, would have previously ‘outperformed my HYP’. I suspect going forward this may also be the case.
Many “dividend hero” ITs, in capitals terms, have been hit hard e.g. CTY down 17% but off course the dividend currently remains in place.

I am tempted towards selling some HYP shares and putting these into high yield ITs, growth ITs and global trackers. My limited knowledge on these matters is that a world tracker, over many years, will tend to beat most managed funds. Hence, I think most of my investments will head towards a world tracker (may some government bonds although I am not decided on that) with an annual sell down at retirement e.g. 4%.


VC