iambic Portfolio - any thoughts welcome please

[iambic]

After a lot of deliberation about what should make up my & my husband's joint portfolio (both being new to investing), I think we've finally settled on what it should look like. To start with it's mainly trackers but we'd like to start adding Investment Trusts or individual shares down the line to try improve returns, when we feel more comfortable about they work.

I've borrowed heavily from the excellent RetirementInvestingToday blog as well as Monevator, but have made a few tweaks here & there to the below. We haven't got money in all of these yet as we're still building it up (no bonds or property at all yet for instance), but I've unitised what we've invested from the beginning & we're currently at -5.26%. Not great but I'm hoping having poor returns now will help build up our tolerance & stop us panicking when there's a downturn down the line. The plan is to invest for the long term (10+ years) so we don't plan to sell (unless someone here points out a glaring error & we've massively overexposed ourselves somewhere...!)

All the funds are currently (or will be when we buy them) held within ISA wrappers in Vanguard & Fidelity. I've included cash (held in a savings account) & P2P lending just for tidiness so the target percentages add up to 100.

Any thoughts would be appreciated - does this look like a sensible starting point & is it diversified enough do you think?

Many thanks, iambic.

[Backache]

I don't know all of the things you hold such as P2P but much of it looks sensible.

However I do think that some of the holdings are a bit meaningless. I can see the point of gold if you are wanting to rebalance and use it as a diversifier but at 1.5% it doesn't really serves that purpose, the same goes for the very small holdings in Index linked gilts.

I am a fan of Fundsmith and hold a fair bit of it, my own opinion is that if you want an active overlay you should hold more than 4%, or forget about having an active overlay.
I am not quite sure of the point of having a very small holding in an all world fund and two separate and considerably larger holdings in America.
Personally if the holding period is long I would add specific small cap exposure which looks a bit cheaper than large cap and has a good long term record.

Having given some criticisms I think the basic idea appears sound and the main thing with investing is to start and keep going when the going gets rough which it probably will.

[argoal]

I agree with Backache that any conviction type position e.g. Gold, should be at least 5% of the portfolio to make any difference to the performance unless the portfolio has a very large value.

It is a pretty aggressive mix (85% equity - 90% if you include REITS) so large percentage drawdowns are likely at some stage. If you are starting out that might not be an issue but with a large portfolio you could lose the equivalent to 3-4 years salary in a fairly short order. I know that would mess up my head quite a bit so I'd always be more conservative.

You might want to model the selection in Portfolio Charts https://portfoliocharts.com/ to see how it has behaved historically. You won't be able to replicate your portfolio 100% but it would give you something close enough and show you the depth and length of drawdowns, real inflation adjusted returns and range of growth rates. I would also have a look at some of the portfolios there to see if a different asset mix is more suitable to your investment goals, risk tolerance and time horizons.

The great thing about your proposed selection are that the costs are low and the diversification level is high. Those 2 factors alone put you 90% of the way to giving yourself a chance of decent returns.

Investment returns are a bit bumpy out there at the moment so don't beat yourself up about a 5% loss. Lucky timing has more of an influence on investmentperformance than most people give credit for. If you are going to be contributing to the portfolio over many years though, timing luck will tend to even out.

Good luck.

p.s. The P2P stuff should probably be included in the Cash portion of the portfolio.

[kiloran]

I very much agree with Backache on some of the low percentage holdings.

The only reason I would hold such a low percentage of anything is for a small company which might be a ten- or hundred-bagger, but which might just go bust. A bit of fun which might have a massive upside.
For collective investments which might go up or down a bit, but no more, I think such a low percentage is nothing more than a distraction.

--kiloran

[argoal]

I have just modelled your portfolio in Portfolio Charts to see how it has historically performed. The model using a UK perspective is probably more than 95% a match so the read across should be reasonably reliable.

Over a 10 year time frame the inflation adjusted returns (CAGR) range from -1.6% to +13.2% per annum (average 6.5%). Over 15 years the minimum CAGR return is 3% per year. That suggests to me that a 10 year time horizon is probably a bit short for such an aggressive mix.

The deepest drawdown is about 46% in real terms (I suspect in the the 70s) which took 12.5 years to return to the original portfolio value in real terms.

The portfolio lost money in 27% of years. That sounds damning but is pretty normal for any equity heavy portfolio. It is even slightly better than a domestic focused 60/40 portfolio.

[tjh290633]

How long until retirement? To my mind you have far too many holdings there. I don't see the point in that small amount of fixed interest. FCIT, for example, covers many of the fields into which you are trying to diversify, with good geographical spread and some private equity. I would also avoid open-ended funds which hold property direct. They can be hard hit in a downturn.

TJH

[monabri]

I'd recommend spending an hour or two watching some of the ( excellent imho) PensionCraft videos.

https://pensioncraft.com

They discuss Vanguard products in some detail.

So, in 10 years time...what's the plan? Why are you investing..new house, mortgage pay off, retirement planning?

I would suggest steering clear of individual shares unless you want a new hobby and invest in collectives. In a few years you might be looking at investment trusts for income rather than growth ( or a mix of the two) depending on your investment goals. This would be a change in tack from the accumulation funds that you currently hold.

When it comes to holding individual shares...you really need to consider holding an interest in perhaps 15 companies to mitigate against individual failures. Then it's a question of building up a meaningful percentage in each of your selections which will mean a largish outlay...or you could simply buy a basket of shares in an IT or Exchange Traded Fund.....a ready made portfolio.

[TheMotorcycleBoy]

Hi iambic,

Congrats on planning this out so well. This most certainly wasn't what me and Mel did when we started 11 months back; we did things the hard way by jumping in the deep end trying to stock pick and analyse company reports, which was definitely a steep learning curve, and one in which we are still doing much.

As I am new to this too, my advising skills are limited, but I think you probably shouldn't invest in the index/inflation linked bonds, since they are very low returns and your fund-style equity investments give you lots of diversity already. If you want to invest in bonds perhaps just use a higher return mix of corporate bonds fund?

Mel and I when we first started we (also?) tried to "balance" our foli by adding bonds, but due to QE and rising rates, it was probably ill-advised.

we don't plan to sell (unless someone here points out a glaring error & we've massively overexposed ourselves somewhere...!)

My personal view is that you shouldn't sell anything at a loss unless you think it's losing you massive amounts to persist. Just don't top it up. That's Mel and I's take on our 7k or so we originally investing in standalone-bonds, i.e. just leave them there, and over time they will (perhaps - unless bonds become good value again) dwindle in relative proportion to the main-stay equity investments we plan to make as the years go by.

Matt and Mel

[Backache]

How long until retirement? To my mind you have far too many holdings there. I don't see the point in that small amount of fixed interest. FCIT, for example, covers many of the fields into which you are trying to diversify, with good geographical spread and some private equity. I would also avoid open-ended funds which hold property direct. They can be hard hit in a downturn.

TJH

Agree completely about open ended funds holding property directly but I dont think the ones mentioned do , they hold property companies.

[iambic]

Really appreciate all of your responses, they're very helpful. Some questions/comments below - hope responding to them all in one post is readable!

However I do think that some of the holdings are a bit meaningless. I can see the point of gold if you are wanting to rebalance and use it as a diversifier but at 1.5% it doesn't really serves that purpose, the same goes for the very small holdings in Index linked gilts.

I think when I realised how many funds I thought needed to be included, I shrunk the percentages down just so they'd all have some allocation & then got nervous about cutting any out in case I'd missed the key diversifier that I'd need! You make a good point though about small percentage allocations, I'll look at bundling them up into something slightly more substantial.

I am not quite sure of the point of having a very small holding in an all world fund and two separate and considerably larger holdings in America.
Personally if the holding period is long I would add specific small cap exposure which looks a bit cheaper than large cap and has a good long term record.

Do you mean a global small-cap? Vanguard have a fund "Global Small-Cap Index Fund - Acc" which is 61% America but also the rest of the world.

p.s. The P2P stuff should probably be included in the Cash portion of the portfolio.

I originally had P2P in the cash allocation actually, but then thought that it's not as "safe" as cash in that we could lose some our original investment, so thought maybe it fitted better with equities. It does mess up my equities charts though so maybe I should move it back

Over a 10 year time frame the inflation adjusted returns (CAGR) range from -1.6% to +13.2% per annum (average 6.5%). Over 15 years the minimum CAGR return is 3% per year. That suggests to me that a 10 year time horizon is probably a bit short for such an aggressive mix.

Thank you so much for taking the time to do this analysis on our portfolio. I've looked at Portfolio Charts but haven't quite got my head around understanding the data properly so reading this was fascinating (if not a bit scary!) I take it the returns are the figures before inflation?

FCIT, for example, covers many of the fields into which you are trying to diversify

I'm interested in Investment Trusts, but haven't yet figured out how to compare their holdings clearly enough - I'll certainly look into FCIT though, thanks for the recommendation. In your opinion, would just holding FCIT be nearly as diversified as my portfolio, or would this be something to look at holding in addition to other IT's/funds?

I'd recommend spending an hour or two watching some of the ( excellent imho) PensionCraft videos.
...
So, in 10 years time...what's the plan? Why are you investing..new house, mortgage pay off, retirement planning?

Thanks for the PensionCraft link, we'll set aside some time to watch those videos.
Our aim is to build up enough of a pot that we can go part-time (or retire early if possible) or at least have some assets that can generate an income for us outside of our 9-5 jobs. 10 years may be a bit optimistic (really wish we'd started 10 years ago!) but that's the target.

If you want to invest in bonds perhaps just use a higher return mix of corporate bonds fund?

Thanks Matt, tbh I haven't bought any bonds yet as I'm still a bit torn as to what % we should have in them (also I don't fully understand them yet!), but I'll certainly look at corporate bond funds as an alternative.

Lots of food for thought, thanks again iambic

[TheMotorcycleBoy]

If you want to invest in bonds perhaps just use a higher return mix of corporate bonds fund?

Thanks Matt, tbh I haven't bought any bonds yet as I'm still a bit torn as to what % we should have in them (also I don't fully understand them yet!), but I'll certainly look at corporate bond funds as an alternative.

Indeed, your foli doesn't have an explicit corp bond mention. But bear in mind it does state an allocation (the first two constituents) in "gilts". A.k.a. uk government bonds. These are very low risk, and hence very low return fixed-income instruments, i.e. a much safer, and corresponding lower yielding version of a corp bond, if you like.

This is a v. good intro to FI instruments

https://www.amazon.co.uk/Sterling-Bonds ... 0857190423

(I'm sure that a couple of the others on LF will agree with me on this rec.)

Benjamin Graham in "The Intelligent Investor" illustrates the background to equity VS bond investments......basically emphasising an active(ish) investor (well certainly over the decades which BG was around) may consider equity purchase when bonds are pricey, and bond purchase when equity pricey.

Thing is (in my naive newbie view) a lot of those thinkings are harder to apply right now since 1) prevailing interest rates are low 2) the UK government printed a bunch of money (Quantitative easing) at the economy post the credit crunch, and that's made gilts and corp bonds quite pricey.

But anyway, keep on with what you are doing, and gradually learn more about straight equities (and bonds if you like) as time goes by.

Matt

[argoal]

I've looked at Portfolio Charts but haven't quite got my head around understanding the data properly so reading this was fascinating (if not a bit scary!) I take it the returns are the figures before inflation

The figures are inflation adjusted I.e. real returns.

[tjh290633]

FCIT, for example, covers many of the fields into which you are trying to diversify

I'm interested in Investment Trusts, but haven't yet figured out how to compare their holdings clearly enough - I'll certainly look into FCIT though, thanks for the recommendation. In your opinion, would just holding FCIT be nearly as diversified as my portfolio, or would this be something to look at holding in addition to other IT's/funds?

Thyey have a list of holdings as at 30-Nov-2018 at https://www.bmogam.com/fandc-investment ... 301118.pdf, but there are 467 of them. The annual report may make it a bit plainer, see https://www.bmogam.com/fandc-investment ... t-2017.pdf

I think that FCIT would give you a lot of coverage. The choice is yours, of course.

TJH

[iambic]

Thyey have a list of holdings as at 30-Nov-2018 at https://www.bmogam.com/fandc-investment ... 301118.pdf, but there are 467 of them. The annual report may make it a bit plainer, see https://www.bmogam.com/fandc-investment ... t-2017.pdf

I think that FCIT would give you a lot of coverage. The choice is yours, of course.

Many thanks for those links, I'm looking forward to doing some research.

[Backache]

I think when I realised how many funds I thought needed to be included, I shrunk the percentages down just so they'd all have some allocation & then got nervous about cutting any out in case I'd missed the key diversifier that I'd need! You make a good point though about small percentage allocations, I'll look at bundling them up into something slightly more substantial.

I really would bundle them up into something larger , unless you have a very substantial portfolio transaction costs on small holdings tend to be disproportionately large and you gain nothing in terms of diversification from very small holdings. Unless you are talking about individual shares I am not sure that anything under about 5% offers very much as a diversifier.

Do you mean a global small-cap? Vanguard have a fund "Global Small-Cap Index Fund - Acc" which is 61% America but also the rest of the world.

I wasn't referring to any particular small cap methodology but historically over the long term small cap has tended to outperform large cap over prolonged time periods all be it at the cost of greater volatility though as they don't always move in step with large cap offerings they may reduce the volatility of the portfolio.
The Vanguard global small cap fund may be a good choice(the 61% is North America 58% is USA and 3% Canada).

Investment trusts are often a good way of accessing small caps as they can often be had at considerable discounts when small caps are out of favour though IT's tend to be more country and region specific rather than global, maybe something to look at at a later stage rather than now when you are starting the portfolio.

[iambic]

I really would bundle them up into something larger , unless you have a very substantial portfolio transaction costs on small holdings tend to be disproportionately large and you gain nothing in terms of diversification from very small holdings. Unless you are talking about individual shares I am not sure that anything under about 5% offers very much as a diversifier.

Thank you for the advice, I hadn’t thought about the smallest holdings in terms of relative transaction costs & your comments makes a lot of sense. Having fewer holdings to worry about will be easier to manage I should think (not to mention simpler to understand).

I wasn't referring to any particular small cap methodology but historically over the long term small cap has tended to outperform large cap over prolonged time periods all be it at the cost of greater volatility though as they don't always move in step with large cap offerings they may reduce the volatility of the portfolio.
The Vanguard global small cap fund may be a good choice(the 61% is North America 58% is USA and 3% Canada).

That’s interesting about the effect small cap holdings can have & I’ll certainly look at including some (in place of something else in our portfolio, rather than in addition to it).

Investment trusts are often a good way of accessing small caps as they can often be had at considerable discounts when small caps are out of favour though IT's tend to be more country and region specific rather than global, maybe something to look at at a later stage rather than now when you are starting the portfolio.

I’d like to include some IT’s at some point, but am planning to build up a “core” holding of funds first while I’m still so new to investing, then look to add some IT’s later. Understanding the key areas that are important to analyse when considering a new fund/IT etc. is still something I’m figuring out - it’s great having a forum like this to ask questions of so many knowledgeable & helpful people. Often I don’t really know the questions that I should be asking, never mind where to look for answers!

Cheers, iambic.

[iambic]

Don’t sweat the minutiae: Your plan looks way too complicated to me: if I was starting out I would buy a LifeStrategy fund at your desired bond allocation, and supplement with a gold ETF plus as much real gold as you think you need to trade for beads and dog food with Mad Max types. (opinions vary wildly on this).

I did wonder if I'd overcomplicated things slightly & after reading all the comments on here I think it's sensible to simplify it somewhat. I've looked at the LifeStrategy options previously & they probably would be a more straightforward option but I was keen to get a bit more involved in developing our portfolio, in order to get a better general understanding of investing & how the markets work etc.

I quite like the thought of having some gold bars stashed in a vault & if it can be traded for meat, our dog would be hugely supportive of that investment decision

[xxd09]

Too complicated and therefore probably expensive
As an old retired investor (73) I would advise parking your money inside a LifeStrategy Fund- (Vanguard) -use an Asset Allocation of your choice ie if young incline to 80/20 .If old like me and satisfactory amounts of money made -then 40/60
Use ISAs and SIPPs -taxfree wrappers
Then pursue your interest in managing/investing money in education-take a year or two-read books and blogs
Not advisable to learn via your Portfolio -could be an expensive way to discover how much you need know!
Start to tweak when you have more knowledge
You might even leave things as they are ie a Life Strategy Fund to the finish-changing assetallocations as you get older
xxd09

[Backache]

Too complicated and therefore probably expensive
As an old retired investor (73) I would advise parking your money inside a LifeStrategy Fund- (Vanguard) -use an Asset Allocation of your choice ie if young incline to 80/20 .If old like me and satisfactory amounts of money made -then 40/60
Use ISAs and SIPPs -taxfree wrappers
Then pursue your interest in managing/investing money in education-take a year or two-read books and blogs
Not advisable to learn via your Portfolio -could be an expensive way to discover how much you need know!
Start to tweak when you have more knowledge
You might even leave things as they are ie a Life Strategy Fund to the finish-changing assetallocations as you get older
xxd09

I don't completely agree with this though some of the points are fair.
It probably has too many holdings particularly small ones. I agree. I also agree that life strategy products are very good and have suggested them to a lot of my family who have little interest in investment but want to build their savings.
However the best time to make mistakes which everyone does is early on, as that is when there is least money at risk unless you are investing a large inheritance and the best way of learning is through doing, With their constant rebalancing you cannot really see how different markets can behave with life strategy products.
The actual balance of the equity portion is only slightly different to the equity portion of the life strategy funds though with less home bias and more far east exposure the outcome is likely to be only a little different but with the advantage that you can actually see how the different bits of your portfolio behave.
I agree simplification would help but if someone want s to take an interest in building a portfolio having a few different parts to it aids learning.

[Hariseldon58]

The danger of "learning about the market" is the idea that the individual will 'learn' and achieve an edge on the market.

There is a real danger of a 'little knowledge is a dangerous thing', investing is interesting for a small number of people, many of whom frequent boards like this. Hard work, study and experience in investing unlike most subjects is often not marked by superior results !

(I include myself), we can easily deceive ourselves as to our ability to gain superior results, past achievements may well just be luck.

LifeStartegy or a simple two or three fund mix of an All World index, bond index and perhaps a UK index for some home bias would probably be just great with occasional rebalancing as a long term investing strategy that will beat most investors.