Late developer ..... (UK)

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Plantagenet
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Late developer ..... (UK)

Post by Plantagenet » Sat May 25, 2019 9:35 am

Hello Everyone,

I hope you are all happy and well.
I'm new to the forum and to also pretty much at the beginning of my own investment journey (although admittedly late at age 49) :oops:

After much research and deliberation, I have opted to take the passive approach to investing and have constructed a two fund portfolio as detailed below. My current financial situation is as follows:

Emergency funds : Equal to 6 months salary
Debt : Mortgage only / £58,000 at a percentage rate of 2.49%
Marital Status : Married
Tax rate: 20%
Country: UK
Age: 49
Size of Portfolio: £55,000
Monthly contributions: £875 after tax relief
Desired Asset Allocation: Unsure- Currently structured 80% Equity/20% Bonds
Current funds: Vanguard FTSE Global All Cap Index fund (OCF 0.24%) / Vanguard Global Bond Index Fund - Hedged GBP (OCF 0.15%)
Vehicle: UK SIPP or Self Invested Personal Pension (20% tax relief)


I would be grateful for any advise that anyone has to offer.
Thank you in advance

Plantagenet
Last edited by Plantagenet on Sat May 25, 2019 10:08 am, edited 2 times in total.

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Re: Late developer ..... [UK]

Post by LadyGeek » Sat May 25, 2019 9:53 am

Welcome! I have moved your post to the Non-US Investing forum and have added your home country to the thread title.

I don't have the experience to answer your questions, but the wiki has some helpful background information:

- UK investing
- Personal Pensions
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Topic Author
Plantagenet
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Re: Late developer ..... (UK)

Post by Plantagenet » Sat May 25, 2019 10:12 am

Thank you LadyGeek, much appreciated :D

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Re: Late developer ..... [UK]

Post by Valuethinker » Sat May 25, 2019 10:19 am

Plantagenet wrote:
Sat May 25, 2019 9:35 am
Hello Everyone,

I hope you are all happy and well.
I'm new to the forum and to also pretty much at the beginning of my own investment journey (although admittedly late at age 49) :oops:
Welcome to the Forum. Better to start now than in 5 or 10 years!
After much research and deliberation, I have opted to take the passive approach to investing and have constructed a two fund portfolio as detailed below. My current financial situation is as follows:

Emergency funds : Equal to 6 months salary
Debt : Mortgage only / £58,000 at a percentage rate of 2.49%
Marital Status : Married
Tax rate: 20%
Country: UK
Age: 49
Size of Portfolio: £55,000
Desired Asset Allocation: Unsure (currently structured 80% Equity/20% Bonds)
I do not, inherently, see anything wrong with the above.

You do not mention your spouse's financial position (pension, etc.) which will be relevant to your calculations.

Your state pension will start at 67, from memory.

Do you have any Defined Benefit (Final Salary or Career Average Salary) benefits accrued?

Does your employer match your SIPP contributions? The usual (4% now I think is required, statutory?) match?

There is a difficult tradeoff, particularly at the Basic Rate tax level, of SIPP v. ISA.

Advantages of SIPP

- additional tax relief - that compounding of gross money rather than net is, in effect, an interest free loan from the government to you
- "locked in" until age 55, which protects against the very human tendency to raid one's savings for immediate needs
- 25% tax free lump sum on withdrawal (although I expect that to get limited or abolished - it's too tempting for a Chancellor as a revenue source, just as freeing pensions from the annuity requirement was a significant increase in the long run to taxes)

Disadvantages of SIPP

- potentially higher rate of tax. Capital gains in the SIPP are then taxed at income tax rates on withdrawals
- potentially higher platform costs
- inflexible in terms of withdrawals and complex interactions with tax position etc.
- £1m (+ inflation) lifetime limit

Advantages of ISA
- fully protected from tax once inside the ISA - note that with a spouse one can manage £40k pa of contributions
- complete control over when to withdraw/ how much

Disadvantages
- net contribution not gross

When in doubt, and assuming you have all your employer match on your SIPP (if any), I would tend to lean 50/ 50 in contributions or perhaps 2/3rds SIPP, 1/3rd ISA
Current funds: Vanguard FTSE Global All Cap Index fund (OCF 0.24%) / Vanguard Global Bond Index Fund (OCF 0.15%)

Vehicle: UK SIPP or Self Invested Personal Pension (20% tax relief)


I would be grateful for any advise that anyone has to offer.
Thank you in advance

Plantagenet
Depending upon the fund platform fees (since VG UK does not do SIPPs as yet, but promise to enter the market) these 2 funds look eminently sensible. On £100k 0.1% is £100 p.a. so once one gets fees down as low as you have there, it's beginning to get academic. What you want is a quality provider with a long track record, and sufficient fund size that they do not close it down.

The funds themselves look perfectly fine.

On the split, 20% is "a little low" in bonds for someone of your age. But given you are in a "catch up" phase, you probably have to take more risk. If you count your emergency funds in your asset allocation then you have more fixed income assets than you might think.

I would consider aiming to 75% / 25% but, in truth, there is not much in it. Your global bond fund is likely to return 1-2% p.a., sterling hedged (might be 2-3%) and I am assuming, without checking, that that fund hedges into sterling.

Conversely your equity fund (which I am assuming, does not hedge currency exposure into GBP sterling) is absolutely what you should be investing in. Global spread of investments. It will be a volatile ride, but in the long run a good one. In addition, as the political situation deteriorates (at least for the moment) you can enjoy watching your fund go up in value in GBP terms (due to a falling GBP).
Last edited by Valuethinker on Sat May 25, 2019 12:13 pm, edited 1 time in total.

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Plantagenet
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Re: Late developer ..... (UK)

Post by Plantagenet » Sat May 25, 2019 11:08 am

Hi Valuethinker,

Thank you for your reply and the warm welcome ....

My wife and I are both self employed so no defined benefits or employer contributions.
Unfortunately my wife has a very small pension pot and is not in a position to add any further contributions at present.

I am currently using BestInvest as my SIPP provider, however they have recently introduced an additional admin fee of £120 p.a. Which is obviously prohibitive.
As a result I am waiting on Vanguard releasing details of there much anticipated SIPP before comparing all available platforms with a view to switching providers.

When I do this, should I move funds in specie or convert to cash ?

I have voted for the Global All Cap Index Fund as it incorporates small cap and emerging markets and a global bond fund rather than gilts as the volatility seems much lower.Your assumption is correct that the Global
index Fund does indeed hedge to sterling.

Your take on an ISA/SIPP split is interesting,
I do have a relatively small ISA of £2k which consists of Lifestrategy 80% Equity, but am unsure how the UK tilt of approx 24% will pan out on this over the next 5-10 years.
What are your thoughts on this?
Should I keep this as a hedge?
Or use the same funds as I have in the SIPP?

Also, as a side note, I am have been collecting gold coins (CGT exempt only) for the last 10-15 years. This is more of a hobby than an investment, however should I include this along with my fixed income ?


Thank you
Plantagenet

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Re: Late developer ..... (UK)

Post by LadyGeek » Sat May 25, 2019 11:22 am

Plantagenet wrote:
Sat May 25, 2019 11:08 am
Also, as a side note, I am have been collecting gold coins (CGT exempt only) for the last 10-15 years. This is more of a hobby than an investment, however should I include this along with my fixed income ?
I'm a US resident and do not have experience with UK investments. However, you have a common question.

Consider what would happen if your coin collection was stolen or destroyed in a fire. Unless you have insurance, the value will be 0. For this reason, I would not include it with your fixed income.
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Re: Late developer ..... (UK)

Post by Jags4186 » Sat May 25, 2019 11:31 am

Plantagenet wrote:
Sat May 25, 2019 11:08 am

Also, as a side note, I am have been collecting gold coins (CGT exempt only) for the last 10-15 years. This is more of a hobby than an investment, however should I include this along with my fixed income ?
As Lady Geek mentioned, there are definitely cons of holding physical gold. My other concern with your statement is that you’ve been “collecting” as a “hobby”. That to me says you’ve been buying coins not only for their weight in gold but for their rarity or design. This may mean you’ve been vastly overpaying or underpaying for these coins. Do you know your cost basis on these coins and their current market value based on the amount of gold contained in these coins?

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Re: Late developer ..... (UK)

Post by Valuethinker » Sat May 25, 2019 12:11 pm

Plantagenet wrote:
Sat May 25, 2019 11:08 am
Hi Valuethinker,

Thank you for your reply and the warm welcome ....

My wife and I are both self employed so no defined benefits or employer contributions.
Unfortunately my wife has a very small pension pot and is not in a position to add any further contributions at present.
I am currently using BestInvest as my SIPP provider, however they have recently introduced an additional admin fee of £120 p.a. Which is obviously prohibitive.
As a result I am waiting on Vanguard releasing details of there much anticipated SIPP before comparing all available platforms with a view to switching providers.

When I do this, should I move funds in specie or convert to cash ?
That is a question that Ted Swippet could answer (all his posts here are worth a read). When I moved to Vanguard for ISA, I sold the L&G funds I had- they did that as part of the transfer.
I have voted for the Global All Cap Index Fund as it incorporates small cap and emerging markets and a global bond fund rather than gilts as the volatility seems much lower.Your assumption is correct that the Global
index Fund does indeed hedge to sterling.
To be clear - Global index fund hedges to sterling. Meaning Global Bond Index Fund? But not the All Cap Index Fund?
Your take on an ISA/SIPP split is interesting,
I do have a relatively small ISA of £2k which consists of Lifestrategy 80% Equity, but am unsure how the UK tilt of approx 24% will pan out on this over the next 5-10 years.
What are your thoughts on this?
It won't harm you. In that the FTSE 100 is dominated by large international companies like HSBC Diageo and Shell (over 10% of the index in Shell alone). Thus, when GBP falls, FTSE100 (and the broader All-Share index which includes FTSE100) rises.

FTSE has of course not done as well as US index (nothing has). So it's been a drag on returns. Will that continue? Who knows.

You should include your ISA in your asset allocation calculation. I tend to hold all my equities in my ISAs, and all my bonds (plus some equities) in my pension.

However that is not so much an issue for you. You will not hit the lifetime limit (it was insensitive of me to mention it, and I am going to delete that - my apologies)
Should I keep this as a hedge?
Or use the same funds as I have in the SIPP?
It would be better to align the two (same funds) if you can. Or hold the equities in the ISA (should have higher returns and you won't pay tax when you take the money out) and slightly more bonds in the SIPP.
Also, as a side note, I am have been collecting gold coins (CGT exempt only) for the last 10-15 years. This is more of a hobby than an investment, however should I include this along with my fixed income ?


Thank you
Plantagenet
I did not realize they were CGT exempt!

I don't think you can count these as "fixed income". There's no guarantee of a positive return. I would put them into the "Alternative Asset" bucket- and would want to keep it 5% or less of current portfolio.

Topic Author
Plantagenet
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Re: Late developer ..... (UK)

Post by Plantagenet » Sat May 25, 2019 12:26 pm

It seems as if I have sparked some controversy...

LadyGeek,

Thanks for the reply,
I have relevant insurance cover for all coins.
It is also stored in a fire proof safe.

Jags4186

Thank you also.
I have enjoyed an increase in value of these over the time period, some of which have appreciated in value by more than 300%.

There is a premium or intrinsic value over the
actual gold content, however, as the mintages are low there is often a waiting list for these and they sell out very quickly.

As a result they appear in the secondary market within days selling for 20-30% more than issue price.

Topic Author
Plantagenet
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Re: Late developer ..... (UK)

Post by Plantagenet » Sat May 25, 2019 1:18 pm

Valuethinker,

Thank you, I will have a read through Ted’s posts.
You are correct, the Global Bond Index Fund is hedged to sterling, the All Cap Index Fund is not.

Only gold Sovereigns and Britannia’s and a few other types of UK coins are CGT exempt.

I understand that If I hold equities in the ISA I will not have to pay tax on withdrawal, but wouldn’t the tax on withdrawal be offset by the 20% tax relief gained by investing through the SIPP ?

Regards

Plantagenet

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Re: Late developer ..... (UK)

Post by TedSwippet » Sat May 25, 2019 2:56 pm

Plantagenet wrote:
Sat May 25, 2019 11:08 am
When I do this, should I move funds in specie or convert to cash ?
To save you a lot of reading through past posts ... my stock answer to this is, in specie. I have moved pensions between providers several times, and it's never been a short process. Minimum so far is on the order of a couple of months, and the longest was eleven months (really).

Now, much of the reason for the delay, to be fair, was moving fund holdings rather than either share holdings (quicker) or as cash (should be around a week or two). Funds seem to be especially slow to re-register for some reason. Still, no matter what you move or how you move it, you have no control at all over the timescales, and a sizeable pension being out of the markets feels uncomfortable to me.

Personally, I would rather wait out an in specie transfer of several months but be entirely relaxed about market movements, than wait out a much shorter cash transfer but be continually biting my nails over the inevitable huge run up in stocks that will occur during that period :-).

It does tend to depend a bit on how much a provider charges for one type of transfer versus another and the balance in the pension, though. On a £1mm pension, paying £250 to transfer ten fund holdings is not worth worrying about -- if moving for the right reasons, you'll make that back in no time in lower fees -- but paying the same to move a £10k pension doesn't make any sense. Some providers charge hand-over-fist for in specie transfers, others (like Interactive Investor) are apparently free.

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Re: Late developer ..... (UK)

Post by Valuethinker » Sat May 25, 2019 3:46 pm

Plantagenet wrote:
Sat May 25, 2019 1:18 pm
Valuethinker,

Thank you, I will have a read through Ted’s posts.
You are correct, the Global Bond Index Fund is hedged to sterling, the All Cap Index Fund is not.

Only gold Sovereigns and Britannia’s and a few other types of UK coins are CGT exempt.

I understand that If I hold equities in the ISA I will not have to pay tax on withdrawal, but wouldn’t the tax on withdrawal be offset by the 20% tax relief gained by investing through the SIPP ?

Regards

Plantagenet
That's not an easy question.


There is a huge advantage to compounding the extra 20 per cent for however many years. Tax deferred.

*but* you will then pay 20 per cent tax *on the higher amount*. And the tax rate could be higher then.

As long as the 25 per cent tax free lump sum is in place then SIPPS are probably preferred. However if that is removed before you retire you've lost out.

Chancellors like George Osborne like pension tax raids because people don't experience them the way they do a cut to take home pay. It's too far away and too vague.

On balance I would say probably you stick with SIPP right now. But keep an eye on it.

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Plantagenet
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Re: Late developer ..... (UK)

Post by Plantagenet » Sun May 26, 2019 2:30 pm

Thank you all for your input,

Lots of variables, which ultimately I do not have control over. I guess as investors all we can do is act on the components that we can influence.

With the political situation in the UK at present who knows how many times the goalposts will be moved within the next 5,10 or 15 years.

I will look to move the funds in specie to the cheapest provider. No point on being out of the market if I don’t need to be.(hopefully it doesn’t take 11 months Ted).

Once Vanguard release the details of the fee structure for their UK SIPP I will be able to do a proper comparison.

I’m going to keep saving into my Vanguard ISA and will top this up with lump sums from time to time. Thanks for the heads up on the ISA/SIPP split Valuethinker, this may prove useful.

Also I’m curious, does anyone else hold any ‘alternative ‘
Investments?


Kind regards
Plantagenet

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Re: Late developer ..... (UK)

Post by Valuethinker » Wed May 29, 2019 10:27 am

Plantagenet wrote:
Sun May 26, 2019 2:30 pm
Thank you all for your input,

Lots of variables, which ultimately I do not have control over. I guess as investors all we can do is act on the components that we can influence.

With the political situation in the UK at present who knows how many times the goalposts will be moved within the next 5,10 or 15 years.

I will look to move the funds in specie to the cheapest provider. No point on being out of the market if I don’t need to be.(hopefully it doesn’t take 11 months Ted).

Once Vanguard release the details of the fee structure for their UK SIPP I will be able to do a proper comparison.

I’m going to keep saving into my Vanguard ISA and will top this up with lump sums from time to time. Thanks for the heads up on the ISA/SIPP split Valuethinker, this may prove useful.

Also I’m curious, does anyone else hold any ‘alternative ‘
Investments?
Lots of us have, or have done.

The problem is that it has proven to be very expensive - not being in equities in the long run. Granted, the UK FTSE 100 has done a *lot* worse than the S&P 500 since the end of the dot com boom in 2002-03.

In terms of other "alternatives":

- I dabbled in Venture Capital, private companies, VCTs etc. in the late 1990s - generally that was a bad to very bad investment

- personal real estate I own my own home - that's quite a lot of a risk (I live in London and I would reckon prices are down c. 15% from absolute peak at time of Brexit vote - things are just not selling). Long run owning flats in the UK was a good way to get rich, but changes in tax laws make it much less attractive (I would say unattractive)

- I have not tried collectibles, gold, art etc - problems re storage and liquidity

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Re: Late developer ..... (UK)

Post by magneto » Wed May 29, 2019 10:41 am

Plantagenet wrote:
Sun May 26, 2019 2:30 pm
Also I’m curious, does anyone else hold any ‘alternative ‘
Investments?
Very much so but remember the BH philosophy is essentially based around :-
Stocks + Bonds (maybe a touch of Cash)
which has proven very successful since the secular bull market (wild cyclical rampages excluded) started 1982.
Whether further diversification may improve results in future, who knows ?

For us we hold an illiquid portfolio in BTL and probably more relevant to the discussion a liquid portfolio containing :-
+ Stocks
+ Bonds (Conventional and o/wt Indexed)
+ Commercial Property (incl a dash of Ground Rents), seemingly out of favour presently
+ Renewables (over-fashionable perhaps)
+ Infrastructure (ditto)
+ Commodities Income
+ Cash

But must admit to being somewhat of a diversification junkie at every possible level.
Always seeking those deviations in correlations, and trying to limit exposure to idiosyncratic risk.
'There is a tide in the affairs of men ...', Brutus (Market Timer)

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Plantagenet
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Re: Late developer ..... (UK)

Post by Plantagenet » Sat Jun 01, 2019 10:32 am

Thanks Magneto,
magneto wrote:
Wed May 29, 2019 10:41 am
Very much so but remember the BH philosophy is essentially based around :-
Stocks + Bonds (maybe a touch of Cash)
So In your view how could the cash element of the portfolio be allocated?


Regards
Plantagenet

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Re: Late developer ..... (UK)

Post by glorat » Sat Jun 01, 2019 10:38 am

Plantagenet wrote:
Sat Jun 01, 2019 10:32 am
So In your view how could the cash element of the portfolio be allocated?
What you said above...
Emergency funds : Equal to 6 months salary
I'm doing close - 6 months expenditure, based on recommendations I've read elsewhere.

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Re: Late developer ..... (UK)

Post by Valuethinker » Mon Jun 03, 2019 2:55 am

Plantagenet wrote:
Sat Jun 01, 2019 10:32 am
Thanks Magneto,
magneto wrote:
Wed May 29, 2019 10:41 am
Very much so but remember the BH philosophy is essentially based around :-
Stocks + Bonds (maybe a touch of Cash)
So In your view how could the cash element of the portfolio be allocated?


Regards
Plantagenet
A high interest savings account would do. There are usually various good teaser rates/ new customer rates on offer. Just make sure you stay within the insurance limit (£75k at the moment, from memory) for that institution (a couple would thus get £150k insurance on their deposits with one institution).

Accounts at various dealing platforms, ISAs etc. are not so insured. There is a compensation scheme and the chances of actually losing your money are slight, but it's not a risk to just let happen - keep your cash balances to minimum, as an alternative invest in a short term bond fund or short term bond ETF (your volatility should be limited to a few per cent, then).

Avoid at all costs the London & Counties situation. I.e. unregulated bonds "Promising" 6%, etc. People have lost their life savings. You really cannot rely on the FCA to be on these things and to protect investors, it appears.

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Re: Late developer ..... (UK)

Post by Plantagenet » Mon Jun 03, 2019 6:46 am

Valuethinker wrote:
Mon Jun 03, 2019 2:55 am
A high interest savings account would do. There are usually various good teaser rates/ new customer rates on offer.
Unfortunately a lot of these, dare I say 'higher" interest rate savings accounts seem to be capped at £1.5k - £2.5k per year.

I'm currently using a regular saver with Santander, which pays 3% on deposits up to £200 per month.
A pittance, considering the inflation rate for April 2019 was 2.1% :(

The best that I have seen recently is a Nationwide savings account paying 5% on deposits up to £2.5k p.a.
or TSB 5% on savings up to 1£.5k

So, would you advocate using cash as an emergency fund only or additionally,
a cash reserve that could be invested in the event of a significant market drop ?

I would always look to hold emergency funds of at least 6 months earnings in any scenario.


Regards
Plantagenet

Valuethinker
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Re: Late developer ..... (UK)

Post by Valuethinker » Mon Jun 03, 2019 7:49 am

Plantagenet wrote:
Mon Jun 03, 2019 6:46 am
Valuethinker wrote:
Mon Jun 03, 2019 2:55 am
A high interest savings account would do. There are usually various good teaser rates/ new customer rates on offer.
Unfortunately a lot of these, dare I say 'higher" interest rate savings accounts seem to be capped at £1.5k - £2.5k per year.

I'm currently using a regular saver with Santander, which pays 3% on deposits up to £200 per month.
A pittance, considering the inflation rate for April 2019 was 2.1% :(

The best that I have seen recently is a Nationwide savings account paying 5% on deposits up to £2.5k p.a.
or TSB 5% on savings up to 1£.5k

So, would you advocate using cash as an emergency fund only or additionally,
a cash reserve that could be invested in the event of a significant market drop ?

I would always look to hold emergency funds of at least 6 months earnings in any scenario.


Regards
Plantagenet
I had a lot of cash in 2008. It was partly held as reserve for buying a house (which we did in 2010 - London houses never really went down much, the dip was more than recovered by 2010).

Did I rebalance into stocks? No. I did not. I was too scared. I just froze. I could see the financial system nearly disappear down the drain (Alasdair Darling was Chancellor, and his civil servants told him on the Friday "there will be no money in the RBS bank machines on Monday morning"; I had friends who worked in the City who spent the entire weekend opening up building society accounts and depositing £30k into them, the insurance limit at the time), even after Gordon Brown made his announcement (I would summarise the content of that speech as "things are bad. They could get worse. We will do what is necessary. If that is not enough, we shall do more"-- you could almost hear the engines of the Mark I & II Spitfires and Hurricanes coughing into life in the cold air of dawn, up to do battle in the summer skies over 1940 Kent and London-- the columnist in America wrote "Did Gordon Brown just save the world?") things were so badly shaken up I just froze.

It was only the pension deadline of April 5th the next year that meant I put any money into the markets at all (and even then I increased my bond weighting on the fly).

So beware the thought that you will rebalance. It is easy to rebalance into a minus 10% market correction. It's a lot harder to do that at minus 10, then minus 20, then minus 30 - the 2000-03 slump lasted nearly 3 years. The shock of seeing your portfolio just melt away and I can assure you the news will be absolutely nuts- all gloom and doom.

I would say :

- hold cash for 6 months expenses
- have a plan what you are going to do if it turns out your business income dries up for 12 months (saw that happen to my spouse, fortunately I was employed) - what assets you can realise (that's another argument for ISAs, although I don't encourage people to take money out of ISAs, because you cannot put it back in)
- cash is OK for market rebalancing. In the long run, it has been better for me to hold bonds, even Short Term bonds, vs. hold cash. I realise at the moment bank deposits pay more than ST gilts (I am not advocating hold ST corporate bonds, generally bonds of lower credit rating) so it's better to leave them in an account. But in the long run I would have been better off holding bonds, and using those to rebalance.

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Plantagenet
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Re: Late developer ..... (UK)

Post by Plantagenet » Mon Jun 03, 2019 8:38 am

Valuethinker wrote:
Mon Jun 03, 2019 7:49 am
So beware the thought that you will rebalance. It is easy to rebalance into a minus 10% market correction. It's a lot harder to do that at minus 10, then minus 20, then minus 30 - the 2000-03 slump lasted nearly 3 years. The shock of seeing your portfolio just melt away and I can assure you the news will be absolutely nuts- all gloom and doom.
Valuethinker,

Its educational to hear someone's perspective who has actually experienced a market crash .
I guess we all think we will have nerves of steel when the inevitable happens.....

Luckily I have a 20% Shareholding and am a director of a Private Ltd Company which is somewhat uncorrelated to my own.
If for any reason I went out of business tomorrow, I have been assured that I could "make" a job for myself there.
And if doomsday has finally arrived, I do have a gold coin or two which I could punt (assuming gold hasn't tanked as well).

To summarise then....

6 months earnings in cash (instant access account)
Backup plan to ensure the bills get paid
Two fund portfolio - Global All Cap Index / Global Bond Index
When rebalancing use bonds rather than cash
Continue to add as much to my portfolio through regular "drip feeding" as I can

Wow, It all seems so simple now you've put it like that :D

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Re: Late developer ..... (UK)

Post by Valuethinker » Mon Jun 03, 2019 1:41 pm

Plantagenet wrote:
Mon Jun 03, 2019 8:38 am
Valuethinker wrote:
Mon Jun 03, 2019 7:49 am
So beware the thought that you will rebalance. It is easy to rebalance into a minus 10% market correction. It's a lot harder to do that at minus 10, then minus 20, then minus 30 - the 2000-03 slump lasted nearly 3 years. The shock of seeing your portfolio just melt away and I can assure you the news will be absolutely nuts- all gloom and doom.
Valuethinker,

Its educational to hear someone's perspective who has actually experienced a market crash .
I guess we all think we will have nerves of steel when the inevitable happens.....

Luckily I have a 20% Shareholding and am a director of a Private Ltd Company which is somewhat uncorrelated to my own.
In my experience that latter is basically worth zero. I mean, it could someday be worth something, but in the meantime you can't sell it, it usually does not pay a dividend, you are a minority shareholder so you don't have control rights, you can't sell it to anyone else (except the controlling shareholder might buy you out at a discount). So you can't really count it.
If for any reason I went out of business tomorrow, I have been assured that I could "make" a job for myself there.
And if doomsday has finally arrived, I do have a gold coin or two which I could punt (assuming gold hasn't tanked as well).

To summarise then....

6 months earnings in cash (instant access account)
Backup plan to ensure the bills get paid
Two fund portfolio - Global All Cap Index / Global Bond Index
All fine.
When rebalancing use bonds rather than cash
In the sense that cash is meant to be genuine, emergency, money. Cash has zero returns in the long run. So bonds are a better bet. Unfortunately at the moment bonds in the UK return less than inflation, roughly, and less than some bank accounts. My solution has been to hold Short Term bond funds in my pension, and hope that interest rates eventually rise.
Continue to add as much to my portfolio through regular "drip feeding" as I can

Wow, It all seems so simple now you've put it like that
A good plan is neither more complex than it needs to be, nor simpler than it needs to be.

There's a lot of complex choices in the UK around ISA v. SIPP, which broker account you choose - some of the most highly advertised players are strikingly poor value for money.

What it boils down to is that the actual investing part can be relatively simple. Once you accept that you cannot outsmart the market, you set a risk tolerance, which is basically about your bond-equity split, and then:

- your best bet is a global equity index fund

- conversely on bonds, what you want is low volatility. You achieve that by taking minimal credit risk (ie primarily or wholly investment grade government bonds) and by hedging the currency back into your home currency. You *will* experience interest rate risk - bond prices will rise and fall with interest rate changes

Almost irrelevant complications on the story - in the long run an investor should not get too fussed

(one of the reasons I suggest avoiding the gilt index fund is that the modified duration of the gilt index is around 13 years. You are getting paid 1.6% yield, say, to take a lot of interest rate risk. Meaning in plain English, a +1% move in interest rates (at all maturities, i.e. which never happens that way) could potentially cause a -13% fall in the bond prices. By contrast the other major government bond markets (German, USA etc.) are all around 7-8 years.

If you invest in a global government bond index hedged back into sterling, you still have the currency risk, but you have less interest rate risk. Also, see below, if the UK government was ever credit downgraded by the market (the market's estimate of risk of default, which currently is effectively zero, were to change) the international bonds would outperform.

There's also the problem around what a change in government might do to the UK's credit rating. We cannot discuss the politics of that in this Forum (by Forum rules). And it's uncertain, a minority administration would be different than a majority one, in any case.

Topic Author
Plantagenet
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Re: Late developer ..... (UK)

Post by Plantagenet » Tue Jun 04, 2019 4:35 pm

In my experience that latter is basically worth zero. I mean, it could someday be worth something, but in the meantime you can't sell it, it usually does not pay a dividend, you are a minority shareholder so you don't have control rights, you can't sell it to anyone else (except the controlling shareholder might buy you out at a discount). So you can't really count it.
When I bought shares in this company, I was working part time there....

I was just starting a degree at university.
The hours were flexible and I could fit the work around
study and family etc.

At the time, the three original owners decided to sell in order to generate a lump sum to add to their retirement funds.

Back then, 12 employees agreed to raise the funds necessary to purchase the business.

I bought two shares for £1k.(it was all I could afford).

We all agreed to set out a condition in the articles of association, that should anyone wish to sell their share(s),
they could only be bought back by the company.

Also that share value, would be equal to shareholders funds divided by the number of remaining shareholders.

Last year, I declined an offer of £180k for my stake in the business. It’s still a little early for me.

Since incorporation, I have received over £25k in dividends.

Not a bad return on a £1k investment.....

Valuethinker
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Re: Late developer ..... (UK)

Post by Valuethinker » Wed Jun 05, 2019 3:27 am

Plantagenet wrote:
Tue Jun 04, 2019 4:35 pm
In my experience that latter is basically worth zero. I mean, it could someday be worth something, but in the meantime you can't sell it, it usually does not pay a dividend, you are a minority shareholder so you don't have control rights, you can't sell it to anyone else (except the controlling shareholder might buy you out at a discount). So you can't really count it.
When I bought shares in this company, I was working part time there....

I was just starting a degree at university.
The hours were flexible and I could fit the work around
study and family etc.

At the time, the three original owners decided to sell in order to generate a lump sum to add to their retirement funds.

Back then, 12 employees agreed to raise the funds necessary to purchase the business.

I bought two shares for £1k.(it was all I could afford).

We all agreed to set out a condition in the articles of association, that should anyone wish to sell their share(s),
they could only be bought back by the company.

Also that share value, would be equal to shareholders funds divided by the number of remaining shareholders.

Last year, I declined an offer of £180k for my stake in the business. It’s still a little early for me.

Since incorporation, I have received over £25k in dividends.

Not a bad return on a £1k investment.....
Then it is a really good investment: the 1 in 100, in my experience.

(my venture capital investments have barely broken even over 20 years).

How to value? Well, you can use the book value (Net Assets per share). More than that? There's no liquid market for them.

Yes I think you should hold on, because these shares could be worth £1.8m some day. It is not (yet) a lifechanging sum of money (although it would certainly help). Main issue is if capital gains taxes rise under a new government.

Topic Author
Plantagenet
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Re: Late developer ..... (UK)

Post by Plantagenet » Fri Jun 07, 2019 3:35 am

Then it is a really good investment: the 1 in 100, in my experience.
I was in the right place at the right time (lucky).

When selling, I was thinking of putting the shares in joint names (along with my wife) in order to take advantage of both of our CGT allowances.

If I could arrange to sell one per financial year, it would probably help too.

Do you have any other suggestions in order to minimise or
mitigate the tax payable on the sale of these shares ?

Regards
Plantagenet

Valuethinker
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Re: Late developer ..... (UK)

Post by Valuethinker » Fri Jun 07, 2019 7:04 am

Plantagenet wrote:
Fri Jun 07, 2019 3:35 am
Then it is a really good investment: the 1 in 100, in my experience.
I was in the right place at the right time (lucky).

When selling, I was thinking of putting the shares in joint names (along with my wife) in order to take advantage of both of our CGT allowances.

If I could arrange to sell one per financial year, it would probably help too.

Do you have any other suggestions in order to minimise or
mitigate the tax payable on the sale of these shares ?

Regards
Plantagenet
You might be eligible for Entrepreneur's relief (10% tax rate). Basically if you can argue that this is a company you helped to set up as a business you worked in, then this was an Entrepreneurial venture.

Also there is something called Enterprise Investment Scheme, and if your shares qualify (ask the company if they have ever sought HMRC registration on behalf of shareholders) then they are CGT exempt.

EIS is well documented on HMRC website and you can look it up and ask the company whether other shareholders have ever applied under EIS (30% tax credit up front when you invest).

Entrepreneur's relief I again suggest reading HMRC website - if you think there's a chance then you should probably at that point involve an accountant.

LHRAdam
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Re: Late developer ..... (UK)

Post by LHRAdam » Fri Jun 07, 2019 2:35 pm

one of the reasons I suggest avoiding the gilt index fund is that the modified duration of the gilt index is around 13 years. You are getting paid 1.6% yield, say, to take a lot of interest rate risk
@ Valuethinker

Thank you for answering a question I have been struggling with. I hold VGOV in my portfolio but as you say the bond duration is very long. Average duration = 12.9 years

https://www.vanguard.co.uk/adviser/adv/ ... ##overview

VGOV has grown by 6.8% in the last 12 months which doesn’t really sit with the BH consensus on the expected growth of treasury style bonds.

A global treasuries bond fund hedged to GBP might be a better choice?

Valuethinker
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Re: Late developer ..... (UK)

Post by Valuethinker » Fri Jun 07, 2019 4:35 pm

LHRAdam wrote:
Fri Jun 07, 2019 2:35 pm
one of the reasons I suggest avoiding the gilt index fund is that the modified duration of the gilt index is around 13 years. You are getting paid 1.6% yield, say, to take a lot of interest rate risk
@ Valuethinker

Thank you for answering a question I have been struggling with. I hold VGOV in my portfolio but as you say the bond duration is very long. Average duration = 12.9 years

https://www.vanguard.co.uk/adviser/adv/ ... ##overview

VGOV has grown by 6.8% in the last 12 months which doesn’t really sit with the BH consensus on the expected growth of treasury style bonds.

A global treasuries bond fund hedged to GBP might be a better choice?
Given weakness in the economy and Brexit concerns expectations of future interest rate rises were pushed out in time.

At that duration roughly a 0.5 per cent interest rate fall for all maturities would cause a 6.5 per cent capital gain.

Thus the bond fund did well.

The advantage of long duration is that if interest rates fall then the fund or bond does well. Some argue that's a good portfolio mix with equities which tend to do poorly in periods of deflation. Greater diversification benefits.

Shrug. There is no free ride in investing.

A global government bond index fund, sterling hedged, will tend to give you a similar yield as a gilt fund, due to effect of currency hedging, BUT will have a lower duration.

LHRAdam
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Re: Late developer ..... (UK)

Post by LHRAdam » Fri Jun 07, 2019 5:09 pm

Thank you. :happy

Forester
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Location: UK

Re: Late developer ..... (UK)

Post by Forester » Sat Jun 08, 2019 10:31 am

The cheapest UK SIPP provider currently is iWeb (owned by Halifax).

Topic Author
Plantagenet
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Re: Late developer ..... (UK)

Post by Plantagenet » Wed Jun 12, 2019 11:20 am

Valuethinker,

Sorry I havent replied sooner, I'm currently on a break in Spain.
Thank you for the heads up on Entrepreneurs relief and the Enterprise Investment Scheme.
I shall do some homework on these when I get back to the UK.

Best Wishes
Plantagenet

magneto
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Re: Late developer ..... (UK)

Post by magneto » Sat Jun 15, 2019 3:48 am

Plantagenet wrote:
Sat Jun 01, 2019 10:32 am
Thanks Magneto,
magneto wrote:
Wed May 29, 2019 10:41 am
Very much so but remember the BH philosophy is essentially based around :-
Stocks + Bonds (maybe a touch of Cash)
So In your view how could the cash element of the portfolio be allocated?
Regards
Plantagenet
Whichever most convenient locations to safely spread around in, as already suggested.
Wouldn't fret unduly about Cash sub-inflation yields - let the rest of the portfolio do the heavy lifting (and reflect on those Alternative Asset Classes, lest Stocks and Bonds subside together as in the distant past - now forgotten by many investors)
The role of Cash is not one of out-performance.
All Best
'There is a tide in the affairs of men ...', Brutus (Market Timer)

Topic Author
Plantagenet
Posts: 16
Joined: Sat Apr 27, 2019 4:25 am

Re: Late developer ..... (UK)

Post by Plantagenet » Sat Jun 15, 2019 9:21 am

magneto wrote:
Sat Jun 15, 2019 3:48 am
Plantagenet wrote:
Sat Jun 01, 2019 10:32 am
Thanks Magneto,
magneto wrote:
Wed May 29, 2019 10:41 am
Very much so but remember the BH philosophy is essentially based around :-
Stocks + Bonds (maybe a touch of Cash)
So In your view how could the cash element of the portfolio be allocated?
Regards
Plantagenet
Whichever most convenient locations to safely spread around in, as already suggested.
Wouldn't fret unduly about Cash sub-inflation yields - let the rest of the portfolio do the heavy lifting (and reflect on those Alternative Asset Classes, lest Stocks and Bonds subside together as in the distant past - now forgotten by many investors)
The role of Cash is not one of out-performance.
All Best
I completely identify with logic and simplicity of a two fund portfolio (Global Equity Index Fund and a Global Bond Index Fund).

I am curious however to hear any views on diversifying further by way of alternative asset classes such as Gold or Commodities, in effect a type of 'All Weather Portfolio' ? Is there any need for this ? As Magneto has pointed out, it is possible that both Stocks and Bonds could suffer during a downturn.

Kind Regards
Plantagenet

andrew99999
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Re: Late developer ..... (UK)

Post by andrew99999 » Sun Jun 16, 2019 12:01 am

Plantagenet wrote:
Sat Jun 15, 2019 9:21 am
I am curious however to hear any views on diversifying further by way of alternative asset classes such as Gold or Commodities, in effect a type of 'All Weather Portfolio' ? Is there any need for this ? As Magneto has pointed out, it is possible that both Stocks and Bonds could suffer during a downturn.
There are endless discussions on here and other forums.
What I have gathered is that it is essentially an inflation hedge.
The reason I see most often against it that I see are
1. Gold/commodities don't have an income return (I really don't understand this reason to be honest since in theory it should still keep up with inflation while bonds & cash deposits decrease with inflation making their income mostly just make up for the loss);
2. Whether we will ever go back to high inflation now that the government seems to understand their tools to help moderate inflation (this is the big one for me);
3. In the case of gold, it had insane out performance over something like 2 years (I think when the USD came off the gold standard in the early '70's), so if you use back testing that includes that date gold looks great and if you leave out those dates gold returns look like crap.

Valuethinker
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Re: Late developer ..... (UK)

Post by Valuethinker » Sun Jun 16, 2019 2:43 am

Plantagenet wrote:
Sat Jun 15, 2019 9:21 am
magneto wrote:
Sat Jun 15, 2019 3:48 am
Plantagenet wrote:
Sat Jun 01, 2019 10:32 am
Thanks Magneto,
magneto wrote:
Wed May 29, 2019 10:41 am
Very much so but remember the BH philosophy is essentially based around :-
Stocks + Bonds (maybe a touch of Cash)
So In your view how could the cash element of the portfolio be allocated?
Regards
Plantagenet
Whichever most convenient locations to safely spread around in, as already suggested.
Wouldn't fret unduly about Cash sub-inflation yields - let the rest of the portfolio do the heavy lifting (and reflect on those Alternative Asset Classes, lest Stocks and Bonds subside together as in the distant past - now forgotten by many investors)
The role of Cash is not one of out-performance.
All Best
I completely identify with logic and simplicity of a two fund portfolio (Global Equity Index Fund and a Global Bond Index Fund).

I am curious however to hear any views on diversifying further by way of alternative asset classes such as Gold or Commodities, in effect a type of 'All Weather Portfolio' ? Is there any need for this ? As Magneto has pointed out, it is possible that both Stocks and Bonds could suffer during a downturn.

Kind Regards
Plantagenet
You do not have large savings.

You can't really afford to have 5 per cent of the portfolio give you low or negative returns.

Granted right now bonds are in a similar position. There will be a moment to add inflation linked bonds but not yet

Hard Brexit and the possibility of a change of government to a radically different political philosophy pose additional event risk. Either or both events could lead to much lower sterling and higher inflation

Politics is not allowed in this forum but I believe we can at least note the possibility.

Valuethinker
Posts: 38405
Joined: Fri May 11, 2007 11:07 am

Re: Late developer ..... (UK)

Post by Valuethinker » Sun Jun 16, 2019 2:46 am

andrew99999 wrote:
Sun Jun 16, 2019 12:01 am
Plantagenet wrote:
Sat Jun 15, 2019 9:21 am
I am curious however to hear any views on diversifying further by way of alternative asset classes such as Gold or Commodities, in effect a type of 'All Weather Portfolio' ? Is there any need for this ? As Magneto has pointed out, it is possible that both Stocks and Bonds could suffer during a downturn.
There are endless discussions on here and other forums.
What I have gathered is that it is essentially an inflation hedge.
The reason I see most often against it that I see are
1. Gold/commodities don't have an income return (I really don't understand this reason to be honest since in theory it should still keep up with inflation while bonds & cash deposits decrease with inflation making their income mostly just make up for the loss);
2. Whether we will ever go back to high inflation now that the government seems to understand their tools to help moderate inflation (this is the big one for me);
3. In the case of gold, it had insane out performance over something like 2 years (I think when the USD came off the gold standard in the early '70's), so if you use back testing that includes that date gold looks great and if you leave out those dates gold returns look like crap.
Long run commodity prices fell relative to inflation.

It seemed in the early 2000s that the tise of China had broken this pattern. Again now post 2008 the pattern seems to have returned.

Topic Author
Plantagenet
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Joined: Sat Apr 27, 2019 4:25 am

Re: Late developer ..... (UK)

Post by Plantagenet » Mon Jun 17, 2019 6:35 am

You can't really afford to have 5 per cent of the portfolio give you low or negative returns./quote]-

I completely agree Valuethinker, thats why intend to stay fully invested in 80/20 Equities & Bonds.
My aim is to keep my portfolio as simple as possible (two global funds), but was curious on the rational behind further diversification.

There will be a moment to add inflation linked bonds but not yet/quote]-

Are you saying that if inflation begins to rise, it would be a good idea to add some inflation linked bonds to a portfolio?

Valuethinker
Posts: 38405
Joined: Fri May 11, 2007 11:07 am

Post by Valuethinker » Mon Jun 17, 2019 9:37 am

Plantagenet wrote:
Mon Jun 17, 2019 6:35 am
You can't really afford to have 5 per cent of the portfolio give you low or negative returns./quote]-

I completely agree Valuethinker, thats why intend to stay fully invested in 80/20 Equities & Bonds.
My aim is to keep my portfolio as simple as possible (two global funds), but was curious on the rational behind further diversification.


There will be a moment to add inflation linked bonds but not yet/quote]-

Are you saying that if inflation begins to rise, it would be a good idea to add some inflation linked bonds to a portfolio?
Also on alternative assets you already have 2:

- equity in your home
- equity in a private business you worked for

The rationale for further diversification is that you have assets that zag while the rest zigs, or zigs when it zags. Alas, the number of genuinely alternative assets in this regard is very low. Real Estate for example is often cited, but I think all evidence shows it has high correlation with equities BUT a greater correlation with inflation. But if you look at Sir Philip Green (Arcadia Group) crashing commercial rents it is clear landlords are not exempt from the changes out there. City of London property underpins a lot of the sector, what will that be worth post a hard Brexit?

Gold probably is (physical gold not so much gold shares). But the inherent return of gold is just minus its storage cost, so it's negative in real terms (opinions differ). So one would hold an asset which would pay off, periodically, in bad crises, but most of the time just cost returns.

Re inflation linked bonds:

- alas if inflation rises we have missed the boat - the bonds were a buy now. The problem now is that the real yields on Indexed Linked Gilts are -1.6 to -1.9%. You are lending money to the UK Chancellor, in the sure knowledge that unless inflation is c. 1.6 to 1.9% higher than the market expects, you will lose money in real terms.

That just gives me a giant ughh.

If there is a change in government to a more inflationist government, that for example changes the purpose of the Bank of England (away from the regime of inflation targeting adopted by Gordon Brown as Chancellor in 1997), then those real yields will have proven to be prescient, and even cheap. We could be back to the macroeconomic world of the 1960s & 70s, the stop-go economy, boom & bust etc.

If not, well, unless we are in a perpetual low growth scenario (there's a case for that) it seems that at some point the rates must rise.

I have thought that for ohh, 5-6 years now at least and have been totally and decisively wrong ;-).

So, for the moment, I sit in short gilts (the duration/ interest rate sensitivity of the gilt index, at 12-13 years, is the longest of any govt bond market; Germany and US are around 7-8 for example - so the full gilt index is a relatively high interest rate risk, for which I get paid c. 1.6% yield? This seems a lousy bargain to me for investors). I am earning nearly 0 nominal return, and real return c. -1.5-2.0%, and wait patiently (hah!) for the higher rates that *must* be coming (mustn't they?).

Think of it as a cash substitute. ST gilts. No yield, but no credit risk.

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