UK Based Investor – Building a Long-Term ISA Portfolio

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Stringfellow
Posts: 9
Joined: Sat Nov 02, 2019 3:18 am

UK Based Investor – Building a Long-Term ISA Portfolio

Post by Stringfellow » Sun Nov 03, 2019 4:49 am

Dear all

Newbie poster here - please bear with any ignorance on my part.

Quick overview of where I am at; I own my own home and have a small rental property that has a mortgage (the rent covers the monthly mortgage payment). Emergency fund in place and various insurance products to cover the above assets, in addition to critical illness cover and a professionally drawn up will – all in place. Government backed final salary pension scheme, paid in to on a pro-rata basis, with a private pension to fill the gaps left by the former. The private pension has not received any contributions for a number of years.

So, I will soon be entering a new phase of my life whereby I will be fortunate enough to have a larger monthly percentage of my earnings available for investment, primarily for the building of a retirement lump sum. Due to this I have delved deeper in to research, discovered Jack Bogle and index investing and have consumed various books over the last few months (BH Investing, Four Pillars, Random walk, Common Sense on MF etc.) My reading continues.

I have invested via ISAs over the past fifteen years, utilising DCA, and have “actively managed” holdings with SJP. I now realise that their charges are considerable and, with the information I have absorbed, now wish to “go it alone”, keeping charges and fees of any kind to an absolute minimum. I am not looking to move my SJP ISAs at present, but it is a future option.

Here is my current thinking for new money. Any alternatives, further considerations, or insights will be appreciated – this will all help to set-up a strategy that could well last the next twenty five years (retirement age of 65yo):
1) Use Lloyds Share Dealing as my chosen ISA platform, (£40.00 flat fee per annum, £1.50 per funds trade) contribute a regular set amount on a monthly basis to chosen funds.
2) Build holdings in year one: UK FTSE All Share Index Fund, year two: International or All World Index Fund (ex. UK) – or perhaps build them simultaneously (increase in charges though)? Ultimately aiming for an allocation of 70% stocks, 20% bonds, 10% real estate as the years pass by.
3) Annually rebalance via switching, once holdings include both stock and bond allocations.

I am also considering a value averaging approach, acted upon every three months, but I need to read Edleson’s book again and do some further thinking.

Thank you if you are still reading and I am most grateful for any responses.

Best regards,

String

Valuethinker
Posts: 39262
Joined: Fri May 11, 2007 11:07 am

Re: UK Based Investor – Building a Long-Term ISA Portfolio

Post by Valuethinker » Sun Nov 03, 2019 8:12 am

Stringfellow wrote:
Sun Nov 03, 2019 4:49 am
Dear all

Newbie poster here - please bear with any ignorance on my part.

Quick overview of where I am at; I own my own home and have a small rental property that has a mortgage (the rent covers the monthly mortgage payment). Emergency fund in place and various insurance products to cover the above assets, in addition to critical illness cover and a professionally drawn up will – all in place. Government backed final salary pension scheme, paid in to on a pro-rata basis, with a private pension to fill the gaps left by the former. The private pension has not received any contributions for a number of years.

So, I will soon be entering a new phase of my life whereby I will be fortunate enough to have a larger monthly percentage of my earnings available for investment, primarily for the building of a retirement lump sum. Due to this I have delved deeper in to research, discovered Jack Bogle and index investing and have consumed various books over the last few months (BH Investing, Four Pillars, Random walk, Common Sense on MF etc.) My reading continues.

I have invested via ISAs over the past fifteen years, utilising DCA, and have “actively managed” holdings with SJP. I now realise that their charges are considerable and, with the information I have absorbed, now wish to “go it alone”, keeping charges and fees of any kind to an absolute minimum. I am not looking to move my SJP ISAs at present, but it is a future option.

Here is my current thinking for new money. Any alternatives, further considerations, or insights will be appreciated – this will all help to set-up a strategy that could well last the next twenty five years (retirement age of 65yo):
1) Use Lloyds Share Dealing as my chosen ISA platform, (£40.00 flat fee per annum, £1.50 per funds trade) contribute a regular set amount on a monthly basis to chosen funds.
2) Build holdings in year one: UK FTSE All Share Index Fund, year two: International or All World Index Fund (ex. UK) – or perhaps build them simultaneously (increase in charges though)? Ultimately aiming for an allocation of 70% stocks, 20% bonds, 10% real estate as the years pass by.
3) Annually rebalance via switching, once holdings include both stock and bond allocations.

I am also considering a value averaging approach, acted upon every three months, but I need to read Edleson’s book again and do some further thinking.

Thank you if you are still reading and I am most grateful for any responses.

Best regards,

String
Theres lots we don't know about your situation.

AFAIK there are no UK govt final salary schemes left? Civil servants, army, fire services are all on Career Average Salary? For new accruals that is. Pre 2011 or 2012 (different for the NHS & Services v. the Central Govt Civil Service scheme) one did have FS pension benefits, but post it is all Career Average Salary?

If you have a deferred Final Salary Scheme from a private sector employer it is by law indexed to RPI inflation. And the survivor benefits can be quite handy. However if the sponsoring employer goes bust it will fall into the Pension Protection Fund and there are reductions in benefits. There are some quite high cash value buyouts being offered because of low interest rates (the scheme liabilities in present value terms are larger with a lower discount rate, thus by buying someone out, they can reduce their liabilities by more than the cost, reducing any deficit). If you are considering leaving the scheme you must take professional advice.

You can open a Vanguard Isa right now and transfer all your ISAs to it. Then you buy the global equity index fund and forget about it No Home Bias to UK stocks which would be a significant investor error.

You will pay a 10 basis point account fee fee in addition to fund TERs. Capped st 350 pounds pa (might be 15 bps now?).

10 basis points equals 0.1 per cent if that is not clear.

I shrug. I moved from paying 50 to 100 basis points at L&G to 22 + 10 at Vanguard w complete transparency. You will save much more moving from SJP. For this I can pay say 100 GBP extra a year.

Your only question is whether to hold bonds. Given your other assets you may not need to.

I also hold a value ETF through Vanguard. Again I can live with the slight extra costs.

If you buy the Accumulating Fund versions, which you must only do in ISAs and Pensions then you don't have to worry about reinvesting distributions it is done automatically via a higher NAV.
Last edited by Valuethinker on Sun Nov 03, 2019 9:14 am, edited 3 times in total.

minimalistmarc
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Re: UK Based Investor – Building a Long-Term ISA Portfolio

Post by minimalistmarc » Sun Nov 03, 2019 8:29 am

The number 1 priority is to get your money transferred out of SJP. Their fees are eye watering.

If you’re investing in ETFs rather than funds, Hargreaves Lansdown is dirt cheap (£45 capped fee/year) or you could just transfer to Vanguard.

Please, anybody but St James Place. They are worse than the much reviled EJ on bogleheads

Valuethinker
Posts: 39262
Joined: Fri May 11, 2007 11:07 am

Re: UK Based Investor – Building a Long-Term ISA Portfolio

Post by Valuethinker » Sun Nov 03, 2019 8:39 am

minimalistmarc wrote:
Sun Nov 03, 2019 8:29 am
The number 1 priority is to get your money transferred out of SJP. Their fees are eye watering.

If you’re investing in ETFs rather than funds, Hargreaves Lansdown is dirt cheap (£45 capped fee/year) or you could just transfer to Vanguard.

Please, anybody but St James Place. They are worse than the much reviled EJ on bogleheads
+1 and I suggest going straight to Vanguard.

Vanguard is a fire & forget solution - you put it there, you globally index with an equity index fund, you forget about it (assuming you are holding bond investments in other places).

Topic Author
Stringfellow
Posts: 9
Joined: Sat Nov 02, 2019 3:18 am

Re: UK Based Investor – Building a Long-Term ISA Portfolio

Post by Stringfellow » Sun Nov 03, 2019 11:17 am

Thank you for the rapid responses and good to get your thoughts. You have adequately confirmed my feelings on the SJP ISAs regarding high fees - I can only add that one makes the best call he can at the time and moves forward from there!

My government pension is Teachers Pension - whilst far from an expert, and things may have changed, my situation is complicated making it difficult to accurately predict an expected monthly provision once retired.

I’ve suggested Lloyds share dealing for the ISA as there would be no annual % charge based on the size of the accumulated funds, using open ended funds, not ETFs.Initially this is not such a concern, but it would limit costs greatly over the years as the fund grows in size. Or am I missing something? Dividends automatically reinvested for sure and you are able to invest in Vanguard through Lloyds share dealing.

If there is a cheaper way to invest in open ended funds on a regular monthly basis, please do let me know.

Valuethinker, thank you for your time. You mention investor error re. bias to UK stocks. Please could you educate me here/ expand upon your thinking? I’m still learning :happy

Once I have the strategy in place I can consider the fund choices in more detail. Thank you.

TedSwippet
Posts: 2578
Joined: Mon Jun 04, 2007 4:19 pm
Location: UK

Re: UK Based Investor – Building a Long-Term ISA Portfolio

Post by TedSwippet » Sun Nov 03, 2019 11:52 am

Stringfellow wrote:
Sun Nov 03, 2019 11:17 am
I’ve suggested Lloyds share dealing for the ISA as there would be no annual % charge based on the size of the accumulated funds, using open ended funds, not ETFs.Initially this is not such a concern, but it would limit costs greatly over the years as the fund grows in size. Or am I missing something? Dividends automatically reinvested for sure and you are able to invest in Vanguard through Lloyds share dealing.
I use Lloyds Sharedealing Direct for one of my (two) ISAs, and would recommend them. The flat-fee £40/year cost is equivalent to a holding of around £27k in Vanguard's platform (at Vanguard's 0.15% platform charge), so just one-and-a-bit year's worth of ISA subscriptions -- you're not missing anything. Lloyd's fee for trading shares is not the lowest, but also not the highest. However, their fee for trading funds is super-skimpy at £1.50, so if you will hold only OEICs and come in above £27k they will be hard to beat.

The only way to beat them might be their alter-ego, iWeb. This has a £25 one-off opening charge, then no annual fee whatsoever, and £5 to trade funds or shares. In terms of use, they are pretty much identical. Clearly the same web software, just with a slightly different skin. Which of the two then really only depends on how much trading you expect to do.

Both seem to offer dividend reinvestment, but there will be a charge for it. If you hold accumulation fund units rather than income ones though, there won't be any cash dividends to reinvest, so a cost saving there. Accumulation units can be a CGT computation bear in taxable accounts, but are fine -- ideal, in fact -- in pensions and in most people's ISAs. You should be able to easily find Vanguard's funds and OEICs on both platforms.

Valuethinker
Posts: 39262
Joined: Fri May 11, 2007 11:07 am

Re: UK Based Investor – Building a Long-Term ISA Portfolio

Post by Valuethinker » Sun Nov 03, 2019 12:04 pm

Stringfellow wrote:
Sun Nov 03, 2019 11:17 am
Thank you for the rapid responses and good to get your thoughts. You have adequately confirmed my feelings on the SJP ISAs regarding high fees - I can only add that one makes the best call he can at the time and moves forward from there!

My government pension is Teachers Pension - whilst far from an expert, and things may have changed, my situation is complicated making it difficult to accurately predict an expected monthly provision once retired.
I am not familiar with what has been negotiated on that one, unfortunately. Doubtless there is a booklet?
I’ve suggested Lloyds share dealing for the ISA as there would be no annual % charge based on the size of the accumulated funds, using open ended funds, not ETFs.Initially this is not such a concern, but it would limit costs greatly over the years as the fund grows in size. Or am I missing something? Dividends automatically reinvested for sure and you are able to invest in Vanguard through Lloyds share dealing.

If there is a cheaper way to invest in open ended funds on a regular monthly basis, please do let me know.
Vanguard does charge 0.1% additional. So £100 pa on £100k ISA balance. It was capped at £350 pa. Now someone updated me, here on this had changed, and I don't remember in which way.

AFAIK they have no other additional charges.

So you could transfer all of your money from SJP into the Vanguard Global Equity index fund, and make monthly contributions to that. As far as I know they levy no additional charges e.g. per investment - but you should check that. They also give a nifty little calculator as to how much fees you would be paying. That's what tipped me off that I had inadvertently picked their active global fund, rather than the index/ passive one (you want the latter).

The question is whether you also need a bond fund. I am inclined to think not *unless* you will need the money for spending inside of 10 years. You have these other sources of certain income - pensions + Basic State Pension. Plus rent on your property. So probably you do not.

Normally I tell people here that everyone should have 20% in a safe government bond fund. To help you hold your nerve in a bear market when your equities have dropped by 50%, and to provide ammunition for rebalancing into equities just when you don't want to (i.e. when they are falling). The benefits from such diversification are large (and are large down to 30-40% in bonds, empirically) - you lose a little bit of return but due to lower than 1.0 correlation between bonds & stocks, you lose a lot more volatility).

However if you have a number of predictably sources of income that's not so important.
Valuethinker, thank you for your time. You mention investor error re. bias to UK stocks. Please could you educate me here/ expand upon your thinking? I’m still learning :happy

Once I have the strategy in place I can consider the fund choices in more detail. Thank you.
Home Country Bias. Or Home Market Bias. There are (thousands) of academic articles about this.

It's confused here because John Bogle (among others) said that American investors only need to hold American stocks, and there are all sorts of reasons to doubt the value of international investing. Buttressed by the fact that historically they have been right - especially in the last 10 years. You get a bit of American exceptionalism in there, too. Whereas British exceptionalism is mostly an amusing relic of the 19th century, for Americans it's a here-and-now (but of course the 21st century may be different). But for an American it's not a huge sin - US is c 60% of developed world stock markets by market capitalisation in any case. Some time periods this decision will hurt them, sometimes it will benefit them.

The reality is that for someone sitting in a country which is less than 8% of world markets, there's no case for only investing in a fraction of the companies out there. BP & Shell but not Exxon, Sage but not Amazon Apple Microsoft Google. HSBC but not JP Morgan or BNP Paribas or Bank of America. Other than tobacco and mining, the UK stock market index does not have much unique about it, and it's heavily underweight in technology in particular. Unilever but not P&G or Nestle?

Put £100k into a UK index fund and you have something like £5k in HSBC and £15k in BP + Royal Dutch Shell. Is that really what you meant to do?

In essence what you are throwing away (by weighting your equity portfolio more than c 8% UK stocks) is diversification - you are taking on more uncompensated risk (volatility which is not matched by higher return, because it is diversifiable risk). Once, when non UK investing funds were more expensive there was a justification for that (and there used to be exchange controls, if you can remember back to 1979), but now? There just isn't.

A related question is whether to hold Emerging Markets. From memory the Vanguard fund (in the UK) is developed market only. There are issues with EM (nearly 50% of the index is China + Taiwan) but it's perfectly reasonable to hold 10-15% of your equities in an EM fund (ie a little below market weight, depending on which index provider is counting this is typically 15-20%).

The real problem with foreign exposure is exposure to foreign exchange risk. Your liabilities (future spending) are in GBP but most equity funds are unhedged as to currency. So movements in FX rates will hit your buying power - as the fall in the GBP over the last few years highlights. And we hold here FX risk to be a volatility that pays no additional reward.

3 factors:

1. Purchasing Power Parity. In the long run, currencies will adjust their levels to maintain buying power. So for an investor it won't matter. There is mixed evidence of this, empirically - it certainly does not hold in the short run.

2. There are currency hedged funds and most bond funds are so hedged - otherwise the returns would be totally dominated by FX volatility. The effect of the currency hedging is to bring the yield of the bond fund to *almost* the yield of the equivalent government bond fund in the home currency.

But currency hedging has a cost and it's not exact matching of currency movements even so. Currency hedged equity funds seem to underperform their unhedged counterparts (I am not entirely sure as to why).

3. holding UK equities or any fund denominated in GBP (reporting currency) but not hedged to GBP does not reduced exchange rate risk. The FTSE 100 has a 60-70% negative correlation with currency moves. GBP goes up 10% and index will fall 6-7%. If you look at the components, you can see why - the top 10 companies are c. 45% of the index and they are very international companies, with only a historic connection to the London SE (+ a head office).

Given that you have pension and rental income in GBP, plus home equity (a sort of hedge against care home fees), I think you can afford to just take XR risk on the chin. The long run tendency of the GBP is down (it was $4.85 before WW1), as part of Britain's long slow decline (relative) to the rest of the world, and I do not expect that to change.

Exception is if you are within 10 years of retirement AND you don't have significant desires re foreign travel, consumption of imported goods, etc. Then there's a case for hedging. But I'd increase my bond weightings, and all my bond funds (mostly in my pension) hedge to GBP.

TedSwippet
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Location: UK

Re: UK Based Investor – Building a Long-Term ISA Portfolio

Post by TedSwippet » Sun Nov 03, 2019 12:36 pm

Valuethinker wrote:
Sun Nov 03, 2019 12:04 pm
Vanguard does charge 0.1% additional. So £100 pa on £100k ISA balance. It was capped at £350 pa. Now someone updated me, here on this had changed, and I don't remember in which way.
Hello! It's 0.15%, capped at £375/year.

https://www.vanguardinvestor.co.uk/what ... -explained
Account fee 0.15%​
Our account fee is just 0.15% per year. And on amounts above £250,000 there’s no fee at all, effectively capping your account fee at £375 per year.

Topic Author
Stringfellow
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Joined: Sat Nov 02, 2019 3:18 am

Re: UK Based Investor – Building a Long-Term ISA Portfolio

Post by Stringfellow » Sun Nov 03, 2019 2:11 pm

Ted, thank you for confirming my calcs on Lloyds SD - anything over 27k and you are saving. Even if I start at Zero, I intend to pass that figure and beyond, hoping to set this up and forget it (pretty much anyway!) minimum of twenty year time frame is the intention. Early doors though we are only talking a few pounds and at least there won’t be any 5% front load like that I’ve been clobbered with for years - :oops:

I would like to utilise DCA via monthly contributions and even top up if cash flow allows, on a quarterly basis - a kind of value averaging. With one fund, this would cost £58.00 a year to run, plus the ER of the chosen fund - ex. top-up trades.

Thank you for the heads up on dividend reinvesting and accumulation funds - I presumed they amounted to the same, but I will be looking out for oeic index accumulation funds for my ISA.

Great input Valuethinker, many thanks, especially for the economic history slant and big picture view, not to mention FX issues and volatility, risk/ reward considerations. Is this the Vanguard fund you are referring to/ recommending?

https://www.investments.lloydsbank.com/ ... 00BD3RZ582

Heavily weighted to the US. I’ll search those academic papers you mention asap.

Bill Bernstein recommends splitting international funds in to separate European, Pacific, Emerging Markets & International Value funds once a figure of approx. 50k is reached....but I’ll throw this stuff up once I get nearer to that level of holdings though!

Many thanks again.

Valuethinker
Posts: 39262
Joined: Fri May 11, 2007 11:07 am

Re: UK Based Investor – Building a Long-Term ISA Portfolio

Post by Valuethinker » Mon Nov 04, 2019 3:47 am

Stringfellow wrote:
Sun Nov 03, 2019 2:11 pm
Ted, thank you for confirming my calcs on Lloyds SD - anything over 27k and you are saving. Even if I start at Zero, I intend to pass that figure and beyond, hoping to set this up and forget it (pretty much anyway!) minimum of twenty year time frame is the intention. Early doors though we are only talking a few pounds and at least there won’t be any 5% front load like that I’ve been clobbered with for years - :oops:

I would like to utilise DCA via monthly contributions and even top up if cash flow allows, on a quarterly basis - a kind of value averaging. With one fund, this would cost £58.00 a year to run, plus the ER of the chosen fund - ex. top-up trades.

Thank you for the heads up on dividend reinvesting and accumulation funds - I presumed they amounted to the same, but I will be looking out for oeic index accumulation funds for my ISA.

Great input Valuethinker, many thanks, especially for the economic history slant and big picture view, not to mention FX issues and volatility, risk/ reward considerations. Is this the Vanguard fund you are referring to/ recommending?

https://www.investments.lloydsbank.com/ ... 00BD3RZ582

Heavily weighted to the US. I’ll search those academic papers you mention asap.
"Heavily weighted". Rather, it is market weighted. The US is c 55% of the world market. To go for a different weighting is to argue that the market is "wrong" in its judgements. That's certainly possible - consider 2000 and the peak of the dot com Tech Media Telecoms bubble. Or the bottom of the market in 2009. The reality is though that the US economy has done better post 2009 than other economies, and in particular a group of tech companies have done far better. Plus major US financial stocks have recovered much better than their European counterparts in particular.

Do you feel able to make those judgements? That you know better than the market as to the "right" market values for different stock markets?

You can access this directly via Vanguard ISA. Costs are 0.15% on top of the fund TERs. Capped at £375 pa. AFAIK there are no dealing costs per investment.
Bill Bernstein recommends splitting international funds in to separate European, Pacific, Emerging Markets & International Value funds once a figure of approx. 50k is reached....but I’ll throw this stuff up once I get nearer to that level of holdings though!

Many thanks again.
The question is why does Bernstein do this?

- he thinks you can pick which markets will outperform OR
- there was not a fund which did that kind of global coverage when he wrote the book OR
- some other reason

What I like about the fund above is that it is one decision.

There's a key risk-return decision about holding bonds vs equities. Once you have done that, for equities you hold the global portfolio. Poster nisiprius here has written many times about that choice B v E, and how important it is.

William Bernstein likes to "slice and dice". However I think even he would agree that a good default for an investor (non US) is a global equity fund with global equity weights. And if it saves trading costs, or taxes, then that is far and away the best choice.

As to Value. I believe in the Value factor more than I believe in other, more recent factors - Momentum, Quality, Low Volatility etc. And I believe it more than Small Cap. I think the Value factor is the one with the longest demonstrated track record - which is basically of long periods of underperformance followed by bursts of outperformance (you might cal me more "anti Growth" than "pro Value"). It requires enormous patience, however.

Value has underperformed, massively. 25% of my ISA is in the Vanguard value fund, which follows the same world country weights, pretty much, as the main fund (ie USA c. 55%).

I also have another ISA and I hold the ishares value ETF in that - it does take a huge skew, for example it is nearly 2x weighted in Japan, heavily underweighted in USA.

So I am "market timing". A bit in line with Augustine "Lord make me chaste. But not yet". But I am not betting the ranch on Value.

Topic Author
Stringfellow
Posts: 9
Joined: Sat Nov 02, 2019 3:18 am

Re: UK Based Investor – Building a Long-Term ISA Portfolio

Post by Stringfellow » Mon Nov 04, 2019 3:27 pm

Thank you again for taking the time to make such a detailed response, it has given me plenty of food for thought. I shall contact Vanguard re. any charges per transaction and can see why this would be a streamlined way of setting up an ISA system.

Apologies for my poor choice of words, market weighted is much more appropriate.

The simplicity of a one fund portfolio, due to my other financial circumstances, certainly has an appeal. Thank you for pointing me in this direction.

Best with your investments,

String

Topic Author
Stringfellow
Posts: 9
Joined: Sat Nov 02, 2019 3:18 am

Re: UK Based Investor – Building a Long-Term ISA Portfolio

Post by Stringfellow » Fri Jan 03, 2020 3:45 am

Happy New Year to everyone. I have developed my planning further and would welcome any thoughts. Many thanks again for the valuable input thus far.
————————-
Country of residence: UK
International Lifestyle: Retirement in the UK highly likely.
Currency: GBP
Emergency Funds: Six months expenses in a standard savings account.
Debt: One mortgage covering two residential properties (one rented).
Age: 40yo
Desired asset allocation: 80% stocks/ 20% bonds.
Current ISA portfolio size: mid five-figures; to be transferred.
Pension: Teacher’s Pension pro-rata contributions, Private Pension high five-figure value, OAP – when I get there hopefully!
------------------
I have now been in touch with Vanguard UK and their ISA package appears to fit a Boglehead approach well: low fees (0.15% annual ISA account fee), open ended index funds, tax free, no further charges for regular or ad-hoc contributions or switches from fund to fund (the latter primarily for any necessary rebalancing).
So, looking ahead to the fiscal year of 2020 and beyond, my current thinking is to contribute a regular amount each month to the following Vanguard funds, annually rebalancing and adding top-ups on an ad-hoc basis, as and when finances/ work bonuses allow:
80% FTSE Global All Cap Index Fund – Acc (OCF 0.23%)
10% UK Government Bond Index Fund – Acc (OCF 0.12%)
10% UK Inflation-Linked Gilt Index Fund – Acc (OCF 0.12%)
Reasoning:
The goal is to build a tax free capital lump sum to help supplement pension and rental income in retirement. ISA capital will accrue alongside pensions and the eventual extinguishment of mortgage.
An 80%/20% allocation is aggressive but will allow for the potential benefits of rebalancing over an expected building & holding period of at least twenty years. Also, via rebalancing, the bond funds will act as “ammunition” in the next bear market, as helpfully mentioned by a previous poster (thank you VT!).
Global fund is world market weighted and greatly diversified. UK bond funds give some protection against volatility and the ravages of inflation, plus will hopefully help me to hold my bottle during major down trends. Lars Kroijer’s book “Investing Demystified” was a pleasure to read and an influencer here (& again, VT).
Questions:
• Bonds: my understanding is limited; do the two chosen funds seem a worthy pairing? Why?
• REITs: with a rental property eventually providing an indefinite monthly disposable income, is the consideration of REITs less valid in the building of this ISA portfolio? Why?
My reading & learning continues, but I am most grateful for any further help with my plan and have learnt much from the forums etc.
Best regards,
String

glorat
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Re: UK Based Investor – Building a Long-Term ISA Portfolio

Post by glorat » Fri Jan 03, 2020 9:45 am

In the context of ISAs, I'd suggest going 100% FTSE Global All Cap Index Fund in your ISA because
  • It is simple and simple is good. You've got better things in life to worry about than tinkering with REITS and other things that make less difference then saving regularly
  • Put your bonds in places other than ISAs (e.g. your pension) because ISAs have unlimited tax benefits but limited yearly investment amounts, whereas pensions or taxed accounts have limited tax benefits
However, please ignore my advice if you are not earning enough to max out your annual ISA allowance. If that's the case, you need to consider your AA as you were. Your proposed choice is fine too

Topic Author
Stringfellow
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Joined: Sat Nov 02, 2019 3:18 am

Re: UK Based Investor – Building a Long-Term ISA Portfolio

Post by Stringfellow » Fri Jan 03, 2020 1:03 pm

Hi Glorat, many thanks for your response. This is a good call and I would love to be able to say that my annual income allows me to max out my ISA allowance, but unfortunately it doesn’t. (At least, not at the moment!)

I’m hoping to set this system up and then do very little tinkering at all tbh! Swensen & Malkiel (amongst others) include REITs in a recommended generic portfolio, hence my questioning its relevance. I’m struggling to locate a UK index based REIT and would prefer to follow your recommendation of simplicity.

Thank you again for your input.

Valuethinker
Posts: 39262
Joined: Fri May 11, 2007 11:07 am

Re: UK Based Investor – Building a Long-Term ISA Portfolio

Post by Valuethinker » Tue Jan 07, 2020 4:15 am

Stringfellow wrote:
Fri Jan 03, 2020 3:45 am
Happy New Year to everyone. I have developed my planning further and would welcome any thoughts. Many thanks again for the valuable input thus far.
————————-
Country of residence: UK
International Lifestyle: Retirement in the UK highly likely.
Currency: GBP
Emergency Funds: Six months expenses in a standard savings account.
Debt: One mortgage covering two residential properties (one rented).
Age: 40yo
Desired asset allocation: 80% stocks/ 20% bonds.
Current ISA portfolio size: mid five-figures; to be transferred.
Pension: Teacher’s Pension pro-rata contributions, Private Pension high five-figure value, OAP – when I get there hopefully!
------------------
I have now been in touch with Vanguard UK and their ISA package appears to fit a Boglehead approach well: low fees (0.15% annual ISA account fee), open ended index funds, tax free, no further charges for regular or ad-hoc contributions or switches from fund to fund (the latter primarily for any necessary rebalancing).
So, looking ahead to the fiscal year of 2020 and beyond, my current thinking is to contribute a regular amount each month to the following Vanguard funds, annually rebalancing and adding top-ups on an ad-hoc basis, as and when finances/ work bonuses allow:
80% FTSE Global All Cap Index Fund – Acc (OCF 0.23%)
10% UK Government Bond Index Fund – Acc (OCF 0.12%)
10% UK Inflation-Linked Gilt Index Fund – Acc (OCF 0.12%)
Reasoning:
The goal is to build a tax free capital lump sum to help supplement pension and rental income in retirement. ISA capital will accrue alongside pensions and the eventual extinguishment of mortgage.
An 80%/20% allocation is aggressive but will allow for the potential benefits of rebalancing over an expected building & holding period of at least twenty years. Also, via rebalancing, the bond funds will act as “ammunition” in the next bear market, as helpfully mentioned by a previous poster (thank you VT!).
Global fund is world market weighted and greatly diversified. UK bond funds give some protection against volatility and the ravages of inflation, plus will hopefully help me to hold my bottle during major down trends. Lars Kroijer’s book “Investing Demystified” was a pleasure to read and an influencer here (& again, VT).
Questions:
• Bonds: my understanding is limited; do the two chosen funds seem a worthy pairing? Why?
There is nothing in principle wrong with that allocation. Indexed Linked Gilts will do strange things - although c 30% of UK govt debt is ILGs, much of it is not traded - bought by pension funds and insurers and held to maturity. You can get sharp movements and not in the direction anyone anticipated. As usual, Stay the Course. They give you inflation protection.

To be simpler you could have 20% Government Bond Index fund. Just remember not to panic when (if?) interest rates rise. The bond fund will fall in value, but the yield on the bond fund will also rise - so in the long run you will be in the same place or better off (the "long run" in this case is measured by something called Modified Duration, which for UK gilts right now (the whole index) is 12-13 years).
• REITs: with a rental property eventually providing an indefinite monthly disposable income, is the consideration of REITs less valid in the building of this ISA portfolio? Why?
My reading & learning continues, but I am most grateful for any further help with my plan and have learnt much from the forums etc.
Best regards,
String
You don't need REITs other than what is already in the global equity index:

1. you already own UK property

2. many areas of commercial property in the UK are under huge pressure, particularly retail, where landlords are being forced to slash rents or lose the tenants (retailers in CVA). There's no area of UK commercial property that is "safe": you can see signs of severe overbuilding in student housing, even city centre offices the demand could be much smaller in future years, industrial is always very volatile etc.

You get indirect exposure to UK property via shareholdings in for example UK banks (c. 80% of bank lending is property backed).

Much of the return from REITs comes in the dividend, and you get the first £2k of that tax free *outside* ISAs etc.

All having REITs would do is add to your volatility without necessarily adding to your returns. The theoretical efficiency gain would probably only be achievable with more than 10% REITs, and that's a lot to put into 1 sector which is (by its nature) financially leveraged.

Topic Author
Stringfellow
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Re: UK Based Investor – Building a Long-Term ISA Portfolio

Post by Stringfellow » Tue Jan 07, 2020 5:46 am

Thank you again for taking the time to respond to my questions VT, and this has firmed up with details on what Glorat has mentioned above re. fund choices. Understanding brings confidence to decision making, and with such a long-term view on this portfolio build, it's just what I needed. Now I've only got to earn the money and then stay the course... :happy

Sorted! Many, many thanks for everyone's input.

Best regards,

String

LHRAdam
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Re: UK Based Investor – Building a Long-Term ISA Portfolio

Post by LHRAdam » Wed Jan 08, 2020 5:57 am

This thread has been incredibly useful to me too. I started working again recently and had to change the “default” company pension (with L&G) to a passive unhedged global equity tracker. (The default was an actively managed fund with a bunch of corporate bonds and a nice solid management fee!!)

The points earlier about overweighting the UK being a mistake have been so helpful in the past and again just now. Reminds me why I made the decisions I did. Thank you for posting.

Valuethinker
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Re: UK Based Investor – Building a Long-Term ISA Portfolio

Post by Valuethinker » Wed Jan 08, 2020 8:11 am

LHRAdam wrote:
Wed Jan 08, 2020 5:57 am
This thread has been incredibly useful to me too. I started working again recently and had to change the “default” company pension (with L&G) to a passive unhedged global equity tracker. (The default was an actively managed fund with a bunch of corporate bonds and a nice solid management fee!!)

The points earlier about overweighting the UK being a mistake have been so helpful in the past and again just now. Reminds me why I made the decisions I did. Thank you for posting.
One issue. There's a post by Ted Swippet somewhere about this.

Usually with a corporate scheme there's a "cap" on fees - might be 1%, might be less. So whichever funds you own, it appears that the fee is taken out equal to that percentage cap. (if you choose funds that say charge 1.3% a year, this is allowed to breach the cap).

So in other words there's a minimum funds charge.

Something to check in to - reading the fine print. They don't make it easy because the way they charge the fee is via reducing number of units you hold (at least in the case I was familiar with).

I have a personal pension on which I pay 1% reduced to 0.8% for being over a certain size (something like £150k?) & my old company pension (with another insurer) I pay 0.5%. Although I don't like the fund choices as much in the latter, I keep the money in that fund for that reason.

ISAs I got so confused on the different platform charges that I finally settled on Vanguard - they are not the cheapest provider but they are completely transparent about cost.

LHRAdam
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Joined: Thu Jul 26, 2018 7:58 pm

Re: UK Based Investor – Building a Long-Term ISA Portfolio

Post by LHRAdam » Wed Jan 08, 2020 10:44 pm

Thank you.

I might be paying a management fee of (say) 1% even though the TER is listed at 0.11%.

If the fee is fixed then I guess the BH philosophy would be to choose the passive global equity tracker anyway. Given the pension can’t be moved until we leave the company then as you say probably nothing can be done. No point worrying about it 😀

Valuethinker
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Re: UK Based Investor – Building a Long-Term ISA Portfolio

Post by Valuethinker » Thu Jan 09, 2020 9:08 am

LHRAdam wrote:
Wed Jan 08, 2020 10:44 pm
Thank you.

I might be paying a management fee of (say) 1% even though the TER is listed at 0.11%.

If the fee is fixed then I guess the BH philosophy would be to choose the passive global equity tracker anyway. Given the pension can’t be moved until we leave the company then as you say probably nothing can be done. No point worrying about it 😀
And you have to be careful about who you transfer it to because the transfer fees add up (when you switch the pension, that is).

Topic Author
Stringfellow
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Re: UK Based Investor – Building a Long-Term ISA Portfolio

Post by Stringfellow » Thu Jan 09, 2020 2:54 pm

LHRAdam wrote:
Wed Jan 08, 2020 5:57 am
This thread has been incredibly useful to me too. I started working again recently and had to change the “default” company pension (with L&G) to a passive unhedged global equity tracker. (The default was an actively managed fund with a bunch of corporate bonds and a nice solid management fee!!)

The points earlier about overweighting the UK being a mistake have been so helpful in the past and again just now. Reminds me why I made the decisions I did. Thank you for posting.
Hi. Glad this has helped you out a bit too. There appears to be very little activity by UK investors on here (or are they all lurking?), so I’m very grateful to Ted, Glorat & VT. Best with your fiscal health :beer

LHRAdam
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Re: UK Based Investor – Building a Long-Term ISA Portfolio

Post by LHRAdam » Thu Jan 09, 2020 7:39 pm

I have noticed the relative lack of UK posters too.

What has been most useful to me in the UK advice since I found BH a couple of years has been
1. Differences in expected TER from the US and the need to take into account platform fees
2. Home bias and why it’s important not to have it
3. Hedging considerations
4. Discussions about pension legislation
5. How to think about bonds as a British investor

Same to you 😀

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Forester
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Location: UK

Re: UK Based Investor – Building a Long-Term ISA Portfolio

Post by Forester » Tue Jan 14, 2020 11:51 am

iWeb (owned by Halifax) charges no annual fee. I would rather own a Vanguard ETF on those platforms, than pay 0.1%. There's also more fund & ETF choice.

https://www.iweb-sharedealing.co.uk/cha ... harges.asp

A flat fee alternative is IG, £24 a quarter. The ETF choice is extensive.

Topic Author
Stringfellow
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Re: UK Based Investor – Building a Long-Term ISA Portfolio

Post by Stringfellow » Tue Jan 14, 2020 3:53 pm

Hi Forester

Thanks for the input.

I looked in to iWeb as a possible. Thing is, I intend to utilise DCA via a monthly commitment, and this incurs a charge for each trade with iWeb, so I'm opting for Vanguard at 0.15% per annum, all in. If I was just moving a chunk of cash and leaving it be to grow, iWeb or Lloyds Share Dealing look perfect - what do you think?

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