The post that outlines what I’ve actually decided to invest in.
In Choosing an Investment Strategy: Part 1, I was mulling over how to start dabbling in the investment world or, indeed, whether to begin at all. I was debating whether to build a loft conversion and thus keep my money in cash for the time being.
As it happens, I’ve decided not to pursue the loft conversion in the near future. I figure that it’s time to get cracking on investing and building my future fund – especially given how uncertain I am about staying in London for the long-term.
Also, I’m telling myself that just because I’m putting the money into investments it doesn’t mean I can’t withdraw it to build the loft extension in the future. There would only be an issue if I needed the money urgently and the stock market was going through a dip.
I was feeling some pressure to do the loft conversion soon, as the current freeholder of my building seems to be willing to sell me the loft space for a very reasonable premium. But in reality there’s never going to be an urgent need to build a loft conversion.
INVESTMENT STRATEGY FOR BEGINNERS
I’m pretty much a beginner to investing. Until now I’ve kept all my savings in cash as I was saving for a housing deposit. I have invested through my workplace pension for some time, but have always just stuck with the scheme’s default fund.
Given that I have a relatively limited understanding of the intricacies of the stock market, my plan is to keep is simple in the first instance.
I’m a big fan of Lars Kroijer’s Investing Demystified series and think that’s as good a place as any to start. Lars advises having just two funds in your portfolio – a global index tracker and a “home” government bond index – split according to your risk tolerance. The Monevator website has also been a huge help in helping my choose funds.
As I explained in Part 1, I’ve decided to aim for an approximate 80/20 split between equities and bonds. I’m also going for index funds rather than ETFs.
It goes without saying that the below should not be taken as advice in any way, given what a newbie I am to investing. However, I know the nosy side of me likes to hear about how other people invest. So, for those of you who enjoy the same, here’s what I’ve landed on.
For those non-UK readers, ISAs (individual savings accounts) are our tax-efficient savings accounts. They can be held in cash or stocks and shares. You can contribute up to £20,000 a year and they are income and capital gains tax free.
To invest in stocks and shares you need to choose an investment platform. Monevator has a great comparison table.
I ended up opting for Lloyds share dealing. As someone who is going to invest in funds on a drip feed basis (by regular payments every month around payday), the fees work out best for me. Time will tell if I like the platform. So far it seems quite simple and well laid out.
In Part 1 of Choosing an Investment Strategy, one of my options (the one I have ultimately decided to aim for) was to invest 50% of my ISA in Vanguard Lifestrategy 60 (fund charge of 0.22%). This is a multi-asset “fund of funds” that has 60% in equities and 40% in bonds. Thus it hits my goal of 20% in bonds (albeit this is a range of bonds, not just UK gilts).
I originally intended to put the other 50% into an all-world tracker. The cheapest I could find was a HSBC one. However, a bit of digging showed that both the VLS 60 and the HSBC tracker had State Street as the fund trustee. Now, I realise that State Street is a huge institution and there are probably many investors who have all of their funds with them as custodian and aren’t at all worried.
I also realise that if something went catastrophically wrong with State Street it doesn’t affect that I still own the underlying investments. However, I don’t think it hurts to hedge your bets at every level of the investment flow.
Even if the worst that happens is an administrative delay to accessing my money, I’d rather that not happen. I also have a paranoia about an unprecedented cyber-attack wiping out an institution’s IT system and records. That probably shows my ignorance of the impact of a cyber-attack, but if it helps me sleep at night, I’d rather be over-cautious.
When I have enough invested to justify it I’ll split between two platforms
I’m not ploughing everything into one fund, such as the Vanguard Lifestrategy 80
I’m making sure my funds have at least two different trustees
I discovered a Fidelity fund (Fidelity Index World Fund P – fund charge 0.12%) that seems to meet my needs. However, it’s developed world only. So I’m putting 45% into that and 5% into Fidelity Index Emerging Markets Fund P (fund charge of 0.2%).
The country split
One other reason I haven’t invested everything into a VLS fund is that they are quite heavily weighted in UK equities. Instead, I prefer the philosophy of avoiding home market bias and investing according to a country’s weighting in the global market.
I have ended up with a bit of a UK bias across both my ISA and pension, but I can live with that.
Here’s how it breaks down:
|European (ex. UK) equities||8.2%|
|Emerging market equities||7.5%|
|UK government bonds||5.5%|
|International government bonds||6.5%|
This might not be exactly accurate as fund information doesn’t always make it clear what falls within “other equities”. As such, the European equities figure is probably higher than the table above suggests, and the “other equities” figure a bit lower. The same applies to the other tables below.
For those that like graphs:
My workplace pension is with Legal & General. The default fund was far too heavily weighted in bonds. It had less than 40% equities. I have therefore chosen my own funds.
Given the longer time horizon before I’ll be drawing on my pension I’m a bit lighter on bonds here: approximately 15%. Some would argue even that’s unnecessarily high.
I have also upped my pension contributions to 15% of salary. Combined with my employer’s 5% contribution I’ve got 20% of my salary going into my pension.
L&G have a fairly good world (excluding UK) tracker. I’m putting 65% into this fund.
I’m putting 25% into a “Consensus” fund. It’s a multi-asset fund which gives me exposure to UK equities and various bonds. However, it is mostly international bonds so I’m also investing 5% in a UK gilts index and another 5% in an inflation-linked gilts index.
The country split
|European (ex. UK) equities||9.8%|
|Emerging market equities||4.9%|
|UK government bonds||11.6%|
|International government bonds||3.2%|
Across my ISA and pension investments it roughtly breaks down like this:
|European (ex. UK) equities||9.0%|
|Emerging market equities||6.2%|
|UK government bonds||8.5%|
|International government bonds||4.8%|
I’m sure I’ll tinker with this plenty as I go, but I think this is a decent start.