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Weekend Reading: surely not cash ISAs?

Weekend Reading: surely not cash ISAs? post image

What caught my eye this week.

I don’t know about you, but I really miss that six-month spell last year when we all fretted about what was going to happen to pension allowances, inheritance tax, AIM shares, and all the rest of it.

Everyone knows financial planning is dull as dishwater. So why not living things up by throwing all the rules up into the air every few years?

That way we won’t get too complacent.

Instead: all the fun of the power-ups and banana skins in Mario Kart. Anyone might win – or lose!

Well rejoice because according to the Financial Times and This Is Money, financial firms have been lobbying the government to do away with – or at least severely do-in – the humble cash ISA.

The Financial Times reports that:

During a meeting last month, City firms lobbied chancellor Rachel Reeves to scale back incentives for cash Isas, arguing that the money would be put to better use if it were invested in the stock market.

Le sigh.

Cash cachet

Happily – though not exactly surprisingly, given it should be blindingly obvious to anyone – both articles found experts to defend the virtues of cash ISAs.

After all, here’s a rare popular financial product that anyone can understand.

Rates are now reasonable again. And the ISA shielding means there’s no returns lost to tax or time lost to paperwork.

This is what success looks like, and you can see why it turns the City green with envy:

Source: HMRC

Of course I know returns from equities and even bonds will very likely trounce cash over longer timeframes.

And ever since 2007 Monevator has been trying to help people understand how to invest more productively.

I also agree that boosting the flow of capital going into the London Stock Exchange would be helpful for Great Britain PLC.

But getting rid of one of the very few financial products that the average person is comfortable with – and upsetting the applecart yet again – is not a good way to encourage more investment.

How about instead educating people from school age about regular saving and compound interest, and what it might mean for their futures?

Or how about just not changing the rules on the whim of every other Chancellor, and instead letting us properly plan for the long-term?

Heck, how about politicians not inflict years of political chaos and ultimately economically damaging policies on the British public?

That way instead of flirting with recession every few quarters (see the links below) maybe we’d have enjoyed years of proper GDP growth and even some of the full-throated animal spirits that the Americans have seen.

And by the same token, maybe don’t bang on about ‘going for growth’ and then immediately inflict an employment-penalising kick in the arse for business as soon as your first budget comes around?

(Okay, and it’d be nice if we could re-roll the cosmic dice so we don’t have a pandemic and a war in quick succession next time.)

Honestly, for the average financially-confused person out there, just hoarding cash in the face of all this uncertainty seems very understandable to me.

Cash is not trash

If something must be done about this ‘unproductive’ cash – and to re-iterate, I’d prefer they just left well alone for a few decades – then I’d vote for carrots rather than sticks.

Let’s get rid of the ridiculous stamp duty on UK traded shares for starters. And scrap that pernickety £1.50 PTM levy on trades over £10,000 while we’re at it.

But something as fundamental as the cash ISA shouldn’t be up for debate.

Politicians who look forward to generous defined benefit retirement schemes need to understand that normal people in the brave new-ish world of defined contribution pensions face what’s notoriously the hardest problem in finance.

Given that is already a lot to cope with, some lasting stability might go a long way to encourage more learning about investing – and eventually coax more money out of cash and into other assets.

Get a real job

To be fair to her, Rachel Reeves doesn’t appear to be the instigator of any of this cash ISA dissing – though This Is Money does note ominously that:

The Chancellor did not dismiss the idea, according to a senior banker.

Really? Okay, then I’ll make the decision for her.

Dismiss it: we don’t need any more unforced errors.

Get on with sorting out planning or transport or a proper energy policy or anything big and bold that could actually improve our future writ large, rather than more fiddling with how we move this or that pile of the dwindling coins we’ve already got.

Cash ISAs are a solution to a problem – not the other way around.

Lord make my readers frugal, but not yet

On a totally unrelated note, ten years after I first sketched out a couple of ideas for ‘quirky’ investing-related T-shirts, we’ve finally got some Monevator merch coming your way!

Yes, you’ll soon be able to wear your love affair with investing on your sleeve – and in any colour too, so long as it’s Monevator-style black and white.

Got too much cash hoarded in your ISA? Then why not live large and spend a few tenners from it before Rachel comes a-calling…

This Shopify – um – shop of ours will also feature pointers to our favourite investing books on Amazon. Because you’ve got to eat your greens too, you know.

Anyway I’m going to rollout access to the shop in stages, so we don’t get overwhelmed* like in those Black Friday stampede videos that used to go viral a few years ago.

(What happened to those? I guess it’s all just standard behaviour nowadays?)

Moguls first – please watch your inboxes over the next few days for your teaser discount code!

And have a great weekend.

* I wish!

[continue reading…]

{ 7 comments }

The benefits of living mortgage free

The benefits of living mortgage free post image

Becoming mortgage free is not just a practical goal to be sensibly evaluated as part of your wider investing strategy – although it is that for sure.

There’s an emotional component to getting rid of your mortgage, too. And we shouldn’t ignore our emotions because they hugely influence our ability to stick to our plans.

Feelings matter!

Mortgages and make believe

It’s always seemed to me that mortgages are deeply sentimental, in a way that other financial products are not. They’re like the Hallmark movies of the financial world.

Think about it.

Firstly, there’s the hackneyed but heart-warming narrative…

A young couple in love are chasing their dream to own their own home. They struggle to pull together a deposit. The bank agrees to help them. There is champagne (or cheap plonk). They sleep on the floor until their furniture arrives. 

Soon they’re ripping wallpaper samples off the rolls at B&Q and picking up those little paint cards with the different coloured strips. The IKEA catalogue is suddenly intensely fascinating.

It’s not all plain sailing, obviously. Our couple have their struggles. Tight budgets and problem neighbours. Arguments about the damp patch on the kitchen ceiling.

A dog joins the cast, and then a couple of children. There are barbecues in the garden.

And all the while they’re paying off that mortgage.

At last – usually when they’re much older and the kids have flown the nest and the dog is buried under the barbecue – their mortgage comes to an end, as all good things must. 

The end credits roll, and we see them sailing away into the sunset on a Saga cruise.

Living the dream

Being deeply gullible, I bought into all of that.

I remember going to get my first mortgage, and sitting in a little office in the shopping centre branch of a building society with a woman wearing a name tag and a stern expression.

I was 27 and completely petrified. 

Would I make an unfunny joke – likely – and accidentally destroy my chances of getting a mortgage? 

Might my asthma – an occasional cough – be categorised as potentially fatal for mortgage-gaining purposes?

Would my employment history – patchy – show that I shouldn’t be trusted with proper money? 

When my application was actually approved, it felt like I’d been accepted as a Real Grown-Up.

I was thrilled. So I agreed to everything: payment protection, life insurance, you name it. Because that was what Grown-Ups did.

Shortly afterwards of course I went through the enormous reams of paperwork and realised what I’d done – and promptly cancelled most of what I’d been talked into.

But nevertheless, for a while having a mortgage was a great thing. Because having a mortgage allowed me to buy a house, and that was very exciting indeed.

True, it was a run-down terraced house opposite a patch of waste ground. Not exactly white-picket-fence material

But as far as I was concerned I was Living The Dream.

Questioning the dream

It only dawned on me later that a mortgage was still a debt. 

I’d never thought of it like that before.

A mortgage was a necessary bill, surely? You paid a mortgage or you paid rent. That was how things worked. And at least with a mortgage, you got to have a house that was yours.

Right?

Well, sort of.

Unless the bank took it back.

The more I thought of about it, the more it bothered me. 

Debt nightmares

The reality was that I was in debt – to the tune of many thousands of pounds.

I would never even consider that in any other situation. But I’d just blithely skipped into my mortgage.

I’d even thanked the bank for saddling me with a giant stonking debt!

What was wrong with me?

I read up. I learned that there was Good Debt and there was Bad Debt, and that mortgages fell into the category of Good Debt. 

But knowing that didn’t help much. 

I ran the numbers – easier to do nowadays with online calculators – to see how much I was going to pay over a 25-year term on the money that I’d borrowed. 

The answer was a mind-boggling amount.

Rejecting the dream

Within a year of moving in and mortgaging up, I was furious about the whole situation. 

I didn’t know anything back then about FIRE or investing. I hadn’t found Monevator and I didn’t realise that financial independence was an achievable thing. 

But I still felt cheated because the world hadn’t properly explained to me that I was digging a hole that would take me most of my working life to climb out of.

It didn’t help that my parents had recently had a brush with the endowment mortgage drama, either. As a consequence I’d begun to see mortgages not as a necessary part of life, but rather a trap for the unwary.

So I decided to haul myself out of the hole.

Fortunately, when my mortgage was set up I had opted for a one that allowed me to make limited monthly overpayments.

I remember that it was presented to me in terms of a saving scheme – that if I built up a surplus through overpayments, I could tap that for a payment holiday at some point in the future.

Going back through the paperwork though, I found that overpayments could be used to reduce the term of the mortgage. Over time, this could slash the total interest that I’d be charged.

Just like that, I was off.

Mortgage repayment illustration

Let’s say you have a £200,000 repayment mortgage charging 5% with 25 years left to run on the clock.

According to Monevator’s mortgage repayment calculator:

  • Your monthly payments will be £1,169
  • Over the lifetime of the mortgage you’ll pay £150,754 in interest
  • The total paid will be £350,754

Ouch.

But wait – you’ll see in the calculator there’s a box for ‘overpayments made per month’.

Don’t leave it hanging! Instead let’s round up the mortgage to £1,400 a month, by entering a £231 overpayment every month into that slot.

Here’s a pretty graph showing what will happen when you do so:

By finding £241 down the back of a sofa / side-hustlin’ / skipping lattes each month, you:

  • Pay the bank £1,400 a month
  • Save £46,248 in interest over the mortgage’s life
  • Pay a far lower total cost of £304,506

Oh, and you get to pay off your mortgage seven years early!

My new mortgage-free hopes

You can see why doing these sorts of sums set my heart a flutter. I was racing to get started.

However back then it wasn’t so straightforward to overpay a mortgage. I didn’t live near a branch of the building society, and it all had to be done by post.

Also, I couldn’t commit to a set overpayment schedule. Instead I just threw whatever I could spare at it.

Every month I would write a cheque for whatever I could afford. I’d put my mortgage account number on the back, stick it into an envelope with a stamp, and post it off to the address of the relevant office.

And every month I would get a piece of paper back through the post stating the amount of my overpayment and the consequent reduction in the term of the mortgage.

Building a better dream

I hoarded those additional mortgage statements like treasure. I kept them in a special ring binder which I hid under the sofa, and I’d take it out and flick through it when times were hard.

That was important. Because mortgages are about emotions, not just money.

It was incredibly difficult, some months, to find any spare money. Often I resorted to selling things on eBay and sometimes Gumtree to make some cash. I very rarely bought anything nice for myself – for years. If relatives gave me money for my birthday, it went straight into the ‘mortgage-free fund’.

But because I got such a sense of achievement from my little file of paper statements, I kept going and I didn’t waver. 

Even when my socks became more hole than sock. 

Even when I messed up cutting my own hair and had to wear a hat for three months.

Squirrels gonna squirrel

The funny thing is that in some ways it was a very happy time for me. I was on solid ground. I had a mission and I knew how to go about pursuing it.

That walk to the postbox with my cheque every month – I don’t think I’ve ever enjoyed a walk as much since.

There were ups and downs of course. The course of true mortgage freedom never did run smooth.

Setbacks included a financially feckless ex-husband, a child with lots of unanticipated needs, an unwanted second mortgage foisted upon us by said ex-husband (before he was ex-ed!) and several banking shake-ups.

There was also a delightful episode when the building society refused to put the mortgage in my sole name because they didn’t like my job. 

But in the end I became mortgage-free not long before my 40th birthday. I’d shortened my mortgage term by about 12 years and saved myself tens of thousands of pounds in interest.

Living the mortgage-free dream

Becoming mortgage free took more than a decade of dedication, but it was worth the effort. It was, financially, the best thing I’ve ever done.

Now that I’m mortgage free I don’t have to worry about being one calamity away from losing my home.

And all that money I had to find every month – not just the mortgage payments, but also the overpayments – isn’t going out with regular cheques in the post anymore. This meant I could readjust my finances and start investing.

But paying off the mortgage didn’t just bring practical benefits.

It brought emotional ones, too.

I’d done something that once seemed impossible, against the odds, through sheer determination and stubbornness, on a low income while parenting, and through multiple crises.

I prioritised my long-term goal over short-term comforts, year after year. 

If I can do that then as others have said I feel I can do anything.

Mortgage free is one way to independence

Most of all, my mortgage freedom quest introduced me to the mindset of Financial Independence.

The FIRE acronym encourages us to think of Financial Independence as a very specific endpoint. It might involve retiring early or it might not. But the focus is generally on becoming independently wealthy.

But I think that misses an important point along the way.

Real financial independence starts when you step away from what you’ve been told, or from what other people are doing. When you reject the neatly-packaged Hallmark narrative of necessary debt and unnecessary spending, and do something bold instead.

There are probably a lot of people out there who are not and will never be financially independent, in the literal FIRE sense.

But they’re still reading and learning and dreaming big.

And they’ll find their own way to become free.

{ 41 comments }

InvestEngine LifePlan portfolio review

InvestEngine LifePlan portfolio review post image

Disclosure: Links to platforms may be affiliate links, where we may earn a small commission. Your capital is at risk when you invest. This article is not personal financial advice. Please do more research before deciding whether an InvestEngine LifePlan portfolio is right for you.

Do you fancy the idea of buying an entire portfolio at the click of a button? Do you like the pre-packaged, multi-asset convenience of Vanguard’s LifeStrategy funds? Do you wish someone would do that for ETFs, only without the UK equity bias?

Well, they have!

Enter the LifePlan portfolios from UK investment platform InvestEngine.

InvestEngine is known for its zero-fee broker services for DIY investors.

The LifePlan portfolios are not zero-fee but they are nicely-priced for small investors. They also feature several noteworthy points-of-difference versus their LifeStrategy rivals.

The headline: there’s much to like about the LifePlans.

With that said, there is a lurking cost issue for large investors that must be aired. We’ll deal with that in the costs section below.

What are the LifePlan portfolios?

LifePlan portfolios are like InvestEngine-managed ETF meal deals.

They’re readymade ETF portfolios you can buy off-the-shelf, one and done. As opposed to agonising about how much to allocate to Emerging Markets, or spending your nights sweating over your precise percentage of inflation-linked bonds. (Who even does that? Not me. Definitely not. Oh no.)

This type of multi-asset, ‘life is too short’ strategy is incredibly popular among those investors who are happy to exchange a measure of control for convenience.

Choice cuts

Instead of filtering through hundreds or thousands of funds, your choice with LifePlan immediately narrows down to picking one of six portfolios.

Each portfolio contains anywhere from 11 to 15 ETFs – with trading and rebalancing handled for you.

You only need to pick your strategic equity/bond allocation:

Portfolio name Equity allocation Bond allocation
LifePlan 20 20% 80%
LifePlan 40 40% 60%
LifePlan 60 60% 40%
LifePlan 80 80% 20%
LifePlan 100 100% 0%

LifePlan 100 is so-named because it’s 100% invested in equities. That’s ideal for young bucks with little to lose and the nerves of a mountain goat.

At the other end of the spectrum is LifePlan 20. No prizes for guessing it’s 20% equities while the other 80% is in Dogecoin low-risk bonds.

Stability is the watchword of the LifePlan 20 portfolio. Its owners want all the excitement of a Sudoku book. That’s because they’re either risk-averse or wealth-preservers who’ve already won the game.

Sitting in the middle is the 60/40 portfolio – the default choice for passive investors the world over.

Are multi-asset investments a good idea?

Absolutely. Multi-asset investments are an excellent idea for anyone who wants to put their money to work, but doesn’t want to be hands-on.

Contrary to popular opinion and the messages we’re assailed by online, investing success does not depend on micromanaging ‘secret’ stocks, cryptocurrencies, or currency trading techniques.1

Rather than such punting, you’re far better off doing a few very basic and boring things:

  • Invest in a low-cost, globally diversified array of equity ETFs, supported by high-quality bonds
  • Automate your investing habits
  • Press the snooze button and leave your investment alone while you get on with your life
  • Check in periodically (every few years, not days) to make sure everything’s on track
  • Look back with astonishment years later at how much your wealth has grown

That’s the basic operating manual of passive investing – a strategy that balances results with simplicity and best investing practice.

And happily, these principles underpin the creation and management of the LifePlan portfolios.

Sticking to the knitting

Fundamentally there’s nothing new here. And I mean that as a compliment, not a slight.

There are few points on offer for originality in the retail investing space.

You might be intrigued if you walked into the Tate Modern to see a parade of dead-eyed turkeys dropping votes into a Christmas-themed ballot box. A commentary on contemporary democracy perhaps?

But it’s best to steer clear of novelty when managing your money. Financial innovation and complexity has a history of backfiring upon trusting regular Joes/Josephines.

Hence I’m very happy that InvestEngine has opted for a tried-and-tested approach. Essentially, these are the sort of portfolios we’ve championed for years on Monevator.

Although there are enough twists to keep things spicy if you have strong opinions on currency hedging, bond duration, and factor investing.

But before we go on, we need to talk about costs.

After all, one of the key strengths of passive investing is that its devotees wage Holy War on fees.

Costs crusade

The Ongoing Charge Figure (OCF) of a LifePlan portfolio is 0.11% to 0.15% depending on the version you choose.2

Now add InvestEngine’s 0.25% fee for managing your portfolio.

The total price tag for a LifePlan portfolio is therefore 0.36% to 0.4% of your investment per year.

For LifePlan 60, for instance, it’s 0.37%.

LifePlans are only available at InvestEngine so there’s no account fee or trading charge to pay.

Which is all an excellent deal for small investors.

By way of comparison, a LifeStrategy fund held on Vanguard’s platform costs 0.22% for the fund and 0.15% in platform fees. Again a total of 0.37% – so a dead heat with LifePlan 60. (Probably not a coincidence!)

However, small investors must pay a £48 a year minimum charge at Vanguard, which is quite a drag when you’re starting out.

Advantage InvestEngine.

Size matters

LifePlans are less competitive for large investors though.

That’s because LifePlan’s 0.25% management charge is uncapped. Bad news for big portfolios as there’s no limit to your fees on that portion of the costs.

Contrast that with Vanguard, which caps its 0.15% platform fee at £375 (when your portfolio reaches £250,000 in size).

Beyond that point, you’ll pay progressively more for your LifePlan versus Vanguard LifeStrategy.

Indeed it’s not hard to find an even better deal than that because LifeStrategy funds are not a Vanguard platform exclusive.

For example, Interactive Investor offers a flat-rate platform fee of £156 per year for a SIPP. That’s the charge no matter how big or small your portfolio.

Interactive Investor’s flat-fee is good for large investors and bad for small investors.

What counts as large and small in this scenario?

You can work out the crossover point like this:

£156 (fixed fees) / 0.0015 (differential between LifeStrategy and Lifeplan 60 percentage fees)
= £104,000

If your portfolio is worth more than £104,000, then LifePlan 60 is more expensive than LifeStrategy 60 in Interactive Investor’s SIPP.

Conversely, LifePlan 60 is cheaper than LifeStrategy 60 below that crossover point.

So that’s the threshold to think about if cost is your dealbreaker (and assuming Interactive Investor is your favoured flat or capped-fee broker).

Side-bar: for a fair comparison, include an estimate of your trading costs when you weigh up a fixed fee versus uncapped percentage fee proposition.

In this case, I’ve assumed the investor takes advantage of Interactive Investor’s free regular purchase scheme.

Sells aren’t needed because LifeStrategy rebalances itself.

LifePlan versus LifeStrategy – the detail

But cost is not the only battleground, so let’s consider some other key differences between InvestEngine and Vanguard’s offerings.

Home bias

InvestEngine promises no home bias in LifePlan portfolios. That is, a LifePlan’s UK equity allocation should equal the UK’s presence in the global market cap portfolio.

Right now, UK stocks sum just over 3% of the equity side of LifePlan, as opposed to about 25% in Vanguard LifeStrategy.

Why is home bias an issue? Because financial theory suggests we should accept the market’s view (that is, the wisdom of the crowd) unless we have a very good reason to do otherwise.

And yet home bias persists – with one theory being that investors prefer to invest in what they know.

Long-term studies suggest however that such a preference is not a winning strategy, even if it is a psychological comfort.

Choice of components

Vanguard LifeStrategy portfolios are built exclusively from Vanguard funds while LifePlan portfolios are free to play the field.

InvestEngine can choose from any ETF it stocks on its platform – and it has a solid range these days.

Vanguard funds are good but they’ve long since surrendered their lead in the price wars.

Moreover if InvestEngine spots an ETF with some other advantage then it can swoop on that, too.

Diversity fans should also note that LifePlan 60 currently comprises ETFs from five different providers, including Vanguard.

Bond duration

An interesting selling point for LifePlans is they use a shorter duration bond portfolio than LifeStrategy.

All things being equal, a shorter duration bond allocation implies lower overall portfolio volatility in exchange for a lower expected return.

Your bond portfolio’s duration number helps reveal the difference this choice can make.

The rule of thumb is that the duration number indicates the approximate gain or loss you can expect to see from your bonds for every 1% change in yield.

For example, if your bond portfolio’s average duration is 7 then it:

  • Loses approximately 7% of its market value for every 1% rise in its yield
  • Gains approximately 7% for every 1% fall in its yield

Marvellous. From there, we can see that a long-bond duration of 15 can result in some big movements when yields buckaroo. (With ‘movements’ being the operative word back in the time of Truss.)

More common scenarios to think about include:

  • Yields rise, perhaps because inflation is running hotter than expected – shorter durations are best.
  • Yields fall, and the stock market crashes as the global economy goes into deep recession – longer durations are best.

The right choice for you as an investor may depend on which scenario you fear more: surging inflation or a deflationary recession.

Or you might decide you have no idea what yields will do, but you’ll likely experience many such scenarios in your lifetime. In which case, it’s a balanced approach for you!

So what durations are our multi-asset pair sporting like rival teams’ football scarves?

I calculate average bond durations of approximately:

  • LifePlan 60: 5.2
  • LifeStrategy 60: 7.2

Hence if yields rose 2% from here then you’d roughly expect:

  • 5.2 x 2 x 0.4 (bond % of overall portfolio) = 4.16% in bond losses for LifePlan 60
  • 7.2 x 2 x 0.4 (bond % of overall portfolio) = 5.76% in bond losses for LifeStrategy 60

Conversely if bond yields fell 2% then the same maths would apply, only this time reversed for gains.

It doesn’t seem life-changing to me, either way.

(Neither firm publishes average durations for these portfolios but it looks like the difference could be more significant at the LifePlan/LifeStrategy 20 level.)

Global and corporate bond diversification

One thing many of us discovered in 2022 is that bonds are a complex beast.

A bit like a guard dog sold as a family pet, they made us feel safe right up until we were bitten in the backside.

It’s surprising to me then that neither InvestEngine or Vanguard makes it easy to assess the key splits in their bond portfolios.

For example, geographic diversity, type, credit quality and, as mentioned, duration.

One long-running debate on Monevator is whether it’s best to diversify your government bonds across other developed world countries or to stick to UK gilts.

To that end, here’s each product’s global/GBP fixed income allocation (as a percentage of the bond portfolio):

  • LifePlan 60: 37/63
  • LifeStrategy 60: 66/34

(Note: these percentages include some corporate bonds, and cash-like securities.3 They’re also my approximate calculations based on fund provider and Morningstar data.)

Personally, I’m indifferent to the split. Home bias isn’t a thing if you stick to high-quality government bonds.

But I know many others prefer to diversify, in which case LifeStrategy has the edge. (Although, LifePlan’s overseas bond holding becomes more pronounced at the 40/60 and 20/80 equity/bond levels.)

Finally, both portfolios hedge all overseas bond holdings back to GBP, which is what I want to see.

Moving on, here’s the corporate/government bond allocation (as a percentage of the bond portfolio):

  • LifePlan 60: 13/87
  • LifeStrategy 60: 32/68

I prefer the LifePlan approach here. Fewer corporate bonds means InvestEngine is accepting a smidge less expected return in exchange for lower risk.

That divergence only widens as you head into the meatier bond realms of LifePlan 20 versus LifeStrategy 20.

Inflation-linked bond conundrum

For inflation defence, LifePlan uses the short duration, US inflation-protected bonds in iShares $ TIPS 0-5 ETF (GBP hedged).

LifeStrategy plumps for long duration, UK inflation-protected bonds in Vanguard’s UK Inflation-Linked Gilt Index Fund.

Here’s how those two options have performed since inflation took off in late 2021:

Source: Trustnet Chart tool

Lordy, Vanguard’s fund lost 37% without even adjusting downwards for inflation.

Meanwhile, LifePlan’s pick managed 6.3% growth (or 1.85% per year), although that’s also before adjusting for inflation. In real terms, LifePlan’s TIPs ETF also lost money, just not as much.

So neither put up a great fight against high inflation albeit InvestEngine’s choice was far better.

The reasons are complex but duration is key to the puzzle:

  • Vanguard’s fund is long duration – average duration is 14.5 at the time of writing
  • InvestEngine’s ETF has a very short duration of 2.3

When inflation runs riot, you want a shorter duration inflation-linked fund on your bond side (imperfect though it is), as the chart shows.4

Ultimately, you have to enter LifePlan/LifeStrategy 40 territory before either product starts to offer a significant index-linked bond allocation.

To hedge or not to hedge (equities)

Vanguard does not hedge equity exposure.

However, 50% of a LifePlan’s US equity exposure is hedged to GBP.

InvestEngine says:

While a fully unhedged equity position increases a portfolio’s risk, a fully hedged position increases costs and the temptation to time currency markets.

Based on extensive research, our balanced currency hedging policy is designed to reduce volatility and drawdowns, while keeping costs low and increasing long-term risk-adjusted returns.

That’s a strong claim.

The conventional view is that currency fluctuations are extremely hard to predict and we should expect hedged and unhedged investments to deliver similar returns over the long run.

If so, the decision to hedge depends more upon your personal risk exposure than the evidence base, which presents a truly mixed and timeline dependent picture.

It’s certainly a good idea to hedge your overseas bonds because their primary job is to lower portfolio volatility. Exchange rate gyrations can add excessive volatility on the bond side, hence Vanguard and InvestEngine both eliminate that problem with GBP-hedged choices.

In contrast, currency swings aren’t as problematic for stocks because they’re such a wild ride anyway. Thus the volatility benefit gained by hedging out FX perturbations is much less on the equity side.

So because hedges increase fees – and can work for or against you – most people don’t bother hedging equities unless they’re betting on currency moves.

Hedging my bets

One person who might consider hedging some of their overseas stocks is a retiree or near-retiree.

That’s because if you’re relying on global equities to pay your bills soon, then you don’t want a rapidly appreciating pound devaluing your foreign assets. (Think some kind of reverse Brexit, or the discovery of Saudi-scale oil reserves in Cockermouth.)

On the other hand, if most of our retiree’s wealth is held in gilts or hedged overseas bonds then their bills are probably covered by assets linked to GBP. In which case some currency diversification is probably a good idea, just in case the pound sinks.

Overall, I’m sceptical of the need for hedged equity exposure – though it wouldn’t put me off either, if I liked the rest of the portfolio (which I do).

For what it’s worth the pound remains at a low ebb against the dollar. If it should rise over the next few years then InvestEngine’s decision will provide a boost.

But over the long-term? Nobody knows.

For more on this, see Monevator contributor Finumus’ post on why you may not want to hedge your equities.

Factor investing: thrive or dive?

Factor investing is a strategy that advocates holding particular stock categories which are historically associated with beating the market.

The risk factor categories that LifePlan includes are:

Things to know:

  • The research underpinning the risk factors is convincing
  • But nobody guarantees the risk factors will continue to outperform in the future
  • Indeed, they’ve mostly been down on their luck in recent years
  • Risk factors are only available in a diluted form in ETFs
  • They do diversify the standard market cap portfolio
  • InvestEngine has chosen an excellent blend of factors
  • It invests 30% of the equity portfolio in risk factors, which is a sensible slice if you’re going to do it
  • Some or all of the risk factors can trail the market for long periods

The next chart shows how each risk factor has performed since dedicated factor ETFs came on stream:

Source: JustETF

Only momentum has really fulfilled its promise over the past 11 years. Quality scored a draw. The rest of the factors would have weighed a portfolio down.

But the purpose of the chart isn’t to illustrate that risk factor investing is a bad idea per se. Risk factors could come roaring back and start trouncing the market tomorrow. Again, nobody knows.

What the chart does reveal is that good investment ideas can fail to deliver – and for long periods – even when backed by research, theory, and common sense.

I invest in risk factors myself. But I also think it’s worth knowing the pros and cons to avoid disappointment later.

Like the equities-hedging decision, this one may prove to be a tailwind or headwind, but we’ll only know in retrospect.

Summing up

I think the LifePlans are an excellent option for people who want to invest but don’t care about investing.

That’s a lot of people!

I’ve recommended LifeStrategy funds to friends and family and I’ll happily do the same with LifePlans.

Personally, I think the LifePlan-InvestEngine fee structure is a great deal for small investors.

But InvestEngine needs to cap its fees before I could recommend LifePlans to anyone with much over £100,000 in their portfolio.

For current LifeStrategy investors, LifePlan offers a rational alternative, especially if you’re looking for a portfolio without home bias or long-duration inflation-linked bonds – or if you want to diversify your exposure to fund management companies.

Take it steady,

The Accumulator

Bonus appendix

InvestEngine shared with us the current allocation for each ETF in the LifePlan portfolios. It’s very useful information if you’re interested in how the portfolios are constructed.

LifePlan 100% equity portfolio

Weights may not sum to 100 due to rounding errors.

80% equity portfolio

60% equity portfolio

40% equity portfolio

20% equity portfolio

You can only invest in LifePlan portfolios through InvestEngine. See our review of the platform.

InvestEngine offers LifePlans in ISAs, SIPPs, and GIA accounts.

InvestEngine is FCA-authorised and is covered by the UK’s FSCS investor compensation scheme.

LifePlans are managed portfolios of ETFs, not fund-of-funds. Thus the underlying ETFs determine whether dividends are accumulation or income. Happily, InvestEngine automatically reinvests all dividends for you, if you enable the AutoInvest feature.

LifePlan’s asset allocations are rebalanced when they stray too far from their initial moorings. InvestEngine checks daily to see if the rebalancing thresholds have been passed.

Check out our best multi-asset funds list for a snapshot of other products available in this category.

If you’re wondering how to select the right LifePlan portfolio then check out our articles on:

  1. Y’know, the one recommended by that nice guy off the Internet? Promising he’ll teach you everything for free / after you’ve spent hundreds of pounds ascending through his multi-level marketing scheme. []
  2. That charge covers the individual OCFs of the underlying ETFs. You don’t pay those on top. []
  3. InvestEngine includes a money market ETF on the bond side of the portfolio. []
  4. Of course, you also want an index tracker that holds inflation-linked bonds that correlate with UK prices. A short-duration index-linked gilt fund is a good choice. Global/US index-linked trackers (GBP hedged) also work. []
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Weekend reading: Are rich people miserable?

Weekend reading logo

What caught my eye this week.

I enjoyed Life After The Daily Grind’s article asking whether money and miserableness go together. It was sharply written and thought-provoking.

But I didn’t really agree with the main premise.

Over the last decade or so several of my friends have ‘made it’. From wealthy enough to eschew the commute forever, all the way up to properly rich.

And honestly, besides a bit of a psychic dislocation for the first year or so, they don’t change very much.

Rich pickings

You wouldn’t be able to tell the most understated and modest of my financially very successful friends from how he was 20 years ago, unless you were lucky enough to visit his gorgeous house in the country.

Meanwhile the one who took many of his best friends with him on his entrepreneurial adventure would have done much the same I think if he’d convinced them to eschew the rat race to decamp to Thailand.

As for the banker, yes it was hard to pin him down when he was working 100-plus hours a week in his 20s. But even nowadays when he mostly points underlings to the treadmill or works from home – or on the slopes – a few days a week, he’s still just as hard to get hold of. (It’s not just me…is it, N.?)

True, the friend I’m closest to remains restless and unsatisfied despite his eight figures. He still worries about money, and frets over whether he’s investing it right.

And he just can’t quit the game.

I guess this is the bit where I’m supposed to say I feel sorry for him.

But I don’t.

You see, he was restless and hungry when I met him – and it was part of what attracted me to him. His energy and drive is infectious.

I feel a bit guilty saying this, but if he now spent his days drinking sundowners and spending an hour meditating on the beach before an afternoon nap, I wonder if I’d be disappointed?

In contrast, if my co-blogger The Accumulator was living a materially richer life that was still abundant with quiet moments, I’d be thrilled for him.

That’s his lane, rich or poor.

The bottom line: money doesn’t seem to transform anyone very much – or at least not once you’re off the bottom rung. Mostly just the scenery and props.

Money, money, money

However I am largely with L.A.T.D.G. when they make this observation:

All the high achievers I’ve worked with over the years are disciplined, organised, and highly driven by material gain. While the people I know who strike me as the happiest don’t have these attributes and although not successful in the monetary sense — they are happy and find enjoyment in simple things, like a sunny day, a walk in the park, or the smell of freshly ground coffee first thing in the morning.

Substitute ‘material gain’ in that first sentence for ‘winning’ – or add it as a second or alternative motivation – and I’d agree 100%.

None of my friends stumbled into being rich. They went for it. They didn’t have much of a work-life balance. Or rather they did because work and life was one and the same, so there wasn’t much to topple over anyway.

Many of you will probably find this a bit dispiriting, and are likelier to agree with the bits in the article about how there’s more to life than money.

Of course there is! Much more.

I’m just saying the people I know who got a lot of it first wanted to get a lot of it. Right or wrong, and whatever else they were after in life.

They weren’t necessarily happy or miserable before – nor more so afterwards.

Shiny and/or happy people

All that said, this thought experiment is perceptive:

If the health trackers we wear on our wrists that track our activity and sleep could somehow accurately tell us a happiness score out of 100, and in addition, we could compare that score with friends and celebrities then we would obsess over that number. It would be used to elevate our status as money is today. We’d all want to improve our score and make it into the top 1% of the population’s happy people.

We’re fixated on wealth because it’s measurable whereas happiness is hidden, but if that curtain was unveiled and our happiness became public knowledge then it would have a seismic effect on how we live our lives.

Food for thought.

Go read the rest of the article. And have a great weekend!

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