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Fixing my portfolio and my brain: Confessions of a passive investor [Members]
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This is great. Thanks so much. I share your past fear of bonds, and now add another layer of confusion. There have been some recent articles on Monevator about building bond ladders, but I’m curious about how this arguably more labour-intensive method compares with simply buying a bond fund such as Vanguard’s UK Government Bond Index Fund. Does the fund represent the worst of all worlds?
Very very timely post for me.
Although I’ve just spent time rejigging my portfolio in a very different way!
I have – pushed myself to hold less cash and more equities. (im sure in hindsight this will simply turn out to be the age old private investor’s psychological achilles heel of buying high and selling low).
I have – eliminated my tilts to UK and small cap and instead gone for the lowest number of holdings. So mainly now just in single global equity index funds.
I have – swapped my bond index fund for short dated individual gilts
I have – rejigged my asset allocation between tax wrappers and GIAs so that I don’t hold any equities in the latter, only short dated gilts. This might be financially suboptimal but as with the other changes I am mainly motivated by the mantra ‘simplify, then simplify again’. So goodbye to annual CGT calculations. Hurrah!
Now you’ve got me thinking – should I buy gold? Commodities? Linkers? should I be less gung ho about increasing my equity allocation and exposure to the US? What even should my equity allocation be, given that I have secured income providing at least a third of my spending needs? (and in 10 years time it will likely be at least half)
My goal has been to essentially have one equity fund in each ISA and SIPP, and a ladder of short gilts in my GIA, plus some cash.
Any feedback welcome!
@Firesoon – there’s definitely a monevator post looking at comparison of bond funds with individually held gilts.
So ignoring property, I got a surprise the other day when updating my spreadsheet that I hold:
71% – Global Stocks (Via ETF)
17% – UK Bonds (Via ETF)
2% – Cash
5% – Private Business Equity
5% – BTC
I never intended to hold so much BTC, but that’s what happens when a gamble pops!
Including property:
4.4% – Global Stocks (Via ETF)
1% – UK Bonds (Via ETF)
0% – Cash
0.3% – Private Business Equity
0.3% – BTC
94% – UK Property (Own home and 1 x BTL)
I should probably sell my BTL at some point. The yield is comparable to Bonds, but with more risk. However the capital gain has been very favourable.
N.b. I’ve rounded numbers a little, and they always float around a bit
My split is roughly a 60:40 portfolio, based on the strong floor of DB pensions. It is pretty close to your Slow and Steady portfolio and quite different from the wealth preservation portfolio you describe here.
Emotionally, I can’t do gold. I can understand where the gains come from in equities and bonds, but gold is just a speculative bet. Something I can’t bring myself to do.
The case for avoiding commodities is similar but not as extreme. Having spent my formative years in a business that made extensive use of commodity futures for their intended purpose (securing future commodity supplies at a known price), I always found the antics of professional commodity investors weird. Again, it was largely driven by speculative betting and added no value I could discern.
So, my defensive assets are bonds and cash. Roughly 10% global Gov’t bonds, 10% UK Gov’t bonds, 10% index linked (inc. NS&I certificates). Cash is a bit low at the moment and needs building up again towards 10% (note: if I add in my partner’s cash holdings that we consider separately, our cash is 17% of total assets, so no immediate need to do anything).
The thing I should do is switch to a linker ladder. I know I should. I have read the Monevator stuff on how it all works, but I don’t feel confident in doing so. It all seems like a lot of work.
And the pressure to do so is muted. From the beginning (2015), I have unitised my portfolio. and seen the unit price rise steadily from £100 to £182. Eyeballing the data, I could put a fairly convincing straight-line through it. So, I have a feeling of – if it ain’t broke, don’t fix it.
I will keep pondering a linker ladder, but not sure I will ever do it.
Thanks for the article.
We are both retired and have 4 isas and 2 sipps. I decided I would make life simpler by assigning an objective to each pot, eg for immediate income, to pay care fees in deep old age etc. It hasn’t helped ! I find it hard to switch brain modes when looking at each one. Still onwards I’ll plod. The recent pension iht switch hasn’t helped either as I have to find a way of retaining assets to fund my part of the inheritance and change my will. On the bright side I might not live until 2027/75 years old in which case no change needed.
I bought a couple of bonds to hold directly. The IL is in my wife’s name and although short duration might be good, the faff of buying by phone doesn’t make we want to do this too frequently so I went for a 2032 maturity.
Still grumbling about only seeing clean prices….
@TA do commodity funds pass the “don’t buy what you don’t understand” test? I know Monevator has published some excellent guides about them but they still seem pretty opaque.
Thanks TA, this is diamond! (No, that’s not another asset class!)
I’m doing a similar Pot thing to Paul_a38. I turned 59 last week so need to complete 8 years till I receive my State and Civil Service pensions. That’ll give me a floor of £2k a month, adequate if the kids are successfully launched (Huh!) and just the two of us.
Over the next 8 years I’ll fill my personal allowance from the SIPP using up a money market fund and fixed income. That’ll cover my contribution to the family budget.
Once that’s exhausted and I receive my pensions, my SIPP will be for emergencies and totally discretional spending. It’ll comprise HSBC global tracker for growth (50%) and 4 equal defensive assets – gold, commodities, BHMG and then cash in Premium Bonds.
I have an ISA which I’m planning on using for dividends to fund my personal spending, currently VHYL as it’s the broadest based dividend index. This also is a slight tilt away from the almighty US.
Though I’m wondering if the juicy yield of VanEck Morningstar Developed Markets Dividend Leaders (TDIV) might be better or is it a value trap? It’s all traditional industries of course, not much growth potential (though better than VHYL I think over the last 7 years). Any thoughts?
Great informative article -rather follows on from Saturdays post
Staying the course here (wife and I both 78) so race nearing its end
Equities have gone up a percentage or two in the Asset Allocation-bonds down in the same way -essentially no change (holding equities/bonds/cash only) as once again we head into the maelstrom!
Portfolio done its job-so far!
xxd09
Have you considered splitting your gold holding with Bitcoin? They’ve both got zero (or close to) intrinsic value but this might be considered added diversification (or foolhardy depending on your opinion). Personally, I’m struggling to add either one to my portfolio.
Thanks @TA, fascinating and very timely as just doing some early spring cleaning My main (outside of HL workplace pension) ii SIPP got a bit big, so split it in two (with AJ Bell). Whilst I have more to benefit from the highly educated collective here than vice-versa, I am now;
64% global equity (of which 14% tilt – multifactor and small caps, no home bias)
14% diversifiers (gold and commodities)
22% Bonds (infl. linked, global and med gilts)
Plus cash. Property covered by house, equity release from which is part of the running-out-of-money plan. This spans three SIPPS and one ISA.
Sadly no DB. I served 18 months in local authority (as much as I could take!) many years ago, contributing minimally to the pension fund. I tracked it down only a few years back, and could only then transfer or withdraw. Despite having contributed only about £3k, it transferred out over £30k! Should have stayed a bit longer.
Plan to feed bond funds from equities as retirement approaches. I like @Paul_a38’s ideas of having different pots to fulfil different requirements, nice research project. Similarly to @old_eyes, understand the benefit of the linker bond ladder, but sounds like a high involvement retirement project!
Always top notch.
2 more years: have you split your SIPP so monies are spread across platforms, as a safety measure?
Have everything (GIA, ISA, SIPP) in ii till this week and planning on moving ISA to Lloyds and gilts to Lloyds GIA just to platform-diversify.
Any views on platform diversification from others?
Thanks all for articles and comments/ very educational to one who is still fumbling in the dark
All this political and economic uncertainty seems to have many of us sorting our affairs/investments.
I moved all my DC pots to II mid last year and left them mostly in cash.
Finally bit the bullet last week and built a 8 year gilt ladder close to the HRT limit – combined with the TFLS in a few weeks should get close to fully draining by the time DB starts. GRY was around 4.5%, hopefully i can forget about it, and think about ISA investments.
The tax benefits of ISAs are starting to look too-good-to survive many more years.
I looked at my long term projection and it showed a ~6% tax rate (me and wife combined, inc ISA draw down at 6% pa). This is totally out of sync v workers brining in the same gross. NI on pensions is coming too.
I started with a spreadsheet. X
Ooops I timed out. Meant to say I started out with a spreadsheet, X on the yearly income, y for ages. Blocked out SP, me and wife 8 yes apart, then infilled with individual UK linkers to get floor. 1no. IT for a specific spend, and a SWR pot that provides variable income. A fair bit of cash and about 25% equity which will hopefully grow as we age. Main aim is for me not to fiddle as I’m the weakest link..
@Wildlife – yes, that’s exactly why I split my ii SIPP. Having lived through my parents’ pain with Equitable Life, thought it a prudent mitigation for relatively small premium. It also forces some diversification, as AJB needs ETFs, HL workplace needs funds but will flip to ETFs on retirement when preferential rates cease, and ii (SIPP)/ iWeb (ISA) aren’t fussy.
I would add that my experience with all of these providers, albeit AJB only just joined, has been very good so far. Mrs 2my has a small Vanguard SIPP – they have also been very good. Proof of the pudding though; pulling the plug (fingers crossed) in 12 months when it’s bound to get a lot more complicated.
Well done @Boltt, and indeed anyone else, on the gilt ladder. I’m rather intimidated but wonder about the possibility of a fixed term annuity to cover the gap between retirement and SP?
Love the chunky and courageous global multifactor allocation, although a 15 percent target is a bit high for me (I’m at 10, but also have a dash of small cap value and the low volatility anomaly).
I’m surprised and I guess reassured by the emphasis on a secure floor and non equity allocation in these comments. Perhaps I hang out too much with gung-ho accumulators who seem to think less than 100% equities is for wimps.
I’ve always felt I carried too much cash and not enough risk assets. Looking at my asset allocation now, I’m actually 75% equities, 15% cash and 10% gilts. Oops. Looks like I’ve overcome my cautious nature!
But then I have a DB floor income which is pretty generous, with two state pensions and another smaller DB later. So ultimately I think the investment portfolio will only need to cope with a 2% withdrawal rate. I can’t decide whether that means I should dial risk back or dial it up!
@2my, the gilt ladder is quite easy. The hardest bit is tracking down yield to maturity data – about a decade ago when I first learnt about investing you could get this on the government DMO website, now they don’t produce it.
I needed to revise what I’d learnt about coupons and redemption values but then the actual purchases were much easier, just online purchases like anything else. Its no harder than a ladder of cash deposits (apart from finding the data on returns. Not that I actually used that in my choices, I just bought the lowest coupon I could with gilts with varying redemption dates in the next 4 years. I am about to find out what happens when the first one matures!).
I am just buying short dated vanilla gilts to go in my taxable account. Maybe I will have a look at the index linked ones too.
@TA, don’t you worry about the complexity of your portfolio?
I know you are somewhat younger than me, but my experience of looking after my dad’s finances really impressed upon me how important it was not to have too many accounts or too much complexity. Hence my simplify, and simplify again mantra.
Its not just about consideration for those who will manage our estate (hopefully not for many decades). I just don’t really want to have to spend more of my time managing the damn stuff!
I’m due to start drawdown in the next year or so as my wife stops work. I do have some self-employment income but it only covers about 25% of spending and is very variable. We have 7 years to SP, my wife will have a small DB pension, I just have DC. In my industry employer contributions were very rare, in fact I only received employer contributions with the advent of auto-enrolment.
I have one ISA which is just the 80/20 LifeStrategy fund, I intend dialling that down but don’t get round to it.
I have two SIPPs, the first was opened quite recently and is very streamlined, four etfs in total, 60% global equities, 20% medium gilts, 10% short gilts and 10% TIPs. However the second which I’ve had for about 20 years was suffering from far too many positions so before Christmas I sold quite a few ITs and increased bonds and money market exposure. The intention is to replicate approximately the first SIPP but I’m keeping a few ITs for which I retain perhaps an irrational fondness, as they were some of the first things I bought eg SMT, PNL, RCP.
We have about 15% in cash as well which is about 5-6 years spending.
I’ve thought about a gilt ladder but am put off by complexity. We may also move abroad which is an extra consideration.
@All – Cheers for the very thoughtful comments – they’re going very well with my strong mug of tea this morn. It’s always very interesting to hear about what others are up to behind-the-scenes. The different approaches also remind me how personal finance really is, especially in later years.
@FireSoon – I’ve personally invested in individual index-linked gilts because of structural problems with inflation-linked funds. The same problem does not exist with nominal bonds (e.g. such as the one you mention). For that reason I stick to nominal bond funds rather than individual gilts as I can do without the added complexity. Quite a few people on Monevator have got into individual nominal gilts. Some to avoid capital gains tax, and also to take advantage of quirks like this: https://monevator.com/reduce-tax-on-savings-with-gilts/
@Vanguardfan – do you think of your secure income as ‘bond-like’ and factor that in to your asset allocation? Would probably look very different through that lens like Ian’s #4.
You can get YTM data here: https://reports.tradeweb.com/account/login/?ReturnUrl=%2fclosing-prices%2fgilts%2f
I think you make a good point about complexity. I could ditch the separate UK, EM, and REIT components in a heartbeat and just go for a global equity tracker. Much will depend in the decades ahead whether managing it feels like hard work or brain-training.
@Ian – it’s striking how your allocations completely change when you add the property.
@Paul_a38 – it’s interesting that the objective per pot has not worked for your brain but I guess that’s a technique that would just “click” for someone else. It sounds like the “jam jar” method of budgeting that’s oft recommended in Personal Finance 101s.
@CGT101 – Commodities pass that test for me. I guess it’s a subjective thing. I believe I understand what I’m in for, what I can expect, why it could go wrong…
@Brod – diamond you say? Ooh, I need to get 3.76% of that now 😉 I personally steer clear of dividend funds having convinced myself that I’d rather rely on total returns.
@Gareth Ghost – there doesn’t appear to be any diversification benefit with BTC but I do gnaw my hand off in frustration every time it goes stratospheric. That said, I don’t cry into my soup every time it crashes either.
@2 more years – you’re situation sounds quite similar to my own. +1 equity release if ever needed.
@Wildlife – I’m very happy with my SIPPs in AJ Bell and Fidelity. Very cost effective when everything is ETFs / individual bonds.
@Sleepingdogs – I hear you on the fiddling. It can be very difficult not to make like Nero.
@Larsen – plenty to think about there. That cash buffer must be very reassuring. I’ve been building mine up of late and probably need to stop now.
@FireSoon – … [The same problem does not exist with nominal bonds (e.g. such as the one you mention).]…
Fantastic, thanks again TA.
@ TA – r.e. the “structural problems with inflation-linked funds” – do see any prospect of such funds that took a hammering in 2022 every recovering their capital value? I’ve held some INXG (duration of 14 years….) for a number of years, naively thinking they’d serve as an inflation hedge.
(On the positive side, they’ve delivered quite a reasonable income yield this past year, in particular based on their current value if not the book cost!)
@TA. Yes the irony of owning an active IT to stop me fiddling isn’t lost on me. I’m still primarily passive, but it gets more blurry for me on the defensive side..
@TA. Cheers. It might help if I actually wrote out a plan with objectives stated for each pot. Now that I have had to switch strategy re SIPP/ IHT maybe I’ll just do it.
An additional issue is having enough cash to allow gifting ( 3 years normal expenditure covered elsewhere), or non volatile stuff that can be converted to cash pronto.
I have considered getting an IFA but from experience by the time you have clarified objectives, provided expenditure budget, itemised assets etc you may as well do it yourself.
@CGT101 — It’s very understandably human to frame your evaluation of index-linked gilts in terms of ‘will I get back what I lost’ but it’s also not really the right away to think about it.
The reality is that when you owned INXG prior to 2022, you owned a basket of index-linked gilts that were priced at the worse point to deliver negative yields to maturity — i.e. they were priced to return less than they cost to buy in the market, in real terms! (Incidentally, at that time the duration for INXG was from memory in the mid-20s).
As I’ve tried to stress recently, this was the case whether you owned a basket of IL gilts via fund or individual gilts *of similar duration*.
For example, look at this five-year graph of Treasury 1.25% index-linked 2032:
https://www.hl.co.uk/shares/shares-search-results/t/treasury-1.25-22112032-index-linked-gilt
You can see that the capital price fell from £150 down to near £100. Hence holding individual ILs gilts with longer duration would still have delivered huge capital losses. You needed to hold (much) shorter duration to avoid these losses.
The ‘structural issues’ TA refers to is the fact that (a) most IL gilt funds (such as INXG) available to UK investors were/arguably are still pretty long duration and (b) if you’re looking for a stream of inflation-protected cashflows in the future (such as a pension income) then you can’t guarantee getting these via a fund because of the price volatility of a fund that maintains its target asset allocation even as you age out (versus individual gilts that would mature and redeem, and return in real terms what you expected when you bought them).
The time to take action IMHO was when index-linked gilts were pricing in very low to negative real yields, such as when TA wrote his seminal post in 2016:
https://monevator.com/why-uk-inflation-linked-funds-may-not-protect-you-against-inflation/
However even then it wasn’t quite clear cut. I held no gilts back then, but I accepted there were reasons why real yields were so low, and the timing of any day of reckoning was certainly impossible. (It took many years longer than most predicted!) We do need to beware hindsight bias.
Anyway, in evaluating holding INXG now, I’d be thinking about (a) what role does it hold in my portfolio (e.g. diversification, inflation protection, and/or do I intend to draw on it for cashflows) and (b) do I think it’s priced reasonably (longer-duration IL gilts were yielding real yields of 2+% as recently as yesterday, so I would say yes. This is why ladders have been so popular recently.)
If someone wants cashflows in particular, then individual is probably the way to go, via a ladder. But if you are young and you want the broader benefits (diversification) then IMHO there’s still a role for IL funds, though I appreciate TA may differ a bit on this.
Here’s how to build a ladder:
https://monevator.com/index-linked-gilt-ladder/
And here’s a linker fund with a shorter-duration (duration 5) if that appeals to readers:
https://monevator.com/short-duration-index-linked-gilt-fund/
Note the shorter duration fund would likely *underperform* if inflation and interest rate expectations fall steeply, versus longer-duration options such as INXG.
Bottom line: longer duration linkers are no longer sitting on a box of nitroglycerine, but you can’t undo the decisions of yesterday and investing is about looking forward. 🙂
Klement this morning covering the complex drivers of bond returns/yields:
https://open.substack.com/pub/klementoninvesting/p/a-watershed-moment-for-bond-yields
Is this regime change, paradigm shift or business as usual? And what, if anything, does this mean for bonds as diversifiers? Scratching head times.
@TI lots to reflect on here, thank you! Alas, until relatively recently I did not know about Monevator – I was a babe in the woods.
Recently I have invested in a much shorter duration index-linked government bond fund (a global one hedged to GBP rather than UK only), so I hold this as well as INXG, and some IL savings certificates for good measure (which I’ll switch to individual bonds if the conditions are right when these mature).
If I’m honest I’m probably holding on to INXG out of denial, so I’m glad to hear there might be a diversification benefit to them!
I know index-linked government bonds don’t have a long track record, but would be interesting to know how a 2% real yield compares with what you could get in the 80s/ 90s/ 2000s. Any good data source for this?
@CGT101 #29: “Any good data sources”:
sources for data on long-term index linked gilt yields include:
– UK Debt Management Office: Offers detailed data on index-linked gilts, including historical prices, yields, and redemption yield calculations. Historical statistics available.
– FTSE Actuaries Index: Provides daily summaries of index-linked gilt performance, including over 5-year series published in the FT.
– Bank of England: Hosts yield curve data and insights into gilt market dynamics.
– Heriot-Watt/IFoA/ESCoE Gilts Database: Contains historical UK gilt yield data since 1840.
– Tradeweb and Yield Gimp have daily market closing price and yield data on index linked gilts, but not so much on the historic side.
– Trading Economics and Global Financial Data also have historical gilt info here, but GFD is mostly behind paywalls.
In the mid-1990s the real terms yield to maturity on a 30-year index-linked gilt was 4%, so investors were guaranteed to triple the real value of their money by 2025! It sounds great, and was, but looking back 30 years now it turns out that one would have been better off in terms of raw maximum returns in piling into the Dot Com bubble of 1995-1999, and whilst a relatively risk less and a highly risky option are obviously not as such comparable, one still wonders if the high real yields on offer on index linked gilts back then put people with very long investing horizons off of investing into equities, thereby possibly delaying the onset of the late 90s boom, and perhaps even tempering it somewhat.
@CGT101 – A decent graph on historical 5yr linker yields:
https://www.investorschronicle.co.uk/content/fa33b1cb-d20f-59fa-b746-1bfcf30e749c
They were only issued from 1981 so this chart covers most of the period.
The author’s conclusion that linkers may not protect against inflation needs nuance. He’s right if we’re talking about funds. He’s wrong if you hold individual index-linked gilts held to maturity.
That aside, 2% seems like a pretty excellent yield to me for guaranteed inflation protection from individual linkers.
https://monevator.com/rising-bond-yields-what-happens-to-bonds-when-interest-rates-rise/
This post explains the mechanism which would eventually put you back in the black with INXG. Obvs it would be quicker if yields just plummeted from here.
This post may help as well:
https://monevator.com/bond-duration/
TI has written the comment of the day though. I can’t argue with his thinking – much as I’d love to 😉
Thank you TA, and TI. And to everyone for the comments.
I have a 10×10 portfolio, consisting of ten asset classes with a target allocation of 10% each. Over the years various aspects of this approach have been inspired by TA, TI, the Monevator community, Hale, McClung, Lars.
10% Developed Markets (Large VWRL)
10% Developed Markets (Small WLDS)
10% Developed Markets (Value IWVG)
10% Emerging Markets (Large VFEM, Small DGSE, Value DEM)
10% Property (Developed World IWDP, Asia IASP)
10% Corporate & Emerging Market Bonds (Corporate Bonds LQDS, EM USD Bonds SEMB, EM Local Currency Bonds SEML)
10% Long Term Nominal Bonds (Hedged Treasuries IDTG, Unhedged Treasuries IBTL)
10% Short and Intermediate Term Nominal Bonds (Hedged ST Treasuries IBTG, Unhedged Intermediate Treasuries IBTM)
10% Index Linked Bonds and Commodities (ST Hedged TIPs TI5G, ST Unhedged TIPs TP05, Commodities COMM)
10% Precious Metals and Cash (Gold SGLN, Cash in SIPPs)
It ends up being, as I see it, 60% growth and 40% defensive. And, yes, I know that last one isn’t really an asset class!
All our holdings are in ETFs to minimise platform costs. ISA and SIPP for myself, ISA and SIPP for Mrs Mack.
I’ve had the above in place for a few years. I rebalance using guardrails: if the overall 60/40 allocation deviates by more than 5%, or if any individual asset class deviates by more than 10%.
I’m thinking about the following.
Gold – check. But only 5%.
Commodities – check. But also only 5%.
Linker ladders – I need to read again.
Should I ditch the Value tilt? It does currently reduce the exposure to that expensive US market! I’ll read up again TA on what you and the community had to say about multi-factor ETFs and re-read TI’s “What to do if you’re queasy about the US stock market!”
Should I switch from distributing to accumulating ETFs? At some point years ago I decided it would be motivating to see the dividends growing over time. Which it was, but now it just distorts things and adds to the admin. Switching to accumulating ETFs would however mean I’d incur the spread cost.
Long bonds are scary. Should I scale back?
All my bond holdings are in US Treasuries. Should I diversify globally? Lars did suggest if you’re in the US, UK, etc then your bond holdings should be in your home country. I’ve lost track of my reasons for solely being in Treasuries. Not good!
Half of my Treasury holdings are hedged, half not. Should more of my Treasuries be unhedged, especially long Treasuries, where I would expect the pound to depreciate against the dollar in circumstances that allow long Treasuries to perform well?
Now that pensions will be brought into the IHT net, what should I change? The intention being earlier gifting to the children, and to worthier causes. I’m looking forward to the series that Finumus has lined up.
I’m about to go into decumulation (a few more months – I promise!). Should I reduce my equity holdings to mitigate sequence of returns risk? I know I should focus on preservation rather than growth, but I intend following a drawdown approach similar to yours, TA (influenced by McClung). Initially I’ll sell bonds to fund living expenses. Once bonds are depleted, I’ll start selling equities to cover living expenses. (100% equities at age 95 – woohoo!) Seriously though, since I don’t intend selling any equities for the next 15 or 20 years, shouldn’t I retain rather than reduce my equity percentage?
Re IL, don’t know if this has been mentioned but the US now has bond ladder etfs including tips eg iShares Bonds 1-5 years TIPS Ladder ETF LDRI. Apologies if already covered.
Brilliant article as usual
@TI Re #27 It’d be wonderful to have an article showing the pros and cons of a short linker ladder vs the iShares Up to 10 Years Index Linked Gilt Index Fund (UK) that you mention. Does the fund effectively hold the gilts to maturity? The language around how the fund operates is as usual somewhat opaque.
Having avidly read all the brilliant linker ladder content I’m still concerned with the level of complexity I’d be leaving MrsH to deal with rather than just a single fund …
@Robin H. Yes, the complexity of what I’ll leave behind figured in my thinking too. My wife’s ISA (halifax) requires a phone call to buy gilts. To do this you have to figure out which bond you wish to buy and check it’s liquidity, then not be phased by clean and dirty prices. Don’t want her having to make too many decisions. So I plumped for a 2032 IL. May buy another one, perhaps 2028 maturity.
Can’t say I see the point of a 3 year ladder a la TA. In my view any cash flow/ contingency issues over a 3 year timescale could best be met with cash, money market fund or ultrashortbond fund. A 7 year ladder of 3 holdings perhaps.
@Robin H – That fund won’t hold its bonds to maturity so is subject to price risk as per the bond fund hits taken in 2022. Its short duration means that wouldn’t be as bad as a standard linker fund though.
Fair point about bond ladder complexity. That said, once you set it up, all you have to do is collect and spend the dividend / redemption money. Assuming it’s a non-rolling ladder, there’s no reinvestment required. It just deposits inflation-adjusted income in your account to spend until the last bond matures. Now I come to think of it, it would be an advantage not to pay close attention to the ladder. That way you never get diverted by the irrelevant price fluctuations along the way.
@Paul_a38 – it’s a rolling ladder but I kept it short partly to stay within my asset allocation, partly so as not to be upset by large price fluctuations, and mostly so it didn’t seem like too much work to set up in the first instance. It took me quite a bit of effort to overcome my inertia on this one, so I kept it simple 🙂
I’m thinking about whether I should extend it given real yields have gotten quite a bit tastier since.
@Mack – switching to acc funds seems like a no-brainer. I went on exactly the same journey as you. Divis seemed like a morale booster initially, now they’re a faff. I’m not sure what you mean by spread costs?
You’re obviously extremely well diversified and have a 60/40 topline allocation.
Many of your questions are about tweaking small-ish asset allocations. But there isn’t an optimal configuration ex-ante. So as you head into decumulation I wonder if it would help to step back and think about how you want your portfolio to look during that phase of life?
e.g.
Do you want to manage that much complexity? If not then that would resolve the dilemma around Value more quickly than wondering if Value will perform in the years ahead – which none of us can know.
With sequence of returns risk being a concern, does an all-weather portfolio appeal to you?
https://monevator.com/asset-allocation-for-all-weathers/
If your objective is to preserve wealth, rather than grow it, then a portfolio that targets lower overall volatility makes sense. That would mean trimming equity holdings, increasing your defensive holdings, especially gold and commodities.
Long bonds are very volatile but as part of an all-weather deal they are an excellent diversifier.
But if you find yourself obsessing about individual components (as opposed to overall portfolio risk-adjusted performance) then you may have a hard time living with gold, commodities, and long bonds.
Tilting towards shorter term bond holdings and cash would help with that problem.
I do think you’re right to think of cash as an asset class. That’s the house view at Monevator and TI would say your home should be included too. (That said, he’s half-Vulcan).
Lars’ arguments for (hedged) global bond holdings make a lot of sense. Holding unhedged US Treasuries is a bet on the currency markets. That’s complexity I’d rather not have in my life. Here’s a couple of posts I’ve written on the topic:
https://monevator.com/are-us-treasuries-better-than-gilts-uk/
https://monevator.com/do-us-treasury-bonds-protect-uk-investors-better-than-gilts/
@firesoon The key difference between individual gilts / linkers and funds of the same is control over duration. With individual bonds you know exactly what your cash flows will be (or in the case of linkers what cash flows will be in real terms) and the fund price in nominal (gilts) or real (linkers) terms at redemption. So broadly speaking individual bonds are better in draw down and funds are more convenient in accumulation.
@TA, thank you for your insights at #37 and the links – really helpful.
Of course yes, long bonds aplenty in the All-Weather portfolio!
I’ve skimmed through the links and the 200+ comments, and I’ll read them thoroughly on the weekend.
Regarding ‘spread costs,’ what I meant was that I’m holding ETFs not funds, so by selling income ETFs and buying the equivalent accumulation ETFs, I incur a cost that is equivalent to the bid/offer spread, don’t I? Essentially, I pay an ‘entry fee’ by selling at the Sell price (slightly below the value of the underlying assets) and buying at the Buy price (slightly above the value of the underlying assets).
I had always assumed the average bid/offer spread on ETFs was around half a percent under normal trading conditions. However, I checked this afternoon (when the larger markets were open) and the spreads on my ETFs averaged only around a tenth of a percent. I should have known this! The point is, the switching costs are minimal, so I’ll be joining you in swapping to accumulation units.
Oh, and thank you for confirming TI’s Vulcan status – it explains a lot.
@Mack #32: love the 10 by 10 allocation. Many thanks for setting out the same.
Have you thought about using capital efficient products in substitution for VWRL and IBTM?
This would free up more space for further (and maximal) diversification with say some trend following (e.g. Winton trend etc) and listed global macro hedge funds (i.e. listed macro ‘pod shop’ hedge fund BHMG).
The Wisdomtree Issuer Global Efficient Core UCITS ETF (WGEC) does a 50% levered Global Equity tracker and global high quality government bonds (i.e. 1.5 x a 60/40, so a 90/60).
It could be used in an initial 10 x 10 allocation (substituting it for the 10% in VWRL, and then getting rid of 5% in IBTM) to free up 5% for a mix of trend following and BHMG.
WGEC is covered here:
https://moneyforums.citywire.com/yaf_postsm326772_wisdomtree-capitial-efficient-global-etf-WGEC.aspx
Overall portfolio would still only then be 5% levered/1.05x, so minimal.
@Delta Hedge #40: Interesting suggestion – I will certainly look at WGEC, thank you.
Given the number of asset classes I hold, the percentage allocation to each is obviously relatively low. I’ve often felt that my allocations particularly to SGLN, COMM, and VWRL are too low (the latter making WGEC even more appealing).
Freeing up some space would therefore be useful. I’ll need to think through whether to use it for some trend following, macro hedge funds, or simply to increase my allocations to SGLN or COMM.
(Speaking of which, my 5% in SGLN and 5% in COMM happen to match @TA’s new target percentages. I’ll be interested to see how long it takes him to ‘acclimatise’ and increase each to 10%!)
Thanks again for your thoughts on WGEC – much appreciated.
I started with something like the slow and steady allocation which has help me understand how to build a portfolio. Recently I have been looking to simplify but this has not happened so far. Having worked outside the UK I have funds outside ISAs which is also playing into my choice
For Equities I went with one Global Tracker Fund. Recently I have added Europe – Asia Equities to reduce the exposure to USA. So much for simplifying.
For defensive side of the portfolio prior to the bond crash I had mainly medium and a lesser amount of short term bond funds. New money I have been putting into Commodities, Gold and increasing the short term bonds allocation. With the recent Monevator articles on Gilts I am considering adding them. So far I have just bought a few to see how the process works.
Current plan
60% Global Tracker Equities.
10% Non USA, Europe – Asia Equities may move to Global Tracker excluding USA
10% Commodities
5% Gold
7.5% Short Term Bonds Fund
7.5% Medium Term Bonds Fund
? % Individual Gilts (Considering replacing the Short Term Bonds Funds and hold in general account)
Back up cash mostly held in Premium Bonds
@TheAccumulator – any particular reason for the choice of UC15 (34bps ER) for commodifies exposure over any other thing? Like BCOG (15bps)?
@Mack/@TheInvestor – Amusingly we are now furiously switching older generations holdings in ISA funds from ACC the DIST share classes as we get ready to produce “surplus” income from which to make PET-IHT free gifts…..
@TheAccumulator – Re-reading your piece on “Are USTs better than Gilts” – of course I think unhedged USTs are better. Although, I don’t actually go “all-in” on this, my bond allocation is about 50% unhedged UST, 25% GBP hedged UST, 25% gilts. The former tend to be in accounts of the more risk seeking, and the later in the more risk averse (grandparents) who have GBP money illusion – think in nominal GBP return space, not real USD return space.
@Mack – a substantial fraction of my bond exposure is through WTEF.L/WGEC.L/NTSX – so this mostly futures and exposes you to their _excess_ returns over the risk-free rate.
@Finumus – yes, essentially UC15’s 2nd-gen index has held up better than BCOG’s 1st-gen benchmark. Though of course, no guarantees:
https://monevator.com/best-commodities-etf/
Re: USTs vs gilts or any Investment A vs Investment B question – my first instinct these days is to ask better at what and for whom? What’s the objective? What’s the stage of life? What’s the financial situation and risk tolerance? What’s the level of investment education and engagement required? So many debates on Monevator are between people who’s circumstances are very different. I appreciate you’re sketching that ground out when you mention UST for the risk-seeking (I assume that’s you!) versus gilts for risk averse.
@TA #44 – you’re right – our circumstances are all different, and they change over time!
@Finumus #43 – interesting to learn that you are also using WTEF.L/ WGEC.L/ NTSX. Following your and @Delta Hedge’s comments I’m reading up, including several mid-2024 Monevator articles which had some discussion in the comments that I only skimmed through at the time.
@TA, having re-read the links you provided on the All Weather Portfolio (regarding long USTs), and considering your comments @Finumus (about USTs vs Gilts), I’ve once again made peace with my USTs!
I should have been more disciplined in documenting my original reasons for choosing my asset allocation, and my further evolving views over time. (Speaking of which, my thoughts mid-2023 on adding some second generation UC15 commodity holdings to my first generation COMM holdings also seem not to have been written down and acted upon!)
@Finumus – noted your point about switching from accumulating to distribution share classes in ISAs if one is looking to gift out of surplus income. I mentioned somewhere above that I’m looking forward to your series on the proposal to bring pensions into the IHT net. I’m holding off for now on switching to accumulation classes, as I now see most of my ETFs in any event only have distribution classes. That’s one reason. The other is that I need to work out a proposed drawdown and sequence to decide what the optimal holdings should be in each of our ISA and SIPP accounts, and how much cash will be needed for the upcoming first year of retirement!
@TA If your index linked gilts are solely to protect against inflation what’s the advantage of holding more than one? I assume (perhaps wrongly) that all linkers are as safe as each other so you could just pick for a specific maturity date and then buy another when it matures? Obviously this assumes you don’t need access to this money before maturity…
Hi Robin – generally better yields the further out you go. Think of it like a cash ladder. A certain amount matures every year, so some of the money is always close to hand (in the case of linkers I can always sell, but short-dated bonds reduce price risk), meanwhile longer term linkers are earning a better return.
@TA – this was a great article – such a good idea to write down where such prevarication comes from and see if it holds up outside of all the competing worries in ones head! For me a long running one has been whether to de-risk the funds in my workplace DC that are earmarked to pay off the mortgage in 2 years. When there were still 10 years to go the strategy was to just wait and remortgage should we be dealt a bad sequence of returns. But in great part thanks to the call to arms above and more generally the wisdom of you, @TI and the community here I’ve finally pressed the button to stop the default lifestyle strategy in the pension and lock in 15% to the cash fund on offer (L&G sterling liquidity). I’ve effectively paid the mortgage off.
I would never have had the confidence to make such a 6 figure decision without the 7 years of Monevator readership. Seriously – thank you. And continued best wishes for your own journey into this next phase.
My portfolio fixing is merely coming down to managing my platform risk. I know previous threads have mentioned this on occasion, but wondering if those with larger portfolios would share their thoughts on how many platforms is optimum for them. Are most investors thinking two platforms spreads their risk enough in their own mind (as always these things are personal)? I am currently losing sleep worrying that I should be spread across many, but that obviously incurs costs, and the necessity to learn how to use many platforms. Currently using ii and Lloyds. And Netwealth tracking tools to get an overview. I also use Netwealth modelling for decumulation strategies (getting closer…). Any thoughts on optimum platform numbers welcomed. Thank you
@Andy J – I’m pleased as Punch for you. It’s hard to beat the feeling of paying off the mortgage! Thank you for taking the time to let us know. These personal stories very much help TI and I to keep ploughing on.
Aged Investor-78
One platform only for 2 SIPPs and 2 ISAs-Interactive Investor
2+ years living expenses in BS Instant Acess Cash ISAs and High Interest Bank Account
Simple cheap easy to manage as I get older
Chose a “big” platform for safety
Only less than half our income comes from investments
It’s a compromise between safety and ease of use
Worked so far-22 years rtd
xxd09